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New York, December 15, 2022 — Moody’s Investors Service (Moody’s) has assigned definitive ratings of Aaa (sf) to three tranches of senior secured cost recovery bonds (the bonds) that Brazos Securitization LLC (the issuer) issued. The sponsor, Brazos Electric Power Cooperative, Inc. (Brazos), is a member-owned electric generation and transmission cooperative headquartered in Waco, Texas and owned by 16 electric distribution cooperative members, of which ten participated in the transaction (the participating co-op members).
Winter Storm Uri resulted in unprecedented prices on the Electric Reliability Council of Texas, Inc. (ERCOT, A1 Stable) wholesale market and natural gas. As a result of the high prices, and the resulting increase in claims on its financial resources, Brazos filed for bankruptcy under chapter 11 on 1 March 2021. A plan of reorganization for Brazos was confirmed by the Bankruptcy Court on 14 November 2022. As part of the plan, the participating co-op members will use the majority of the proceeds from the issuance of the bonds to pay amounts they owed to Brazos arising out of Winter Storm Uri. In turn, Brazos will use the payments from the participating co-op members, along with other funds expected to be made available to Brazos, to make payments to its creditors, including ERCOT, in order to emerge from its Chapter 11 proceeding.
The asset backing the bonds is the securitized property established by an irrevocable financing order (the Financing Order) which was adopted by the board of each participating co-op member. The securitized property grants the participating co-op members the right to impose, bill and collect non-bypassable securitized charges based on electricity usage from all retail electric customers, with certain exceptions, within the ten participating co-op members’ service territories in north central Texas, including the right to periodically adjust the securitized charges through a statutory, mandatory, uncapped true-up adjustment mechanism to ensure timely bond payments until the bonds are repaid in full. The true-up adjustment mechanism is the primary form of credit enhancement supporting the bonds.
Brazos acts as the master servicer of the securitization and each of the participating co-op members sold the securitized property to the issuer and will act as the servicers of the securitized property backing the bonds in their respective service areas. As master servicer, Brazos is responsible for calculating the true-up adjustment of the securitized charges in each participating co-op member service area.
The complete rating actions are as follows:
Issuer: Brazos Securitization LLC, Senior Secured Cost Recovery Bonds, Series 2022
Brazos Securitization LLC, Senior Secured Cost Recovery Bonds, Series 2022, Tranche A-1, Definitive Rating Assigned Aaa (sf)
Brazos Securitization LLC, Senior Secured Cost Recovery Bonds, Series 2022, Tranche A-2, Definitive Rating Assigned Aaa (sf)
Brazos Securitization LLC, Senior Secured Cost Recovery Bonds, Series 2022, Tranche A-3, Definitive Rating Assigned Aaa (sf)
RATINGS RATIONALE
The definitive ratings assigned to the bonds are based primarily on the following:
1) the strength of the securitization provisions in the State of Texas’ Public Utility Regulatory Act (PURA) as amended by Senate Bill 1580 (the Financing Act), including the state’s non-impairment pledge, and the irrevocable Financing Order issued by the participating co-op members, which together authorize the creation of the securitized property backing the bonds, and strongly protect the securitized property,
2) credit enhancement consisting of a statutory uncapped true-up adjustment mechanism that mandatorily adjusts the securitized charges at least semi-annually to ensure sufficient collections to pay timely interest, scheduled principal and ongoing transaction costs on the bonds until paid in full, and a non-declining capital subaccount fully funded at closing at 0.50% of the initial principal balance of the bonds,
3) the remote likelihood of a successful legal, political, or regulatory challenge to the securitized property and other rights that the participating co-op members will sell to the issuer on the transaction’s closing date for the benefit of the indenture trustee on behalf of bondholders,
4) the economic stability, diversity, and scale of the ratepayer base in participating co-op member’s service territory from whom the securitized charges will be collected,
5) the strength and experience of the participating co-op members as servicers and Brazos as master servicer of the securitized property,
6) the low probability that collections arising from the securitized property could fall short of the scheduled principal and timely interest payments on the bonds, and
7) the initial securitized charge, that Brazos expects to represent an average of approximately 7.7% of the total monthly electricity bill, as of 2022, that an average 1,000 kilowatt-hour (kWh) residential customer in the participating co-op members’ service areas will be charged after transaction closing. Across the ten participating co-op members, Brazos expects the initial securitization change to range between 5.1% to 11.0%. The expected average initial charge is higher than the average initial charge of around 5% for other utility cost recovery charge (UCRC) transactions that we rate, but Brazos expects it to decrease over time. Additionally, although the initial charge is relatively high, the participating co-op members estimate the debt service on the bonds to be less, on a net present value basis, than the expected debt service that the members would otherwise incur if the members borrowed such funds using traditional financing methods.
