Fitch Rates Chattanooga's EPB's (TN) Electric System Revs 'AA+'

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

--Approximately $209,735,000 electric system refunding revenue bonds series 2015A;

--Approximately $15,400,000 electric system refunding revenue bonds series 2015B (Taxable);

--Approximately $25,900,000 electric system revenue bonds series 2015C.

The bonds are scheduled to price via negotiation the week of July 20. The Series 2015A and 2015B (Taxable) will refund portions of outstanding parity bonds (Series 2006A, 2006B and 2008A) for interest savings while the series 2015C bonds will fund costs related to EPB's ongoing capital program.

In addition, Fitch has upgraded the following outstanding revenue bonds to 'AA+' from 'AA':

--$269.925 million electric system revenue bonds series 2006A, series 2006B and series 2008A

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on net revenues of the electric utility system, after payment of operations and maintenance costs.

KEY RATING DRIVERS

LARGE DISTRIBUTION SYSTEM: Chattanooga Electric Power Board (EPB, or the system) provides electric distribution service to a broad and diverse service area that primarily includes the City of Chattanooga and neighboring portions of Hamilton County [general obligation (GO) bonds rated 'AA+' and 'AAA', respectively, both with a Stable Outlook].

STEADY OPERATIONS DRIVE UPGRADE: The rating upgrade to 'AA+' reflects continuation of the distribution system's sound financial results, strong financial management, and competitive retail rates, as well as recent improvement to the economic underpinnings of the service territory.

RELIABLE SOURCE OF POWER: EPB is among the largest all-requirements customers of the Tennessee Valley Authority (TVA; global power bonds rated 'AAA'/Stable Outlook) pursuant to a rolling ten-year contract. The long-term power contract with TVA provides EPB with a reliable, low-cost power supply, and limits the system's exposure to operating risk.

STABLE FINANCIAL METRICS: EPB's debt service coverage remains strong at over 3.0x. Although coverage of full obligations and liquidity generally lag median ratios for the rating category, Fitch expects liquidity ratios will gradually improve going forward. In addition, EPB's obligation to automatically pass through its purchased power costs (equal to nearly 80% of total expenses) provides for full and timely cost recovery.

MANAGEABLE DEBT LEVELS: Capital needs over the next several years appear manageable, and leverage ratios should remain consistent with rating category medians despite the issuance of the series 2015C bonds to fund planned capex. Fitch expects a gradual but ongoing improvement in debt levels given the lack of additional borrowing plans forecast over the next ten years.

MIXED SERVICE TERRITORY: The system's service area is increasingly stable and diverse, but continues to exhibit weak income levels that could ultimately challenge EPB's ability to impose needed rate increases. The resulting concern is mitigated, however, by EPB's trend of strong collection rates as well the obligation to automatically pass through power supply costs.

RATING SENSITIVITIES

FAILURE TO SUSTAIN PERFORMANCE: Chattanooga Electric Power Board's upgrade reflects Fitch's expectation that the system's improved financial performance will be sustained and that liquidity will improve to levels more in-line with rating category medians. However, failure to achieve forecasted metrics due to rate pressures or other unanticipated circumstances could result in downward rating pressure.

CREDIT PROFILE

LARGE TVA WHOLESALE CUSTOMER

EPB is a combined utility consisting of the electric system (the system) and a fiber optics division, although outstanding bonds issued by EPB are secured only by net revenues of the electric system. The fiber optics division includes telecommunications, cable and internet services, all of which are accounted for separately.

Exposure to operating risks related to direct commodity, power supply, and asset ownership are somewhat limited given EPB's role as retail electric distribution provider with no generating capacity of its own. TVA, the largest public power system in the U.S., provides all of EPB's power supply pursuant to a 10-year, rolling all-requirements contract.

TVA's resource portfolio is increasingly diverse with owned generating assets well balanced between coal-fired, natural gas/oil-fired, hydro and nuclear. Fitch believes the contractual relationship with TVA is a positive credit factor given the authority's competitive wholesale power costs and diverse power resources.

SOLID FINANCIAL RESULTS EXPECTED TO CONTINUE

Although EPB's financial profile remains somewhat weak for the rating category, improvement in the system's performance is notable and financial metrics are satisfactory relative to the system's overall risk profile. Debt service coverage has fluctuated over the years but has remained consistently strong, averaging nearly 4.37x over the prior five fiscal years.

Liquidity remained low in fiscal 2014, falling to 71 days of cash on hand from 91 days in the prior year. However, a $25 million undrawn line of credit with Regions Bank (IDR of 'BBB'/Stable Outlook) provides additional cushion, increasing the number of days of liquidity on hand to about 90 days.

Fitch expects modest improvement in EPB's financial profile going forward based on management's most recent comprehensive ten-year financial forecast. Strong annual debt service coverage continues through the forecast period, staying comfortably above 2.50x while liquidity gradually increases to about 110 days of cash on hand. Operating cash flow is projected to fund the entirety of EPB's ongoing capital program after exhausting the series 2015C bond proceeds. Accordingly, EPB's already modest leverage ratios should continue improving.

STABLE SERVICE TERRITORY

The electric system serves a diverse customer base with residential users accounting for nearly 90% of total metered accounts and 40% of total sales and revenue. Commercial customers make up the majority of sales (59%) and system income (55%), but generate less than one-third of net margins. Positively, residential end users generate nearly half of the system's net margins. Industrial accounts make up the balance.

The city economy's continues to grow and diversify following a relatively slow recovery from the prior economic recession. The city's unemployment rate continues to trend favorably, falling from 6.2% in April 2014 to its current level of 5.4%, only moderately higher than state and national figures.

Income levels have also exhibited modest improvement in recent years, but continue to be roughly 15% - 30% lower than national averages, with a poverty rate that remains more than 50% higher than the national average. While the service area's low wealth levels are of some concern, EPB's affordable rates, consistently near-perfect collections, and its obligation to automatically pass through wholesale costs help ensure the continued financial stability of the system.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

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Contacts

Fitch Ratings
Primary Analyst
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Alan Spen, +1-212-908-0594
Senior Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Alan Spen, +1-212-908-0594
Senior Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com