Fitch Rates Piedmont Muni Power Agency, SC Elec Revs 'A-'; Outlook Stable
Proceeds will be used to fund PMPA's share on on-going capital projects and additions related to its share of the Catawba nuclear project, fund reserve requirements and pay the costs of issuance. The bonds are expected to price the week of Aug. 17th.
In addition, Fitch affirms the following ratings for the outstanding PMPA bonds:
--$1.01 billion electric revenue bonds at 'A-';
The Rating Outlook for all bonds is Stable.
SECURITY
The bonds are secured by the net revenues of PMPA including payments received from each of its ten participants pursuant to their Catawba project power sales agreements and supplemental power sales agreements.
KEY RATING DRIVERS
STRONG POWER SUPPLY CONTRACTS: PMPA provides all-requirements bulk power supply to its ten member cities. Energy requirements are principally supplied pursuant to take-or-pay project power sales agreements governing the agency's ownership interest (277 MW) in the Catawba nuclear generating station co-owned and operated by Duke Energy Carolina's (DEC). The term of the Catawba contracts extends through Aug. 1, 2035, past the maturity date of PMPA's outstanding debt.
NUCLEAR CONCENTRATION: Nearly all of PMPA's assets and power supply are nuclear concentrated. Unit exposure, however, is mitigated by a series of reliability exchange agreements with DEC and the co-owners of three other nuclear units operated by DEC. All four units have been among the industry's top performers in recent years in terms of cost and reliability.
RATE INCREASES IMPLEMENTED: Annual rate increases averaging over 6% since May 2011 have eliminated PMPA's reliance on rate stabilization funds to achieve full cost recovery, and have allowed the agency to replenish historical draws. Although funds on hand may be used to reduce rate volatility going forward, only modest rate increases are anticipated through 2019.
HIGH WHOLESALE POWER RATES: The agency remains challenged by wholesale power rates that are higher than regional and national averages. This is largely attributable to excess baseload generating capacity, slow sales growth, and higher debt service costs.
STABLE PARTICIPANTS: PMPA's participants serve growing populations and a relatively stable customer base consisting primarily of residential and small commercial customers. Although regional unemployment and income metrics remain weaker than national averages, the figures are consistent with historical levels and the recent trends are favorable.
RATING SENSITIVITIES
MEMBER CREDIT QUALITY: The credit quality of the Piedmont Municipal Power Agency is ultimately driven by the credit strength of its contractual participants. A change in participant credit quality, particularly among its six largest members which account for 81% of the Catawba nuclear project output and costs, could affect the agency's rating.
POOR NUCLEAR PERFORMANCE: Poor operating performance at the Catawba and McGuire nuclear generating units (which supply 88% of the agency's power) that results in higher than anticipated wholesale power costs, additional rate increases and higher leverage, would be viewed negatively.
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 an operating expense of their respective electric systems, satisfied ahead of any direct debt service of the member systems.
PMPA has a 25% undivided ownership in the Catawba nuclear unit No. 2, which is operated by DEC. 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.
RATE INREASES ACHIEVE FULL COST RECOVERY
PMPA has implemented a series of annual rate adjustments which have effectively closed the historical gap between the agency's embedded costs and rates. This should enable PMPA to continue fully recovering operating costs via operating cash flow, preserve cash on hand, and provide greater flexibility for the agency to meet ongoing debt service. The most recent cost projections indicate nominal wholesale rate increases of through 2019.
HIGH LEVERAGE BUT IMPROVING METRICS
The recent rate increases implemented by PMPA have bolstered funds available for debt service (FADS) and helped solidify financial performance in recent years despite increasing debt service requirements. Fitch-calculated debt service coverage ratios have improved, ranging from 1.20x to 1.58x since 2011, versus 1.08x in 2010. Coverage in 2014 was strong at 1.58x.
Leverage at PMPA has improved in recent years, but remains relatively high reflecting the high fixed costs associated with the Catawba project and associated debt. At year end 2014, PMPA reported approximately $1.02 billion of debt. Although down steadily since 2010 ($1.11 billion), total debt still represents approximately 95% of capitalization and 232% of net capital assets. Positively, PMPA's ratio of total debt to FADS has improved to 9.3x in 2014 from 13.6x in 2010 reflecting the agency's stronger FADS. Going forward leverage should continue to gradually decline as existing debt is repaid and additional borrowings are limited Catawba related improvements.
With PMPA's wholesale rates now substantially at full cost recovery, Fitch expects reserves will remain relatively stable going forward. At year end 2014, the agency reported $68 million (232 days) of unrestricted cash and investments including funds available for rate stabilization.
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