Fitch Rates Bryan, Texas' 2006 Utility Revs 'A+'; Upgrades Outstanding Revs to 'A+'.

NEW YORK -- Fitch assigns an 'A+' rating to the City of Bryan, Texas' (Bryan Texas Utilities, BTU) $12.6 million electric system revenue bonds, new series 2006. In addition, Fitch upgrades BTU's outstanding bonds to 'A+' from 'A' and revises the Outlook to Stable from Positive. This transaction issue is part of BTU's $84 million capital improvement plan through 2012. Proceeds will be used to fund transmission projects approved by the Electric Reliability Council of Texas that are within the BTU service area. The bonds are scheduled to price the week of August 21, 2006 with Lehman Brothers as senior manager.

The rating upgrade reflects the following:

--Sound long term business strategy including good financial policies;

--Management and the city council's support of BTU's financial plan, which provides financial metrics supportive of an 'A+' rating;

--Texas Municipal Power Agency (TMPA) debt amortization that targets the pay down of all debt in 2018;

--Demonstrated ability to obtain rate approvals from the Public Utilities Commission of Texas (PUCT) for transmission projects;

--Improved rate competitiveness compared to retail electric providers in Texas.

New Development

Since our last review in (March 2005) management has made some modifications to its financial plan that includes reduced reserve levels and the creation of minimum debt service coverage targets over the long term. Fitch believes that these revisions are reasonable and continue to support the 'A+' rating. Adjustment's to the plan derive from additional transmission projects requested by ERCOT within BTU's service area (increasing capital expenditures for transmission by about $20 million), an agreement by the TMPA members' regarding the agency's debt strategy, and BTU's continued need for future base load generation. BTU's financial projections also reflect rate reductions that should secure its competitive position, a draw down of its rate mitigation fund to pay for certain distribution and transmission system improvements, and a 50 mw participation in a new base load generating facility. As a result, financial metrics will over the next five years level off, with targeted debt service coverage of above 2 times (x), equity to capitalization of about 50%, and cash liquidity of over 25% of operating expenses (or 90 day cash on hand). Management has assured Fitch that it will make appropriate rate adjustments in the future and revise liquidity levels upward in if needed to meet its stated financial targets and policies.

Additional Credit Factors

BTU's 'A+' rating also takes into account management's current progress with its capital improvement plan, which includes funding transmission related projects primarily with debt and continuing to fund local distribution projects mostly from cash. Fitch believes that this capital plan is prudent given the favorable rate structure in ERCOT, which provides for full recovery of a utility's transmission costs of service (TCOS). In essence, this result's in the recovery of BTU's transmission related debt service (1.35x) from all distribution service providers in the ERCOT market (according to their load) through net billing arrangements (the postage stamp rate).

Additional support comes from BTU's participation as a member of TMPA and benefits associated with BTU's share of the Gibbons Creek coal-fired generating unit. Going forward, BTU will receive approximately 50% of its energy supply (including off system sales) from TMPA's single Gibbons Creek coal unit (Fitch Rates TMPA 'A'; for more information see Fitch's report dated May 14, 2004). The Gibbons Creek plant's operating performance and cost structure is sound, and has been a source of stable, inexpensive energy relative to the higher, more volatile prices of natural gas and oil generation in the Texas market.

While Fitch has some concern with the system's heavy reliance on a single unit for much of its need, BTU and the other TMPA members are looking for ways to mitigate this exposure going forward, such as securing an outage insurance policy. In addition, BTU is looking to add 50 mw of new base-load generation in the 2011 timeframe. Management is reviewing its options and expects to make a decision on this matter later this year. The new resource is needed to replace market purchases and meet system growth. BTU has hired outside consultants to asses their needs and the options available to them.

Additionally, it should be noted that in 2007, the retail price to beat for investor owned utilities will be open for all customer classes in ERCOT. While potential retail rate pressure is unknown, Fitch believes that BTU has adequate liquidity targets and financial flexibility to protect themselves over the near to medium term.

The City of Bryan is located in east central Texas approximately 90 miles from Houston, Waco and Austin. The utility serves both residential and commercial customers within Bryan and provides wholesale power to the cities of Bowie, Bridgeport and Granbury.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.