Fitch Affirms Chattanooga Electric Power Board's (TN) Electric System Revs 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'AA' rating on the following revenue bonds issued by the city of Chattanooga on behalf of the Electric Power Board (EPB) of Chattanooga:

--$284.2 million electric system revenue bonds, 2006 series A and B and 2008 series A.

The Rating Outlook is Stable.

SECURITY

Outstanding electric system revenue bonds are secured by a first lien on net revenues of the electric system.

KEY RATING DRIVERS

LARGE DISTRIBUTION SYSTEM: Chattanooga Electric Power Board (EPB, or the system) provides electric distribution service to customers within the City of Chattanooga (general obligation {GO} bonds rated 'AA+' with a Stable Outlook by Fitch) and in portions of Hamilton County, Tennessee (GO bonds rated 'AAA' with a Stable Outlook). The electric system continues to generate sound financial metrics despite an ongoing trend of uneven sales and the relatively weak service area demographics.

RELIABLE SOURCE OF POWER: EPB is among the largest all-requirements customers of the Tennessee Valley Authority (TVA; global power bonds rated 'AAA'; Rating Watch Negative) pursuant to a rolling ten-year contract.

STABLE FINANCIAL METRICS: Coverage of full obligations and liquidity are consistently low compared to median ratios for the given rating category. However, EPB's obligation to automatically pass through in full its wholesale costs (equal to nearly 80% of total expenses) coupled with a demonstrated ability and willingness to increase retail rates ensures satisfactory results.

COMPETITIVE ELECTRIC RATES: EPB's low overall retail rates compared to other regional systems provides flexibility; although TVA's sizeable capital needs could ultimately challenge the system's rate competitiveness. Base rate changes are subject only to the approval of TVA.

LOW DEBT: Capital needs will continue to be funded from excess operating cash flow, which should lead to continued improvement in EPB's already favorable debt metrics.

CHALLENGING SERVICE TERRITORY: The system's service area is relatively stable and diverse, but continues to exhibit above average unemployment and low income levels. The resulting concern is mitigated, however, by EPB's trend of strong collection rates, the obligation to automatically pass through power supply costs and competitive retail rates.

RATING SENSITIVITIES

RATING STABILITY: Fitch expects EPB's stable financial position, low debt levels and sound overall operating profile will continue for the foreseeable future.

CREDIT PROFILE

LIMITED RISK DISTRIBUTION PROVIDER

EPB derives its power supply entirely from TVA pursuant to an all-requirements take-and-pay power contract (the contract). The system is among TVA's five largest customers. The contract with TVA remains in effect, subject to automatic one-year extensions on the first of each year. TVA or EPB may terminate the contract subject to a 10-year advance notice requirement. TVA's supply obligation is absolute and unconditional, and EPB is required pursuant to the contract to purchase all of its electric power from TVA.

TVA operates a fairly diverse mix of power generating facilities and maintains capacity expected to be sufficient to meet load requirements for the foreseeable future. EPB currently has no plans to terminate its contractual relationship with TVA and expects to remain a long-term wholesale customer. Fitch believes the contract with TVA is a positive credit factor given TVA's competitive wholesale power costs and diverse power resources.

SOUND, STABLE FINANCIAL RESULTS

Debt service coverage has fluctuated over the years but has remained generally strong, averaging nearly 3.0x over the prior three fiscal years. Fitch notes that EPB makes an annual payment in lieu of taxes (PILOT) payment to the city of Chattanooga that accounts for a manageable 3% of total operating revenues. Coverage of debt service rises to well over 4.0x with the PILOT payment excluded from annual operating and maintenance costs, as required by the bond indenture.

Coverage of full obligations remained at 1.3x in fiscal 2013, lower than the rating category median of 1.6x. However, free cash flow after the payment of debt service and meeting the PILOT obligation is generally sizeable and used primarily to fund capital needs. Liquidity is also comparatively low at 91 days, but remains at a satisfactory level relative to the system's operating profile.

Financial projections through fiscal 2023 appear reasonable. Debt service coverage (including the PILOT payment) is forecast to decline to a still solid average of about 2.7x over the following five years as annual debt service rises moderately over the next three fiscal years. Retail rates are not projected to change, although any adjustment in wholesale costs will be automatically passed through to EPB's ratepayers. Liquidity remains close to current levels before steadily increasing in the outer years of the forecast.

WEAK SERVICE TERRITORY

Chattanooga is located in southeastern Tennessee and serves as the regional economic center of a six-county metropolitan statistical area (MSA). Economic growth in both the city and the broader MSA has been relatively healthy following the recent recession, driven in part by the opening of a Volkswagon assembly plant and an Amazon distribution center. City officials believe the gigabit internet service offered over the fiber-optic network owned by EPB has also had a positive impact on economic activity.

The system's customer base is diverse with residential users accounting for nearly 90% of the customer base and about 40% of total sales and revenue. The system's ten largest customers composed a modest 11.7% of system sales in fiscal 2013 and accounted for just 9.8% of total revenue.

Economic and income indicators lag those of the state and nation, although the service territory remains largely stable and rate increases continue to be imposed as needed. The city's December 2014 unemployment rate of 8% is down from a peak of 10.4% midway through 2009, but remains elevated compared to the unemployment rates of the state (6.8%) and nation (6.6%).

Per capita income and median household income levels of the city are comparatively weaker than state figures by 5% and 15%, respectively, and the city's individual poverty rate is nearly 60% higher than the national rate. While the service area's low wealth levels are of some concern, EPB's affordable rates, near-perfect collections, and its obligation to automatically pass through wholesale costs ensure the continued financial stability of the system.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013);

--'U.S. Public Power Peer Study Addendum -- June 2013' (June 13, 2013);

--'U.S. Public Power Rating Criteria' (Dec. 18, 2012).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710397

U.S. Public Power Peer Study Addendum -- June 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710641

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696027

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821629

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Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Ryan A. Greene, +1-212-908-0593
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director

Sharing

Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Ryan A. Greene, +1-212-908-0593
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director