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Rating Action:

Moody's affirms ERCOT's Aa3 Issuer Rating; stable outlook

29 Jan 2021

New York, January 29, 2021 -- Moody's Investors Service, ("Moody's") today affirmed the Electric Reliability Council of Texas, Inc.'s (ERCOT) long-term Issuer Rating of Aa3. The rating outlook is stable.

RATINGS RATIONALE

"ERCOT's rating reflects the essential and established role it plays in the Texas electricity market as the independent, nonprofit operator of most of the state's high voltage power grid as well as in its wholesale markets", said Toby Shea, Senior Credit Officer. ERCOT has operational control of the transmission grid within a control area covering most of the state. Its role as the independent system operator (ISO) is therefore literally essential to keeping the lights on for 90% of the population in Texas.

ERCOT's financial stability is critical to the functioning of the power grid as ERCOT is the central counterparty to all market participants. Wholesale market participants, including generators, load-serving entities and intermediaries, rely on the ISO to not only transmit the power, but also to collect payments from buyers and make payments to sellers.

ERCOT has a stable source of revenue from a system administration fee it charges to market participants on each trade to cover its costs, which include operating costs, capital costs, debt service, and reserves. Since 2016, ERCOT's system administration fee has been established at $0.55/MWh, which has been sufficient to cover these costs. ERCOT's budget is authorized by the ERCOT Board and the Public Utility Commission of Texas (PUCT) once every two years.

ERCOT is protected against counterparty defaults because it is allowed to socialize any credit loss among its market participants. In the event that a market participant defaults on its payment obligation or fails to pay ERCOT's system administrative fee, the ISO can first draw on the collateral provided by the defaulting counterparty, and if needed, collect any shortfall from all other non-defaulting market participants, as a part of its right to socialize any credit loss.

As a result of ERCOT's stable revenues, low costs and minimal debt, its adjusted CFO pre-WC to debt has averaged about 100% for the past three years (2017-2019) and we expect the ratio to be maintained at around or above 100% on a run-rate basis.

Liquidity

As of 31 December 2019, ERCOT's liquidity position was robust and included approximately $973 million of cash and cash equivalents on hand, consisting primarily of amounts held by ERCOT on behalf of market participants for congestion revenue rights and settlement obligations. Congestion revenue rights are a financial instrument that allow market participants to hedge geographic basis risk. This amount is the equivalent of about 5 years of the ISO's revenue requirements and excludes approximately $503 million of additional cash it held as collateral security.

Although ERCOT's cash consists almost entirely of cash that is due to market participants, ERCOT's Board has adopted standards that allow the use of congestion revenue right funds, which constitute the vast majority of cash on hand, to fund ERCOT's working capital and capital expenditure needs within certain guidelines. In a default situation, ERCOT could withhold all funds due to market participants from these accounts to pay itself first. As a result of these provisions, ERCOT generally seeks to maintain its own operating cash at or near zero.

ERCOT also has access to a $100 million bilateral credit facility that terminates on 31 December 2024. The credit facility contains a covenant requiring the company to maintain a minimum debt service coverage ratio of 1.1 times, which it is in compliance of, and also requires a representation of no material adverse change (MAC) for new money borrowings. The requirement for a MAC representation at each borrowing is very unusual for such a high credit quality company and increases the risk that the credit facility may not be available when the company's liquidity needs are greatest, which we view as a credit and liquidity weakness.

Rating outlook

The stable rating outlook reflects ERCOT's essential role in the Texas electric industry and its proven cost recovery process, strong revenues, low costs, and limited debt, which we expect to continue.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Factors that could lead to an upgrade

While limited near-term prospects exist for the rating to be upgraded, upward pressure on the rating could develop if ERCOT's rate approval process were to become more formulaic, including for example automatic adjustments for variations in volumes or revenue requirements.

Factors that could lead to a downgrade

The rating could be lowered if liquidity becomes constrained or if regulatory oversight jeopardizes management's ability to establish rates in a manner that provides sufficient coverage of expenses and debt service.

Profile

Established in 1970, ERCOT is a Texas membership-based non-profit corporation governed by a 16 member board including both stakeholders and unaffiliated directors (who are approved by the PUCT). The company serves to ensure a reliable, and open access, transmission network on a system that encompasses about 75% of the land area (90% of the electrical load) of Texas including over 46,500 miles of transmission lines and serving more than 26 million consumers.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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 ratings tab on the issuer/entity page for the respective issuer on www.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 rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

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 www.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 www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Toby Shea
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​
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