Fitch Rates Nashville Metro Government's Energy System Bonds 'AA'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 11, 2002

Fitch rates The Metropolitan Government of Nashville and Davidson County, TN's (Metro) $66,700,000 district energy system revenue bonds, series 2002A 'AA'. The series 2002A bonds (non-Alternative Minimum Tax) are expected to price on Sept. 17 by negotiation via a syndicate led by Lehman Brothers, Morgan Keegan & Company, and M.R. Beal & Company. Final maturity is in 2033 and the bonds are subject to redemption prior to maturity. The series 2002A bonds are secured by district energy system net revenues and by a deficiency make-up pledge subject to appropriation. Fitch affirms the 'AA+' rating on Metro's outstanding general obligation bonds. The Rating Outlook is Stable. Proceeds of the series 2002A bonds will be used to finance construction of the new chilled water and steam generating facility at Metro's district energy system (DES), make improvements to and expand the current energy distribution system, acquire land related to the project, pay capitalized interest, fund the debt service reserve fund and pay costs of issuance.

The system provides heating and cooling services to 38 office buildings in downtown Nashville and has been operating since 1974 as a solid waste to energy facility. With eight buildings, Metro is also a large customer for this service; the State of Tennessee owns fourteen buildings served, and there are sixteen private office buildings served. All but three have signed new 30-year purchase contracts, and two of those are still considering signing renewal contracts. Since 1975, Metro has funded operating and debt service deficiencies, which have grown from $75,000 to $11.6 million in 2001. These deficits have been caused primarily by the trash-burning component of the system. In 2001, Metro decided it would keep the system operating, but would replace trash burning with more efficient natural gas generators. This plan was accelerated when the waste burning plant was damaged by fire in May 2002. The system is currently operating with temporary gas-fueled boilers.

Metro defeased prior system bonds, but will extend its operating and debt service deficiency make-up provision to these bonds, for both the construction period, as well as subsequent operations. It has contracted with Constellation Energy Systems (C.E.S.) to build and operate the new plant for a fixed cost 15-year operating contract and its parent Constellation Energy Group (C.E.G.) will provide construction and operating guarantees. Costs for utilities, fuel and insurance are variable costs, which will be passed on to Metro and other customers. Projections indicate that the system could reduce Metro's deficiency funding requirements to $1.6 million annually, from fiscal year 2001's $11.6 million; forecasts also indicate that total costs passed on to Metro and the other users could be lower by around 10% after the conversion. Although there is the potential for volatility and a substantial exposure to Metro for deficiencies, they are very likely to be substantially less than those now being borne by Metro under the old system. Metro will also be buffered against large unexpected draws on its make-up provision by the maintenance of the debt service reserve fund/insurance substitute, as well as by a required operating reserve of at least 25% of budgeted system expenses.

The deficiency make-up provision is subject to appropriation, but there are no effective limitations on Metro's power to tax to provide government services. The essentiality of the system is also strong, as there are no real substitutes or alternate providers available for this service. In addition, the customer contracts prohibit the customers from using alternative services as long as Metro can meet the service provisions of the contract. Metro estimates that it would be more costly for the system's users to build their own heating/chilling systems.