Fitch Rates Chattanooga, Tennessee's 2006A & 2006B Electric System Revs 'AA'.

NEW YORK -- Fitch assigns an 'AA' rating to the following ratings for the City of Chattanooga, Tennessee (Electric Power Board):

--$40 million electric system revenue bonds, series 2006A;

--$24 million electric system refunding revenue bonds, series 2006B.

Series 2006A bond proceeds will be used to finance improvements to EPB's distribution system. The series 2006B Bonds (which will only be issued if market conditions provide for economic savings) will refund a portion of the outstanding Series 2000 Bonds. The bonds are expected to price competitively the week of Aug. 14, 2006. Public Financial Management is the Financial Advisor. Fitch also affirms the 'AA' rating on the $32 million outstanding series 2000 electric system revenue bonds for the Electric Power Board (EPB). The Rating Outlook is Stable.

EPB is one of Fitch's highest rated retail systems. The strong 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) and EPB's competitive retail rates (7.8 cents / kWh in 2006). Fitch believes the TVA contract is a positive factor due to the competitively priced wholesale power provided by TVA's diverse power resources, EPB's ability to terminate the contract with 10-year's notice and contract provisions that protect EPB from substantive negative consequences if EPB experiences a reduction in its energy needs.

Additional support for the rating comes from a strong service territory with a diverse and expanding economy (City of Chattanooga G.O. 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. In 2005, EPB's largest commercial customer accounted for 2.5% and 0.5% of revenues and margins, respectively.

EPB's financial performance continues to be very strong and compares favorably to other 'AA' rated distribution systems. For fiscal year 2006 (unaudited) EPB achieved debt service coverage of 6.20 times (x), consistent with levels over the last five years. As of June 30, 2006 EPB had $40.1 million of cash on hand, which represents 37 days of operating costs. Enhancing its liquidity, EPB also has a $10 million line of credit. Fitch views EPB's liquidity as adequate for the rating level given EPB's relatively stable cost structure and its practice of passing its wholesale power costs through to its customers on a monthly basis. Going forward, EPB has a modest capital improvement plan. Over the next four years EPB expects to spend $122 million on capital improvements, two-thirds of which will be paid for from internally generated funds, with the remainder being funded with the 2006A debt issuance.

Credit concerns are limited. Fitch notes that TVA's ability to provide additional power to EPB and other customers over the long-term may be limited as a result of TVA's federally imposed borrowing limitations. EPB and other 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 the existing contract may require federal legislative action and that potential changes in EPB's power supply, if any, are several years away and would be incremental and limited in scope.

EPB is an electric distribution system providing electric service to over 165,000 customers in a 600-square mile service territory encompassing the greater Chattanooga (TN) area. EPB had operating revenue in 2006 (unaudited) of over $422.1 million derived from residential (40.9%), small commercial (7.8%), large commercial (50.0%) 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.