Fitch: US Public Power Deal Could Be Positive for Constituents

The recently announced agreement to sell North Carolina Eastern Municipal Power Agency's (NCEMPA) generating assets to Duke Energy Progress (DEP) does not heighten risk to existing agency bondholders and could benefit member communities and related creditors, Fitch Ratings says. The agreement, announced yesterday, is subject to the execution of final agreements between the parties, as well as approval from federal and local regulators.

The proposed sale will not expose existing bondholders to additional risk as all of the agency's $1.87 billion of outstanding revenue bonds would have to be retired or defeased pursuant to the terms of the bond resolution and as a condition to the sale, according to NCEMPA. Fitch rates the agency's existing revenue bonds 'A-' with a Stable Rating Outlook. Proceeds required to retire or defease outstanding debt would be derived from the asset sale proceeds, internal operating and reserve funds, and the issuance of approximately $475 million of debt under a new resolution. NCEMPA's outstanding debt is scheduled to be repaid entirely by 2026.

Agency members could benefit from the agreement, which is expected to significantly reduce operating costs and reduce debt by more than 70%. NCEMPA wholesale power rates have historically been higher than regional averages due to the high fixed cost of the power system, including debt service costs. Following the proposed sale, DEP will supply wholesale power to NCEMPA under a long-term contract. Cost savings will be passed on directly to member cities and towns in eastern North Carolina, many of which have experienced modest population growth, high unemployment rates and low median household income.

The expected timeline for the potential approval from regulatory bodies is not yet known. Until the approval process occurs and the asset sale is complete, Fitch expects no meaningful change in the agency's operating performance.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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