DALLAS – Plans to build a $500 million gas-fired power plant in Brownsville, Tex., with public and private investment have been delayed by falling gas prices, according to those involved in the deal.
Tenaska, Inc. has not found enough customers to make the project viable, according to Noe Hinojosa Jr., president of Estrada Hinojosa and Co., the financial advisor for the Brownsville Public Utility Board.
Brownsville had committed to buy 200 megawatts of the merchant plant's 800 megawatt capacity and had also agreed to build water and gas pipelines to transport fuel and coolant. However, Tenaska has not received sufficient commitments from other customers to build the plant, Hinojosa said.
"We're hopeful that in the next year or two, gas prices will rise, and our project will be viable and we can proceed with it," Hinojosa said.
With natural gas prices at historic lows, power customers can buy wholesale electricity more cheaply on the spot market, Hinojosa said. Brownsville relies on the spot market.
With Brownsville's investment in the pipelines, the project was budgeted at $650 million.
BPUB has approved several rate increases to finance the project but has not yet sold any bonds or made a final commitment. Revenue from the rate increases will bolster BPUB's reserves, Hinojosa said. Announced in 2013, the plant was originally expected to be completed in 2016.
Shortly after the plant was announced, energy marketing firm Hino Energy filed a complaint seeking access to documents used in planning the Tenaska plant. The Texas Attorney General's office upheld BPUB's contention that the documents were proprietary.
Hino Energy's top executive sought to show that buying power on the spot market would be less costly than committing to the Tenaska plant.
The delay in building the plant led Fitch Ratings to improve its outlook on BPUB's A-plus rating to stable from negative in an October report.
"The negative outlook reflected BPUB management's expectation at that time that debt issuance would occur shortly thereafter, and that the substantial increase in debt would weaken financial and leverage ratios," analyst Kathy Masterson wrote. "However, construction has not yet begun on the Tenaska project and any additional debt at BPUB appears to be at least a few years away."
Moody's Investors Service had also warned that the plant would impact BPUB's A2 rating.
"The manner in which BPUB manages this large potential investment that we believe is likely to result in a long power position and a doubling of indebtedness will be a critical factor for the rating and outlook prospectively," Moody's analyst Gaurav Purohit wrote in July, ahead of a $97 million BPUB refunding.
Natural gas prices are about 80% lower than they were seven years ago, according to Zacks Investment Research. The low gas prices, along with oil prices that have fallen 60% from their peak of 2014, have begun to have an impact on Texas production.
"In the absence of major production cuts, we do not expect much upside in gas prices in the near term," researchers at Zacks wrote.
So far, the depressed energy market has not halted plans to build three liquefied natural gas plants at the Port of Brownsville, representing billions of dollars of private investment. The Tenaska plant was intended to serve new industrial customers at the port.
Plans call for the new LNG facilities to export gas produced in Texas.
In April, Standard & Poor's upgraded the city of Brownsville's general obligation debt one notch to AA from AA-minus and kept the outlook stable. S&P rated the BPUB debt A-plus in July and maintained a stable outlook, even with the Tenaska plant still on the boards.
In addition to power, BPUB provides water and sewage facilities for the southernmost city in Texas.
One city board serving the city, the Brownsville Community Improvement Corp., received an upgrade from Moody's Investors Service on Nov. 20, to A1 from A2, reflecting "steady sales tax revenue growth resulting in improved debt service coverage levels."
The upgrade affects about $12 million of sales tax revenue debt.
"We expect the tax base growth to maintain its current pace in the near term," said Moody's analyst Julie Meyer, "but the economy of the Brownsville MSA faces some downside risk given the manufacturing base's vulnerability to low oil prices. Oil rig manufacturers employ nearly 30% of factory workers in the area, and persistently weak prices drag demand for extraction equipment."
