Chattanooga’s public power utility approves $125 million bond issuance

Chattanooga, Tennessee’s public power utility board voted to approve the issuance of $125 million of new electric utility revenue bonds for improvements and new construction on local power networks.

EPB of Chattanooga is the brand of the city’s Electric Power Board. The utility provides electric and telecommunications services over a 600 square mile service area that includes the city of Chattanooga and several counties in Tennessee and Georgia.

It says is raising funds for capital work necessary to accommodate expected population growth.

“Funds raised will be devoted to capital improvements to further enhance the reliability and resilience of the local electric system for customers while accommodating the cost of building out new infrastructure to support rapid growth in the Chattanooga area,” the EPB said in a statement Oct. 20.

“Issuing bonds will help EPB spread out the cost of needed capital investments that will serve customers over the next several decades. This is a standard practice for many utilities across the country because it means current customers pay only for the cost of the power infrastructure in place today and are not responsible for bearing the costs of improvements that don’t benefit them directly,” EPB Executive Vice President CFO Greg Eaves said in the statement.

The sale has been endorsed by Mayor Tim Kelly, who selects EPB’s board, and is now headed for a vote in Chattanooga’s City Council.

Plans call for the bonds to be issued by Chattanooga, but secured by EPB’s electric system revenues, not subject to the taxing authority of the city.

Sophie Moore, a spokesperson for EPB, said officials are aiming for a December sales date and further details on the deal were still in discussion.

“The parameters we plan to set focus on a duration of up to 20 years but the exact structure will be dependent on market conditions at time of sale,” Moore said.

Chattanooga is experiencing population and economic growth and Moore said it has seen increases in working residents, retirees, and pleasure seekers over the past several years.

The EPB estimates that growth will continue in the decades ahead and, among other increases, expects a doubling of residential premises requiring power that will put an increased demand on its networks.

Proceeds from the bond sale will go towards investments and new construction of power infrastructure, keeping in mind significant increases in the cost of material and equipment, EPB said.

Funds will also go towards increasing the reliability of EPB’s networks in neighborhoods on the edge of its service area that may not be served through redundant power lines.

“The city is one of the five fastest-growing cities in Tennessee,” Moore said. “Our state enjoys one of the lowest tax burdens and is cited high among site selector lists for business location criteria.”

The EPB’s last issuance of $71 million of electric power revenue bonds in 2021 was rated AA-plus with stable outlook by Fitch Ratings. Fitch also affirmed $224.68 million of outstanding parity debt.

Analysts cited EPB’s low and improving leverage ratio, revenue defensibility provided by an expected 1% annual growth rate in customer base, and a “very strong operating risk profile primarily reflects a very low operating cost burden.”

“The system’s capital planning and management is very strong as EPB has moderate investment needs with its low age of plant and consistently high capital expenditures to depreciation ratio,” Fitch said.

Fitch said it considered EPB “a related entity” to the city of Chattanooga “given the city’s reporting of the system as an enterprise fund and its oversight of the system, including the mayor’s authority to appoint board members, which are approved by the City Council.”

Moody’s Investors Service rated the 2021 sale Aa1 with stable outlook.

S&P Global Ratings, which rated EPB’s 2015 bonds, twice since 2019 has downgraded EPB debt; in 2019, it lowered the long-term rating on its electric system revenue debt to AA from AA-plus based on analysis of the system’s fixed-charge coverage metrics. The outlook remained stable.

The latest downgrade in 2022 saw it lowered further to AA-minus from AA. The outlook also remained stable.

The most recent rating reduction was based on S&P’s view of the utility’s liquidity position, “which management projects will decline” over its financial forecast as it supports its capital program.

“It is not supportive of a higher rating based upon peer comparisons,” S&P credit analyst Scott Sagen said in the rating report.

“The stable outlook reflects EPB’s primarily residential and diverse revenue stream, which we believe will provide revenue predictability, and the utility’s improved coverage metrics will allow the electric system to cash fund almost all of its capital planning needs over the financial forecast period,” Sagen said.

Rating agencies have get to release evaluations of the new bond sale but the city’s general obligation bonds recently snagged AAA rating affirmations from Fitch and S&P ahead of a planned $42.5 million GO bond sale.

Analysts cited a growing population and economy boosted by manufacturing and automotive growth, with positive growth in its tax base and sales tax revenues that beat official estimates.

Fitch said it “expects management will continue to maintain strong reserves to cushion operations against economic downturns and manage the pace of future expenditure growth without pressuring the city’s financial flexibility.

“Fitch expects debt levels to remain moderately low with continued growth in the resource base and annual principal amortization offsetting anticipated issuance of new debt for capital needs,” it said.

Chattanooga’s bottom line was boosted by a favorable tax year in fiscal 2023, in which it closed the year with a $19.2 million general fund surplus and an unassigned fund balance of $135.6 million, 44% of the year’s total spending based on year-end unaudited financial reports. Its fiscal 2024 budget of $341.3 million is 4% higher than the previous year’s and factors in expectations for increased levels of investments and property tax revenues.

The city is scheduled to issue the GO bonds by competitive sale Tuesday. PFM is municipal advisor. Bass Berry is bond counsel.

Moore is hopeful the city council will vote on the utility bonds in November, allowing for the targeted December sales date to be met.

“We can’t speculate on how the City Council will vote,” she said. “We’ve been fortunate to enjoy a collaborative relationship with the City Council and are available to address any questions they may have.”