As U.S. gas utilities report billions of dollars in natural gas purchasing costs during the deep February freeze, analysts and executives say the industry has never faced such a collection challenge. costs.

Initial gas cost estimates are “astronomical and unprecedented” enough to complicate the funding and timing of any type of cost recovery, said Gabriel Moreen, analyst at Mizuho Securities USA LLC, in a recent research note. While Mizuho was initially convinced the impact on gas distributors would be limited, Moreen said the company now sees potential for longer-term impacts. The cost recovery mechanism that policymakers ultimately approve will play a major role in determining the magnitude of these impacts, the analyst said.

There is a consensus among gas utility executives and stock analysts that cost securitization would be the easiest and best solution for businesses and taxpayers. Under this model, companies would issue bonds to finance the costs of purchasing gas related to storms. Some state commissions have already allowed utilities to record these costs as a regulatory asset. They will later determine whether these recorded costs were reasonably incurred and accurate, before setting a schedule to recover them.

One Gas Inc., which reported gas costs of $ 2.2 billion, is working with policymakers and state regulators to develop legislation allowing gas utilities to securitize regulatory assets, the deputy said. – Senior President and Commercial Director Curtis Dinan on a February 26 conference call. He called the conversations “very positive”, but warned the situation was unprecedented.

“Historically, you have seen [securitization] in different parts of the country, mainly related to the electric utilities which faced different costs related to the storms, ”said Dinan. “To my knowledge, there have not been any situations that would apply to a gas utility similar to this one until this most recent event.”

Securitization is considered probable

The Texas Utilities Commission, which regulates electric utilities, can use securitization to meet storm-related costs, but state law does not grant the same authority to the Roads Commission. Texas iron, which oversees gas distributors, according to Moreen. However, the analyst noted that Texas lawmakers responded to calls for securitization in 2006 following Hurricane Rita and in 2009 following Hurricane Gustav.

Given the scale of the costs of purchasing gas, Moreen believes lawmakers will allow some degree of securitization. For context, in 2019, the Texas PUC enabled AEP Texas Inc. to securitize approximately $ 229 million in costs of restoring the electrical distribution system after Hurricane Harvey, he noted. Atmos and One Gas face expenses that could be 10 times larger, he added.

According to Moreen’s calculations, Atmos’ forecast for storm-related expenses has exceeded its total gas costs for the past nine quarters, while One Gas’s forecast costs have equaled nearly all of its costs from purchase in the last 15 quarters.

On March 1, Atmos Energy Corp. reduced its cost estimate from $ 3.5 billion to a forecast of $ 2.5 billion, making it easier to digest with cash, debt and an existing equity program. In a March 1 report, UBS Group AG equity analyst Aga Zmigrodzka expected investors to applaud the review, and said a securitization decision could be constructive for credit ratings recently. lowered from Atmos.

Atmos’ disclosure that around 95% of the extraordinary costs were related to the Texas operations could also be positive if the state moves quickly to clear the securitization. Likewise, CenterPoint Energy Inc. said $ 1.25 billion of its estimated $ 2.5 billion in gas purchase costs relate to operations in Texas.

Maturity without securitization

If policymakers decide not to securitize, they will be faced with the challenge of establishing a cost recovery mechanism that does not substantially change the capital structure of utilities or leave them with more bad debt, a said Moreen. Companies would likely try to avoid issuing new shares or using financing options that have a long-term impact on their capital structure, he added.

These options could cause stock price dilution and give the impression that regulators are allowing utilities to earn a return on equity tied to gas purchase costs. It could open a “box of worms,” ​​Moreen said. Regulators require utilities to pass gas costs on to customers without mark-up.

When asked if One Gas could just roll over its term loan, Dinan noted that One Gas not only has to factor in the astronomical costs of purchasing gas, but the cost of that expense as well. Securitizing these costs would provide more clarity in the recovery and would not require utilities to change the way they capitalize their business, Dinan said.

Moreen saw a way for regulators to pursue a more traditional recovery approach while avoiding problematic outcomes. Regulators, who typically take debt and equity levels into account when determining a utility’s allowable return on equity, could allow gas distributors to take on more debt without penalizing them with respect to allowed ROE. , did he declare.

However, regulators would have to thread the needle to get the timing right. The magnitude of the excess gas costs may be a reason not to try to recover them too quickly, Moreen said. While accelerated cost recovery is ideal, it could explode business bad debts as customers would face higher monthly bills that they might not be able to pay, he noted. This would only add to unrecoverable overdue amounts, which have increased during the COVID-19 pandemic.

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