OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to the following bonds issued by the city of Bryan, TX on behalf of Bryan Texas Utilities' (BTU) rural electric system (the rural system):

--$16.6 million rural electric system revenue refunding and improvement bonds, series 2016.

Bond proceeds will be used to finance distribution system improvements, purchase a surety bond to fund the reserve fund, refund outstanding bonds for savings, and pay costs of issuance. The bonds will be sold via negotiated sale the week of July 11.

In addition, Fitch affirms its 'A+' rating on the following city electric system obligations:

--$5,200,000 rural electric system revenue bonds, series 2008;

--$1,925,000 rural electric system revenue bonds, series 2011.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

RURAL ELECTRIC SYSTEM: Bryan's rural electric system is a retail distribution system serving a largely residential customer base in a quickly growing service area. The rural system is an all-requirements wholesale customer of Bryan's city electric system (rated 'A+' with a Stable Outlook). The two systems are separately financed but share the same senior management and all administrative functions.

ADDITIONAL DEBT ISSUANCE: Proposed debt issuance through fiscal 2019 is expected to pressure the rural system's financial profile. However, despite a nearly tripling of outstanding debt and a reduction in debt service coverage from nearly 5.0 times (x) in fiscal 2015 to approximately by 2.3x in fiscal 2019, metrics should remain adequate for the rating. Liquidity levels are projected to remain relatively low but stable at close to 60 days cash on hand.

FLEXIBLE RATE STRUCTURE: The system's rate structure includes two adjustable mechanisms tied to fuel costs and regulatory costs, including transmission charges. Fitch views the flexibility provided by the adjustable rate structure positively. Rates are expected to remain competitive following a multiyear base rate increase of 9.9% that will be fully implemented in October 2016.

GROWING CUSTOMER BASE: Electricity sales increased by 5.1% in fiscal 2015 and are expected to continue increasing due to significant growth in the area. Additional development in all customer classes is expected to continue despite a reduction in oil exploration activities in the area.

RATING SENSITIVITIES

WEAKENING FINANCIAL METRICS: Bryan rural electric system's anticipated borrowings through fiscal 2019 could result in financial metrics that are inconsistent with the current rating unless offset by sufficient rate increases and higher liquidity levels.

CREDIT PROFILE

The City of Bryan, TX is located approximately 90 miles west of Houston in Brazos County and is considered a twin city of College Station, TX. Bryan owns and operates two electric systems: the City Electric System, which serves customers within city boundaries, and the Rural Electric System, which serves areas outside the city's borders. The combined systems are referred to as Bryan Texas Utilities (BTU). Each system, while operated by a common staff, is maintained separately for accounting and reporting purposes.

The rural system began operations in 1937 and provides electric service to approximately 19,068 customers. The rural system's service territory includes the immediate area outside the city of Bryan extending to most of Brazos County, adjacent to and including portions of the City of College Station, and parts of Burleson and Robertson counties in a radius of about 20 miles from the City of Bryan.

The rural system is an all requirements customer of the city system. The city system has sufficient capacity to meets its power needs, including those of the rural system, through its own natural gas fired resources, ownership share in the Gibbons Creek coal fired plant through Texas Municipal Power Agency (TMPA), and long-term purchase power contracts.

PROJECTED DECLINE IN FINANCIAL METRICS

The rural system's financial performance remained strong in fiscal 2015 with Fitch calculated debt service coverage and coverage of full obligations at 4.95x and 1.42x, respectively. While coverage levels are above medians for similarly rated retail systems, the rural system's liquidity level are comparatively low at just 64 days cash on hand. However, as a distribution retail system with an all-requirements contract, the rural system's liquidity needs are more predictable relative to vertically integrated utilities with generation operating responsibilities or purchasing utilities that may have collateral posting requirements.

Management's financial projections through fiscal 2021 reflect the system's growing debt burden and its impact on financial performance. Following the current issuance, annual debt service costs are expected to increase to approximately $2 million and coverage will decrease to just under 3.0x through fiscal 2018. An additional debt issuance in fiscal 2019 tentatively sized at $16 million would further reduce coverage levels to around 2.3x.

Projected liquidity is expected to remain relatively low for the rating with no less than 58 days cash on hand through fiscal 2021. Reductions below the forecast levels for debt service coverage or liquidity could pressure the rating.