NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' rating to North Carolina Municipal Power Agency No. 1's (NCMPA1, or the agency) $69.935 million, refunding series 2016A Catawba electric revenue bonds. The Rating Outlook is Stable.
The 2016A bonds are scheduled to price on Feb. 18, with a final maturity of Jan. 1, 2030. Proceeds will refund certain outstanding series 2009A Catawba electric revenue bonds for economic savings and pay costs of issuance. The 2016A bonds rank on parity in terms of payment with NCMPA1's outstanding senior lien $1.14 billion Catawba electric revenue bonds (rated 'A', Outlook 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; rated 'A', Outlook Stable).
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.
DEBT EXTENSION LOWERED COSTS: In 2015, NCMPA1 completed a partial debt restructuring to reduce near term escalating debt service 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 provides members rate relief through 2020, in exchange for slightly higher debt service payments longer term (through 2032).
HIGH WHOLESALE POWER RATES: The debt restructuring allowed the agency to reduce wholesale rates by 6% in July 2015. While positive, the wholesale rates remain moderately higher than regional averages. Prospectively, with no projected rate increases through 2019, the agency's rate position should improve through 2020.
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 for the first nine months of fiscal 2015 was solid at 1.5%, and ahead of budget (0.6%).
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. In the event a participant defaults on their payments to NCMPA1, the remaining nondefaulting members' project shares are stepped up, to a maximum of 25%, providing added revenue support. The members pay for their purchased power as an operating expense of the electric system, prior to own debt service payments.
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.
2015 DEBT EXTENSION AND RESTRUCTURING PLAN
NCMPA1's decision to extend and restructure its debt in 2015 reflected a combination of factors: (1) the historically low cost (interest) of restructuring; (2) the moderate size of the restructuring, which had diminished over time with repayments; and (3) retail rate increases that had been 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 (2043) and the members' power sales agreements with NCMPA1 (2033). High debt-service requirements had driven the agency's wholesale rates notably higher along with the members' retail rates through mid-2015. The debt restructuring plan provided moderate rate relief in the near term (five-year horizon) in exchange for slightly higher rates longer term (through 2032). As a result, the agency implemented a 6% wholesale rate reduction in July 2015. NCMPA1's wholesale rate position relative to its nearest competitor, Duke, is projected to remain approximately 24% above Duke's through 2020.
The longer term rate impacts are manageable as only 37% of total debt outstanding was affected by the restructuring.
LOWER WHOLESALE RATES THROUGH 2020
Wholesale rates should remain relatively flat through 2020 assuming modest surplus power sales and conservative energy sales growth. This rate projection is a departure from the prior years' forecast, as the reduced debt service payments eliminated the need for additional rate increases through 2019. In the prior year's forecast, average wholesale rates were slated to reach $95/MWh in fiscal 2017. 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, including supplemental revenues and expenses.
Liquidity, as measured by days operating cash on hand has averaged over 250 days for the past five years, above the Fitch median of 169 days cash for wholesale systems in 2015.
Prospectively, with lower annual debt service requirements and modest assumed energy sales growth, debt service coverage should remain solid through the five year horizon and in line with 'A' rated wholesale electric systems.
Even with the partial debt extension to 2032, NCMPA1 is still fairly rapidly paying down debt, as 61% of debt currently outstanding is scheduled to be retired by 2020. NCMPA1 is currently updating its five year strategic plan, which is anticipated to become available July 2016.
The agency's financial position is supported by solid member participants, particularly its five largest members that continue to exhibit sound cash flow, modest direct debt obligations, and the willingness to raise rates when needed.
Fitch reviewed NCMPA1's series 2016A proposed debt issuance at a rating committee held Feb. 11, 2016.
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
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999450
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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