Fitch Rates NC Eastern Muni Power's $147MM Pwr System Bnds 'BBB+' (Und).

NEW YORK -- North Carolina Eastern Municipal Power Agency's (NCEMPA) $146.5 million variable-rate power system revenue bonds, refunding series 2006A ($144.3 million) and 2006B ($2.2 million federally taxable) are rated 'BBB+' by Fitch. In addition, NCEMPA's outstanding $2.8 billion parity power system revenue and refunding bonds are affirmed at 'BBB+'. The Rating Outlook is Stable.

The 2006 bonds are secured by net revenues of the agency derived from the ownership and operation of its power system. Proceeds will refund certain of the series 1996A power system revenue bonds. The 2006 bonds are scheduled to price Oct. 11, 2006, with Citigroup as sole underwriter.

The 'BBB+' rating reflects the bonds' unenhanced long-term rating. The 2006 variable-rate bonds will be issued with the support of bond insurance to be provided by MBIA and liquidity support to be provided by Wachovia Bank, N.A. Fitch's rating of the variable-rate securities will be summarized in a separate press release nearer to the closing of the bonds.

The rating encompasses NCEMPA's solid, take-or-pay contracts with its members, stable financial performance, and ability to pass-through fuel cost changes via an energy adjustment charge. Positively, NCEMPA's member systems' customer base is well diversified and gradually growing in terms of energy sales, at 1.8% per annum.

Credit weaknesses center on a high average wholesale rate (over 8.0 cents for the current year including transmission), consequently high member retail rates, and relatively weak member financial metrics. NCEMPA's leverage is above average for the rating category as measured by total debt to funds available for debt service at 11 times (x) for fiscal year-end 2005. On a net basis, offsetting total debt outstanding with cash reserves, NCEMPA's leverage is more in-line for the rating category at 8.5x. Prospectively, with no new debt issuances projected through at least 2008, the debt burden should continue to decline.

Over the past year, NCEMPA has been affected by the rising cost of fossil fuels, resulting in an unanticipated 5.1% increase in the energy adjustment rider in May 2005 and a subsequent 10% increase in the wholesale rate in January 2006. With the recent pullback in natural gas and coal prices this year, NCEMPA may have an opportunity for a modest reduction in the energy adjustment rider in 2007. Thereafter, NCEMPA is projecting no additional adjustment for the foreseeable future. Despite NCEMPA's higher than projected rate increases for 2005/2006, NCEMPA's relative rate disadvantage is likely to remain the same. NCEMPA benefits from regionally less exposure to the more volatile fossil fuel-powered generation (47% nuclear-fired power supply), and the surrounding corporate utilities have pending rate increase requests to accommodate the higher fuel costs. On a retail basis, the members' rate disadvantage is not as large, particularly for industrial users that have the benefit of economic development rates and load management rate incentives.

Other credit positives include: the lack of electric deregulation in NC, the Local Government Commission's (LGC) fiscal oversight of NC municipalities, and solid plant operating performance for the nuclear (Brunswick and Harris units) and coal-fired (Roxboro and Mayo) generating units. The role of the LGC in NC is unique, monitoring the financial health of all municipalities while providing a strong voice at the state level on behalf of municipal bondholders.

NCEMPA is a joint action agency providing power supply to 32 member distribution systems in eastern NC, pursuant to take-or-pay power sales contracts. The member systems provide retail electric service to roughly 258,000 customers, primarily residential and commercial users.

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