NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a bank bond rating and an underlying rating of 'BBB+' to the following Piedmont Municipal Power Agency's (PMPA) variable rate financing:
--$53.95 million refunding series 2011B electric revenue bonds;
--$53.95 million refunding series 2011C electric revenue bonds.
The proceeds of the bonds will be used to refund outstanding series 2008B bonds. The 2011B and 2011C variable-rate bonds will be assigned a rating closer to transaction pricing (March 16, 2011) to reflect the liquidity and credit support provided via an irrevocable direct pay letter of credit by U.S. Bank and T.D. Bank N.A.
It is important to note, the bank bond rating is only applicable if the 2011B/C bonds could not be remarketed and are subsequently purchased by the bank(s) providing associated credit facilities (TD Bank N.A. and U.S. Bank).
In addition Fitch affirms the following PMPA electric system parity revenue bond ratings:
--$1.074 billion outstanding PMPA electric revenue bonds at 'BBB+'.
The Rating Outlook is Positive.
RATING RATIONALE:
--The rating reflects improving financial metrics primarily due to a combination of regular rate increases and lower debt service, as well as continued plant operating efficiency.
--Favorably PMPA's board recently approved an increase in the wholesale rate of 6.7% to be effective as of May 1, 2011.
--None of the agency's variable rate debt is currently held as bank bonds. The agency's overall interest rate and term-out risk is manageable given the sufficient available resources to accommodate the potential for increased principal and/or interest payments associated with bank bond mode.
--While the proposed transaction is a variable for variable refunding, PMPA has decreased its gross variable rate debt exposure over the last month from approximately 25% of total to 15%.
--Additionally, about 5% of variable interest rate exposure is swapped to a fixed rate, thereby reducing net interest rate risk to a more modest 10% of total debt.
--The rating is supported by the strong take-or-pay power sales contracts PMPA maintains with its member electric distribution systems, wherein PMPA's costs (including debt service) are paid as an operating expense of the participant's respective electric systems.
--PMPA's participants have a stable and moderately growing customer base consisting of mainly residential and small commercial customers.
--PMPA continues to benefit from the sound operating performance of its primary power resource the Catawba Nuclear Unit #2.
--PMPA has limited risk associated with carbon emissions, as 92% of the energy used to serve PMPA's participants is derived from nuclear and hydro resources.
--Fitch notes that the reduced dependence on the Rate Stabilization Fund (RSF) and the forecasted coverage metrics are predicated on the successful implementation of a 6% annual rate increase required over the 2011-2014 time period.
WHAT COULD TRIGGER A RATING UPGRADE?
--A key credit driver for PMPA is the successful implementation of planned annual wholesale rate increases (6%) through 2014 and attainment of adequate financial metrics commensurate with the next rating level.
--Although there is some degree of plant concentration, the reliability exchange agreement between the Catawba units and the associated McGuire units serves to mitigate that risk.
--Positively, PMPA's participants have adequately weathered the economic recession. Nonetheless, Fitch will be monitoring the impacts of the economy on the members' financial and operational strength.
SECURITY:
The bonds are secured by net revenues derived from the Catawba Power Sales Agreement and the Supplemental Power Sales Agreement.
CREDIT SUMMARY:
Piedmont Municipal Power Agency 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 the 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 South-eastern 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 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% undivided ownership in the Catawba Nuclear Unit #2. The Catawba Nuclear station is operated by Duke Energy Carolinas. Through various reliability exchanges with the Catawba (Units #1 and #2) and McGuire Nuclear project (Units #1 and #2), the single-site risk of continued operation of any one unit is shared and mitigated among the four units.
PMPA's management is aware of the need to adjust rates in line with costs. The most recent cost projections indicate that wholesale rate increases of approximately 6% per year (2011-2014) will be required to allow PMPA to fully cover operating costs with operating cash flow. This would extend the life of the RSF to 2033 and positions PMPA to meet a higher level of debt service from 2014 and beyond.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', Oct 8, 2010;
--'Public Power Rating Guidelines', June 11, 2009.
Applicable Criteria and Related Research:
Public Power Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=447150
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
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