Big Power Companies in Texas May Clean Up From Storm

While these companies have balance sheets to weather the storm, others are on the brink of solvency, opening up the possibility of forced sales at distressed valuations. Just Energy, JE -2.74% a retail energy provider, had said the financial impact from the storm could hamper its ability to continue as a going concern. Another provider, Brazos Electric Power Cooperative, filed for bankruptcy on March 1.

The ultimate dollar impact from the storm is still a moving target. Under existing rules, the grid operator spreads the cost of unsettled bills among other market participants. That number isn’t likely to be finalized for some time as market participants and regulators iron out the fine points.

Representatives of some renewable-energy generators indicated in a filing with the Texas Public Utilities Commission that companies representing at least nine gigawatts worth of capacity would suffer steep financial losses if nothing is done to unwind the peak power prices that were set during the winter storm.

There seemed to be a small possibility that some scarcity payments to power providers—which the grid operator set to the maximum of $9,000 per megawatt-hour for days—could be reversed after an independent market monitor said the grid operator kept prices high for 33 hours longer than warranted. But the Public Utility Commission of Texas on Friday signaled that such a reversal is unlikely, noting that doing so could have unintended consequences, such as harming certain power providers.

Power-market participants that benefited from the peak prices will likely not want to give up their gains. Notably, Australia’s Macquarie Group MQBKY -0.73% bumped up its own guidance in February to reflect the windfall its commodities-trading desk got from capitalizing on gas and electricity volatility in Texas. A number of hedge counterparties to wind farms, typically Wall Street banks, could be owed significant sums, too, under financial agreements that put the generator on the hook for buying power from the market if it can’t operate when called upon.

When all of the dust settles, the long-term impact of the shake-up might not be all that bad for the large power companies as long as they stay solvent. So far, it seems like they will. While S&P Global Ratings downgraded the credit rating for Exelon Generation Co., the Exelon arm that bore the brunt of the Texas impact, it remains investment-grade. Both NRG and Vistra remain one notch below investment grade, though the latter is on credit watch.

One reason for optimism is that last month’s blackouts are bringing a lot of scrutiny to Texas’s market design, which could lead to reforms. Whatever shape those changes take, they will likely be designed to prevent more volatile events, which is ultimately good for market participants.

The other silver lining is that these larger companies will likely gain more retail customers, both because customers will organically migrate to larger, more stable retail providers and because there will be opportunities for larger companies such as Vistra and NRG to buy financially weakened ones at bargain prices. The retail side of the power business is highly profitable and has been a target of acquisitions for Texas power companies for some time, notes Aneesh Prabhu, analyst at S&P Global Ratings. Accordingly, acquisitions of retail energy providers were done at rich multiples in recent years, averaging roughly eight times earnings before interest, taxes, depreciation and amortization, Mr. Prabhu notes. “In distress sales, those acquisitions could happen at two to three times Ebitda or maybe even at book value,” he added.

Vistra, NRG, Exelon and Calpine, a private company, are among the largest generators in Texas and collectively own almost half of the grid’s total capacity. The remaining ownership is rather fragmented.

It also is important to note that Texas faces growing electricity demand while for the U.S., overall electricity demand has flatlined in the past decade or so, making Texas a rare growth market for electricity.

The Texas power market isn’t for the faint of heart, but sticking it out could well be worth it.

Write to Jinjoo Lee at [email protected]