TEXT - Fitch affirms N. Carolina Electric Membership Corp
Nov 28 - Fitch Ratings affirms the 'A-' rating on the following North Carolina Electric Membership Corporation (NCEMC) outstanding bonds: --$99.4 million York County, SC pollution control revenue refunding bonds, series 2000B. The Rating Outlook is Stable. NCEMC's rating takes into account another $1.046 billion in non-publicly held (not rated) parity secured obligations. These debt obligations were privately borrowed from the Federal Financing Bank (guaranteed by the USDA's Rural Utilities Service ) and National Rural Utilities Cooperative Finance Corporation (CFC) - frequent lenders to the electric cooperative sector. SECURITY The bonds are secured by a mortgage interest in substantially all of NCEMC's tangible and certain of its intangible assets. KEY RATING DRIVERS GENERATION AND TRANSMISSION COOPERATIVE: NCEMC supplies wholesale power to its 25 member distribution cooperatives who serve a geographically and economically diverse region throughout North Carolina. Power is supplied pursuant to long-term, take-or-pay contracts that extend through Dec. 31, 2046. DIVERSE AND FLEXIBLE POWER SUPPLY: NCEMC's current power supply portfolio, which includes a 61.51% ownership interest in the Catawba Nuclear Station Unit 1, 622 MW of combustion turbine units, and a blend of purchased power contracts, provides competitively priced power supply and offers flexibility to add resources as needed. RELIANCE ON PURCHASED POWER: NCEMC purchases approximately 60% of the energy required to serve its members, exposing the cooperative to the performance of certain counterparties, including Progress Energy Carolinas, Inc (PEC; Fitch Issuer Default Rating of 'A-', Stable Outlook). Related risks are mitigated by the competitive terms, diversity and flexibility inherent in the cooperative's largest contracts. LARGE AND GROWING RESIDENTIAL LOAD: The NCEMC member cooperatives serve a large and growing base of predominately residential and small commercial customers. Residential customers accounted for 75% of energy sales in fiscal 2011. IMPROVING FINANCIAL METRICS: NCEMC's financial metrics have shown solid improvement over historical levels, aided by financial policies adopted in 2010. Stronger net margins contributed to healthier Fitch calculated debt service coverage (DSC) and equity-to-capitalization ratios of 1.76x and 7.1%, respectively, in fiscal 2011. NCEMC's margins for interest (MFI) ratio improved to 1.29x, from 1.08x in 2008. STRONG MEMBER COOPERATIVE PERFORMANCE: Member cooperative performance in fiscal 2011 was reasonably strong as evidenced by the consolidated times interest earned (TIER) ratio of 2.25x, DSC of 2.18x, and equity to capitalization of 41%. WHAT COULD TRIGGER A RATING ACTION CONTINUED IMPROVEMENT IN FINANCIAL POSITION: Fitch expects that the cooperative's adherence to its financial policies and strategy will result in a continued improvement in NCEMC's financial metrics. Any meaningful deviation or a return to sub-standard metrics would likely result in downward pressure on the rating and/or Outlook. CREDIT PROFILE BALANCED POWER SUPPLY STRATEGY NCEMC's power supply strategy utilizes a combination of owned capacity, including 682 MW of the Catawba resource, 622 MW of combustion turbine units, and purchased power to meet demand requirements. Given the availability of flexible and attractively priced contracts in recent years, NCEMC has chosen to purchase approximately 60% (2,132 MW in 2011) of its power supply from third parties - an amount within the cooperative's comfort level. Fitch views NCEMC's blend of owned generation and laddered purchased power structure favorably as this portfolio approach has enabled the cooperative to achieve its objective of stable, cost efficient, and reliable power supply. Short-term contracts (less than five years) account for 22% of NCEMC's contracted power while 31% and 47% account for the medium term (5-15 years) and longer term (greater than 15 years), respectively. CONTINUED IMPROVEMENT IN EQUITY CAPITALIZATION The general positive trend in NCEMC's financial profile has continued as the effect of the cooperative's initial efforts to improve net margins have generated stronger financial metrics. Projected 2012 results point to another year of stability with a projected MFI of 1.25x, equity-to-capitalization of 7.1%, and improved liquidity of 55 days cash on hand. NCEMC's 7.1% equity-to-capitalization ratio in 2011 remained below the 15% median for the rating category but was much improved since 2009 (3.4%). The ratio is likely to continue to improve and reach 10.1% by 2015. Fitch expects that the weakness in NCEMC's equity position will be addressed as total debt levels remain close to current levels, and equity is accumulated according to plan. WELL-BALANCED MEMBERSHIP Energy sales among the members are well balanced and exhibit little concentration. In 2011, no member accounted for more than 14% of total energy sales and only six reported sales reaching as high as 8% of the total. Energy sales by NCEMC are further balanced between participating members (those receiving all-requirements power supply) and independent members (those receiving a fixed power supply). In 2011, seven of the 10 largest purchasers were participating members. Participating members accounted for 71.5% of NCEMC's total kWh sales, while the independent members purchased 15.6%. Going forward, NCEMC's declining obligation to serve its independent members should offset the expected growth of its participating members, thereby allowing the cooperative to meet nearly all near-term demand requirements with its existing portfolio of resources. Participating members will become an increasing percentage of NCEMC's total energy sales, solidifying their position as the cornerstone of NCEMC's creditworthiness. By 2016, the participating members are expected to account for 87% of total revenue compared to 79% in 2011.