Gas utilities face multibillion dollar financing needs after soaring prices
Natural gas utilities are looking for ways to finance the exorbitant cost of recent gas purchases during a historic cold spell and wintery conditions in the western and southwestern United States, creating new hurdles for local distribution companies who are already dealing with the challenges of cost recovery during a one-year pandemic.
In a first sign of the new challenge, eight-state gas distributor Atmos Energy Corp. announced on Feb. 19 that it had accumulated between $ 2.5 billion and $ 3.5 billion in natural gas purchases. – primarily for its Colorado, Kansas and Texas jurisdictions – due to “unpredictable and unprecedented market prices” during the winter storm. The company said it has around $ 3 billion in total cash, including around $ 800 million in cash assets.
Atmos said it was considering several options to cover costs, which are usually payable in late March, including deploying available liquidity, using short- or long-term debt, and issuing equity. The company said it believes it can find a cost effective way to fund extraordinary costs through a “balanced funding strategy” and regulatory mechanisms authorized by state utility commissions in some of its territories.
The Texas Railroad Commission, the regulator of gas utilities, on February 13 authorized local distribution companies to record extraordinary gas purchase costs in a regulatory asset account. Utilities could then seek to recover the costs recorded in the accounting mechanism in a subsequent process. The aim is to defer costs to a later date and reduce the impact on customers.
The Kansas State Commission on Crown Corporations followed suit with a similar authorization on February 15.
Atmos and other utilities buy gas at wholesale rates and then pass the price on to customers. On February 17, Southwest Gas Holdings Inc. alerted customers in its service territories in Arizona, California and Nevada to soaring gas prices. He reminded taxpayers of the pass-through and warned them to conserve gas to avoid exploding their monthly bill.
High gasoline prices during the storm have created the possibility that many taxpayers will not be able to pay their bills when they fall due in the coming weeks. This in turn threatens to leave utilities with more past due customers and an increase in bad debts, or overdue balances that will likely never be collected. The situation follows a period when arrears and bad debt levels are already high among utilities due to the COVID-19 pandemic and the economic downturn.
In an extreme case, a liquidity crisis could force a utility into Chapter 11 bankruptcy. Other negative consequences could include dilution of stock prices for companies that issue stocks to cover unforeseen costs or a drop in the stock price. investor confidence if a bank refuses to lend money to a utility.
Goldman Sachs analysts said financing needs are not expected to have a permanent impact on Atmos. In light of statements from state utilities commissions, regulators should ultimately allow the company to pass on and recover the costs of purchasing and related debt financing, assuming regulators determine that the costs were reasonable and accurate. Goldman noted that Atmos does not currently carry any holding company or non-utility level debt.
“Given [Atmos’] solid balance sheet and constructive regulatory framework, we believe any material underperformance would be unwarranted, ”Goldman said in a February 22 research note.
However, financing needs could impact Atmos’ results in 2021, analysts said. If Atmos were to issue $ 1 billion in additional long-term debt at interest rates of 2% to 3%, this move could have a negative impact on EPS of 12 cents to 18 cents per share in 2021, or 2 , 5% to 3.5% of Goldman. estimate of $ 5.06 per share. Atmos reaffirmed on February 19 its EPS target for the year 2021 of $ 4.90 to $ 5.10. S&P Capital IQ’s consensus normalized earnings estimate currently stands at $ 5.10 per share.
There are already signs that the loans will remain available for gas utilities in good standing. On February 22, One Gas Inc. entered into a credit agreement with Bank of America NA for a $ 2.5 billion unsecured term loan facility, the proceeds of which will be used to purchase natural gas resulting from severe winter weather and debt repayment. In a filing with the SEC, the company revealed that it spent about $ 2.2 billion on aggregate natural gas purchases in its three states in February.
“Due to the historic nature of this winter storm, One Gas experienced unpredictable and unprecedented market prices for gas costs in our jurisdictions of Kansas, Oklahoma and Texas,” the company said in the case.
One Gas said it has access to approximately $ 3.1 billion in liquidity, including approximately $ 297 million in cash and cash equivalents, $ 296 million through existing credit facilities and $ 2.5 billion through the new credit agreement.
One Gas is also subject to regulatory treatment by Texas and Kansas commissions. The company has filed an application with the Oklahoma Corporation Commission for similar authorization to record a regulatory asset to record “extraordinary expenses.”
Atmos shares were down about 4% from the previous close price just before the market closed on February 22, at $ 89.40. One Gas shares fell nearly 6% to the session low of $ 69.73, before cutting losses to trade lower by around 5%.