Fitch Ratings said Oct. 8 that the Brownsville Public Utilities Board in Texas is sticking with its plan to buy 200 MW of the 800 MW of capacity of a Tenaska power project, despite delays in building that project.
Fitch Ratings affirmed the ‘A+’ rating on certain revenue bonds issued by the city of Brownsville on behalf of the Public Utilities Board. Fitch also affirmed the ‘A+’ rating on other revenue bonds issued by the Southmost Regional Water Authority (SRWA). The Rating Outlook on the bonds and a note rating was revised to Stable from Negative. SRWA bonds are secured by contract payments from BPUB made pursuant to a water supply agreement.
The Brownsville Public Utilities Board (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.
The revision reflects the extended delay of BPUB’s planned purchase of 200 MW of the proposed 800-MW Tenaska Brownsville Generating Station (TBGS) and issuance of related debt. Competitive market energy prices within the Electric Reliability Council of Texas (ERCOT) market have undermined the economic incentives of adding capacity in recent years, Fitch noted. Although BPUB still intends to participate in the new plant if Tenaska secures firm commitments for the other 600 MW of proposed capacity, the effect on BPUB’s profile will be evaluated as the details and timing become more concrete, Fitch added.
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.
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.
Fitch wrote: “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’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.
Fitch’s rescinded Negative Outlook dated back to news of the power project
Fitch assigned the board’s rating a Negative Outlook in 2013, following BPUB’s announcement of its intent to purchase the 200-MW ownership interest in the 800-MW TBGS (a natural gas-fired combined cycle 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 800 MW of plant capacity, Fitch added. Since Tenaska and BPUB’s announcement in early 2013, no additional commitments have been secured for the remaining 600 MW, it said.
Fitch said its revision of the Outlook to Stable reflects diminished interest in the remaining capacity of the power 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 said it 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 (578 MW) to well in excess of projected total requirements (426 MW), including the recommended 13.75% reserve margin in ERCOT.
In other news for this power project:
- Sharyland Utilities LP on July 10 filed with the Public Utility Commission of Texas a Standard Generation Interconnection Agreement with Tenaska Brownsville Partners LLC. The scheduled commercial operation date for this facility under this agreement is Dec. 31, 2018. There are two options for the Tenaska Brownsville Generating Station under this agreement: Option A covers two gas-fired turbines at 335 MVA each and one steam turbine at 380 MVA; and Option B includes only one gas turbine at 335 MVA and one steam turbine at 380 MVA. The Point of Interconnection for this project is the 345 kv bus at the Sharyland 345 kV Station.
- The U.S. Environmental Protection Agency said Jan. 26 that it had approved the final greenhouse gas (GHG) prevention of significant deterioration (PSD) permit for Tenaska Brownsville Partners. Tenaska under that EPA permitting also proposed two project designs: a 1‐on‐1 or a 2‐on‐1 combined cycle combustion turbine (CCCT) configuration. It would have an estimated nominal power generation summer condition output capacity of approximately 400 MW for the 1‐on‐1 configuration or 800 MW for the 2‐on‐1 version.