NEW YORK--(BUSINESS WIRE)--As part of routine surveillance, Fitch Ratings has downgraded the rating on Chattanooga, TN's $290 million electric system revenue bonds to 'AA' from 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by net revenues of the electric system.
KEY RATING DRIVERS
FINANCIAL METRICS: The downgrade reflects weaker than projected financial metrics partly due to an increase in leverage to fund capex in the electric system's smart grid. The lower metrics, although still healthy, are more in line with similar systems in the 'AA' category.
MULTI-SYSTEM OPERATION: The rating also reflects the elevated scale of the multi-system operation of Chattanooga's Electric Power Board (EPB). In addition to the electric system, EPB operates a fiber optics division (also called communications division) that provides telecom, internet and cable & video services. Although each system is accounted for separately, the initial funding for the communications division was provided by the electric system.
RELIANCE ON NON-ELECTRIC REVENUE: Although the fiber-optics network will primarily be used for EPB's smart grid, a portion of the related costs will be covered by revenues generated from internet and newly launched cable & video services. These services entail a higher degree of business risk and operating margins that are less predictable than the EPB's traditional electric operations.
TVA ALL-REQUIREMENTS CUSTOMER: EPB receives its entire power supply from The Tennessee Valley Authority (TVA, global power bonds rated 'AAA'/Negative Outlook). TVA's wholesale rate changes are automatically passed through to the board's customers through a fuel cost adjustment charge.
STABLE DEMOGRAPHICS: EPB is the third largest distribution customer of TVA serving a diverse and stable territory in the greater Chattanooga area. Residential and commercial customers make up almost the entire kWh sales of the board. There is no customer concentration with the top 10 customers accounting for about 9% of the board's revenue.
RECENT RATE ADJUSTMENT: Fitch views favorably the recent increase of 5% in base electric rates. Although changes to TVA's wholesale rates are automatically passed through, base rate changes need a review and approval by TVA and the EPB board. Historically TVA has never objected to EPB's base rate increases, and Fitch does not expect TVA to do so in the future.
WHAT COULD TRIGGER A RATING ACTION
ELECTRIC AND FIBER OPTIC SYSTEM PERFORMANCE: Given the cross-funding relationship between the electric and other systems it is important for EPB to maintain solid operating performance at its electric system and for the fiber optics division to perform as projected.
CREDIT PROFILE
EPB is owned by the city of Chattanooga and provides electric and communications services to the city and surrounding areas. The communications or fiber optics division consists of telecom, internet and cable and video service. These services are offered over the new fiber optics network which was financed by the issuance of series 2008 electric system revenue bonds together with the smart grid stimulus grant award from the Department of Energy. The fiber optics division pays the electric system for its use of the fiber optic network. Each service offered by the fiber optic division is accounted for separately and was initially financed with a note payable to the electric division.
The electric division receives its entire power supply from TVA, and operates a distribution system that serves about 172,000 customers. While EPB is not regulated by any state commission, rate changes other than fuel cost adjustment have to be approved by TVA and the EPB's board of directors. TVA has never objected to an EPB rate adjustment request.
EPB's customer mix is heavily weighted towards residential customers, but the consumption mix is more equally dispersed between residential and commercial users. The electric division has recently completed a major system upgrade which includes building the fiber optic system to be used by both divisions. The plan was financed with the issuance of series 2008 revenue bonds.
The EPB's financial metrics although weaker are still healthy. Fitch calculated Debt service coverage is in excess of 2.0x for fiscal 2011. Fitch notes the deterioration in the operating margin at the electric system in 2011, mainly due to a delay in implementation of the fiber system and one time storm costs, but expects operating margin to improve in fiscal 2012 as a result of the 5% base rate increase. Liquidity at 72 days cash on hand is adequate and in line with the rating category.
Beyond 2012, EPB is not projecting any electric rate increases as financial performance will rely predominantly upon anticipated electric operating cost reductions and generation of income from the fiber optics system. Given the more variable nature of these revenue sources, Fitch will be monitoring EPB's ability to meet projected financial performance levels.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 20, 2011;
--'U.S. Public Power Rating Criteria', Jan. 11, 2012;
--'U.S. Public Power Peer Study', June 20, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815
U.S. Public Power Peer Study ￢ﾀﾔ June 2011
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=636311
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