Fitch Rts Delaware Muni Elect Corp's $36MM Ser 2001 Revs `A-`.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 23, 2001

Fitch assigned an `A-` rating to the Delaware Municipal Electric Corporation's (DEMEC) $35.6 million of electric revenue bonds, series 2001.

This is DEMEC's first bond issuance and credit rating. Bond proceeds will fund the construction of a 45-megawatt natural gas-fired electric generating unit that will provide power to the project participants during peak demand times (the project). The bonds are scheduled to price the week of August 27th with Bear, Sterns & Co. Inc. and Morgan Stanley as co-managers.

DEMEC is a joint action agency providing wholesale energy to nine municipal electric systems in the state of Delaware. Presently, DEMEC does not own any generating facilities and obtains all of its power requirements though contracts and market purchases. The project is secured by amounts payable from the project participants under take- or-pay power sales contracts that include a 25% step-up provision. Seven of DEMEC's nine members will participate in the project. The City of Newark is the largest participant accounting for 47.4% of project debt, followed by the Town of Milford at 20.8%. While the Newark electric system project share exceeds the step-up provision, this concern is somewhat mitigated by its solid competitive position and stable financial performance. In addition, the Newark electric system is an integral part of the City of Newark's operations, with electric system transfers representing the city's largest source of funds at 40% of general fund revenues (Fitch rates the City of Newark's general obligation bonds `AA').

DEMEC's decision to build a peaking unit stems from the regions increasingly volatile power prices, the members' location on the Delmarva Peninsula which is considered a load pocket (where power requirements exceed local generating capacity), and limited transmission access resulting in congestion pricing during high demand periods. The new unit is scheduled to come online in December 2001 and should provide a hedge against volatile energy spot prices, increase system reliability, and relieve some transmission constraints thereby lowering the amount participants pay due to transmission congestion. Other credit strengths include the projects favorable economics and its fit within the participants' power supply portfolio, which includes a mix of baseload, and intermediate power contracts, as well as spot market purchases. In addition, project debt service costs are a minimal part of each participant's operating expenses at less than 8%.

Concerns include some construction risk associated with the project, the potential for an increasingly competitive electricity market going forward, and DEMEC's need to firm up power supply arrangements by 2003, due to the expiration of its power purchase agreement with Conectiv Energy. The existing arrangement has been beneficial to DEMEC, both on a power supply and price basis, and at this time, it is somewhat unclear what the future power supply mix will look like.