Rating Affects $662 million Electricity Prepay Revenue Bonds
New York, November 26, 2012 -- Moody's Investors Service has affirmed the credit rating of Aa2 on the outstanding $662,695,000City of Memphis, Tennessee Electric System Subordinate Revenue Refunding Bonds. Moody's also affirmed the stable outlook.
The major credit factors supporting the rating include Memphis Light, Water and Power (MLGW)'s reliable and economical source of power supply from the Tennessee Valley Authority (TVA) (rated Aaa) , (MLGW represents 11% of TVA's electrical load) ; MLGW's well-established record of satisfactory finances and its competitive retail electricity rates. While the Memphis City Council (Memphis general obligation bonds are rated Aa2 by Moody's) can set retail rates in a seven week period, TVA does have scrutiny over the rate process. Any TVA power rate increase can be directly passed through to MLGW customers without City Council approval which provides for more certain cash flow since TVA's power supply costs are a significant part of the city-owned electric utility's cost structure. A significant credit strength are the contract terms which obligateTVA in certain circumstances to ensure debt service is paid.
MLGW is an electricity distributor and gets its full power requirements from TVA. This partly explains the utility's low debt ratio (excluding the TVA pre-pay bonds). MLGW expends from current funds about $60 million annually for distribution system capital improvements. MLGW has limited future electric distribution borrowing plans. In 2003, MLGW financed the prepayment of 27% of its power supply from TVA pursuant to a 15- year supply contract. Bond proceeds of the 2003 bond issue were provided by MLGW to TVA in return for energy and capacity for the 15 year period. MLGW receives $13 million annually as a discount on its TVA power bill. There is no debt service reserve for the prepayment bonds.
Moody's has assigned a stable credit outlook to MLGW's revenue bonds given the satisfactory financial and competitive position of MLGW, the reliable and competitive base load power associated with the prepayment obligation with TVA and the demonstrated value of the prepayment agreement to both parties. All MLGW revenue bonds mature by 2018.
What Could Change the Rating UP:
The rating could be upgraded should MLGW debt service coverage margins and liquidity levels improve..
What Could Change the Rating DOWN:
The rating could be downgraded if MLGW's financial results weaken; MLGW fails to comply with terms of the power supply agreement; or TVA fails to meet its objectives of competitive and reliable power supply.
*TVA, rated Aaa by Moody's, is a strong counterparty in the prepayment transaction (27%) and for the balance (73%)of MLGW's power supply. TVA has an absolute and unconditional obligation to deliver to MLGW the full amount of power associated with the prepaid energy and capacity. TVA also supplies all MLGW power requirements on an all-requirements basis.
*The City of Memphis general obligation bonds are rated Aa2 by Moody's
*Both parties to prepayment transaction are provided value: TVA's accessed a lower cost of capital (tax-exempt prepaid bonds versus TVA's taxable debt structure) and it maintains a strong relationship with its largest wholesale customer (11% of TVA's revenues). MLGW has met its objective of an annual cost savings and it has locked in a stable and reliable source of power supply
*Reliability and competitive power costs
*TVA has nearly full control over all transmission in the TVA region. Memphis remains key to the TVA transmission system since it provides important voltage support for TVA in that part of system.
*Low debt ratio excluding prepayment debt and has limited distribution system borrowing plans
*There is no debt service reserve for the outstanding bonds.
*Memphis MLGW has had a record of weak financial metrics
*MLGW subject to external circumstances outside of its control with the dominant role TVA plays
The principal methodology used in this rating was U.S. Public Power Electric Utilities published in April 2007. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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Dan Aschenbach Senior Vice President Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael G. Haggarty Senior Vice President Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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