Bryan Texas Utilities is on a credit rating watch following February’s historic winter storm, but it should have little impact on operations at this time.
Joe Hegwood, chief financial officer for BTU and the city of Bryan, testified before the Texas Senate Committee on Business and Commerce on Thursday. He discussed the financial impacts of the winter storm on BTU, although much is still to be determined. Hegwood said he testified upon the request of the Texas Public Power Association, which represents 72 municipal power companies in Texas.
BTU has a high credit rating — which helps when borrowing money — but this week was informed that it’s under a “credit watch negative” that could lead to a downgrade due to uncertainty in the state grid manager’s market. Hegwood told the Senate Committee that there are 23 other municipally owned utilities and co-ops that are in the same situation.
The watch essentially means that the rating agency, Standard and Poor’s, recognizes something is going wrong for the state’s grid operator, but the agency does not have enough information to determine whether to downgrade the utility. A downgrade would still allow BTU to make investments but would mean a higher interest rate when it borrowed, Hegwood explained in a Friday interview.
Hegwood stressed that the watch does not guarantee a downgrade, but it does mean BTU will need to have a more in-depth discussion with the rating agency within the next 90 days.
He said being on the watch only matters when money needs to be borrowed. BTU was planning to borrow money for a new distribution service center, but Hegwood said that borrowing will probably be deferred. However, he said deferring that step won’t impact the overall project since other work can still be completed in the meantime.
During Hegwood’s testimony, he shared that BTU has a cash reserve policy of 175 days of cash — which amounts to $63 million — to cover unexpected costs and changes in revenues. Ahead of the storm, BTU was $21 million above that target with a total of $84 million in cash reserves. Hegwood said he believes that BTU will be able to fund any costs with under $21 million of its operating reserves, therefore not tapping into the 175 days of cash.
He added that BTU will not need to raise customer rates.
It will still take time to determine what the net cost will be, though, since several factors are still being sorted out. This includes how much BTU owes to the grid operator, Electric Reliability Council of Texas, for energy that BTU had to purchase on the market, as well as figuring out how much ERCOT owes to BTU since the BTU generators kept running throughout the storm, allowing the local utility to continue selling energy.
During the winter storm, market prices soared from the average $22 per megawatt hour in 2020 to $9,000 per megawatt hour, according to the Houston Chronicle. Additionally, Hegwood said that BTU had to pay 154 times the normal price for natural gas that the utility needed to power its generators.
Another factor that makes the net cost uncertain is the running debate over whether or not utilities should have to pay reliability uplift charges. Hegwood explained that these are additional fees that ERCOT billed utilities during certain periods of the winter storm.
“We don’t feel like they should have billed us for that, or that they should have billed anybody for that, not just BTU but anybody in the market,” Hegwood said in the Friday interview.
He said that short pay uplift charges are being disputed by BTU and all other municipally owned utilities. ERCOT bills utility companies with short pay uplift charges to make up for when other utilities cannot pay what they owe.
Hegwood told senators on Thursday that he doesn’t want the residents of Bryan to have to pay bills that others in the state don’t pay.
Though Hegwood said he believes BTU will be able to pay the net costs, and current data shows that it should be under $21 million, he said in his testimony that the BTU annual energy budget is $50 million and over the five-day storm BTU incurred more than it usually does in an entire year for net energy cost budgets.
He added that BTU was able to substantially offset the costs with its sales back into the market since generators kept running. Even so, he said that uplift charges and short pay uplift charges could not be offset and will need to be paid with reserve funds.
“We know this has been stressful and beyond inconvenient for our customers,” Hegwood said Friday. “We are doing everything to ensure that this doesn’t happen again and that we protect the citizens of Bryan and BTU customers.”
Sen. Kelly Hancock commended BTU leadership on Thursday, saying he was glad to hear from a utility that handled its financials “extremely well.”
College Station Utilities has not been asked to testify, Director of Fiscal Services Mary Ellen Leonard said in a Friday email.
College Station receives billing for power provided to customers on the ERCOT grid through Garland Power and Light and is billed monthly. CSU has yet to receive its final February bill for power from Garland but expects to have it around March 20.
She added that the financial situation is still fluid, as decisions about items such as uplift charges could significantly impact CSU and BTU.