Fitch Affirms Memphis Light, Gas & Water's Electric System Sr. & Sub Revs 'AA'; Outlook Stable.
MLGW is one of Fitch's highest rated electric systems. This strong rating is primarily reflective of the limited business risk associated with an electric distribution system and the continued strong financial position of the utility. The underpinnings for the 'AA' rating also include the favorable terms of MLGW's all-requirements power purchase contract with the Tennessee Valley Authority (TVA) and average residential retail rates (7.8 cents / kWh currently) that are competitive for the region. Fitch believes the competitively priced wholesale power provided by TVA's diverse power resources and the flexibility afforded MLGW through its ability to terminate the contract with 5-year's notice (with notice no earlier than November 13, 2013) result in the contract being viewed as a positive credit factor. MLGW is TVA's largest customer.
MLGW and TVA entered into a supplemental contract in 2003, under which MLGW prepaid for a portion of its baseload electric capacity through 2018. The prepayment locks-in approximately $13 million of annual savings for MLGW. In 2005 the prepaid portion accounted for approximately 17.5% of MLGW's power purchase expense.
Additional support for the rating comes from a service territory that benefits from a diverse, modestly growing regional economy (City of Memphis and Shelby County GO bonds are rated 'A+' and 'AA' by Fitch respectively) and a customer base that is well diversified among a number of industries. There is no customer concentration, as the largest and top 10 customers accounted for only 1.7% and 7.2% of 2005 revenues respectively. Energy sales growth has grown at a CAGR of 1% over the last five years, with this trend expected to continue in the near term.
MLGW's financial performance continues to be very strong and compares favorably to other 'AA' rated distribution systems. MLGW achieved debt service coverage (inclusive of debt service on the prepaid electric bonds) of 1.78 times (x) in fiscal year 2005 and based on preliminary results provided by management, Fitch expects that coverage will be stronger in 2006. As of Sept. 30, 2006 MLGW had approximately $186 million of cash on hand, representing approximately 75 days of operating costs (inclusive of prepaid power costs). Fitch views MLGW's liquidity as adequate for the rating level given its relatively stable cost structure and the requirement that it pass through its wholesale power costs to its customers. TVA's implementation of a quarterly fuel adjustment surcharge beginning October 1, 2006 may lead to slightly more volatile retail rates, but should eliminate large wholesale rate increases such as those seen in 2005 and 2006. MLGW is also required to pass these costs directly through to its customers. MLGW's capital improvement plan for the next five years is modest, totaling approximately $330 million, all of which is expected to be funded on a pay-as-you-go basis. The electric division does not expect to issue any additional debt at least through 2012.
Credit concerns are limited. Fitch notes that TVA's ability to provide additional power to MLGW and other customers over the long-term may be limited as a result of TVA's federally imposed borrowing limitations. Some customers have expressed interest in obtaining some flexibility to take a portion of their power supply from a provider other than TVA. Fitch recognizes that any modifications to existing contracts with TVA may require federal legislative action and would be several years away and incremental and limited in scope.
MLGW is an enterprise fund of the City of Memphis that operates electric, water and gas systems as separate divisions for accounting and financial purposes (including debt that is secured separately). Common activities are administered jointly and paid for on a pro rata basis by each division. The electric division serves over 428,000 customers in a 755 square mile service territory that includes all of Memphis and Shelby County. The electric division serves a diverse customer base and has operating revenues derived from residential (42%), commercial (48%), industrial (8%) and other (2%) customers.
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|Date:||Jan 23, 2007|
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