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Rayburn Electric Receives S&P Rating ...............2‘Intelligent Efficiency’ Could Boost Energy Savings ..............2CFC’s Newest Hires Visit Member Co-op .............. 2Capital Markets Analysis .........3Financial Feature .....................4In Brief ................................... 4

JUNE 18, 2012 | VOL. 14, NO. 24INSIDE THIS ISSUE

SIPC Closes $65 Million CFC-Led SyndicationCFC recently arranged a $65 million four-year unsecured revolving credit facility for Southern Illinois Power Cooperative (SIPC). The transaction was the second syndication for the Marion, Ill.-based generation and transmission cooperative, replacing a portion of the first one that CFC arranged in 2007.

“We were very satisfied with CFC’s service throughout this transaction—that’s why we stick with them,” SIPC CFO Stephanie Oxford said.CFC acted as lead arranger and lead lender, and will serve as administrative agent for the facility. The transaction was met with strong investor interest, with three other financial institutions participating. Funds will be used for general

corporate purposes, including issuing letters of credit.“We hadn’t previously worked with one of the four participating banks,” Oxford said. “I feel it’s good to both maintain and extend bank relationships whenever possible.”SIPC first established a relationship with the bank group through its 2007 syndicated line of credit. Funds from that deal went toward up-front costs for the Prairie State Energy Campus, the largest coal-fired power plant built in the United States since 1982. Unit 1 of the 1,600-MW plant went live earlier this month with Unit 2 slated to come online later this year. The campus, which includes a coal mine, is owned by SIPC and eight other electric utilities. More information about the advanced project can be found at www.prairiestateenergycampus.com.

Continued on Page 2

“We were very satisfied with CFC’s service throughout this transaction—that’s why we stick

with them.”

EPRI: Flexibility in Meeting EPA Regs Could Save $100 BillionThe U.S. economy could save $100 billion if electric utilities are allowed flexibility in developing control technologies to meet environmental regulations, according to a report from the Electric Power Research Institute (EPRI). The report estimates the full cost of compliance to range between $175 billion and $275 billion over the next 25 yearsIn its analysis, EPRI utilized its U.S. Regional Economy, Greenhouse Gas and Energy (US-REGEN) model, a full macroeconomic model of the U.S. economy with details on electric power production, energy demand and transportation. “This assessment is the first to take a regional approach in examining how current and pending emissions requirements will impact the U.S. generation portfolio and the overall economy,” said Bryan Hannegan, vice president of Environment and Renewables at EPRI.EPRI applied two potential courses of action within the US-REGEN model: a Current Course, with little technology flexibility and real cost escalation driven by demand for retrofits; and an Alternative Path, with an availability of lower-cost technologies and policy flexibility to apply them, and lower escalation in retrofit costs associated with extra years for compliance.Under the Current Course, approximately 202 GW of existing coal capacity would remain financially viable. Another 61 GW of coal capacity would not be profitable and, therefore, retired or retrofitted, and the remaining 54 GW of coal capacity would be either retired or retrofitted, depending on market-specific factors.

$0

$50

$100

$150

$200

$250

$300

Alternative Path Current Course

(In bi

llions

, 200

9 US

D)

GDP LossElectric Sector Cost

Cost of Compliance, 2010-2035

Source: EPRI

Solutions News Bulletin | June 18, 20122

EPRI: Flexibility in Meeting EPA...Continued from Page 1

Rayburn Electric Receives S&P RatingRayburn Country Electric Cooperative recently was assigned an “A-” issuer credit rating from Standard & Poor’s Ratings Services (S&P). The rating and stable outlook was the first for the Rockwall, Texas-based G&T.

“Rayburn’s board of directors has taken a disciplined approach to balancing Rayburn’s financial stability and competitive wholesale power costs,” Rayburn Electric President and CEO John Kirkland said. “We are pleased that S&P has recognized the financial strength of Rayburn, its members and the areas we serve.”In assigning the rating, S&P noted Rayburn Electric’s strong financial profile, a monthly

power cost adjustor that recoups volatility in wholesale prices, long-term wholesale power contracts with members and Rayburn’s balanced approach toward resource planning, which includes both owned assets and purchased power.“A majority of the power we supply members is purchased wholesale power from long-term partners,” Rayburn Electric CFO Lynn Midgette said. “S&P’s rating will provide possible future partners with credit assurance as they build relationships with Rayburn. It also will be a help in securing financing for any future plant investments.”Rayburn Electric serves five electric distribution cooperatives across 17 counties, including fast-growing areas east of the Dallas-Fort Worth metroplex; annual growth in new meters has averaged more than 3 percent in the past decade. In 2010, the G&T utilized a $110 million loan from CFC in acquiring its first generation asset, a 25-percent share (250 MW) of a gas-fired generation plant. Gaining physical plant has helped evolve Rayburn Electric into a full-service G&T; it was first formed in 1979 to obtain more affordable electricity for its members through wholesale purchased power bargaining.

