Fitch: Credit Deterioration Unlikely Among Texas Retail Electric Providers

CHICAGO--(BUSINESS WIRE)--Fitch Ratings does not foresee any adverse credit effects for the four principal Texas electricity market participants as a result of recent price spikes, as discussed in a special report published today. The four market participants defined by Fitch are generators, electric transmission and distribution (T&D) companies, utility tariff bonds and regional electric providers (REPs).

Following the recent record high prices experienced when the market-clearing prices for energy (MPCE) in the balancing energy segment of the market rose above the Public Utility Commission of Texas' (PUCT) previously approved offer cap of $2,250 per megawatt-hour (MWh), four small REPs filed for bankruptcy and defaulted on their payments to the Electric Reliability Council of Texas (ERCOT).

'Should ERCOT's precautionary actions fail to eliminate price volatility, future credit rating implications resulting from price spikes would vary by type of market participant,' said Karen Anderson, Senior Director, Fitch Ratings.

Fitch views REPs to have the most exposure to high power prices and are the most at risk for default or bankruptcy from power spikes. This is specifically true for small REPs that purchase much of their energy needs on the spot market due to lack of sufficient hedging or liquidity support. Larger REPs that have effectively managed their liquidity position to hedge power supply are currently not at material risk from spiking spot power prices.

Fitch believes the credit risk to generators is neutral due to their significant hedged position. In the short term, generators will experience an increase in cash flow from their unhedged capacity sold into the balancing energy segment of the market. This is also true for the T&D companies, which have counterparty risk to REPs that collect customer revenues for the utilities. T&D companies have the ability to seek recovery of uncollected receivables from defaulted REPs through a regulatory rate filing, which limits credit exposure.

Utility tariff bond ratings are not at risk from market price swings. All of these entities are rated 'AAA' by Fitch and are secured by transition property that represents the irrevocable right to collect a tariff from electric customers.

The full report titled 'Fitch Credit Perspectives on ERCOT Power Price Spikes' is available on the Fitch Ratings' web site www.fitchratings.com.

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