Rating Action Commentary
ֳ Rates Brazos Electric Power Cooperative, TX's Series 2025A Notes 'A+'; Outlook Stable
Wed 19 Feb, 2025 - 4:44 PM ET
ֳ - Austin - 19 Feb 2025: ֳ has assigned an 'A+' rating to the following Brazos Electric Power Cooperative, TX (Brazos) obligations:
--$125.5 million first mortgage notes, series 2025A.
Proceeds of the bonds will be used to fund capital plan expenditures and for general corporate purposes. The notes will be privately placed and are expected to price the week of March 18.
ֳ has also affirmed Brazos' Issuer Default Rating (IDR) at 'A+'.
The Rating Outlook is Stable.
The 'A+' rating reflects ֳ's expectation that Brazos will continue to demonstrate strong and stable financial performance as a transmission and distribution electric utility, despite a significantly larger capital plan than anticipated last year.
The rating is supported by Brazos' strong revenue defensibility and very low operating risk. The cooperative's strong revenue defensibility reflects consistent regulated transmission revenues received from ERCOT-wide utilities, and the predictability of distribution revenues from its 16-member cooperatives. Brazos' operating risk is very low and reflects its transition to a transmission and distribution entity following its exit from bankruptcy in December 2022. The Brazos bankruptcy was triggered by power supply obligations related to winter storm Uri in February 2021. Brazos completed divestiture of its power generation assets and the transfer of higher-risk power supply responsibilities to its distribution members during 2023.
ֳ believes that Brazos' regulated transmission revenue certainty allows it to handle higher leverage compared to utilities with significant power supply operations.
ֳ's rating case scenario expects Brazos will maintain a debt service coverage ratio of at least 1.20x and a leverage ratio, calculated as net adjusted debt to adjusted funds available for debt service (FADS), between 10x and 11x. These metrics include ֳ's expectation for board-established discretionary deductions of annual margin rebates (AMR) to members, which reduce revenue and FADS.
Brazos' board reviews its financial condition and objectives monthly and at year-end may approve AMRs from net revenues in excess of amounts necessary to meet the cooperative's debt covenants and financial obligations. In 2023, the board approved an AMR of $48.4 million. ֳ's scenario also factors in Brazos' $1.1 billion five-year capital plan which will primarily be financed through debt, typical for this capital-intensive, rate-regulated structure.
SECURITY
The IDR is ֳ's assessment of the cooperative's vulnerability to default on its financial obligations. The series 2025 mortgage notes are collateralized by substantially all assets of Brazos on parity with other obligations pursuant to the original and most recently updated Tenth Supplemental Indenture.
KEY RATING DRIVERS
Revenue Defensibility - 'a'
Regulated, ERCOT-Wide Transmission Revenue
Brazos' strong revenue defensibility considers its revenue mix of about 80% transmission and 20% distribution revenues. Transmission revenues are reliably received from transmission users across ERCOT, based on PUCT-approved rates, which have generally been supportive and are designed to provide timely and sufficient cost recovery. Distribution costs are assigned directly to the Brazos members and recovered from customers served by its distribution lines and assets.
Purchaser credit quality (PCQ) is assessed as midrange, based on the credit quality of ERCOT's eight largest utilities, but does not limit revenue defensibility. These eight utilities contribute about 86% of both ERCOT's and Brazos' transmission revenues and include the state's three major investor owned utilities. The credit quality of the Brazos members supporting distribution revenue is stronger, assessed at 'a'.
Operating Risk - 'aa'
Very Low Operating Risk as a Transmission and Distribution Utility
Brazos' very low operating costs and risks reflect the nature of its transmission and distribution (T&D) functions. Although ERCOT transmission costs have increased significantly over the past decade due to major investments in the electric grid, they still make up less than 25% of a typical residential customer's electric bill.
