DALLAS –Brownsville, Tex., will refund $114.5 million of revenue bonds as it lays the groundwork for a natural gas pipeline system connecting the city to a proposed investor-owned power plant.

The negotiated deal is expected to price in early April. Estrada Hinojosa & Co. serves as financial advisor. The bonds will refund a 2005 issue, with savings used to replace an Ambac insurance policy with a cash-funded debt reserve.

Standard & Poor’s on Tuesday assigned its A-plus rating to the refunding revenue bonds with a stable outlook.

"The ratings continue to reflect our opinion of the general creditworthiness of the combined utility system, doing business as the Brownsville Public Utilities Board," said Standard & Poor's credit analyst Theodore Chapman.

Moody’s Investors Service rated the bonds A2 with a stable outlook.

The ratings affect $303 million of senior-lien parity debt and $1.3 million of junior-lien debt.

“The stable outlook is based on our expectation that BPUB will continue to maintain strong levels of liquidity that provide a key mitigant to the ongoing capital projects necessary to ensure adequate system capacity is maintained to accommodate projected growth,” wrote Moody’s analyst John Medina.

The Brownsville City Commission, acting as the Brownsville Public Utility Board, has entered into a memorandum of understanding with power-plant builder Tenaska to buy a 200 megawatt share of an 800 MW combined cycle gas fired plant that Tenaska is developing.

BPUB would provide the water to the plant, build the gas pipeline to the plant, and be a minority owner in the facility.

Tenaska plans to start construction of the Brownsville plant in 2014, with completion expected in June 2016. The project would move forward after Tenaska secures appropriate permits and agreements with other wholesale customers to purchase the remainder of the plant’s capacity.

Brownsville will open a revenue stream to finance its share of the project with an electric rate increase going into effect April 1.

The first revenue bond issue for the pipeline could come near the end of this year or in early 2014, according to Noe Hinojosa Jr., chief executive of Estrada Hinojosa.

While the additional electric capacity will result in BPUB being long on power in the short run, the expected efficiency and strategic location of the plant are expected to position it well for daily power sales into the Texas electric grid known as ERCOT (Electric Reliability Council of Texas), Medina said.

“Moody's notes that it remains uncertain as to whether or not Tenaska can move forward with the construction of the plant if the remaining power is not fully contracted to a credit worthy off-taker,” Medina added. “If the plant is constructed without a high degree of cash flow certainty and full cost recovery in the form of long-term PPAs with credit worthy off-takers, the plant may be materially exposed to the merchant market or speculative grade counterparties, which could have negative implications for the project, and indirect implications for BPUB.”

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