CFC’s Newest Hires Visit Member Co-opFifteen new CFC employees recently visited Denton, Md.-based Choptank Electric Cooperative, as well as a poultry farm in its service territory, in order to get a first-hand look at how electric cooperatives operate. “CFC works with local co-ops in organizing these daytrips, which give CFC employees new to the cooperative network a better understanding of how all of the pieces fit together,” said Mike O’Brien, CFC vice president, Member Engagement. “We see a lot of benefit in this kind of collaboration.”The day’s itinerary included an introduction to Choptank Electric by President and CEO Mike Wheatley, a visit to a nearby substation and a visit to a member poultry farm.More information about the cooperative is available at www.choptankelectric.com.

‘Intelligent Efficiency’ Could Boost Energy SavingsImproving the energy efficiency of systems as opposed to individual devices could cut U.S. energy consumption by up to 22 percent, according to a study from the American Council for an Energy-Efficient Economy (ACEEE). The report focuses on the concept of “intelligent efficiency” as a systems-based approach incorporating three broad categories: people-centered efficiency, technology-centered efficiency and service-oriented efficiency. “Intelligent efficiency rests on carefully considered combinations of relying on technologies (not humans) where that maximizes efficiency, and inviting human interaction where that is optimal,” ACEEE said. “Intelligent efficiency represents a pivotal opportunity in a time of constrained resources to step up our energy efficiency game.”People-centered efficiency involves making energy use more visible in order to facilitate a change in consumer behavior, according to ACEEE. Technology-centered efficiency implements “smart” energy management techniques, such as automated building systems that use weather forecasts to predict HVAC needs. Service-oriented efficiency—also called substitution efficiency—provides consumers an opportunity to substitute a material-based service, like a face-to-face meeting, with a less energy-intensive option, like a video conference.The report outlines 10 case studies documenting intelligent efficiency at work in a range of sectors, including agriculture, manufacturing, transportation and defense. For example, an initiative in Charlotte, N.C., utilizes video monitors in the lobbies of downtown offices that display the collective energy used in the city’s core. Duke Energy, the investor-owned utility serving the area, hopes more energy-conscious tenants will shave energy use by 20 percent over the next four years. Possible barriers to further developing intelligent efficiency include significant up-front costs, a lack of in-depth knowledge of potential applications and lack of a workforce skilled in managing intelligent energy systems, according to ACEEE.The full report, “A Defining Framework for Intelligent Efficiency,” is available at www.aceee.org; search for report number E125.

John Kirkland

Lynn Midgette

In contrast, the Alternative Path would enable a greater number of existing coal units to comply with regulations while maintaining profitable operations. “Although not included in this analysis, [our] view is that additional advanced pollution control technologies can be made commercially available in the near term as part of an accelerated demonstration and deployment effort,” EPRI said.In the Alternative Path scenario, 288 GW of coal-fired capacity would remain viable, according to EPRI. Fewer units (25 GW) would be forced to retire or switch fuels and even fewer would have to be retired or retrofitted due to market-specific factors (4 GW).The value to the overall economy in pursuing the Alternative Path versus the Current Course is estimated to be about $100 billion over the next 25 years, according to the report (see chart on page 1). The analysis is the first of three phases planned under EPRI’s “PRISM 2.0” project. Future phases, expected to be completed this year, will focus on economic impacts and technology options under a proposed Clean Energy Standard as well as a New Source Performance Standard for new fossil generation.An executive summary of the report is available at www.epri.com.

A Choptank Electric lineman during a pole-climbing demo. Photo: Aamer Arshad

C A P I T A L M A R K E T S A N A L Y S I S

3Solutions News Bulletin | June 18, 2012CFC’s finance experts can answer your questions about economic information: 800-424-2954. JOHN F. SUTER | BRUCE MACNEIL | PETER LILLESTOLEN | MADHURI DHAWAN | TERI OCAMPO | ERIC LEVINE

Payrolls, Unemployment DisappointNon-farm payrolls increased by a net 69,000 jobs in May, drastically missing estimates of 150,000 new jobs. April and March numbers also were revised downward by a combined 49,000. The main contributors to the weakened job creation rate were private-sector decreases in the construction, professional services and leisure/hospitality sectors; government jobs also fell by a net 13,000 positions.The unemployment rate rose slightly in May from 8.1 percent to 8.2 percent—the first month-over-month increase since June 2011—due to a large increase in the labor force. More U.S. workers, some of whom had given up on looking for work, are now restarting their job search, which boosts the labor force and requires stronger job growth to avoid an increase in the unemployment rate. Employment growth is an important factor influencing consumer confidence and spending, both of which are vital for continued economic growth.

