Kinston City CouncilMay 18, 2015

North Carolina Eastern Municipal Power Agency

Projections

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The projections set forth herein are based upon assumptions, data and information obtained from various sources, including North Carolina Eastern Municipal Power Agency, North Carolina Eastern Municipal Power Agency’s consultants and Duke Energy Progress, Inc.

North Carolina Eastern Municipal Power Agency believes the assumptions, data and information to be reliable, accurate, and reasonable for purposes of the following analyses. Actual costs and rates may change materially from those projected herein due to changes in the facts underlying the assumptions and the data and information used; accordingly, no assurance is given that the results projected herein will be achieved.

 

Purpose of Today’s Discussion

Consider the adoption of an Ordinance that:

Approves the sale of the North Carolina Eastern Municipal Power Agency (NCEMPA) generating assets to Duke Energy Progress (DEP),

Approves the execution of three contracts between NCEMPA and Kinston:

– Power Sales Agreements Termination Agreement,– Full Requirements Power Sales Agreement, and– Debt Service Support Contract

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Our Goal:

To provide reliable power at the

lowest possible cost

An Opportunity to Lower Rates

We have heard a consistent message from you: lower our electric rates.

Selling our power generation assets and purchasing wholesale power from DEP will allow us to:

– Continue providing a reliable power supply

– Lower rates and become more cost competitive

– Provide long-term economic benefits

– Increase stability and reduce risk

– Adapt and respond to changing market conditions

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Economic Impact to Kinston

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Immediately Reduce Annual Debt Payments by 81 Percent,*

Resulting in an Immediate 20 Percent Reduction in Wholesale Power Cost

* Based on Initial Project Shares

Background

Between early 2010 and September 2013: NCEMPA and DEP discuss interest in acquiring NCEMPA ownership interest in generation assets

November 15, 2013: DEP submits Indication of Interest to acquire NCEMPA’s ownership interest in generation assets and simultaneously enter into a full requirements power supply

December 2013 through July 2014: NCEMPA and DEP negotiate contract terms and conditions

July 28, 2014: Both companies’ board of directors approve agreement and enter into an Asset Purchase Agreement and Full Requirements Power Purchase Agreement

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Progress to Date

October 10, 2014: Federal Energy Regulatory Commission (FERC) approval of transaction filed

December 9, 2014: FERC determines that the transaction is just and reasonable and approves the transaction

March 17, 2015: Legislation introduced in the North Carolina Senate and House of Representatives

April 2, 2015: Governor McCrory signed legislation into law– Enables NCEMPA to issue defeasance bonds– Authorizes Members to enter into Debt Service

Support Contracts with NCEMPA– Allows DEP to recover cost of assets from its NC

Retail Customers

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NCEMPA Jointly Owned Units

Mayo Plant16.17% Ownership (117.6 MW)

Roxboro Unit 412.94% Ownership (90.3 MW)

Brunswick Plant18.33% Ownership (342.7 MW)U1 License Expires: 9/8/2036U2 License Expires: 12/27/2034

Harris Plant16.17% Ownership (150.0 MW)License Expires: 10/24/2046

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NCEMPA and DEP

Asset Purchase Agreement

DEP to pay $1.2 billion, in cash, to acquire all of the rights, title and interest in NCEMPA’s generation assets on a debt free basis

Transfer (to DEP) NCEMPA’s Decommissioning Trust funded at the required Nuclear Regulatory Commission minimum level and $26M of NCEMPA’s internal reserve funds earmarked for decommissioning costs

DEP will assume all liabilities, including any plant and environmental liabilities incurred after Closing that are related to or resulted from a pre-Closing event or condition

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Transfer (to DEP) NCEMPA’s ownership interests in nuclear fuel and spare parts in inventory

Cap NCEMPA’s pension fund contributions between execution of Asset Purchase Agreement and Closing at 100% funded (i.e., no build-up of pension funds)

NCEMPA to retain ownership share of settlement of pre-Closing damages related to spent fuel storage costs (DOE)

