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Fitch Affirms Piedmont Muni Power Agency, SC Elec Revs at 'A-'

February 16, 2014

Fitch Ratings affirms its 'A-' rating assigned to Piedmont Municipal Power Agency (PMPA or the agency), SC's outstanding $1.1 billion electric revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of PMPA, derived primarily from power sales contracts with its member cities.

KEY RATING DRIVERS

STRONG TAKE-OR-PAY CONTRACTS: The rating is supported by strong take-or-pay power sales contracts, including a 25 percent step-up provision, between PMPA and its member cities. The agency's costs (including debt service) are paid as an operating expense of the member's electric systems. Favorably, the contracts expire in 2035 while PMPA's current debt matures in 2033.

REDUCED DEPENDENCE ON RATE STABILIZATION FUND: PMPA's 6.7 percent rate increase implemented in May 2013 has significantly reduced the agency's reliance on the Rate Stabilization Fund (RSF). An additional rate hike planned for May 2014 should enable PMPA to replenish the RSF while maintaining debt service coverage metrics consistent with the agency's current rating.

STABLE PARTICIPANTS: PMPA's participants have a stable and moderately growing customer base consisting of mainly residential and small commercial customers. Although unemployment and income metrics are slightly weaker than national averages, they are consistent with historical trends.

CATAWBA PERFORMANCE: The rating also reflects the superior operating performance of the Catawba nuclear Unit No. 2, PMPA's primary power source. While this exposes PMPA to single unit risk, the reliability exchange agreement between Duke's Catawba and McGuire units partially mitigates this risk.

DEBT STRUCTURE: PMPA continues to reduce its variable rate debt obligations. Approximately 15 percent of PMPA's total debt consists of variable-rate obligations, compared to 25 percent in 2011. After excluding variable rate debt that has been swapped out to a fixed rate, PMPA's variable rate obligations are only about 10 percent of total debt.

RATING SENSITIVITY

MAINTENANCE OF FINANCIAL PERFORMANCE: It is important for PMPA to implement and maintain projected rate adjustments through 2014 in order to sustain its improved financial profile.

CREDIT PROFILE

PMPA is a public agency organized under the laws of the state of South Carolina. Ten South Carolina cities (participants) have entered into long-term Catawba project power sales agreements and supplemental power sales agreements with PMPA. Pursuant to the power sales agreements, PMPA is required to provide the participants with all-requirements bulk power supply, net of any Southeastern Power Administration (SEPA) allocation that the participant might have. Under the Catawba project power sales agreement, each participant pays for its percentage share of the operating and debt service expenses of PMPA on a take-or-pay basis (payable regardless of whether the Catawba project is operating or not). Payments from the participants are considered operating expenses of their respective electric systems, ahead of any direct debt service of the member systems.

PMPA has a 25 percent undivided ownership in the Catawba nuclear unit No. 2. The Catawba nuclear station is operated by Duke Energy Carolinas. Through various reliability exchanges with the Catawba (units No. 1 and No. 2) and McGuire nuclear projects (units No. 1 and No. 2), the risk of an extended outage of any one unit is shared and mitigated among the four units.

PMPA is in the midst of implementing a series of annual rate adjustments which have effectively closed the historical gap between the agency's embedded costs and rates. The most recent cost projections indicate wholesale rate increases of approximately 6.7 percent per year through 2014 followed by a 4.0 percent increase in 2015. This will enable PMPA to continue fully recovering operating costs via operating cash flow, extend the life of the RSF to 2033, and provide greater flexibility for the agency to meet ongoing debt service.

More information:

fitchratings.com

fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=696027U.S. fitchratings.com/creditdesk/ reports/report_frame.cfm?rpt_id=636311

fitchratings.com/gws/en/disclosure/solicitation?pr_id=820030

fitchratings.com/understandingcreditratings.

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