NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A-' rating on the following North Carolina Electric Membership Corporation's (NCEMC) outstanding bonds:
--$99.4 million York County, SC pollution control revenue refunding bonds, series 2000B.
The Rating Outlook is Positive.
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
WHOLESALE POWER SUPPLIER: NCEMC is a generation and transmission (G&T) cooperative that supplies wholesale power to 25 member distribution cooperatives across the state of North Carolina. Member systems serve a large and growing base of predominately residential and small commercial customers (approximating 970,000), with forecasted energy growth at about 1.5% annually through 2019. Member power contracts extend through Dec. 31, 2046.
IMPROVING METRICS SUPPORT POSITIVE OUTLOOK: Financial metrics have shown solid improvement in recent years, in line with previously adopted financial policies. Fitch calculated debt service coverage (DSC) for calendar 2013 was a solid 1.75 times (x), compared with 1.59x in 2009, equity to capitalization improved to 10.4% from 3.4% and days funds on hand (cash and investments) rose to 97 from 41.
REVISED RATE STRATEGY: The trend of improving financial metrics and accumulation of equity reflects the cooperative's more constructive rate setting and financial strategy, which was adopted in 2010 and is expected to continue. Even with the prior and forecasted rate adjustments, wholesale rates to member systems should remain competitive.
FLEXIBLE POWER SUPPLY: Power supply includes approximately 1,400 megawatts (MW) of owned generation and 2,100 MW under purchased power agreements. Owned generation includes 704 MW of Catawba Nuclear Station Unit 1 (Catawba) and 696 MW of peaking facilities. Power purchases are derived from a diverse group of energy suppliers, under varying length contracts, helping to reduce risk. NCEMC plans to selectively increase its percentage of owned generation.
RATING SENSITIVITIES
CONTINUED FINANCIAL IMPROVEMENT: Fitch expects that the NCEMC's adherence to previously adopted financial policies will show continued improvement in its financial metrics. A continuation of the positive trend has the potential to result in a rating upgrade over the near term.
OUTAGE OF CATAWBA: The risk of an extended outage of Catawba, which is lessened by a nuclear exchange agreement, could negatively impact the cost-effectiveness of the utility system's power supply.
CREDIT PROFILE
NCEMC is a not-for-profit cooperative formed in 1949 to provide wholesale electric and transmission service to 25 electric membership corporations. NCEMC's members serve a geographically and economically diverse region that includes a customer base of approximately 970,000 homes, farms and businesses and a population of approximately 2.3 million. NCEMC's members' 2013 energy sales were as follows: residential (74%), commercial (20%) and industrial/other (6%). Members' annual customer and energy growth is forecasted at about 1.4% and 1.5%, respectively, through 2019.
PORTFOLIO MANAGEMENT STRATEGY
NCEMC benefits from a diverse and flexible portfolio of power supply resources. Nearly 60% of energy required to serve membership load is purchased from a broad group of counterparties, including Duke Energy, Southern Power, Dominion Resources and AEP. NCEMC's owned resources consist of a 61.5% ownership interest in the highly efficient Catawba unit (704 MW) and 100% share of the Anson and Hamlet peaking facilities (678 MW).
NCEMC has in place an internal Risk Management Committee comprised of senior managers that are responsible for monitoring risk in the areas of power supply, operations, finance, regulatory compliance, ethical conduct and safety. Energy risk management activities are further enhanced by NCEMC's membership in ACES Power Marketing (ACES), which acts as agent in dispatching resources, and short-term trading and execution, providing risk management expertise.
FINANCIALS ACHIEVE TARGETS
The positive trend in financial results reflects management's adherence to its targeted plan, which incorporated stronger target metrics through a gradual increase in margins since 2009 to: (i) achieve an average TIER of 1.24x and an average DSC of 1.45x, (ii) equity to capitalization of 10.4% and (iii) improved liquidity of greater than 150 days liquidity on hand; while maintaining competitive rates. Fitch considered the forecasted improvement in financial metrics to be a key factor in its initial assignment of the 'A-' rating in 2010.
The Board has since approved a 2014 Long Range Financial Forecast to support continued further improvement in its financial strength and has established a targeted equity ratio of 20% by 2023. Demonstrated progress in achieving these updated goals will be an important factor in future rating decisions.
EXPANDING SOURCES OF CAPITAL
On Sept. 30, 2013, NCEMC executed a $250 million syndicated credit facility with nine financial institutions led by National Rural Utilities Cooperative Finance Corporation (CFC). The syndicated facility includes a $100 million accordion feature and expires on Sept. 30, 2018. NCEMC retained its bilateral credit facility with CoBank, which was recently expanded from $40 million to $60 million and extended to November 2019.
The G&T continues to use lower-cost RUS debt as a primary long-term source of financing. Management believes the expanded credit facility broadens its exposure to more banks and lenders, reduces its risk to substantial reliance on RUS loans and provides bridge financing for capital expenditures for Catawba and funding of new generation projects.
CAPITAL EXPENDITURES MANAGEABLE
Projected capital spending for the period 2014-2019 should be manageable, averaging about $72.5 million per year. Largest outlays will be for upgrades to Catawba, costs for a share of the new Lee Combined Cycle plant and a one-time expenditure for an expansion of the main headquarters building. The addition of a 100 MW share of the 750 MW gas-fired Lee combined cycle plant is scheduled for 2017. There are no other plans for significant new generation projects.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789
U.S. Public Power Peer Study Addendum - June 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=934575
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