Fitch Assigns First-Time Rating to Brunswick Electric Membership Corp (NC) of 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has for the first time assigned an 'A+' rating to the following trust receipts for Brunswick Electric Membership Corporation (BEMC):

--$35.3 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 based with amounts due on other BEMC mortgage notes.

KEY RATING DRIVERS

WELL BALANCED DISTRIBUTION SYSTEM: BEMC's credit profile is sound, and supported by a healthy and growing service area, a well-regarded power supplier, improving financial ratios and a management team that has embraced new technologies and used innovative benchmarking techniques.

SOLID ECONOMIC BASE: Brunswick County is primarily a residential community located in southeastern North Carolina, along the Atlantic Ocean. Population growth has moderated, but still averages over 2% a year. Median income levels are in line with the state. Fitch rates the county's general obligation bonds 'AA' with a Stable Outlook.

RETAIL RATES INFLUENCED BY RISING COSTS: BEMC's residential rates held relatively steady for a number of years. However, Brunswick's wholesale energy supplier, North Carolina Electric Membership Corporation (NCEMC), has recently been raising its rates to pay for increased power-related costs and to bolster its financial metrics. When combined with higher distribution costs, it has resulted in upward pressure on customers' electric bills, but not to a significant degree.

EFFICIENT ELECTRIC OPERATIONS: Due to its location on the North Carolina Barrier Islands, almost all new services are located underground, which has resulted in much fewer outages. The use of smart grid technology, automatic meter reading and prepaid metering have further improved cost efficiency.

SOUND LONG-RANGE FINANCIAL GOALS: BEMC's long-range financial goals (2014-2023) appear pragmatic and include the following: (i) minimum times interest earned ratio (TIER) of 1.70x; (ii) minimum debt service coverage (DSC) of 2.00x; (iii) minimum current ratio of 1.00x; (iv) 30% equity ratio; and (v) capital credits rotation of a 20-year FIFO basis.

RATING SENSITIVITIES

UNFAVORABLE RESPONSE TO RATE INCREASES: Consumer resistance to planned rate increases, impacting financial ratios, could have a negative effect on the rating.

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 extending through 2046.

POWER SUPPLY DIVERSE

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 2014, NCEMC's power supply strategy incorporated a combination of owned resources (36% of energy) and purchased power (64%). NCEMC's flexible portfolio strategy is viewed favorably. NCEMC is rated 'A-' with a Positive Outlook by Fitch.

ELECTRIC RATES INCREASING, BUT REMAIN COMPETITIVE

BEMC's wholesale cost of power approximated $68.52 per megawatt-hour (MWh) in 2013, including transmission and demand and energy charges. In 2014, the rate is expected to rise to $70.47 per MWh, increasing to $84.21 per MWh by 2019. While trending higher, the forecast is meaningfully lower than earlier forecasts. The increase in wholesale rates primarily reflects higher costs for power supply and NCEMC's adoption of a comprehensive plan to significantly improve its financial ratios.

BEMC's residential electric rates have remained relatively steady over the years and currently fall in the middle of local electric distribution systems. Customer rate adjustments will be required annually, beginning in 2015 through 2023, to pay for increased cost of power and higher BEMC operating expenses. The average increase in residential electric bills over the next several years is estimated at about 4% per year.

RISK MANAGEMENT PROGRAM IN PLACE

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, almost all new services are located underground, which is funded by a $625 upfront service charge paid by the developer. BEMC has in place an aggressive prepaid metering program, which has helped to lower write offs. Also, AMI (automatic metering) has the ability to read through the power line, rather than having staff go to the customer's residence, providing the ability to disconnect customers for nonpayment, while providing cost savings.

SOUND FINANCIAL PLAN

Fitch calculated DSC for calendar year 2013 was 1.83x, equity to capitalization equaled 36.6% and liquidity (days cash on hand)totaled 93, which is much improved from prior years. Calendar 2014 financials are expected to show solid performance. The equity to assets ratio has historically been in the mid to upper 20% level, largely reflecting the rapid growth of the service area and sizeable capital expenditures. The near-term goal is to have equity exceed 30%, rising to over 40% by the end of this decade. BEMC's long-range financial coverage goals include minimum TIER of 1.70x and minimum DSC of 2.00x.

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=934615

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Contacts

Fitch Ratings
Primary Analyst
Alan Spen
Senior Director
+1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan Greene
Director
+1-212-908-0593
or
Committee Chairperson
Chris Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alan Spen
Senior Director
+1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan Greene
Director
+1-212-908-0593
or
Committee Chairperson
Chris Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com