DEP to reimburse NCEMPA for capital additions incurred after 1/1/15 (up to $78M for 2015 and $55M for 2016)

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NCEMPA and DEP

Asset Purchase Agreement (cont’d)

NCEMPA and DEP

Full Requirements Power Purchase Agreement

Term: 30 year contract commencing at Closing on asset purchase

Product: Full requirements capacity and energy; based on DEP System Average Wholesale Formula Rates; same priority/firmness as DEP native load customers

Pricing: 12 Coincident Peak Pricing locked in for 20 years

Peak Shaving: Continued rights to use qualified generation, PURPA qualified generation and Demand Side Management to manage demands locked in for term of agreement (i.e. 30 years)

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NCEMPA unilateral options to provide alternative power supplies for:

– Supplemental portion of load in 2028– Two separate options to terminate all or a portion of

base and/or supplemental load in 2036, and – Option to terminate portion of base load if any new

nuclear is added to base rates

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NCEMPA and DEP

Full Requirements Power Purchase Agreement (cont’d)

NCEMPA and NCEMPA Member

Form of Contracts and Key Terms and Conditions

All NCEMPA Members contracts are identical in form:

Power Sales Agreements Termination Agreement

Full Requirements Power Sales Agreement

Debt Service Support Contract

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Purpose: Terminates existing Initial Project Power Sales Agreement and Supplemental Power Sales Agreement between NCEMPA Members and NCEMPA

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NCEMPA and NCEMPA Member

Power Sales Agreements Termination Agreement

NCEMPA and NCEMPA Member

Full Requirements Power Sales Agreement

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Terms and conditions structured to conform to NCEMPA’s FRPPA with DEP

– Contract Duration: Terminates on December 31, 2043 with early termination option on December 31, 2035

– Product: Full Requirements Capacity and EnergyBased on DEP System Average Wholesale Formula

RatesPass through of DEP Formula Rate changes will

occur annually in AprilPass through of DEP True-up will occur annually in

October

NCEMPA and NCEMPA Member

Full Requirements Power Sales Agreement (cont’d)

Terms and conditions structured to conform to NCEMPA’s FRPPA with DEP

– Pricing: Monthly Coincident Peak Pricing locked in for 20 years

– Peak Shaving: Continued rights to use qualified generation, PURPA qualified generation and Demand Side Management to manage demands locked in for term of agreement

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Purpose: Establishes terms and conditions for NCEMPA Member’s share of payments to NCEMPA to amortize defeasance debt

Payment Obligation: Member’s share locked in for term of defeasance debt (10-year term)

Contract Duration: Terminates after all defeasance debt has been satisfied (10-years)

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NCEMPA and NCEMPA Member

Debt Service Support Contract

Comparison of Current Debt Annual Debt Service* to

Annual Defeasance Debt Service

Participant

Current Debt

($Millions)

Defeasance Debt

($Millions)

Apex $1.83 $0.64

Ayden 2.95 0.82

Belhaven 1.06 0.20

Benson 1.50 0.37

Clayton 1.94 0.60

Edenton 4.15 0.89

Elizabeth City 11.05 2.31

Farmville 3.35 0.56

Fremont 0.80 0.13

Greenville 41.95 11.61

Hamilton 0.20 0.04

Hertford 1.07 0.22

Hobgood 0.24 0.04

Hookerton 0.40 0.06

Kinston 22.54 4.36

La Grange 1.30 0.24

* Based on Initial Project Shares

Participant

Current Debt

($Millions)

Defeasance Debt

($Millions)

Laurinburg $5.90 $1.25

Louisburg 2.23 0.48

Lumberton 13.41 2.69

New Bern 16.56 3.78

Pikeville 0.53 0.09

Red Springs 1.51 0.31

Robersonville 1.32 0.24

Rocky Mount 41.67 7.35

Scotland Neck 1.50 0.29

Selma 2.11 0.52

Smithfield 5.21 1.29

Southport 1.86 0.42

Tarboro 12.33 2.09

Wake Forest 1.89 0.64

Washington 15.32 2.33

Wilson 40.33 10.11

Total NCEMPA $260.00 $57.00

19 NCEMPA Existing Debt Reduced by More Than 75 Percent

Existing Debt to be Defeased

Cost to Defease Existing Debt at 6-30-15: $1,970M

Proceeds to Defease Existing Debt:

