Fitch Ratings Affirms Piedmont Municipal Power Agency At 'BBB'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 24, 2003

Fitch affirms Piedmont Municipal Power Agency's (PMPA) $1.2 billion outstanding electric revenue bonds at 'BBB'.

The Rating Outlook is Stable. PMPA is a joint action agency that provides all-requirements power to ten 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.

Credit strengths include court validated long-term take-or-pay contracts with 25% step up provisions, South Carolina's lack of electric deregulation activity, a favorable supplemental power contract, and a rate stabilization fund (RSF) with a current balance of $140 million. Additional credit strengths include above average operating performance of Catawba No. 2 and reliability exchanges with three other nuclear units that allow PMPA to mitigate unit specific risk. In addition, PMPA's members have demonstrated solid financial performance with strong equity positions (including over $50 million in surplus cash) and annual energy growth of 3% over the last 5 years.

Credit risks center on PMPA's above market embedded costs resulting from high levels of annual debt service that extends through 2024. These costs will result in frequent rate increases and drawdown from the rate stabilization fund over the next 20 years. Despite PMPA's plan to use RSF funds to lower wholesale rates, Fitch believes members' retail rates (currently among the highest in the state) are likely to be above the region's market retail rates in the future. In 2002, PMPA's embedded costs and wholesale rates averaged 6.8 cents/kwh and 6.0 cents/kwh, respectively.

While there is no substantial deregulation activity in South Carolina at this time, PMPA's ability to repay its debts could be compromised if retail competition were implemented in the state and if the state's deregulation legislation does not incorporate meaningful stranded cost recovery mechanisms. Partial mitigants to this concern are the current lack of support for deregulation in South Carolina, PMPA's diversified customer base that is residential and commercial based, and PMPA's extensive lobbying effort for a statewide solution to stranded costs.

PMPA's recently finalized a five-year contract with Southern Power Company (Southern; rated 'BBB+' by Fitch) that commits Southern to provide supplemental power to PMPA and to purchase PMPA's surplus energy. The arrangement becomes effective in 2006 and replaces PMPA's current arrangement with Duke. The Southern arrangement has comparable pricing to the Duke contract but provides greater flexibility for PMPA to purchase supplemental power and to sell surplus power in the open market. Fitch views the Southern arrangement as a favorable development for PMPA.

PMPA's financial performance reflects its strategy with regards to wholesale rates and the RSF. PMPA's 2002 financial results show debt service coverage at 1.0 times (x) (1.2x after adjusting for the planned rate stabilization fund withdrawal). PMPA's liquidity position includes $250 million of cash reserves providing over two years of operating expenses. However, it is important to note that a majority of those funds are allocated for future uses. In addition, total debt to funds available for debt service is over 16x, 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 a mix of variable rate debt products and interest rate swap strategies. Currently, PMPA's variable-rate exposure is $280 million (or 22% of capitalization).