Fitch Affirms Brunswick Electric Membership Corp (NC) Bonds at 'A+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the following trust receipts for Brunswick Electric Membership Corporation, NC (BEMC):

--$31.52 million enterprise system trust receipts series 2011-1.

The Rating Outlook is Stable.

SECURITY

Substantially all of BEMC's assets are pledged as collateral for its long-term debt, pursuant to the mortgage. The mortgage secures the payment of amounts due on the securities trust note on an equal and ratable basis with amounts due on other BEMC mortgage notes.

KEY RATING DRIVERS

SOLID ECONOMIC BASE: BEMC is an electric distribution cooperative serving primarily residential customers in southeastern North Carolina along the Atlantic Ocean. Residential customers account for nearly three quarters of the utility's customer base, providing for strong revenue predictability. Wealth and economic indicators for Brunswick County (Issuer Default Rating 'AA'/Outlook Stable) are in line with state levels.

DIVERSIFIED POWER SUPPLIER: BEMC's power is supplied by North Carolina Electric Membership Corporation (NCEMC; 'A'/Outlook Stable) through an all-requirements contract that extends through 2066. NCEMC benefits from diversified power supply that includes both owned capacity and resources purchased from a broad group of creditworthy counterparties, the largest of which is Duke Energy Progress, LLC (DEP; 'A-'/ Outlook Stable). Wholesale power rates are regionally competitive at approximately $66.76 per megawatt-hour (MWh) in 2016.

STABLE FINANCIAL PERFORMANCE: BEMC continued to exhibit sound financial performance in fiscal 2015. Fitch calculated debt service coverage (DSC) and coverage of full obligations improved to 2.21x and 1.35x, respectively, while equity-to capitalization increased to 40.3%. Days Cash on Hand (DCOH) decreased to 33 days in fiscal 2015 but is mitigated with available lines of credit totalling $62 million, bringing days liquidity on hand to a more acceptable 219 days.

RISING WHOLESALE POWER COSTS: BEMC's residential rates have remained relatively steady for a number of years primarily as a result of lower commodity prices. However, BEMC expects its wholesale power supplier, NCEMC, to increase rates as natural gas prices begin to rise. Mitigating the expected power cost increase is BEMC's wholesale power cost adjustment (WPCA), which allows the cooperative to pass through rate increases to the consumer.

RESILIENT ELECTRIC OPERATIONS: BEMC's service area is exposed to severe natural weather events due to its location along the North Carolina shoreline. In response, the utility has installed new services underground, resulting in fewer outages and used smart grid technology and automatic meter reading to improve resiliency and increase cost efficiencies. Following Hurricane Matthew, full service was restored throughout the service area in less than five days.

RATING SENSITIVITIES

MAINTAINING FINANCIAL PERFORMANCE: Brunswick Electric Membership Corporation's inability to recover costs and sustain adequate liquidity, particularly if power supply costs increase as anticipated, could result in downward rating pressure.

CREDIT PROFILE

Brunswick is a non-profit electric distribution cooperative formed in 1939 to provide electric service to its member customers. Its customers are mostly situated in the southeastern part of North Carolina, many of which reside in coastal areas. BEMC purchases substantially all of its power from NCEMC, pursuant to an all-requirements contract. The contract was extended from 2046 to 2066 on Jan. 1, 2016.

POWER SUPPLY DIVERSE

NCEMC has a diversified power supply that includes both owned and purchased energy resources and is composed of nuclear (56%), gas (27%), coal (9%) and hydro and renewables (3%), and market purchases (5%). NCEMC's power supply portfolio includes a 61.51% ownership interest in the highly efficient Catawba Nuclear Station Unit 1, a number of combustion turbine units and a blend of purchased power contracts, that provide competitively priced power and affords flexibility to add resources as required. In 2015, power purchased from alternative suppliers represented 60% of NCEMC's total power supply, and owned resources accounted for 40%. NCEMC's flexible portfolio strategy is viewed favorably.

ELECTRIC RATES INCREASING, BUT REMAIN COMPETITIVE

BEMC's residential electric rates have remained relatively steady over the years and currently fall in the middle of local electric distribution systems. BEMC has no planned base rate increases, but BEMC's board has historically shown a willingness to increase rates to maintain its strong financial performance. The last base rate increase was implemented in 2008. BEMC's rate structure also includes a WPCA, mitigating any increase in NCEMC power supply cost increase.

BEMC's wholesale cost of power approximated $66.76 per megawatt-hour (MWh) in 2016, including transmission and demand and energy charges. In 2017, the rate is expected to rise to $68.76 per MWh, increasing to $84.60 per MWh by 2022. The increase in wholesale rates is primarily driven by an expectation of higher commodity and carbon prices and increased fixed capacity charges.

EFFECTIVE RISK MANAGEMENT PROGRAM

Senior management has established a comprehensive risk management program that attempts to define the most significant risks facing the cooperative, while putting into effect mitigation plans. Risks are broken down by: strategic, financial, operational, legal and compliance and information system. They are further evaluated by: likelihood of occurrence, velocity and financial impact, ranked from low, medium to high.

In light of its location on the North Carolina Barrier Islands and the resulting increased likelihood of severe weather events, all new services are located underground. BEMC has also used smart grid technology and automatic metering to improve resiliency and provide cost savings. These investments proved valuable following Hurricane Matthew as BEMC restored power to customers in less than five days.

SOUND FINANCIAL PERFORMANCE

Fitch calculated DSC for calendar year 2015 was 2.21x and equity to capitalization equalled 40.3%, both of which have improved over prior years. DCOH declined to 33 days in 2015, down from 93 days in 2013 but is mitigated by $62 million of available lines of credit that provide 219 days of liquidity.

Fiscal year-end (Dec. 31) financial results are expected to show continued solid performance. Management projects DSC and equity to capitalization to remain above 1.7x and 40%, respectively through 2022. Total long-term debt is expected to increase to $218 million following the issuance of a $30 million loan from National Rural Utilities Cooperative Finance Corporation in late November 2016, but Fitch expects leverage ratios will remain in line with rating category medians.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/site/re/864007

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015201

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or
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or
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Contacts

Fitch Ratings
Primary Analyst:
Tim Morilla, +1-512-813-5702
Associate Director
Fitch Ratings, Inc.
111 Congress Ave, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Committee Chairperson:
Christopher Hessenthaler, +1-212-908-0773
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com