ֳ assesses lifecycle investment management as moderate considering Brazos' 13-year average age of plant, manageable $1.1 billion five year capital plan, and applicable transmission planning and cost recovery processes. Transmission planning is undertaken through an ERCOT member based transmission planning working group that prioritizes projects based on reliability, congestion and growth needs. Asset owners are given the right of first refusal if the project is within their jurisdiction.
Financial Profile - 'a'
Strong and Consistent Financial Profile Anticipated
ֳ's rating analysis focuses on Brazos' future financial performance, given the significant change in scope and function from its historic vertically integrated structure.
Brazos transitioned to its current T&D structure during 2023. The cooperative completed 2023 with leverage of 11x, including the effect of $48 million in board-approved discretionary AMRs. Liquidity was neutral with 134 days cash and 869 days liquidity cushion. COFO was just under 1.0x in 2023, but this reflected the organizational structure's transition during 2023 and did not weaken overall liquidity.
The financial profile assessment of 'a' reflects ֳ's expectation that leverage will stabilize at approximately 10.0x-11.0x, inclusive of anticipated AMRs. ֳ's assessment allows for modestly higher leverage at the current rating category compared to generally indicative thresholds given the revenue stability exhibited by the cooperative's transmission and distribution only business lines. Debt service coverage is expected to approximate at least 1.20x, and liquidity should remain neutral as evidenced by adequate cash balances and/or an external line of credit.
Asymmetric Additional Risk Considerations
There are no asymmetric risk considerations factored into the rating.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-- Diminished regulatory support for transmission cost recovery;
-- Leverage, including the reduction in revenues and FADS from board-established discretionary AMRs, consistently approaching 11.5x.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-- Leverage, including the reduction in revenue and FADS from board-established discretionary AMRs, consistently below 9.0x.
PROFILE
Brazos is the eighth largest T&D operator in ERCOT by revenue with 2,738 miles of transmission lines, 456 distribution substations and 9,976 MVA of installed transformer capacity.
Brazos historically operated as a generation and transmission power cooperative serving 16 Texas distribution cooperative members pursuant to long-term, all-requirements power sales contracts. Brazos provided wholesale generation, transmission and distribution services. The members serve a growing customer population estimated at 1.8 million across 68 counties in central Texas. The most populated parts of the service area are located principally to the west of the Dallas/Fort Worth metropolitan area and northwest of Houston.
On March 1, 2022, Brazos filed for bankruptcy as a result of costs incurred during Winter Storm Uri in February 2021, including $1.8 billion owed to ERCOT and additional amounts to power and gas providers that brought total claims to over $2.0 billion by the time of the filing. Brazos reached a mediated bankruptcy settlement agreement with its creditors and exited bankruptcy on Dec. 15, 2022 having agreed to important changes in its scope of business as well as reduced liability to various creditors.
Brazos' bankruptcy settlement resolved all outstanding claims related to the February 2021 winter storm, including the $1.8 billion administrative claim of the Electric Reliability Council of Texas (ERCOT). One remaining debt obligation to ERCOT will be repaid over 12 years, but Brazos has deposited funds in a trust to defease approximately half of the $166 million amount.
Brazos and its members agreed to the revision of its 16-member all-requirements contracts, and termination of its power supply responsibilities effective March 1, 2023. All remaining generation assets were sold in June 2023 and the proceeds used to settle financial obligations and reduce debt. Brazos' federal lender, the Rural Utility Service (RUS), amended the indenture and remaining outstanding first mortgage debt is now secured solely by Brazos' remaining business lines of transmission and distribution.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Brazos' ESG Relevance Score of '2' varies from public power sector guidance scores of '3' since transmission systems are not significantly exposed to the generation of GHG emissions and have limited exposure to waste and hazardous materials from operations. While operating within the broader public power sector, transmission systems are not exposed to energy, fuel or water use and consumption considerations.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- FAST Econometric API - ֳ Analytical Stress Test Model, v3.1.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Brazos Electric Power Cooperative, Inc. (TX) | EU Endorsed, UK Endorsed |