Service Sector Grows Slightly in MayThe Institute for Supply Management’s (ISM) nonmanufacturing index rose from 53.5 in April to 53.7 in May. The modest increase exceeded analyst expectations of a drop to 53.4 for the month. A level above 50 indicates expansion; below 50 signals contraction. Details of the survey were mixed, as new orders increased to 55.5 from 53.5, while the employment gauge fell to 50.8 from 54.2. The employment index is sitting just above the threshold for expansion. The prices-paid index fell from 53.6 to 49.8, the lowest level July 2009. Although the U.S. economy appears to be weakening again, moderately paced service-sector growth should be considered a positive sign. The index survey covers industries ranging from utilities and construction to retail and finance.

Manufacturing Sector GrowsManufacturing activity continued to show growth in May, despite a 1.3-point decrease in the ISM manufacturing index to 53.5. The overall index has posted growth for 34 consecutive months, although the pace has slowed. The new orders index has shown expansion for 37 straight months, rising to 60.1 in May—the strongest pace since April 2011—suggesting expansion in factory activity in coming months. The employment index, a measure of employers’ willingness to hire, fell 0.4 points to 56.9. Inventories have fallen below neutral territory, ending at 45.6. Manufacturers soon will have to replenish stockpiles and in effect, boost production. The May ISM report suggests the manufacturing sector remains strong and will continue providing economic support in coming months.

GDP Growth Cools Off Gross domestic product (GDP) growth for Q1 2012 was revised down to 1.9 percent, from an initial estimate of 2.2 percent. Downward revisions to inventories and consumer spending, coupled with more severe government spending cuts, contributed to the lower growth rate. State and local government spending fell at an annualized rate of 2.5 percent as governments continued efforts to cut deficits and deleverage. Analysts at Moody’s noted that Q1 corporate profits grew at the slowest pace in three years. Quarter-over-quarter profit growth slowed from 0.9 percent in Q4 2011 to 0.6 percent in Q1 2012. Declining equity markets do not bode well for consumer confidence, although falling oil and gasoline prices will provide a boost for businesses and consumers. Despite record-low interest rates, consumers remain wary of taking on more debt, which could lead to moderate gains in GDP growth.

Personal Income Declines in AprilPersonal income grew by 0.2 percent in April, following a 0.4-percent increase in March. Despite the April drop, consumption growth increased slightly from 0.2 to 0.3 percent. The increase in consumption coincided with a modest drop in energy prices. Consumption of durable goods grew 0.6 percent versus a 1.3-percent drop in March, while consumption of nondurable goods fell by 0.2 percent in April compared with an increase of 0.9 the previous month. Year over year, with personal income growth was 2.8 percent in April; that compares to a much stronger level of 4.9 percent in September 2011. Consumption also has decelerated to 4 percent from a growth rate of 5.1 percent over the same period. Because income growth and the personal savings rate both remain low, continued increases in consumption may be driven by credit-based spending.

R E C E N T E C O N O M I C R E L E A S E SINDICATOR PRIOR PERIOD CURRENT PERIOD

(FORECAST)CURRENT PERIOD

(ACTUAL)

ISM Manufacturing Index (May) 54.8 53.8 53.5ISM Nonmanufacturing Index (May) 53.5 53.4 53.7Wholesale Inventories (Apr.) 0.3% 0.4% 0.6%GDP (QoQ) (Q1) 2.2% 1.9% 1.9%Personal Income (Apr.) 0.4% 0.3% 0.2%Consumer Credit (Apr.) $12.4B $11B $6.5B

