OREANDA-NEWS. S&P Global Ratings has assigned its 'AA-' rating to Memphis, Tenn.'s light, gas, and water division's gas revenue bonds, series 2016. The outlook is stable.

"In part, the rating reflects what we view as a deep and diverse service area and very low gas rates," said S&P Global Ratings credit analyst Jeff Panger. We believe other credit positives include:A purchased gas adjustment (PGA) factor that passes through gas costs to ratepayers, enhancing timely cost recovery and supporting credit quality; andNo debt outstanding for the gas system, and although we expect $120 million to be issued over fiscal years 2016-2018, we believe debt levels will be manageable. The gas division's net revenues secure the bonds, which the city is issuing to support general capital improvements and the gas division share of MLGW's smart metering program.

The utility's service area is deep and diverse. The gas division serves 314,000 customers throughout Shelby County, including Memphis. The customer base is primarily residential (60% of revenue) and commercial (28%), with just 1% coming from industrial customers. Customer concentration is not a credit risk, and the top 10 customers account for less than 2% of revenue.

The stable outlook, which covers the next two years, reflects Memphis Light, Gas and Water's (MLGW) very low rates, which affords financial flexibility; and the PGA, which enhances cost recovery and financial stability.

We could raise the rating within the next two years if MLGW adopts a rate increase that supports coverage after transfers consistent with the 2020 projection.

Although we do not expect to lower the rating in that time, we could do so if gas prices spike and the utility fails to fully recover these costs, resulting in weaker-than-anticipated financial metrics.