AUSTIN, Texas--(BUSINESS WIRE)--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.
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.
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.
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'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form