Fitch Rates Brownsville Public Utility Board (TX) Revs 'A+'; Outlook Revised to Stable
Fitch Ratings affirms the 'A+' rating on the following revenue bonds
issued by the city of Brownsville, TX on behalf of the Public Utilities
Board (BPUB or the board):
--$197.9 million utilities system revenue bonds, series 2005A, 2008,
2012 and 2013A.
Fitch also affirms the 'A+' rating on the following revenue bonds issued
by the Southmost Regional Water Authority (SRWA):
--$21.1 million water supply contract revenue bonds, series 2006 and
2012.
The note program rating on Brownsville PUB's junior lien commercial
paper (CP) program, series A is upgraded to 'A+' from 'A'. The upgrade
reflects the similarity in financial margins for both liens and BPUB's
practice of refunding the CP bonds periodically with senior lien bonds.
The Rating Outlook on the bonds and note rating is revised to Stable
from Negative.
SECURITY
BPUB bonds rated by Fitch are payable from net revenues of BPUB's
combined utility system, which includes electric, water and wastewater
services. BPUB has junior lien bonds outstanding in the amount of $1.1
million (not rated by Fitch) that are payable from net revenues of the
combined utility system after satisfying senior lien debt service. The
CP notes are payable from a third lien on net revenues.
SRWA bonds are secured by contract payments from BPUB made pursuant to a
water supply agreement. The contract payments are unconditional and
senior to BPUB's debt service.
KEY RATING DRIVERS
COMBINED MUNICIPAL RETAIL UTILITY: BPUB provides retail electric, water
and wastewater services to around 47,000 customers, primarily located in
the city of Brownsville. Electric revenues constitute the majority of
combined system revenues.
OUTLOOK REVISION TO STABLE: The revision reflects the extended delay of
BPUB's planned purchase of 200MW of the proposed 800MW Tenaska
Brownsville Generating Station (TBGS) and issuance of related debt.
Competitive market energy prices within the Energy Reliability Council
of Texas (ERCOT) market have undermined the economic incentives of
adding capacity in recent years. Although BPUB still intends to
participate in the new plant if Tenaska secures firm commitments for the
other 600MW of proposed capacity, the effect on BPUB's profile will be
evaluated as the details and timing become more concrete.
ADEQUATE GENERATION AND WATER SUPPLY: The Board maintains generation
assets with an equal mix of coal, natural gas and purchased power. Owned
generating assets are sufficient to meet BPUB's peak demand although
market power purchases have offered a less expensive alternative in
recent years. Water supply from the Rio Grande River and treatment
capacity are ample to meet demand.
HISTORICALLY STRONG FINANCIAL PERFORMANCE: Financial results have been
strong with debt service coverage (DSC) over 2.0x over the last four
years, and strong liquidity. Management expects future financial
performance to be in line with historical levels over the near term, but
participation in TBGS could double outstanding debt.
MODEST SERVICE AREA GROWTH The service area economy benefits from its
location and extensive transportation network in the lower Rio Grande
Valley. While wealth levels remain below average, annual electric rate
increases have been implemented since fiscal 2012 and modest growth is
expected to continue in electric and water sales.
SRWA's RATING LINKED TO BPUB: The credit quality of SRWA is linked to
that of BPUB given its 92.9% ownership share in SRWA and the
unconditional take-or-pay contract provision with an unlimited step-up
requirement in the event that other participants are unable to meet
their respective obligations.
RATING SENSITIVITIES
DECLINE IN FINANCIAL MARGINS: Brownsville Public Utility Board's
prospective purchase of a share of the Tenaska Brownsville Generating
Station could significantly increase the utility's debt load and
pressure BPUB's financial margins. The Stable Outlook reflects Fitch's
expectation that the likely timeline for construction of the project is
outside the Outlook period; however, project-driven leverage and lower
coverage metrics could result in a downgrade.
