DALLAS — The southernmost Texas city of Brownsville has created a new public utility to pipe natural gas to a proposed merchant-owned power plant that would also rely on the city’s treated wastewater for coolant.

The project combines the city’s ability to finance two pipelines with Tenaska Inc.’s expertise in building gas-fired power plants, according to Noe Hinojosa Jr., chief executive of Brownsville’s financial advisor, Estrada Hinojosa & Co.

“Brownsville is at the point where they need to be acquiring more power,” Hinojosa said. “They can buy power or build a plant. Why build your own plant, when you can buy the power from a new private plant in your own city?”

The 60-mile pipeline that would supply the plant would also allow both partners to exploit the cheap natural gas that is flowing at record levels from the nearby Eagle Ford Shale region of South Texas.

While the city would not own the gas, it would be the transporter to Tenaska, the end customer. The Brownsville Public Utility Board would, in turn, buy 200 megawatts of power from the Tenaska plant.

To make the deal work, Tenaska needs to find customers for the remaining 600 megawatts of capacity.

“Having a large, gas-fired power plant in the Brownsville area should attract new customers to this area,” said John Bruciak, general manager and chief executive officer of the Brownsville Public Utility Board. “It’s an important economic development tool.”

In addition to the Tenaska plant, Brownsville’s new gas utility could also pipe gas to customers at the Port of Brownsville, one of the busiest on the Texas coast, Bruciak said.

To cool the Tenaska plant, the city would pump treated wastewater through a five-mile pipeline, sparing the fresh or potable water that might otherwise be used, Bruciak said. The sale of treated wastewater would create a new revenue stream for the board, he added.

For drought-prone Texas, water is a critical issue not only for the growing population and citrus farms of the Lower Rio Grande Valley, but also for energy production.

The fracking process that allows natural gas to flow to the surface in the Eagle Ford Shale requires large amounts of water to create underground pressure.

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 electricity rate increase going into effect April 1, Hinojosa said.

The first revenue bond issue for the pipeline could come near the end of this year or in early 2014, he added.

In the meantime, Brownsville is planning to refund $150 million of 2005 bonds with a negotiated deal through senior manager Jefferies & Co., Hinojosa said.

In December, Standard & Poor’s raised Brownsville’s general obligation rating to AA-minus from A-plus, citing “continued growth of the city’s deep and diverse tax base coupled with the city’s commitment to establish itself as a binational trade center.” It does not rate the Brownsville utility enterprise.

In September, Moody’s Investors Service rated Brownsville’s senior utility system revenue refunding bonds A2 with a stable outlook. Moody’s rates the city’s general obligation debt Aa3.

Fitch Ratings rates the city’s utility debt A-plus and its general obligation bonds AA-minus.

With a population of about 175,000, Brownsville is on the southern tip of Texas in the Rio Grande Valley. Due to its location along the U.S.-Mexico border and its access to the Gulf of Mexico, Brownsville serves as one of the state’s most important ports of entry.

A report by economic analysts at the firm Martin Associates/John C. Martin Associates estimated that maritime operations at the port produced $2 billion in economic activity in the state.

The report says the port is recovering from the global economic crisis and the Gulf drilling embargo that followed the 2010 Deepwater Horizon spill. A large percentage of the cargo shipped through the port is petroleum-based.

The city’s retail base also benefits from Brownsville’s location as a border town, with a population of more than 500,000 in nearby Matamoros, Mexico. Despite the bustling retail activity and heavy volume of cargo passing through the area, median household effective buying income is 61% and 60% of the state and national averages, respectively.

Brownsville’s property tax base continues to experience steady expansion after emerging from a slight contraction in fiscal 2011, according to S&P. Assessed value has grown by 6% to $5.66 billion for fiscal 2013, up from $5.33 billion in fiscal 2011.

The Brownsville Public Utilities Board is wholly owned by the city and provides electric, water and wastewater utility services to the city and surrounding areas.

The Brownsville City Commission voted on Dec. 11 to approve creation of the new natural gas utility, not yet named, to transport the gas. The city and Tenaska signed an agreement Jan. 25 on the sale of one-fourth of the power coming from the new plant. BPUB’s share of the plant would provide enough power for about 100,000 homes, according to Bruciak.

“Leaders have laid out an aggressive economic development plan for coming decades, and Tenaska is presenting us with the opportunity to produce reliable and affordable power locally,” he said.

In a sector report issued Feb. 21, Moody’s said its analysts’ outlook for fully contracted U.S. power projects is stable and the outlook for U.S. merchant power projects is negative.

“Notwithstanding weak pricing, the pace of power price declines is waning, which is offering subdued relief for projects in tight markets such as the Electric Reliability Council of Texas (ERCOT),” analysts noted. “Our outlook for merchant, partially contracted power projects has been negative since March 2011.”

In March 2012, San Antonio issued $521 million of taxable revenue bonds to buy Tenska’s 800-megawatt natural gas power plant in nearby Seguin for city-owned CPS Energy, to replace the 871-megawatt J.T. Deely coal-fired power plant in San Antonio.

CPS decided to close the Deely plant in 2018 to avoid a $565 million expense to install scrubbers under anticipated federal Environmental Protection Agency standards.

According to ERCOT, the operator for the electric grid that covers most of Texas, natural gas was the fuel used to generate nearly 45% of the energy provided in the grid last year, up from about 40% in 2011.

Wind power generation increased slightly to just over 9%, compared to 8.5% the previous year. Coal use in ERCOT’s fell by more than 5%, and nuclear held steady at just under 12%.

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