Source: Bloomberg

K E Y I N T E R E S T R A T E S RATE FORECAST—FUTURES MARKET

6/5/12 6/12/12 CHANGE Q2-12 Q3-12 Q4-12 Q1-13

Fed Funds 0.25% 0.25% - - - 0.25% 0.25% 0.25% 0.25%

1m Libor 0.24% 0.25% 0.01 0.24% 0.29% 0.35% 0.39%

3m Libor 0.47% 0.47% - - - 0.47% 0.53% 0.57% 0.59%

2yr UST 0.24% 0.27% 0.03 0.86% 0.88% 0.90% 1.13%

5yr UST 0.66% 0.70% 0.04 1.04% 1.06% 1.22% 1.37%

10yr UST 1.54% 1.61% 0.07 2.14% 2.22% 2.37% 2.44%

30yr UST 2.60% 2.74% 0.14 3.36% 3.38% 3.34% 3.34%Source: Bloomberg Source: INO.com

0

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000

250,000

275,000

8.5%

8.6%

8.7%

8.8%

8.1%

8.2%

8.3%

8.4%

8.9%

9.0%

9.1%

PayrollUnemployment

MAY

201

2

APR

2012

MAR

201

2

FEB

2012

JAN

2012

DEC 2

011

NOV

2011

OCT 2

011

SEP

2011

AUG

2011

Source: Bureau of Labor Statistics

Stocks Boost Household Wealth—And RiskBy Bruce MacNeil, Director, Long-Term Funding & Risk Management

Household wealth, which eroded substantially during the housing meltdown, rose to its highest level since 2007 during the first quarter of 2012, according to data from the Federal Reserve. Household net worth grew $2.83 trillion dollars in the first three months of this year, primarily driven by large gains in the stock market and stabilizing home values. Consumer spending, which had been lackluster

through this recovery until relatively recently, ticked up last quarter and consumer confidence has been grinding higher—when people feel wealthier, they tend to spend more. Stock market gains are easier to monetize than improvements in housing, especially since credit standards for home lending have tightened. It follows that large gains in liquid asset values should be easier to convert to spending in the economy. Not surprisingly, real estate accounts for a smaller portion of household net worth now than before the housing crisis. Real estate accounted for almost 40 percent of household net worth in 2005, compared with 30 percent today. The amount of equity homeowners have in their homes is about 50 percent lower than before the housing crisis, and total equity in real estate is currently 40 percent versus almost 60 percent pre-crisis. Given how slowly home prices have been recovering, it makes sense that other parts of the consumer balance sheet are rising faster. Unfortunately, much of the recent gains in wealth from the stock market are likely fleeting, as equity markets have fallen precipitously amid the turmoil in Europe, a slowing global economy and evidence of slowing job growth here at home. Consumer wealth is subject to greater volatility as it becomes increasingly tied to financial assets. With interest rates so low, households able to invest are forced to turn to riskier asset classes, such as equities, to generate more meaningful returns. The added risk leaves them vulnerable to swings in wealth without necessarily translating into increased consumption.

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In BriefMerger Clears Hurdle | The Federal Energy Regulatory Commission (FERC) has approved the $26 billion merger of Duke Energy and Progress Energy, which would create the nation’s largest utility, servicing 7.1 million customers in six states. FERC had previously rejected the merger, but recently said it will not have an adverse effect on competition in the Carolinas. The North Carolina Utilities Commission will need to give its final approval before the merger is finalized. Duke Energy currently employs 18,250 in the Carolinas, Indiana, Kentucky and Ohio, while Progress employs 11,000 in the Carolinas and Florida. An estimated 1,860 jobs are expected to be cut within the next three years as a result of the merger, according to FERC.

n n n n n

Coal Cuts | Alpha Natural Resources, the second-largest coal producer by revenue in the United States, plans to idle four coal mines and two preparation plants in Kentucky, according to the Bristol, Va.-based company. A total of 436 employees will be affected—150 positions were cut entirely and the remainder will be relocated. Alpha attributed the cuts to declining demand for steam coal and new federal pollution regulations for coal-fired power plants. “This year, utilities in the U.S. are expected to burn the least amount of steam coal than at any time in the last 20 years,” Alpha CEO Kevin Crutchfield said. “Layoffs are an unfortunate last resort, and it’s tough for miners that want to work but are unable to because of factors beyond their control and the company’s control.”

n n n n n

Nuclear up North | Canada recently marked its 50th year of utilizing nuclear power. Nuclear power plants now supply 15 percent of the country’s electricity (compared with 20 percent in the United States), and almost 60 percent in Ontario—Canada’s most populous province. On June 4, 1962, Ontario’s Nuclear Power Demonstration reactor began supplying electricity to 10,000 homes. Canada’s nuclear fleet has since grown to include 20 reactors with two in planning stages. The world’s first full-scale nuclear power plant, the Shippingport Atomic Power Station, began operating in western Pennsylvania in 1957.

Bruce MacNeil