Fitch Ratings assigns an 'A+' rating to the $23.2 million utility system revenue refunding bonds, series 2012, issued by the City of Brownsville, TX on behalf of Public Utilities Board (BPUB or the board) and the $13.8 million Southmost Regional Water Authority (SRWA) water supply contract revenue refunding bonds series 2012.
Both series of bonds are expected to price around Sept. 25, 2012. Proceeds will refund BPUB's outstanding commercial paper notes and SRWA's water supply contract revenue bonds series 2002.
In addition, Fitch upgrades the ratings on the following bonds:
--$291.3 million of outstanding junior and senior BPUB utility system
revenue bonds to 'A+' from 'A';
--$37.8 million of SRWA water
supply contract revenue bonds to 'A+' from 'A'.
The Rating Outlook on all the bonds is Stable.
SECURITY:
The senior BPUB bonds are secured by net revenues derived from the combined utility systems. Junior debt is secured by net revenues of the combined utility system after satisfying senior debt service.
The SRWA bonds are secured by contract payments made under the water supply agreements with the authority's participants, including the board. The contract payments are unconditional and senior to BPUB's debt service.
KEY RATING DRIVERS:
SOLID FINANCIAL PERFORMANCE: The upgrade reflects BPUB's strong financial performance, as evidenced by Fitch calculated debt service coverage that exceeds 2.0x and an increased cash balance equal to 164 days of operating expenses. Strong cash flow from operations, which obviates the need for significant future rate increases despite a robust capital plan, also supports the upgrade.
FLEXIBLE RATE STRUCTURE: BPUB benefits from a flexible rate structure that includes a fuel and purchased power adjustment charge. Favorably, BPUB has been granted authority by the city commission to adjust base rates automatically by up to 5% over a five-year period, if necessary.
DIVERSIFIED POWER SUPPLY: The board has a diverse power supply with an equal mix of coal, natural gas and purchased power. While the Oklaunion coal plant helps in keeping power supply cost low, it also exposes BPUB to environmental risk with respect to greenhouse gas emissions.
SIGNIFICANT CAPEX PLAN: Capex through 2017 is estimated at about $198 million. Fitch notes that majority of the planned capex is nondiscretionary. About $55 million will be funded with debt, with the balance coming from grants and internal cash.
WEAK SERVICE AREA DEMOGRAPHICS: The rating factors in the service area's below-average wealth indicators, higher unemployment, and dependence on cross-border economic activity. These are partially mitigated by faster growth in the service territory, lower cost of living, and the combined system's flexible cost-recovery mechanism.
SRWA's RATING LINKED TO BPUB's: The 'A+' rating on SRWA reflects the independent unconditional take-or-pay contracts with the participants, of which BPUB is the largest at 92.91%. The participant contracts provide for a reallocation of payment obligations based upon a default by any participant with BPUB's contract ultimately requiring the board to make any unallocated payments.
CREDIT SUMMARY:
Combined Utility System Pledge
BPUB is a component unit of the city of Brownsville, TX (GO rated 'AA-' with a Stable Outlook by Fitch). The board owns and operates a combined utility system that provides electric, water, and wastewater service to residential and commercial customers within the city and in certain areas of Cameron County outside of the city limits. The outstanding debt for each service is secured by a pledge of revenue from the combined utility system.
Electric System Dominates the Combined Utility
BPUB serves approximately 45,500 electric, water, and wastewater customers. All facilities of the system are owned by the city but operated, maintained, and managed by BPUB. The combined utility system had total operating revenue of $168.1 million in 2011, consisting of approximately 74% electric, 13% water, and 13% wastewater. BPUB's financial results indicate each utility system being self-sufficient on a standalone basis.
Limited Automatic Rate-Setting Authority
The rates of the system are established by the city commission based on a petition by the board. The city commission has granted authority to the board to adjust electric rates automatically within certain defined parameters. In order to avoid severe rate spikes, the board can automatically adjust base electric, water, and wastewater rates by up to 5% over a five-year period. BPUB recently increased base rates in October 2011 by 5% as the prior base rate increase was five years ago in 2006. The board's rate structure also benefits from a fuel and purchased power adjustment charge which has been changed frequently to reflect actual costs.
Solid Financial Performance with Improved Liquidity
Financial metrics for the utility remain strong and consistent with prior years. Fitch calculated debt service coverage was more than 2.0x in 2011 after adjusting for transfers to the city. Annual debt service is expected to be level at about $25 million through 2016 and includes new debt to be issued to finance the capital plan. BPUB estimates debt service coverage after adjusting for transfers to be more than 2.0x for fiscal 2012. Liquidity has improved over the last few years and is strong at 164 days cash on hand not counting unused commercial paper capacity. The improved liquidity acts as an insurance against unanticipated costs and is viewed favorably by Fitch.
Largest Participant in SRWA
BPUB also participates in SRWA with a 92.91% ownership share. SRWA has built a 7.5 million-gallon reverse osmosis water treatment plant. This plant includes a 7.5 million-gallon storage tank and a 0.75 million-gallon clear well. The board's total water treatment capacity including SRWA is currently at 47 million gallons per day (mgd).
BPUB and the other participants in SRWA are unconditionally responsible for making payments towards SRWA's expenses which includes debt service on the contract revenue bonds. The participant contracts provide for a reallocation of payment obligations based upon a default by any participant with BPUB's contract ultimately requiring the board to make any unallocated payments.. Fitch therefore views SRWA's credit as being directly tied to that of BPUB due to the board's 92.91% participation and the unlimited step-up provision applicable only to the board.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported
Rating Criteria' (June 12, 2012);
--Criteria' (Jan. 11, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S.
Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815
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