The ratepayer base within the participating co-op members’ service areas from whom the securitized charges will be collected is economically stable, which is a credit strength. The participating co-op members provide electric service to approximately 208,000 retail customers located in 61 counties in north central Texas. The majority of the customers are residential, and the service areas benefited from steady growth in the residential customer segment since 2011.
Similar to other UCRC securitizations, this securitization benefits from the Financing Act’s inclusion of a non-impairment pledge from the state of Texas, which strongly protects the securitized property backing the bonds. Under the state pledge the State of Texas agrees and pledges to bondholders that it will not take, or permit any agency or other governmental authority or political subdivision of the State of Texas to take any action that (1) would impair the value of the securitized property, or (2) except as permitted in connection with a true-up adjustment authorized by the Financing Act, reduce, alter or impair the securitized charges to be imposed, collected and remitted to financing parties, until the principal, interest and other costs on the bonds are paid in full. In addition, the Financing Act and Financing Order contain the typical strong true-sale and security interest provisions.
The Financing Order, coupled with the Financing Act, provides that the securitized charges are non-bypassable. Non-bypassable means that the issuer will be entitled to collect the securitized charges from all of the participating co-op members’ existing and future retail electric customers receiving distribution services in the participating co-op members’ service territory in Texas, including customers of any member successor, with limited exceptions. Customers that have already paid their allocation of the costs and expenses incurred by the participating co-op members during the period of emergency caused by Winter Storm Uri are exempt from paying the securitized charges. Ten customers will be excluded from paying the charge. The issuer is authorized to collect the FRCs even if consumers elect to purchase electricity from an alternative electric service provider or self-generate but remain connected to the electric grid.
Each participating co-op member shares a portion of its service area with at least one other retail electric service provider. Customers located in such dual certificated service areas may choose to disconnect from a participating co-op member and connect to alternative electric service providers from time to time. The Financing Order provides that customers in dual certificated service areas that elect to change electric service providers are required to either continue paying the securitized charges or pay a termination fee. As of 2022, about 30% of the participating co-op member service areas, representing around 27.5% electricity sales, were located in dual certificated service areas. In addition, since 2010 less than 15 customers located in dual certificated service areas, have disconnected from a participating co-op member and move to a different provider.
The Financing Act and Financing Order authorize a mandatory, uncapped true-up adjustment mechanism, which is the key form of credit enhancement supporting the bonds. The true-up adjustment mechanism mandatorily adjusts the securitized charges at least semi-annually to ensure sufficient collections to make timely payments of interest and scheduled principal on the bonds as well as associated ongoing financing costs until the bonds are paid in full. Additionally, the Financing Order authorizes more frequent interim true-up adjustments to the securitized charges at any time, if the master servicer deems necessary, to ensure sufficient collections to make timely payments on the bonds and associated ongoing financing costs as well as replenish any draws on the capital subaccount. The level of the securitized charges is not capped.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was "Utility Cost Recovery Charge Securitizations Methodology" published in December 2022 and available at https://ratings.moodys.com/api/rmc-documents/396216. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could drive the rating down are a significant decline in the ratepayer base or consumption in participating co-op members’ service territories, unanticipated consumer delinquencies and defaults, self-generation, extreme weather fluctuations, or natural disasters or pandemics affecting the servicer’s ability to accurately forecast electricity usage.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
Moody’s did not use any models, or loss or cash flow analysis, in its analysis.
Moody’s did not use any stress scenario simulations in its analysis.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
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Giyora Eiger
VP – Senior Credit Officer
Structured Finance Group
Moody’s Investors Service, Inc.
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New York, NY 10007
U.S.A.
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Karen Ramallo
Associate Managing Director
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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