NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on the following outstanding North Carolina Eastern Municipal Power Agency (NCEMPA) bonds:
--$1.869 billion power system revenue bonds.
The Rating Outlook on all bonds is Stable.
SECURITY
The bonds are secured by net revenues derived by the agency from the operation of the power system project, after the payment of operating expenses. Net revenues are received primarily from payments under the project sales agreements with the agency's 32 participating cities and towns.
KEY RATING DRIVERS
MATURE JOINT-ACTION AGENCY: NCEMPA is a joint-action agency that has provided all-requirements bulk power supply since 1982. The majority of power and energy requirements are supplied pursuant to take-or-pay project power sales agreements governing the agency's ownership interest (693.9 megawatts [MW]) in two coal-fired and three nuclear units.
HIGH WHOLESALE POWER RATES: The agency remains challenged by wholesale power rates ($92.8/MWh [megawatt hours] in 2013) that are higher than regional averages, and largely attributable to the high fixed cost of the power system and related debt service costs. Management's focus on cost cutting, together with aggressive refinancing strategies, has moderated the need for additional rate increases.
WEAK SERVICE AREA DEMOGRAPHICS: The territories served by the NCEMPA participants, particularly the smaller cities and towns, continue to exhibit weak demographics including modest population growth, high unemployment rates and low median household income.
RAPID DEBT AMORTIZATION: NCEMPA's debt service requirements are expected to increase modestly through 2019 before declining rapidly in 2024. All of the agency's debt is scheduled to be repaid by 2026, well ahead of the expected life of its power assets. Fitch acknowledges the benefits of the agency's aggressive deleveraging, despite resulting higher debt service costs and weaker coverage.
STRONG PARTICIPANT OVERSIGHT: Participant operations are heavily monitored by ElectriCities of North Carolina, the agency's management organization, and by the Local Government Commission (LGC) of North Carolina, which approves debt issuance, and ensures compliance with fiscal and accounting standards. Remedies available to the LGC in the event of noncompliance include assuming full control of a participant's financial affairs.
WHAT COULD TRIGGER A RATING ACTION
SUCCESSFUL DELEVERAGING: Continuing debt reduction over time, particularly as currently contemplated, could have a positive impact on the rating and/or Outlook.
PROPOSED SALE OF NCEMPA ASSETS: NCEMPA has entered into negotiations with Duke Energy Progress, Inc. (DEP) for the potential sale of its generation assets. A successful sale of the assets would be conditioned upon the defeasance or repayment of all of NCEMPA's outstanding power supply revenue bonds. Although the sale would likely be positive for credit quality, any related rating action would reflect the final terms of the transaction and required defeasance.
CREDIT PROFILE
NCEMPA provides all-requirements wholesale power supply to 32 participating cities and towns, all of which own and operate municipal electric systems. The participants are located in eastern North Carolina throughout an area that extends from Raleigh, NC to the Atlantic Ocean coast. Collectively, the participating systems serve approximately 269,000 largely residential and commercial customers and a total population of approximately 462,000.
DIVERSIFIED POWER SUPPLY SYSTEM
Approximately 70% all of the power supplied by NCEMPA is derived from the ownership interests the agency acquired from DEP (formerly Carolina Power & Light Company) in 1982 of two coal-fired units and three nuclear units (the 'project'). Participants purchase their respective shares of project energy and capacity pursuant to take-or-pay contracts at wholesale rates that must be sufficient to cover all of the project's costs, including related debt service.
The remaining power and energy requirements of the participants are supplied pursuant to supplemental power sales agreements, and derived from a long-term supplemental load agreement with DEP that extends through 2031.
HIGH WHOLESALE RATES
NCEMPA's wholesale rates have remained relatively stable since 2009 but are higher compared to other regional utilities reflecting the agency's heavy debt burden and relatively high debt service costs. Management-led cost cutting initiatives and active debt management have moderated rate increases and are likely to continue. Additional rate increases are not expected until 2016 as operating expenses, including debt service costs, will remain relatively stable over the near term. Modest increases are expected thereafter through 2021 before rates decline as a result of the agency's rapid debt amortization.
At the beginning of February 2014, NCEMPA entered into negotiations with DEP for the potential sale of its generation assets. If an agreement is reached, all of NCEMPA's outstanding debt would have to be repaid or defeased pursuant to the terms of the resolution. Although NCEMPA would remain the wholesale electric supplier to its members, all of the member energy requirements would be met through a long-term all-requirements power supply contract with DEP. The transaction as proposed would require multiple state and federal regulatory approvals and would require approval by all 32 member cities. Completion would not likely occur prior to mid-2015.
STABILITY RESTORED TO FINANCIAL METRICS
Operating performance at the agency has been stronger and relatively stable in recent years, since the implementation of sizable and timely rate increases in 2008 and 2009. Fitch-calculated debt service coverage has stabilized between 1.26x and 1.45x since 2010, and totaled 1.36x in 2013. Debt to FADS has also stabilized between 6.3x and 6.7x over the same period, but equity to capitalization remains low at 4% at year end 2013.
Cash on hand and liquidity has also strengthened in recent years on the improved cash flow from operations. The agency reported total cash on hand of $263 million or 251 days at year end 2013, well above the median for similarly rated wholesale systems. The anticipated closing of a new $175 million revolving credit facility will further enhance available liquidity.
CONSIDERABLE FINANCIAL FLEXIBILITY
The agency's debt burden continues along a path of rapid amortization. Outstanding debt totaled $1.87 billion in January 2014, which represents a $1.6 billion or 46% reduction since the agency's peak in 1992. More importantly, based on current scheduled amortization, NCEMPA expects to repay nearly $600 million of long-term debt over the next five years, reducing projected outstandings to $1.3 billion by January 2019.
NCEMPA's outstanding debt is currently scheduled to be repaid entirely by 2026 - well before the useful life of the power assets and the expiration of the nuclear unit operating licenses (2034-2046). Although a restructuring and extension of the debt to align amortization and the final maturity with the useful life of the assets remains an option, the agency and its participants have made a consistent and conservative choice over the years to retire debt largely as scheduled. Fitch acknowledges the benefits of the agency's aggressive deleveraging and believes that the strategy yields considerable long-term financial flexibility, including the ability to reduce rates.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'U.S. Public Power Peer Study Addendum - February 2014' (Feb. 7, 2014);
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013);
--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841
U.S. Public Power Peer Study Addendum -- February 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601
U.S. Public Power Peer Study -- June 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710397
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827540
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.