Fitch Rates Brownsville, Texas $250MM New Bonds 'A', Upgrades Subs to 'A', Stable Outlook.

NEW YORK -- Fitch Ratings assigns an 'A' rating to the City of Brownsville TX's, $174 million of utilities system revenue improvement and refunding bonds, series 2005A, $58 million of utilities system taxable improvement refunding bonds, series 2005B, and the $19 million of utilities system junior lien exchange refunding bonds, series 2005A, and taxable series 2005B. Fitch also upgraded the rating on the City of Brownsville's (TX) utilities system subordinate lien revenue and refunding bonds to 'A' from 'A-' and, in conjunction with this rating, affirms the 'A' rating on Southmost Regional Water Authority's outstanding water supply revenue bonds. The Ratings Outlook is Stable.

The bonds are secured by a net revenue pledge of the Brownsville Public Utilities Board (BPUB). BPUB is a combined utility system, located in Texas' Rio Grande Valley, providing electric, water, and wastewater services to the City of Brownsville. Operating revenues for fiscal 2004 totaled $131 million, comprising 75% electric, 12% water, and 13% wastewater. The series 2005A and B bonds are expected to price the week of Aug. 1 with Goldman Sachs as book-running manager.

Over the past several years, BPUB's debt strategy centered on preparing the utility for the advent of electric retail competition. The purpose of this financing is part of BPUB's planned debt restructuring that will allow BPUB to establish a new financing structure for the system and revise certain bond covenants. Proceeds form the bonds will provide a portion of the funds needed to refund all of the senior lien bonds, refund a significant portion of BPUB's outstanding subordinate lien bonds as senior lien obligations, and help fund the systems operating reserve and capital improvement funds. Additionally, proceeds will help pay for the completion of a transmission line upgrade and other system improvements.

Fitch believes that this restructuring will simplify and clarify BPUB's transfer to the city and will provide solid and more traditional security provisions for bondholders. The new transfer policy, calculated as 10% of adjusted gross revenues (adjusted for fuel, purchased power, and costs associated with the Southmost Water District), should provide BPUB and the city with a reasonable and more predictable transfer amount. Using the new transfer formula, Fitch calculated the fiscal 2004 transfer ratio to be about 6% of total revenues, which is in line with the national average. Fitch will be publishing a full report outlining certain changes to the BPUB's security features.

The financing is consistent with the memorandum of understanding (MOU) between the city and BPUB that was put together to clarify the roles of the city and utility and provide greater transparency of the transfer policy for planning on both sides. The MOU was approved in 2004 with support of both the city commission and the BPUB board. While in the recent past there was some division among the board regarding certain issues, the current board, made of three incumbent and three newer members, has resolved these issues. Recent conversation with the BPUB would seem to support this improved working relationship among the current board and city commission.

Other notable improvements resulting from the new plan of finance include approved rate increases that will maintain solid debt service coverage in the range of 1.75x, defined cash levels for system liquidity ($12.5 million in an operating reserve and $15 million in a capital improvement fund), and reduced interest rate risk with reduced variable-rate debt going forward, currently about 20% of total debt.

Underlying support for the rating also includes the combined utility system's, historically solid financial performance, competitive retail rates, and a robust service territory. BPUB's retail rates are expected to remain competitive, even when including planned rate increase of 5.5% in October 2005. The system's average residential rate for 2005 is 9.4 cents pre kwh, compared with the regional average of about 11.4 cents per kwh. The system's service territory continues to expand, supporting continued sales growth of above 5% annually. Fitch rates the general obligation bonds of the City of Brownsville (the city) 'A+'.

Credit concerns center on the electric system's exposure to natural gas price volatility, with 75% of its 2004 energy requirements met with gas-fired generating resources, and that the water system benefits from some subsidization from the electric system. With electric deregulation in Texas continuing to move forward, an increasingly competitive environment adds another element of risk to BPUB's credit profile. While the service territory has featured consistent population growth and economic expansion for several years, the city's low wealth indicators, high unemployment rate, and sensitivity to the Mexican economy should be noted.

Additionally, as part of BPUB power supply planning they have exercised their right of first refusal for their portion of AEP Texas Central Company's (TCC) share of Oklaunion Unit No. 1 in May, 2004 and deposited in escrow $42,750,000. Golden Spread filed suit against TCC, OMPA and the board, alleging that neither the board nor OMPA effectively exercised their rights of first refusal and that TCC was obligated to close the sale of TCC's interest to Golden Spread. The outcome of the dispute is currently unclear. While Fitch would view the acquisition as a positive development, providing the system with a more balanced fuel mix (increasing energy from coal to about 33.9% of total requirements), failure to close the transaction is not a significant credit event.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies, and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.