Fitch Ratings has affirmed the rating on bonds issued by the city of Brownsville, Texas on behalf of the city's Public Utilities Board (BPUB) at “A-“.
Specifically, Fitch affirmed approximately $222.745 million utility system revenue bonds, series 2005A, 2008, 2013A, 2016, 2018, 2020, 2020A, 2022, and 2022A.
Fitch also affirmed the $100 million bank note rating for the subordinate lien commercial paper program, series A, issued by the city of Brownsville, Texas, on behalf of the BPUB at "A-."
Fitch also affirmed the approximately $4.865 million water supply contract revenue bonds, series 2012 issued by the Southmost Regional Water Authority (SRWA) at "A-'".
Fitch assess BPUB's standalone credit profile (SCP) at "a-".
The Rating Outlook is revised to Positive from Stable.
The "A-" rating and "a-" SCP reflect the utility's solid financial profile and Fitch's improved view of the operating risk profile for all utilities participating in the Electric Reliability Council of Texas regional market, Fitch said. "BPUB produced robust operating cash flows during the past two years, with coverage of full obligations approximating 2.0x in fiscals 2022 and 2023," it added.
The strong operating margins are primarily due to substantial water and wastewater rate increases implemented during the past two years, Fitch noted. The rate increases are part of the utility's broader five-year rate plans approved by BPUB's city commission for the water and wastewater systems, which commenced in June 2022. "The rating considers the continued implementation of approved water and wastewater rate increases during the next two years, in addition to the electric utility's ability and willingness to fully recover its fuel and purchased power costs on a timely basis," Fitch said.
"BPUB's operating risk profile remains strong, reflecting the utility's low operating cost burden and Fitch's improved view of the ERCOT regional market."
Fitch noted that it had previously constrained the operating risk assessment for all Fitch-rated ERCOT-based electric utilities. This action was due to certain ERCOT operating risks — including natural gas delivery concerns, counterparty risk and price volatility — all of which were exposed during the Winter Storm Uri in February 2021.
"However, the PUCT and ERCOT officials have taken steps to limit future potential operational and financial risks to utilities through additional winterization requirements, a robust inspection program, increased attention on the timing of scheduled plant outages, large-load demand response incentives, protocols to strengthen grid operations and reserve availability, improved communication regarding conservation during tight conditions, and a reduction in the market price cap (from $9,000/MWh to $5,000/MWh)," it said.
Fitch's ratings further consider the lower operating risk of the water and wastewater operations which allows the utility to accommodate slightly higher leverage levels than electric utility peers that operate solely with generation and retail electric service business lines, it pointed out.
The Positive Outlook reflects the Fitch's expectation that the BPUB's leverage profile, which was 4.6x at FYE 2023, will remain below 8.5x in Fitch's rating case over the next five years.
"While BPUB's capital spending is expected to increase over the near- to medium- term, Fitch believes the utility maintains ample headroom on its leverage metric at the current rating. Sustained outperformance of the utility's budget, driven by further improvement in operating income, would likely result in positive rating action."
The SRWA rating is linked to BPUB's rating, given its 92.91% 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.
