NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' rating to the bank note corresponding to the following Brownsville Public Utilities Board (BPUB) commercial paper notes:
--$100,000,000 commercial paper notes, series A.
The Rating Outlook is Negative.
The bank note rating is assigned to the commercial paper notes, series A but will only become applicable if the commercial paper notes cannot be remarketed and are purchased by the bank providing the liquidity facility.
The bank note rating is being assigned in connection with the substitution of the current irrevocable direct-pay letter of credit (LOC) provided by State Street Bank and Trust Company (rated 'A+/F1+', Positive Outlook) with a LOC to be provided by Bank of Montreal (BMO; rated 'AA-/F1+', Stable Outlook), acting through its Chicago branch.
SECURITY
The bank note is ultimately secured by a subordinate lien on net revenues of the combined utility system of the city of Brownsville, TX (the system) after the payment of senior lien obligations and junior lien obligations.
KEY RATING DRIVERS
BANK BOND RATING: The bank note rating, one notch below BPUB's utilities system revenue bond rating, and Negative Outlook are based on the credit quality of BPUB and reflective of the third and lowest priority of lien on pledged net revenues, as well as the distinct separation of the respective ordinances.
SOUND CREDIT QUAILITY: Financial performance has been strong historically with Fitch calculated debt service coverage (DSC) averaging 2.4x over the prior five years, and available cash and reserves equal to nearly 240 days of operating expenses since fiscal 2009.
UNCERTAINTY OVER NEW PROJECT: The Negative Outlook reflects BPUB's planned purchase of a 25% ownership interest in a new 800 mega-watt (MW) natural gas generating facility (the Brownsville Project). BPUB's participation, if completed, would essentially double current leverage and diminish future net operating margins and financial metrics according to the Board's latest financial projections. A final decision to proceed with the Brownsville Project is expected in the early part of 2014.
AFFORDABLE RATES POISED TO RISE: Fitch views positively BPUB's affordable rates, the employment of a fuel and purchased power adjustment charge which is adjusted monthly, and the Board's ability to adjust base rates by up to 7% over a five-year period. However, sizable rate increases needed to fund planned capital needs, including those related to the Brownsville Project, and meet debt service requirements will diminish financial flexibility.
DIVERSIFIED POWER SUPPLY: The Board maintains a diverse power supply with an equal mix of coal, natural gas and purchased power. Owned generating assets are split between natural gas-fired (62%) and coal-fired (35%) facilities. The additional capacity derived from the proposed natural gas facility would result in significant excess generating capacity, but ensure a reliable power supply sufficient to meet projected needs through 2028.
WEAK SERVICE AREA DEMOGRAPHICS: The rating factors in the service area's weak income levels, chronically high unemployment and economic dependence on cross-border economic activity. Despite the challenging demographics, utility collections have remained strong with minimal annual write-offs.
RATING SENSITIVITY
FINAL PROJECT COMMITMENT: Fitch plans to evaluate the final terms and conditions of the BPUB's participation in the Brownsville Project when available. However, BPUB's participation as currently proposed will likely lead to a rating downgrade, reflecting the anticipated weakening of BPUB's financial metrics and higher debt burden.
For more information on Fitch's long-term rating on BPUB, see Fitch's press release 'Fitch Affs Brownsville Util Sys & Southmost Reg'l Water Auth, TX Bonds at 'A+'; Outlook to Negative', dated March 21, 2013, available on Fitch's web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013);
--'U.S. Public Power Peer Study Addendum -- June 2013' (June 13, 2013);
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710397
U.S. Public Power Peer Study Addendum -- June 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710641
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696027
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=809213
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