Chattanooga's municipal electricity and telecommunications provider will head to Wall Street later this month to market its biggest bond issue ever with an upgraded financial rating based upon the utility's improved financial outlook.
EPB plans to issue a record $251 million in new bonds to cut its current interest rates and generate extra capital to pay for much of the utility's planned improvements in both its electricity and fiber optic systems in the next year.
The issue is the first for EPB since 2008 when the utility issued $226.8 million in 25-year bonds to finance the initial build out of its fiber optic and smart grid system. EPB also benefited in 2009 from a $111.6 million federal stimulus grant for its smart grid.
Most of the new issue will refund EPB's previous issue, which had an average interest rate of 4.38 percent. The new bonds are projected to priced around an average of about 3.2 percent.
The new issue is projected to provide more than $25 million of new capital for EPB to help fund more than half of its planned capital improvements in the current fiscal year. But most of the issue will repay the existing bonds with a present day estimated savings somewhere between $15 million to $20 million, EPB communications director J. Ed. Marston said.
The new bond issue is being bolstered by an upgrade of EPB's financial condition last week by the bond rating agency Fitch, which boosted its assessment of the city-owned utility from AA to AA-plus. The improved rating brings EPB up to the top-rated utilities in Tennessee.
Standard & Poor's also has a AA-plus rating for EPB, although S&P has not issued a new rating for the latest bond issue.
"Chattanooga Electric Power Board's upgrade reflects Fitch's expectation that the system's improved financial performance will be sustained and that liquidity will improve to levels more in-line with rating category medians," said Christopher Hessenthaler, a senior director for Fitch Ratings, Inc., in New York City.
Pending approval of the Chattanooga City Council next Tuesday, EPB plans to price the new bond issue on June 21. EPB directors will meet June 22 to finalize the bond sale.
Fitch, which cut its rating for EPB in 2012 after noting that the utility's venture into telecom service "entails a higher degree of business risk," said EPB's fiber optic services are now generating handsome profits to share with the electricity system.
EPB has invested more than $300 million to build a smart grid and fiber optic network to both improve the reliability and metering of electrical connections and to offer high-speed Internet, cable TV and telephone services across its Chattanooga service territory.
"The smart grid will definitely help them better manage their network, but at the same time they've increased their borrowing and leverage over the past two to three years," Fitch rating analyst Bhal Mehendale said.
Greg Eaves, chief financial officer for EPB, said the telecom businesses at EPB are projected to generate about $131.1 million this year and help funnel about $24 million back into the $564 million annual electricity system revenues, plus generate a $16.6 million net income.
"Every electric system customer of EPB is benefiting whether they are a fiber optics customer or not," Eaves said. "The cash flow from our telecom operations are a huge benefit for our electric system. It's been a wonderful investment — one of the best we ever made."
EPB, which serves about 177,000 electricity customers, also has about 68,000 residential and nearly 5,000 commercial customers of one or more of its telecom services.
EPB has been generated a lower margin with its electricity system, but the utility just implemented a 3.5 percent electric rate increase this month to help improve its power system finances, Eaves said.
EPB, one of 155 distributors of TVA-generated power, has distributed electricity throughout Chattanooga since 1939. The utility has added telecom services over most of past decade.
"I think our financial condition is very strong and this Fitch rating affirms that," Eaves said.
As a city-owned utility, the revenue bonds will be issued by the city fo Chattanooga. The principal bond marketers for EPB will be Bank of America/Merrill Lunch, Eaves said.
Contact Dave Flessner at email@example.com or at 757-6340.