Fitch Rates Southmost Regional Water Auth (Texas) Series 2006 Bonds 'A'; Stable Outlook.

NEW YORK -- Fitch assigns an 'A' rating to Southmost Regional Water Authority's (TX) (SRWA) $10 million water supply contract revenue refunding bonds, series 2006. Fitch also affirms the 'A' rating on the outstanding series 2002 Southmost Regional Water Authority water supply contract revenue bonds. The Rating Outlook is Stable. Fitch also affirms the 'A' rating on the City of Brownsville, TX's outstanding utilities system revenue bonds, utilities system junior lien exchange revenue bonds, and utilities system subordinate lien revenue bonds. The Rating Outlooks are all Stable.

Proceeds from the series 2006 bonds will be used to advance refund a portion of SRWA's outstanding series 2002 water supply contract revenue bonds. SRWA's bonds are payable primarily from pledged water supply contract revenues of the project's five participants. The bonds are expected to be insured and to price the week of Nov. 13, 2006 with A.G. Edwards & Sons as senior manager.

The 'A' rating is supported primarily by the strength of the take-or-pay water supply contracts with the five participants, which pursuant to the contractual agreements, are unconditionally obligated to make payments to SRWA as an operation and maintenance expense of their respective utility systems. The contracts extend through the life of the bonds. The Brownsville Public Utilities Board (BPUB; rated 'A' by Fitch) is the largest participant in the project (92.9%) and is subject to a 100% step-up provision in the event any of the other participants are unable to meet their obligations under the contracts. Given this contractual arrangement, Fitch views SRWA's credit as being directly tied to that of BPUB, whose credit provides the ultimate security for the bonds.

The 'A' rating on BPUB's bonds is reflective of its historically solid financial performance, including debt service coverage of 3.23 times (x) and 158 days cash on hand for the fiscal year ending Sept. 30, 2005. Unaudited results for fiscal year 2006 indicate strong financial performance and continued progress towards the meeting of targeted levels for operating and capital improvement reserves. Additional support for the rating is provided by a vibrant and growing service territory (Fitch rates the general obligation bonds of the city of Brownsville, Texas, 'A+' with a Stable Outlook) and a mix of power supply resources that results in retail rates which are competitive for the region.

Credit concerns center on the financial impact of the combination of BPUB's dependence on (approximately 62% of its 2005 energy requirements) and its exposure to the price volatility associated with natural gas-fired generation and purchased power. It should also be noted that while the service territory has featured consistent population growth and economic expansion for the past several years, it continues to have low wealth indicators, a high unemployment rate and sensitivity to the health of the Mexican economy.

The Southmost Regional Water Authority was established in 1981 for the purpose of developing alternative water supply strategies for its members. The series 2002 bonds were originally issued to finance a 7.5 million gallon per day brackish water desalination plant and related water conveyance system on behalf of five of SRWA's six members. While SRWA is the full owner of the project, BPUB performs all administrative functions of the authority, including system operations. The plant came online April 1, 2005 and supplies approximately 40% of BPUB's water supply.

The Brownsville Public Utilities Board operates, maintains and manages a combined utility system that provides electric, water and wastewater services to the City of Brownsville and certain areas of Cameron County outside of city limits. BPUB serves over 41,000 electric, 42,000 water and 40,000 wastewater customers. The combined utility system had total operating revenue of over $155.8 million in 2005, consisting of approximately 77% electric, 11% water and 12% wastewater revenues.

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