CREDIT PROFILE
BPUB is a component unit of the city of Brownsville, TX (GO bonds rated
'AA-' with a Stable Outlook by Fitch). The Board operates a combined
utility system that provides electric, water, and wastewater service to
approximately 47,000 customers. Total revenues of the combined system
are approximately 76% electric, 12% water, and 12% wastewater.
BPUB's service territory consists almost entirely of the city of
Brownsville as well as certain unincorporated parts of Cameron County
that lie immediately outside the city. Growth in customers continues for
each of the systems. Electric sales increased 2.6% in fiscal 2014 and
water sales decreased by 8.5%%. The electric system has a healthy load
factor of 58% and residential sales typically account for around 40% of
sales. Based on current growth expectations, management is forecasting
modest 3% growth in electric sales and slightly less than 2% in water
sales, even with conservation and efficiency trends in both industries.
PLANNED GENERATION INVESTMENT DELAYED; OUTLOOK REVISED TO STABLE
Fitch assigned the rating a Negative Outlook in 2013, following BPUB's
announcement of its intent to purchase a 200MW ownership interest in the
800MW TBGS (a natural gas-fired combined cycle electric generating
plant) and incur construction risk related to initial terms of the
agreement. The Negative Outlook reflected BPUB management's expectation
at that time that debt issuance would occur shortly thereafter, and that
the substantial increase in debt would weaken financial and leverage
ratios.
However, construction has not yet begun on the Tenaska project and any
additional debt at BPUB appears to be at least a few years away. Under
the terms of the development and purchase agreement BPUB and Tenaska
entered into, Tenaska is not required to move ahead with construction
until it has commitments for the full 800MW plant capacity. Since
Tenaska and BPUB's announcement in early 2013, no additional commitments
have been secured for the remaining 600MW. Construction on the plant and
on BPUB's related components (gas and water delivery lines) will not
occur until the remaining 600MW is subscribed.
Fitch's revision of the Outlook to Stable reflects diminished interest
in the remaining capacity of the project, which is likely the result of
very favorable energy prices available in the ERCOT market. Low natural
gas prices and the addition of substantial wind generation capacity have
contributed to low energy prices and the lack of new non-renewable
capacity construction in the region. BPUB reports that it has not been
affected by the delay. While management still anticipates participating
in the project, low energy prices have provided an economic option for
meeting load in the service area.
While Fitch recognizes BPUB's interest in the project, given its
location within the service area and to ensure an adequate power supply
to meet projected load growth, the additional capacity will increase
total available resources (578MW) to well in excess of projected total
requirements (426MW), including the recommended 13.75% reserve margin in
ERCOT.
STRONG CURRENT FINANCIAL PROFILE; MODERATE DEBT
Financial metrics have been strong historically. Debt service coverage
of senior and junior lien debt was 2.2x in fiscal 2014 and 1.9x after
the transfer to the general fund. Similarly, coverage of full
obligations, including annual transfers to the city's general fund and
purchased power obligations, was 1.7x in fiscal 2014, still comfortably
higher than Fitch's rating category median of 1.4x. Liquidity remained
strong with available cash and reserves equal to about 206 days of
operating expenses.
Preliminary financial results for fiscal 2015 indicate similar financial
results to fiscal 2014. Potential declines in future financial
performance will largely depend on decisions regarding the TBGS - the
timing of additional debt issuance, the structure of the debt and any
mitigating rate actions that are taken to finance debt service. However,
it appears possible that debt service coverage could decline to a point
that might place downward pressure on the rating.
BPUB's current debt position is moderate. BPUB's capital program in
fiscals 2016-2020 totals $169 million and is split across all three
utility systems. The capital needs are projected to be funded by
revenues and slightly less than $100 million in additional debt.
Participation in the TBGS would potentially add another $320 million to
the CIP. The TBGS is expected to be nearly entirely debt-financed,
although with the delays, BPUB has been accumulating reserves generated
by the rate increases to create an equity funding component for TBGS.
BPUB put $19 million into an equity reserve in fiscals 2014 and 2015 and
has budgeted another $10 million deposit in fiscal 2016.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991990
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991990
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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