N.C. Eastern Municipal Power Agency to Sell Generation Assets for $1.2B

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BRADENTON, Fla. - The North Carolina Eastern Municipal Power Agency plans to sell its generating assets in a transaction that requires retiring or defeasing all of its $1.87 billion in outstanding revenue bonds.

The debt must be taken out to complete the negotiated $1.2 billion sale to Duke Energy Progress, according to an agreement inked Monday by the boards of both companies.

The nonprofit NCEMPA provides all-requirements wholesale power supply to its members in the eastern part of the state from Raleigh to the Atlantic coast.

Duke will pay Eastern Municipal Power Agency for its ownership stake in three nuclear power units and two coal-fired units.

At the same time, the public power agency will enter into a wholesale power contract to have Duke meet the future power needs of its 32 member cities and towns, which own municipal electric systems serving a population of 462,000.

"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," said Fitch Ratings analyst Dennis Pidherny.

Fitch rates the agency's revenue bonds A-minus, with a stable outlook, as does Standard & Poor's.

Funding to retire or defease the outstanding debt would come from the asset sale proceeds, internal operating and reserve funds, and the issuance of approximately $475 million of debt under a new resolution, Pidherny said.

The exact structure of the bond deal hasn't been released.

The sale is credit positive for the North Carolina Eastern Municipal Power Agency, said Moody's Investors Service analyst Dan Aschenbach.

Moody's rates the agency's bonds Baa, with a stable outlook.

"The transaction would reduce Eastern's debt outstanding by 70%," Aschenbach told The Bond Buyer Tuesday. "Also, there is a positive impact forecasted on Eastern's wholesale power rates that are charged to its municipal participants."

The complex transaction, he pointed out, still must be approved by NCEMPA's 32 member communities, the North Carolina Utilities Commission, and the Federal Energy Regulatory Commission.

The deal also requires that the North Carolina General Assembly pass a law authorizing the sale.

The North Carolina Local Government Commission's approval is required for the refinancing, according to a notice filed by Duke with the North Carolina Utilities Commission.

After selling the assets for $1.2 billion and liquidating certain bond reserve funds, the power agency's members would share responsibility for outstanding debt of approximately $480 million, power agency officials said.

The sale to Duke should result in lower electric rates for Eastern communities, according to officials with ElectriCities of North Carolina Inc., the nonprofit company that manages the North Carolina Eastern Municipal Power Agency.

"When we entered these negotiations, we knew it wasn't feasible to expect to completely eliminate the debt by selling our assets," said Graham Edwards, chief executive officer of ElectriCities. "But this agreement has the potential to reduce our current debt by more than 70%.

"That's a significant decrease in our costs and the savings would be directly passed along to NCEMPA members."

The impact on rates for each community will be different, and depends on factors such as each community's share of the outstanding debt, the specific load characteristics, and customer mix of the community.

Edwards cautioned that getting final approvals for the sale "won't happen overnight."

The sale of Eastern Municipal Power's electric generation assets won't affect the distribution assets owned by its member communities, which will continue to own the power lines, substations, and transformers that carry electricity directly to their consumers.

Eastern has been challenged by wholesale power rates for members that are higher than regional averages, and largely attributable to the high fixed cost of the power system and debt service costs, Fitch said while affirming its A-minus ratings in an April 23 credit report.

"Management's focus on cost cutting, together with aggressive refinancing strategies, has moderated the need for additional rate increases," Pidherny said in the report.

A reduction in debt could have a positive impact on the rating or outlook, he added.

While a successful sale of assets to Duke is likely to be positive for credit quality, Pidherny said any related rating action would reflect the final terms of the transaction and required defeasance.

Operating performance at the agency has been stronger and relatively stable in recent years, since the implementation of sizable and timely rate increases in 2008 and 2009, according to Fitch.

Debt service coverage, as calculated by the rater, stabilized between 1.26 times and 1.45 times since 2010, and totaled 1.36 times in 2013.

"Cash on hand and liquidity has also strengthened in recent years because of improved cash flow from operations," Pidherny said.

NCEMPA reported total cash on hand of $263 million or 251 days as of Dec. 31, 2013, the end of the fiscal year.

The cash is well above the median for similarly rated wholesale systems, according to Fitch.

Eastern also closed on a new $175 million subordinated revolving credit facility with JPMorgan Chase Bank NA in May, adding to its liquidity.

The two-year credit facility is being used to pay for various projects at nuclear and coal plants, according to a document prepared by the state's Local Government Commission, which approves local and state debt issues.

After two years, any unpaid principal on the credit facility converts automatically to a five-year term loan if the contemplated asset sale to Duke Energy Progress does not transpire.

If a conversion on the principal occurs, efforts will be made to refinance the debt as a conventional long-term revenue bond, the state document said. Hawkins Delafield & Wood LLP was bond counsel for the deal. Chapman and Cutler LLP was counsel for the bank.

While Eastern Municipal Power has implemented a number of strategies to reduce power rates, the agency began negotiating with Duke in February for the potential sale of its generating assets.

The assets include the Brunswick Nuclear Plant Units 1 and 2 in Brunswick County, Harris Nuclear Plant in Wake County, and two coal-fired plants called the Mayo Plant Unit 1 and Roxboro Plant Unit 4, both in Person County.

"We've been investigating options to lower our costs for several years while preserving the benefits of public power," Graham said. "Selling our generation assets is a significant way we can achieve that goal and strengthen…public power's future in eastern North Carolina."

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