Fitch Rates North Carolina Muni Power Agency #1 Catawba Power Revs 'A'; Outlook Stable
Fitch Ratings assigns an 'A' rating to the following North Carolina Municipal Power Agency #1 (NCMPA#1) bonds:
--$461,000,000 Catawba electric revenue refunding bonds, series 2012A;
--$71,000,000 Catawba electric revenue bonds, series 2012B;
--$81,000,000 Catawba electric revenue bonds, series 2012C (federally taxable).
Fitch also affirms the 'A' rating on $1.454 billion of outstanding NCMPA#1 Catawba electric system revenue bonds.
The Rating Outlook on all bonds is Stable.
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: NCMPA#1 is a joint-action agency that has provided all-requirements bulk power supply since 1983. The majority of power and energy requirements are 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.
NUCLEAR CONCENTRATION: NCMPA#1's assets and power supply are nuclear concentrated. Unit exposure, however, is mitigated by a series of exchange agreements with Duke Energy Carolinas LLC and the co-owners of three other nuclear units. All four units have been 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 ($74.07/MWh [megawatt hours] in 2011) that are slightly higher than regional averages, and largely attributable to excess capacity and increasing debt service costs. Management's focus on cost cutting, together with aggressive refinancing strategies, has moderated required rate increases, but further increases are planned.
RAPID DEBT AMORTIZATION: NCMPA#1's debt service requirements are expected to peak in 2016 before declining rapidly, reflecting the full repayment of the agency's debt by 2032, well ahead of the expected life of the Catawba asset. 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.
POOR NUCLEAR PERFORMANCE: Poor operating performance at the Duke nuclear units that results in higher than anticipated wholesale power costs and rate increases, and jeopardizes the agency's debt reduction strategy, would be viewed negatively.
NCMPA#1 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 162,000 largely residential and commercial customers and a total population of approximately 426,000.
Considerable Financial Flexibility
The agency's debt burden continues along a trend of rapid amortization. Outstanding debt totaled $1.45 billion in January 2012, which represents a $1.1 billion or a 43% reduction since the agency's peak in 1993. Although planned issuance will slow the agency's deleveraging somewhat, total debt is still forecast to decline to $613 million by yearend 2020.
PROPOSED RESOLUTION AMENDMENTS RATINGS NEUTRAL
Fitch views the proposed amendments to the NCMPA#1 resolution as ratings neutral. The most significant amendments, including permission to sell a portion of the Catawba project and to issue bullet maturity debt that the agency intends to pay with proceeds other than revenues (i.e. sale proceeds), are designed to give the agency greater flexibility in optimizing the Catawba asset. Fitch's ultimate concern is not about any sale of Catawba, but rather the use of proceeds.
The other amendments include permission to deposit funds for debt service as needed as opposed to monthly and to treat BABs interest subsidy as revenue.
For additional information on NCMPA#1 see Fitch's research dated April 25, 2012.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'U.S. Public Power Rating Criteria', Jan. 11, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
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