– $1,200M – Sale Proceeds from DEP– $ 278M – Net Reserve/Operating Funds on Hand*

New Debt to be Issued at Closing: $492M

New Defeasance Bonds Debt Service (post-sale):

– 10-years ($57M/year, TIC = 2.9%**)

** Interest rate market as of 4-2-15* Net of new reserve funds and issuance costs

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Comparison of NCEMPA Wholesale Power Costs

Before and After Sale

21 Immediate 18 Percent Reduction in Wholesale Power Cost

NCEMPA Competitive Considerations

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Comparison of Wholesale Power Costs

Before and After Sale – Kinston

23 Immediate 20 Percent Reduction in Wholesale Power Cost

NCEMPA Competitive Considerations

Kinston

24 Kinston Wholesale Cost To Remain Competitive Long-term

Obtain City Council Consents

Prepare Financing and Closing Documents

Communicate Status of City Council Consents

NRC Approval of Operating License Transfer

Price and Sell Defeasance Debt Bonds

Closing of Transaction and New Wholesale Rate Effective

Remaining Next Steps to Close

May-June

May-June

June 15

By June 19

Week of June 22

July 1

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Action Requested

Consider the adoption of an Ordinance that:

Approves the sale of the NCEMPA generating assets to DEP,

Approves the execution of three contracts between NCEMPA and Kinston:

– Power Sales Agreements Termination Agreement,– Full Requirements Power Sales Agreement, and– Debt Service Support Contract

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Questions?

End of Presentation

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Back-up Materials

History of Economic Analysis

Single Set of Assumptions

Deterministic Results - Life of Assets(2015-2046)

Analysis Prepared:

January 2014 July 2014 April 2015

Base Case Analysis (No CO2)

CPV Higher / (Lower) Power Costs After Sale – Millions ($607M) ($528M) ($402M)

CPV Higher / (Lower) Power Costs After Sale – % (4%) (4%) (3%)

Contingency Analysis

CPV Higher / (Lower) Power Costs After Sale – Millions ($172M) ($394M) ($205M)

CPV Higher / (Lower) Power Costs After Sale – % (1%) (3%) (1%)

Impacts of Sale on Fixed Cost Exposure

Addressing Uncertainty – Probabilistic Analysis

A range of uncertain variables/assumptions have been modeled in order to assess the likelihood of a reduction in CPV power costs with the sale

– Performance of the jointly owned generating units (same as previous analyses):

Output / Capacity Factors Operating and Capital Costs

– Coal Ash Pond Costs: Modeled 50% probability of high range cost estimates

– EPA CO2 Rule: Modeled 50% probability of rule taking effect as

proposed

CONFIDENTIAL – Closed Session Material

Updated Probabilistic Analysis – Mean Result (2015-2046)

Higher/Lower Wholesale Costs as a Result of Sale

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

(8%) (6%) (4%) (2%) 0% 2% 4%

Prob

abili

ty (

%)

CPV - % Higher / (Lower) Power Costs After Sale

Probability of Lower Costs After Sale = 83%

Low Nuclear Project Costs High Nuclear Output High Ash Pond Costs CO2 Legislation

Mean Result($388M); (2%)

Updated Probabilistic Analysis – Mean Result

Comparison to Previous Analyses

Mean Result over Life of Assets(2015-2046)

Probability Analysis Prepared:

January 2014 July 2014 April 2015

CPV Higher / (Lower) Power Costs After Sale – Millions ($429M) ($534M) ($388M)

CPV Higher / (Lower) Power Costs After Sale – % (3%) (4%) (2%)

Probability of Lower Costs After Sale 84% 94% 83%