Fitch Affirms Bryan Texas Utilities, TX City Electric System Revs at 'A+'; Outlook Stable

Fitch Ratings has affirmed its 'A+' rating on the following outstanding Bryan Texas Utilities, TX (BTU) city electric system revenue bonds:

--$202.6 million city system electric revenue bonds, series 2005, 2006, 2007, 2008, 2009, 2010, and 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of the city electric system.

KEY RATING DRIVERS

CITY ELECTRIC SYSTEM: The city of Bryan's (Bryan) city electric system is a vertically integrated electric utility that serves approximately 34,609 customers within Bryan's city boundaries. The city system also provides power through a wholesale, take-or-pay contract to the city of Bryan's rural electric system ('A+'/Outlook Stable), which is separately financed but shares the same senior management and all administrative functions.

SIGNIFICANT CAPITAL PLAN: The city system's significant capital needs, including the development of new generation, are driven by an increasing customer base and significant load growth. Management plans on debt financing approximately 88% of the $249 million five-year capital plan, including an expected issuance of approximately $90 million in fiscal 2016. Although the system's debt burden is expected to rise to above median levels for the rating, the rapid amortization of existing debt should moderate leverage over the near term.

SATISFACTORY FINANCIAL PERFORMANCE: Debt service coverage remains satisfactory for the rating despite being somewhat below historical levels as the system's rapidly amortizing debt pressures financial metrics. Rating concerns are mitigated by the system's sound liquidity with 117 days cash on hand.

FLEXIBLE RATE STRUCTURE: The system's competitive rates include two adjustable mechanisms tied to fuel costs and regulatory costs, including transmission charges. The flexibility provided by the adjustable rate structure is expected to help offset projected cost pressures and maintain relatively stable financial performance through 2020.

WHOLESALE REVENUE: Wholesale sales accounted for about 37% of sales and 25% of revenues in fiscal 2014. Favorably, about 77% to 68% of wholesale sales in recent years were contracted sales to other municipal utilities. Management's projections include modestly increasing non-contract wholesale sales into the ERCOT market over the next couple of years, which could negatively impact financial performance if those sales are not realized.

DIVERSE POWER SUPPLY: The system obtains its power supply through a combination of owned gas-fired resources, purchased power contracts, and Bryan's 21.7% ownership of the Gibbons Creek (Gibbons Creek) coal plant. The plant ownership is through the city's participation in the Texas Municipal Power Agency (TMPA; rated 'A+' with a Stable Outlook). The continued successful operation of the plant since commissioning in 1983 acts as a mitigant against single unit risk.

RATING SENSITIVITIES

WHOLESALE EXPOSURE: The projected financial performance is increasingly reliant on opportunistic wholesale sales into the ERCOT market, which could negatively impact the system's financial performance if projected sales are not realized.

CREDIT PROFILE

BRYAN TEXAS UTILITIES

The City of Bryan, TX is located in east central Texas, approximately 90 miles west of Houston and is considered a twin city of College Station, TX. The city owns and operates the City Electric System within the boundaries of the city and the Rural Electric System outside the boundaries of the city. The combined systems are also referred to as BTU. Each system, while operated by a common staff, is maintained separately for accounting and reporting purposes.

SIGNIFICANT CAPITAL PLAN

The city system's five-year capital plan is a sizeable $248.6 million, which includes approximately $92.8 million for the construction of a 70 MW reciprocating engine with an expected online date of summer 2018. Other significant projects include approximately $91.7 million for a transmission build-out to increase reliability and to address the large growth in the city's southern and western sections. Part of the growth is due to the development of Axis Pipe and Tube, Inc., which is expected to be the largest city customer following completion of its manufacturing plant and related facilities.

Management plans on funding the capital plan through the issuance of $218.7 million in debt (approximately 88% of total plan) with the remainder cash funded. Issuance plans include $134 million in fiscal 2016, including $90 million for the development and construction of the reciprocating engine, with additional issuances of $47 million and $35 million in fiscal 2018 and 2020, respectively.

The significant debt issuance plans are expected to raise the system's debt burden to above average levels for the rating. However, Fitch views the plans as manageable given the rapid amortization of existing debt. With approximately 58.2% of outstanding debt retired within 10 years, the system should retain sufficient capacity to absorb the planned issuances.

SATISFACTORY FINANCIAL PERFORMANCE

Debt service coverage and coverage of full obligations were satisfactory for the rating at 2.17x and 1.32x, respectively in fiscal 2014. Projected coverage shows a decrease in fiscal 2015 to around 1.9x before returning to above 2.0x in fiscal 2016 and beyond. The out-year projections include the planned debt issuances, demonstrating the system's financial ability to service the increasing debt load.

WHOLESALE SALES

Wholesale sales (not including sales to the rural system) comprised a significant 37% of MWh sales and 25% of total revenues in 2014. Favorably, over the past three years approximately 77% to 68% of wholesale sales are attributable to contracted sales of energy and capacity to neighboring municipal electric systems.

Management's financial projections include a growing amount of ancillary services revenue through fiscal 2016 before leveling out in fiscal 2017. Fitch notes that a failure to realize the projected opportunistic sales could negatively impact financial performance.

COMPETITIVE, FLEXIBLE RATES

The city system's rate structure consists of a base rate and two adjustable charges: (1) a fuel adjustment charge, and (2) a regulatory charge. Both of the adjustable charges can be modified on a monthly basis at the discretion of the Board without city council approval. However, the utility's practice is to maintain stable rates with the fuel charge adjusted annually and the regulatory charge adjusted on a quarterly basis or less. The regulatory charge is intended to capture transmission costs (CREZ driven) plus any regulatory fines or fees imposed by agencies other than the city.

The city system recently began implementation of a three year rate increase for the city system. The three phases, effective Oct. 1 of 2014, 2015, and 2016 are designed to increase the city system's base rates by 2.4%. However, the corresponding decrease in the fuel charge is likely to result in a net neutral change to customer bills over the near term. The city system also benefits from rising rates for the rural system, which is implementing a 9.9% increase over the same time period, resulting in increased revenues from the rural system.

The city system's rates are very competitive when compared with neighboring systems with residential rates among the lowest in the state. Favorably, the residential rates are nearly 28% lower than the neighboring city of College Station. Commercial and industrial rates are midrange when compared to peers but remain significantly below the rates charged by the city of College Station.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 16, 2014);

--'U.S. Public Power Rating Criteria' (May 18, 2015);

--'U.S. Public Power Peer Study Addendum - February 2015' (Feb. 9, 2015).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

U.S. Public Power Peer Study Addendum -- February 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861490

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985269

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