Fitch Rates Chattanooga Electric Power Board's $215MM 2008 Utility Revs 'AA'

Business Wire, Feb 13, 2008

NEW YORK -- Fitch Ratings rates Chattanooga Electric Power Board's (EPB) $215 million series 2008 utility system revenue bonds 'AA' and has affirmed the outstanding $69.8 million bonds at 'AA'. The Rating Outlook is Stable.

Proceeds of the series 2008 bonds will be used to fund EPB's $209 million of electric system fiber infrastructure improvements and other capital projects over a 30-month construction timeline. An additional $21 million of capital expenditures for 2008 will be funded on a pay-go basis. EPB expects benefits to the electric system to include: reduction of theft, automatic meter reading, demand side management of peak load, and capital cost reduction from a higher efficiency infrastructure. Overall savings are estimated at $133 million through 2018. Bonds are expected to price the week of Feb. 25, 2008.

The 'AA' rating reflects the limited business risk of a distribution system and EPB's strong financial position. The primary underpinnings for the 'AA' rating include the favorable terms of EPB's all-requirements power purchase contract with the Tennessee Valley Authority (TVA, rated 'AAA' by Fitch) and EPB's competitive retail rates of 7.4 cents/kilowatt-hour (kwh) in 2007.

Additional support for the rating comes from a strong service territory with a diverse and expanding economy (city of Chattanooga, Tenn., general obligation bonds are rated 'AA' by Fitch) and a customer base that has favorable credit characteristics that include revenue and margin diversity and a lack of customer concentration.

Potential risks include TVA's ability to meet power requirements of EPB and other customers over the long term, due to TVA's federally imposed borrowing limitations. EPB and other customers have expressed interest in obtaining additional flexibility to take a portion of their power supply from a provider other than TVA. Fitch recognizes that any modifications to the existing contract would require federal legislative action, and potential changes in EPB's power supply, if any, are several years away and would be incremental and limited in scope.

EPB's financial performance is solid and compares favorably with other 'AA' rated distribution systems. While the debt burden for the utility will increase significantly over the next few years, management maintains conservative debt service coverage targets of 3 times (x). Another consideration in rating includes the maintenance of a strong financial profile in face of a substantial capital improvement plan is needed to support the 'AA' rating. For fiscal-year 2007, EPB achieved debt-service coverage of 5.28x, consistent with levels over the past five years. As of June 30, 2007, EPB had $62.9 million of cash on hand.

EPB is an electric distribution system that purchases 100% of its power from the TVA. EPB provides electric service to more than 168,340 customers in a 600-square-mile service territory encompassing the greater Chattanooga, Tenn., area. EPB's electric system had operating revenues in 2007 of more than $427.6 million derived from residential (41.5%), small commercial (7.6%), large commercial (49.6%) and street lighting (1.3%) customers.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.