OREANDA-NEWS. Fitch Ratings has upgraded the rating on the city of Greenville (NC) Greenville Utilities Commission's (GUC) \\$38.4 million of outstanding combined enterprise system revenue bonds series 2001, 2008A and 2008B to 'AA-' from 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are special obligations of the city of Greenville and are secured solely by a pledge of all net receipts of the combined enterprise system, which is composed of the electric, water, wastewater and natural gas systems, owned by the city and operated by GUC.

KEY RATING DRIVERS

LESSENED RISK, REDUCED COSTS: The upgrade to 'AA-' reflects the decreased risk profile and lower power supply costs for GUC after its wholesale power supplier, North Carolina Eastern Municipal Power Agency's (NCEMPA; rated 'A' by Fitch), sold substantially all of its generation assets to Duke Energy Progress, Inc. (DEP; A-/Stable). GUC will receive power through NCEMPA from DEP's lower-cost, diversified power supply, which will significantly reduce GUC's above-average wholesale power supply costs.

NOTABLE RETAIL RATE REDUCTION: GUC substantially reduced its retail rates on Aug. 1, 2015, passing through a portion of the cost savings realized from the asset sale. The reduction enables the utility to offer regionally competitive rates and potentially spur economic development. Retail rates are expected to be held steady through 2020.

ANTICIPATED STRENGTHENING OF METRICS: Financial metrics are expected to strengthen, due to the reduction in wholesale power supply costs. Debt service coverage (DSC) is expected to be maintained at around 2.5 - 2.9x through 2020, as compared to previous forecasts of 2.0 - 2.2x. Notable debt issuances are planned throughout the forecast period, but DSC and leverage should remain acceptable for the rating category.

STRONG AND GROWING SERVICE AREA: GUC provides a host of services, including electric and gas distribution, as well as water and wastewater services, to the city of Greenville and surrounding areas. The service area continues to experience population growth that is well above state and national averages and has been driven by regional economic expansion initiatives, primarily in the education and medical services sectors. Usage and customer growth rates at GUC have also exceeded industry averages.

EFFICIENT ELECTRIC OPERATIONS: The electric distribution system has operated very efficiently, despite historically higher than average wholesale power charges from NCEMPA. The keen focus of management on operating metrics is viewed favorably by Fitch.

RATING SENSITIVITIES

CHANGE IN FINANCIAL STRATEGY: The 'AA-' rating reflects Fitch's expectation that Greenville Utilities Commission's diverse and stable revenues streams will continue to generate strong cash flows and ample financial metrics. While not anticipated, a shift in management strategy to operate at tighter margins could prompt negative rating pressure.

CREDIT PROFILE

GUC operates a combined utility system that provides electric, water, wastewater and natural gas services throughout a region that encompasses the City of Greenville, NC (the city) and portions of the broader Pitt County (NC). Net revenues of the combined system are pledged as payment to the bonds. The city has experienced well above-average population growth in recent years and has emerged as a commercial, educational and medical hub for eastern North Carolina. GUC served approximately 150,826 total connections in fiscal year (FY) 2014, inclusive of all its services.

OPERATIONS AND ASSETS

The electric system receives wholesale power from its participation in NCEMPA. NCEMPA sold the majority of its generation assets to DEP for \\$1.2 billion on July 31, 2015. Proceeds from the sale, along with proceeds of NCEMPA's series 2015 bonds issued under a new indenture, were used to defease all of NCEMPA's outstanding power supply revenue bonds. NCEMPA will remain the wholesale electric supplier to GUC and the other members, but NCEMPA will meet its energy requirements through a full requirements power supply contract with DEP.

GUC and the other members have entered into debt service support contracts (DSS Contracts) and full requirements, take-and-pay power sales contracts with NCEMPA. The DSS Contracts govern the repayment of \\$421 million of debt issued by NCEMPA to defease the remaining outstanding bonds after the sale of assets to DEP (GUC portion 20.37%). The new NCEMPA debt amortizes quickly and will be fully repaid by 2025. The power sales contracts provide 100% of GUC's energy requirements through 2043, with options to allow GUC to acquire alternative power supply and terminate all or a portion of the contract in Dec. 2035 (notice needed by July 2027). GUC maintains the right to use its demand side management program and the same self- generation rights.

The sale of NCEMPA's assets to DEP is beneficial for GUC, as it lowers the utility's above-average wholesale power costs and removes the burden of potential environmental and regulatory compliance costs for the assets and the anticipated decommissioning of the nuclear plants. NCEMPA members will benefit from DEP's expansive generation portfolio and economies of scale, resulting in a substantial decrease in wholesale power costs in the first year. The upgrade is based on GUC's reduced wholesale costs, which allows GUC to pass along substantial savings to its customers and enables the utility to offer competitive rate and potentially spur economic development.

FINANCIAL PERFORMANCE

GUC's financial forecast takes into account the sale of NCEMPA's assets to DEP and the associated decrease in power costs and GUC's resulting rate decrease. The decreased costs will allow GUC to implement a 7% rate decrease, while also transferring a total of \\$20 million to a rate stabilization fund (RSF) in 2016 and 2017 and not raising rates until 2021.

DSC is expected to increase significantly in 2016, the first full year after NCEMPA asset sale, to 2.93x and coverage of full obligations will increase to 1.37x, both of which compare favorably to the 'AA-' medians of 2.48x and 1.43x, respectively. Liquidity will also increase to 121 days, not including RSF balance. Leverage will remain low, as shown by debt/FADS of 2.8x at year-end 2016, and will increase to a high of 3.7x by year-end 2020, after approximately \\$100 million in new money issuances. NCEMPA's remaining debt after asset sale will fully amortize by 2025.