Fitch Rates Piedmont Municipal Power Agency $200MM Rev Bonds `BBB'.

NEW YORK -- Fitch rates Piedmont Municipal Power Agency's (PMPA) $200 million electric revenue bonds, 2004 A refunding series 'BBB'. The Rating Outlook is Stable. Fitch also affirms the $1.2 billion outstanding electric revenue bonds at 'BBB'. Proceeds of the 2004 bond issues will be used to refund a portion of PMPA's outstanding revenue bonds. PMPA will also be issuing approximately $250 million of variable rate demand bonds that will be enhanced with bond insurance and supported by liquidity facilities. It is expected that PMPA will enter into a floating-to-fixed interest rate swap to hedge a portion of its variable-rate exposure. In aggregate, the financings will level PMPA's aggregate debt service and will extend the final maturity of the debt to 2035 from 2025. The 2004 fixed-rate bonds are scheduled to price the week of July 19, 2004, with JP Morgan as senior manager. Fitch will rate the structured variable rate securities in a separate press release.

PMPA's long-term rating reflects Fitch's recognition of the improved credit profile of PMPA's members, PMPA's continued satisfactory financial results and the restructuring of its debt service. Fitch believes that while these factors affect the various components that comprise PMPA's credit profile (see below), the net credit risk remains consistent for a wholesale public power utility in the 'BBB' category.

The proposed debt restructuring is a result of a license extension for its primary power supply, the Catawba Nuclear Unit No. 2, and PMPA's desire to provide rate relief to its members. The restructuring - which will extend the final maturity of PMPA's debt to 2035, will level and reduce annual debt service for the next 20 years, lower projected annual wholesale rate increases from 2.0% to 1.3%, and extend the life of PMPA's existing rate stabilization fund to 2032 from 2022. The restructuring (which will produce a slight present value loss) essentially extends risk by creating additional long-term costs for PMPA and its members beyond 2025. Moreover, even with intermediate-term rate relief, PMPA's members' retail rates (currently among the highest in the state) are still likely to be above the region's retail rates in the future, although not as high relative to previous estimates.

PMPA's power cost and its members' retail rates are meaningful given their importance for the members' economic developments efforts. This risk is somewhat mitigated by the members' favorable customer mix (primarily residential and commercial customers) and competitive commercial / economic development rate. While Fitch believes that retail competition is unlikely in the near and medium term, retail rates could be a long-term issue given the restructurings extension of fixed costs.

Other credit strengths include court validated long-term, take-or-pay contracts through 2035 with 25% step-up provisions, South Carolina's lack of electric deregulation activity, a favorable supplemental power contract, and a considerable RSF (over $180 million balance as of May 31, 2004). From an operating cost perspective, PMPA benefits from the above average operating performance of Catawba No. 2 and reliability exchanges with three other nuclear units that allow PMPA to mitigate unit specific risk. Fitch also recognizes the improving credit profile of PMPA's members. Over the past few years, many of the members have taken substantial steps to improve their financial strength (e.g. greater cash balances, lower and restricted transfers to city's general fund) and are experiencing strong energy growth as a result of increased economic activity particularly around Charlotte, NC and Greenville, SC. Fitch recently affirmed the 'A' rating of PMPA's third largest member, Greer Commission of Public Works, and revised the Rating Outlook to Positive from Stable.

Credit risks center on PMPA's above market embedded costs resulting from debt service that currently extends through 2025 (2035 after restructuring). These costs will result in frequent rate increases and drawdown from the rate stabilization fund over the next 30 years as the gap between PMPA's costs and rates narrows. PMPA expects to increase wholesale rates 1.3% annually for the next 30 years.

An added risk includes the long-term viability of extended operations of Catawba Nuclear Unit No. 2. Fitch however takes comfort from the recent operating history of the unit and the record of its current operator (Duke Energy). Duke Energy has outlined a long-term capital plan that involves an ongoing maintenance program funded through existing operating margins (and not requiring additional indebtedness).

PMPA's financial performance reflects its strategy with regards to wholesale rates and the RSF. PMPA's financial profile includes debt service coverage at 0.98x (1.2x after including planned rate stabilization fund withdrawal). PMPA's liquidity position includes $220 million of cash reserves (including RSF) providing over two years of operating expenses. It is important to note that a majority of those funds are allocated for future uses (e.g. wholesale power cost reduction). In addition, total debt-to-funds available for debt service is over 16 times, which is substantially higher than almost all other public power utilities and reflects PMPA's substantial debt burden.

To reduce costs related to its debt, PMPA uses many variable-rate debt products and interest rate swap strategies. Currently, PMPA's variable-rate exposure is $280 million (or 22% of capitalization). Following the restructuring, PMPA's variable-rate exposure is expected to be slightly higher and given the amortization of the fixed rate debt, PMPA's variable rate exposure will increase over time. Fitch does not believe the expected variable-rate exposure is a meaningful credit concern given PMPA's existing cash balances, conservative budgeting practices and past financial management practices.

PMPA is a joint action agency that provides all-requirements power to 10 participating cities in northwestern South Carolina, primarily from its 286 mw interest in the Catawba Nuclear Unit No. 2 (Catawba No. 2). The participants are municipal distribution utilities that serve a population of approximately 143,000.