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,
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.
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.
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
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.