2008-06-11 23:39:34 -

- Fitch Ratings assigns Memphis Light, Gas and Water's (MLGW) $92.37 million electric system subordinate revenue refunding bonds, series 2008 a rating of 'AA'. Fitch also affirms the 'AA' rating on MLGW's $16.9 million of outstanding senior lien electric system revenue bonds and $1.1 billion of subordinate lien electric system revenue bonds (pre-paid electricity bonds). Bond proceeds will be used

to refund outstanding 2003 B bonds that were issued as auction rate securities. The 2008 bonds are expected to sell June 17, 2008. The Rating Outlook is Stable.

The 'AA' rating reflects MLGW's stable financial performance, with very strong debt service coverage of senior obligations (18.1 times (x)). When all obligations, (including debt associated with its prepayment for purchase power from the Tennessee Valley Authority (TVA)), are included, coverage is still a strong 1.71x. Additionally, liquidity at 59 days of operating cash on hand, is stronger than the rating category average. Support for the rating also reflects a diverse customer base, with the 10 largest customers accounting for only 7.3% of electric revenues, and retail rates that are comparable to other municipal rates in the area.

MLGW purchases its entire power supply from TVA, under a long-term, all requirements contract; therefore it has no power supply responsibility. In order to lock in low-cost base-load power at a discount for a 15-year period, in 2003 MLGW entered into an electric prepay contract with TVA. Under the contract terms, MLGW receives a fixed credit on its monthly TVA bill, providing annual savings to the electric system of about $13 million. In order to finance this prepayment, MLGW issued $1.5 billion of debt. Because of this issuance, MLGW's balance sheet debt level appears high (the only other outstanding debt totals less than $17 million); however, this will be paid down by 2018 and there are no additional debt plans currently anticipated.

The rating and Stable Outlook reflect Fitch's expectation that power will continue to be supplied by TVA at a reasonable cost and the savings generated by the prepayment will continue as scheduled. In addition, it is expected that the city council will approve any necessary rate increases in a timely manner.

MLGW's electric utility is among the largest distribution systems in the United States, both in terms of customers served and electric revenues. The service area encompasses approximately 755 square miles. MLGW was established in 1939 and today is an enterprise of the City of Memphis. One component of the enterprise, which is accounted for separately, is the electric system. In 2007, the electric utility provided service to 439,337 customers in its service area which encompasses the city of Memphis and Shelby County. The current county population is 916,744 and it is expected to grow to 934,851 by 2012, or a 2% increase. In 2007, approximately 86% of customers were classified as residential; however, in terms of kWh sales, residential customers accounted for 39% of total kWh's sold. Energy growth has been manageable, with a growth rate of approximately 2.4% over the past few years.

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.

Fitch Ratings, New York
Joanne Ferrigan, 212-908-0399
Karl Pfeil, III, 212-908-0516
or
Media Relations:
Christopher Kimble, 212-908-0226