Fitch Rates NCMPA1 Catawba Revs 'A-'; Stable Outlook.

NEW YORK -- North Carolina Municipal Power Agency No. 1's (NCMPA1) proposed $74.95 series 2006A Catawba electric revenue bonds are rated 'A-' by Fitch Ratings. In addition, $1.91 billion outstanding parity Catawba electric revenue/refunding bonds are affirmed at 'A-'. The Rating Outlook is Stable.

Proceeds from the 2006A bonds will fund a significant portion of NCMPA1's cost responsibility for the Catawba nuclear facility's service water project. The bonds represent the agency's first new money deal since 1986. The 2006A bonds are scheduled to price Dec. 15, 2005, with Morgan Stanley as lead underwriter. The fixed-rate 2006A bonds mature serially from 2007-2020. The rating for the 2006A bonds reflects an unenhanced rating, as certain of the bonds are expected to be insured by AMBAC, whose financial strength is rated 'AAA' by Fitch Ratings.

NCMPA1's ratings reflect their consistent financial performance, solid power resource base, strong take-or-pay contracts with its 19 member systems, and improved supplemental power supply arrangements. NCMPA1's member systems continue to show steady growth, leading the state in terms of population, wealth and economic growth indices. Also favorable is the seemingly indefinite delay in the state's electric restructuring efforts. Most recently, unlike many other utilities, NCMPA1 has been fairly insulated from the higher cost fossil fuel environment due to its predominantly nuclear-fueled power resource mix (94% of total power supply).

From a financial perspective, NCMPA1 targets 1.12 times (x) debt service coverage of Catawba project debt, utilizing cash reserves as planned to meet that coverage level each year, along with disciplined modest annual rate increases. In recent years, the agency has been utilizing less cash reserves than budgeted, extending the projected life of the rate stabilization fund and other cash reserves to 2019 (from 2008 in prior year forecasts). As a result, NCMPA1 is projecting lower prospective rate increases (approximately 1% per year). The agency's ample cash reserves, with a current balance of just under $300 million as of Nov. 30, 2005, represent approximately 597 days of operating expenses -- better than average for their peers in the 'A-' category.

Other favorable credit factors include long-term, take-or-pay contracts with its members, the state Local Government Commission's fiscal oversight authority over municipal entities in the state, and the member cities' stable financial performance with modest electric system transfers to city coffers.

Credit weaknesses include above-average wholesale rates (currently 6.0 cents per kwh), nuclear operating risk, above-average member retail rates, and revenue concentration among the five largest members (representing 71% of NCMPA1's 2004 operating revenues). While the nuclear operating exposure is substantial, the risk of an extended unplanned nuclear outage is partially mitigated by the above-industry-average historical performance of the Catawba generating units.

An added weakness is the Agency's relatively high debt burden. NCMPA1's net debt to funds available for debt service is 11.3x - greater than the median for its peers in the 'A-' rating category. However, the agency's debt has a relatively short life, with a final maturity of just 15 years. Also, beginning in 2007, principal payments will exceed the interest portion of annual debt service, accelerating the pace of debt paydown.

NCMPA1 is a joint action agency providing wholesale electric service to 19 member municipal distribution systems located in central and western North Carolina. The members provide retail electric service to approximately 155,000 customers.

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