Fitch Rates Nashville Electric Service, TN's 2013A Revs 'AA+'; Outlook Stable
Fitch Ratings assigns an 'AA+' rating to the following Metropolitan Government of Nashville and Davidson County, TN (Metro) revenue bonds:
--Approximately $52 million electric system revenue refunding bonds, 2013 series A.
The bonds are scheduled to price via negotiation on June 12, 2013. Proceeds will be used primarily to refund outstanding series 2004 bonds for approximately 16% savings of the refunded par amount.
In addition, Fitch affirms the 'AA+' rating on Metro's outstanding electric revenue bonds totaling $548 million as of May 15, 2013.
The Rating Outlook is Stable.
The bonds are secured by a first lien on net revenues of Nashville Electric Service (NES). NES is a component unit of Metro.
KEY RATING DRIVERS
LARGE DISTRIBUTION SYSTEM: NES is a large electric distribution provider exhibiting solid financial metrics and operating in a strong service territory.
LIMITED POWER SUPPLY RISK: NES' direct commodity and power supply risks are limited. It is an all-requirements customer of the Tennessee Valley Authority (TVA; global power bonds rated 'AAA'/Outlook Negative) pursuant to a 10-year rolling contract.
SOLID, STABLE FINANCIAL METRICS: Traditionally solid financial metrics include an average of 2.9x debt service coverage over the past five years with minimal variation. A history of funding half of capital needs from operating cash flow helps keeps debt levels manageable.
IMPROVING LIQUIDITY: Liquidity ratios are lower than other highly rated distribution systems, but improved. In addition, recent changes in board policy should help sustain higher cash balances and mitigate some potential revenue volatility stemming from TVA's seasonal time of use rate structure.
AVERAGE RATES: Overall retail rates are average compared to other large cities, and TVA's capital needs could result in wholesale rate increases that ultimately affect NES' and other TVA distributors' rate competitiveness.
STRONG SERVICE TERRITORY: A diverse customer base includes a healthy residential contingent and no concentration among the largest payers. The local economy performed relatively well during the recent economic recession.
RATING STABILITY: NES' solid financial position and operating profile should continue to support its rating stability for the foreseeable future.
LIMITED RISK DISTRIBUTION PROVIDER
NES is a retail distribution provider with no generating capacity of its own. TVA supplies all of NES' power pursuant to what is currently a 10-year rolling power contract. Consequently, NES' direct commodity, power supply, and similar risks of asset ownership are limited.
NES' 27 interchanges with TVA provide significant redundancy to ensure adequate power supply, and all of the system's reliability metrics show improvement. NES was awarded the American Public Power Association's (APPA) Reliable Public Power Providers Diamond status for a second time in 2012. The recognition, achieved by just six municipal utilities that year, is based on reliability, safety, workforce development, and system improvement.
SOLID, STABLE FINANCIAL METRICS
The strength and stability of NES' financial metrics are a key consideration of the system's high credit rating. Debt service coverage has averaged 2.9x annually since fiscal 2008 with little variation, and similarly strong results are expected in fiscal 2013. Coverage of full obligations nearer to 1.3x is likewise in line with Fitch's 'AA+' rating category medians.
NES keeps debt levels manageable by funding approximately half of system capital needs with operating cash flow and half through fixed-rate debt issuances typically every three years. Accordingly, NES' ratio of equity to capitalization resides near a healthy 50%.
Liquidity ratios are below most strong retail systems rated by Fitch, but improved. NES twice adjusted its cash target in recent years to help build liquidity and offset some potential revenue volatility from TVA's seasonal time of use wholesale rate structure. NES' new minimum cash target equals 16.5% of operating expenses (effective fiscal 2014), which it currently exceeds. Cash on hand is forecast to remain near the 72 days in fiscal 2012, which essentially doubles the fiscal 2008 figure.
Retail rates provide some additional revenue-raising flexibility. However, TVA's capital needs could ultimately affect the system's rate competitiveness. The wholesale rate and fuel cost adjustment from TVA, which are passed through to NES customers, compose 75%-80% of total system rates.
SOUND SERVICE AREA
NES draws stability from its size; it is the 11th largest public utility in the country by customers and the 16th largest by energy sales, according to APPA. Similar to many parts of the country, load growth fell by 5.4% in fiscal 2012. However, its stable financial position evidences NES' ability to absorb such change. (Nine-month interim load growth has since rebounded by 1.8%.)
The area economy fared relatively well over the past several years, given its depth and diversity beyond its traditional roots in the country music industry. The unemployment rate, currently at 6.3%, remained under 10% in each month of the economic recession. In addition, NES' customer composition adds stability to its revenue base. Residential customers compose a healthy 39%-41% of energy sales, and there is no concentration of largest payers.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
Ryan A. Greene
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
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