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Fitch Rates Arkansas Electric Cooperative's Issuer Credit Rating 'A+'; Affirms CP at 'F1'

NEW YORK - (BUSINESS WIRE) - Fitch Ratings assigns Arkansas Electric Cooperative Corporation (AECC) an issuer credit rating of 'A+' and affirms AECC's commercial paper notes at 'F1'. The Rating Outlook is Stable.

The commercial paper program (CP) was established in 2008 and is authorized up to a maximum issuance of $210.5 million. The CP notes are payable from a pledge of revenues subordinate to AECC's payment of operating expenses and outstanding secured debt obligations. The CP rating takes into account liquidity support provided by a $210.5 million unsecured revolving credit facility with a syndicate of banks and led by National Rural Utilities Cooperative Finance Corporation (CFC, 'F2'). Of the total liquidity support, CFC provides the largest share at $85.5 million (40.6%), with the remaining $125 million provided by CoBank at 19% ('F1+'), Regions Bank at 19% ('F1'), US Bank at 11.88% ('F1+'), and PNC Financial Services at 9.5% ('F1'). In addition to the support from the revolving credit facility, AECC has other sources of liquidity available to support the program's rating. As of July 31, 2009, AECC has $115 million of additional lines of credit ($40 million rated 'F1' or 'F1+'; $75 million rated 'F2'), and $46.4 million in cash.

Fitch believes that the combination of 'F1' and 'F1+' lines of credit and available cash and cash equivalents sufficiently offset the 'F2' lines and provides sufficient support for the program's entire authorization. AECC's policy is to issue its CP in increments of up to $30 million; therefore the rollover risk is capped by limiting the amount that can come due in any one day. Additionally, AECC's intention is to issue up to the full authorization and, once reached, issue long-term debt to redeem $100 to $150 million of the CP. Given the various sources of liquidity, in conjunction with management's documented settlement/contingency policies, Fitch affirms the 'F1' rating. However, should available liquidity levels decline, there may be pressure on the rating.

Key credit considerations include the following strengths:

--AECC's wholesale power contracts; and

--The organizations fairly competitive rate structure.

Key credit considerations also include the following concerns:

--The members' concentrated customer base; and

--Low financial margins and large capital plan.

AECC's has wholesale power contracts with its 17 distribution cooperative members. These power contracts have been extended through 2042 and provide power to 31% of the state's consumers. Demand growth has been revised lower; however, AECC is still projecting annual growth of 2.64% (down from the previously projected 3.32%) through 2013.

The organization has a fairly competitive rate structure. While AECC is subject to rate approval from the Arkansas Public Service Commission (APSC), concern over the regulated status is somewhat offset by new legislation that streamlines the rate approval process. Under the new process, management has requested a 4% rate increase which is expected to be implemented in the November/December 2009 timeframe. Additionally, AECC anticipates another 15% increase to become effective in January 2013. Fitch will continue to monitor the outcome of the rate requests to determine the effectiveness of the new process.

A key credit concern is customer concentration. The two largest customers of the members are Nucor Steel and Nucor-Yamato Steel (both customers of Mississippi County Electric Cooperative) and accounted for approximately 2.64 million MWh in 2008, or approximately 20% of AECC's total sales. Additionally, the three largest coops (Mississippi County Electric Cooperative, First Electric Cooperative and Carroll Electric Cooperative) combined to account for approximately 51% of AECC's revenues. Financial performance of the members is stable and continues to be monitored by management.

The rating also takes into account AECC's large capital plan through 2013 (approximately $859 million) and historically low debt service coverage levels and declining cash liquidity. While coverage is expected to remain low in 2009, requested rate increases are anticipated to improve financial metrics in 2010, with debt service coverage targeted at about 1.40 times (x) and cash on hand increasing over time.

The Rating Outlook is Stable and is dependent on sufficient rate increases to produce improved debt service coverage, along with an increased cash position that is in line with management's targets. Maintenance of current financial metrics in 2010 could result in a negative rating action.

Arkansas Electric Cooperative Corporation (AECC) is a generation and transmission (G&T) cooperative, providing wholesale electricity to 17 member rural distribution cooperatives in Arkansas, with approximately 498,000 customers located system-wide. The majority of power requirements are supplied by AECC's coal facilities. In 2008, peak demand was 2,519 MW.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, New York
Joanne Ferrigan, +1-212-908-0399
Chris Jumper, +1-212-908-0594
or
Cindy Stoller, +1-212-908-0526 (Media Relations)
cindy.stoller@fitchratings.com