Fitch Rates North Carolina Muni Power Agency 1 $498M Ser 2015 Catawba Power Revs 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'A' rating to the following North Carolina Municipal Power Agency Number 1's (NCMPA1, or the agency) Catawba electric revenue/refunding bonds:

--$230 million, series 2015A and 2015B tax-exempt refunding bonds;

--$58 million, series 2015C electric revenue bonds;

--$30 million, series 2015D forward delivery refunding bonds;

--$180 million, series 2015E federally taxable refunding bonds.

The bonds are scheduled to price the week of July 8th, with a final maturity of Jan. 1, 2032. Proceeds will be used to: fund certain capital expenditures; restructure a portion of outstanding debt; refund certain outstanding bonds for economic savings; and pay costs of issuance. The 2015D bonds will be forward delivered (October 2015) to current refund bonds coming due Jan. 1. 2016.

In addition, Fitch affirms the following parity lien ratings:

--$1.196 billion Catawba electric revenue bonds at 'A'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues derived by the agency from the operation of the Catawba power project, after the payment of operating expenses. Net revenues are received primarily from payments under the project sales agreement from the agency's 19 participating cities and towns.

KEY RATING DRIVERS

MATURE JOINT-ACTION AGENCY: NCMPA1 is a joint-action agency that has provided all-requirements bulk power supply to its 19 participants since 1983. Power and energy is principally supplied pursuant to take-or-pay project power sales agreements governing the agency's 75% ownership interest (832 megawatts [MW]) in unit 2 of the Catawba Nuclear Station, co-owned and operated by Duke Energy Carolinas, LLC (Duke).

NUCLEAR CONCENTRATION: NCMPA1's power supply is nuclear concentrated. Unit exposure is mitigated by a series of power exchange agreements with Duke and the co-owners of three other nuclear units. All four units are among the industry's top performers in recent years in terms of cost and reliability.

HIGH WHOLESALE POWER RATES: The agency remains challenged by wholesale power rates that are moderately higher than regional averages and largely attributable to excess capacity and increasing debt service costs in recent years.

DEBT EXTENSION WILL LOWER COSTS: The proposed 2015 debt offering is part of NCMPA1's plan to reduce near term escalating debt service requirements and more closely align the Catawba-related debt with the extended operating life of the nuclear asset. Fitch views the debt extension as credit neutral as it will provide members some rate relief through 2020, in exchange for slightly higher debt service payments longer term (levelizing debt service).

SOLID PARTICIPANT PERFORMANCE: Concentration of NCMPA1 revenues from its largest five participants (68.9%) is mitigated by solid financial performance over the past five years. The top five member cities' maintain highly rated electric system and general obligations debt. Energy sales growth strengthened in 2014 (up by 2.14%), following a few years of lackluster growth post-economic recession.

FAVORABLE STATE FISCAL OVERSIGHT: Participant operations are 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 by the agency and its participants. The LGC ensures compliance with fiscal and accounting standards. Remedies available include assuming full control of a participant's financial affairs.

RATING SENSITIVITIES

PARTICIPANT CREDIT QUALITY: The credit quality of the North Carolina Municipal Power Agency No. 1 is ultimately driven by the sound credit strength of its 19 participants. A change in the participant credit quality, particularly among its five largest which account for 68.9% of the Catawba project output and costs, could affect the agency's rating.

POOR NUCLEAR OPERATING PERFORMANCE: The Catawba nuclear units provide nearly all of the agency's power supply. Poor operating performance at the Catawba units that results in higher than anticipated wholesale power costs and rates and jeopardizes the agency's financial strategy or power supply would be viewed negatively.

CREDIT PROFILE

NCMPA1 provides all-requirements wholesale power supply to 19 participating cities and towns, all of which own and operate municipal electric systems. The participants are located in western North Carolina throughout an area known as the Piedmont region. Although the area has experienced strong historical growth in population and electric demand, growth among the participants has been limited in recent years. Collectively, the participating systems serve approximately 165,000 largely residential and commercial customers and a total population of approximately 427,000.

NUCLEAR CONCENTRATED POWER SUPPLY

Nearly all of the power supplied by the agency is derived from its 75% ownership interest in unit 2 of the Catawba nuclear station (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 Catawba 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 portfolio of short- and medium-term power purchase agreements, and participant-owned units.

The capacity and energy available to the agency from the Catawba project is, at times, in excess of participant demand. Surplus power not required to meet the participant's load is sold at market rates to reduce participant revenue requirements and wholesale rates.

DEBT EXTENSION AND RESTRUCTURING PLAN

NCMPA1's decision to extend and restructure its debt at present reflects a combination of factors: (1) the low cost of restructuring at today's interest rates; (2) the size of the restructuring, which has diminished over time with repayments; and (3) retail rate increases that are outpacing their competitors.

NCMPA1's outstanding Catawba debt amortizes rapidly through 2021 and is entirely retired by 2032 - well before the expiration of the unit's operating license. However, high debt-service requirements have driven the agency's wholesale rates notably higher along with the members' retail rates (approximately 16% - 30% above the nearest IOU's retail rates). The proposed debt restructuring plan will provide some rate relief in the near term (five-year horizon) in exchange for slightly higher rates longer term (levelized debt service). Favorably, the agency's debt will be fully retired by 2032, in line with current terms of power supply agreements between the members and NCMPA1, and well in advance of the Catawba project's operating life expiration.

Fitch believes the proposed debt extension is credit neutral. The agency retains some financial flexibility with debt maturing in 2032 - still 11 years prior to the project's operating life expiration. Additionally, longer term wholesale rates will rise only moderately higher in comparison to the prior year's rate forecast. The longer term debt restructuring rate impacts are manageable as only 37% of total debt outstanding is affected by the restructuring.

LOWER WHOLESALE RATES THROUGH 2020

NCMPA1's wholesale rates are projected to decline 6% beginning July 1, 2015, as a result of the proposed restructuring, assuming modest surplus power sales and conservative energy sales growth. Wholesale rates should remain relatively flat through fiscal 2020. This rate projection is a departure from the prior year forecast, as lower debt service payments eliminated the need for additional rate increases through 2016. In the prior year's forecast, average wholesale rates were slated to reach $95/MWh in fiscal 2017 (from $65.97 in 2009). The average wholesale cost of power is now projected to remain in the $80-$83/MWh range through fiscal 2020.

FINANCIAL STABILITY

Operating performance at the agency has improved since 2009, when Fitch-calculated debt service coverage totaled just 1.07x. Annual wholesale rate increases of roughly 5% per annum from 2009-2013 have strengthened funds available for debt service improving financial metrics. Debt service coverage has improved to 1.44x and 1.54x in fiscal years 2014 and 2013, respectively.

Liquidity, as measured by days operating cash on hand has averaged a very solid 250 days over the past five years, above the Fitch median of 169 days cash for wholesale systems in 2015.

Prospectively, debt service coverage will initially tighten to 1.2x in fiscal 2015-2016 given the planned 6% rate decrease. Post-2016, with lower annual debt service requirements and modest assumed energy sales growth, debt service coverage should improve through the five year horizon and remain in line with 'A' rated wholesale electric systems.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

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Contacts

Fitch Ratings
Primary Analyst
Stacey Mawson
Director
+1-212-908-0678
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Lina Santoro
Analytical Consultant
+1-212-908-0522
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stacey Mawson
Director
+1-212-908-0678
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Lina Santoro
Analytical Consultant
+1-212-908-0522
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com