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Rating Action:

Moody's Changes Outlook of Hoosier Energy to Positive

Global Credit Research - 18 Jun 2010

New York, June 18, 2010 -- Moody's Investors Service changed the rating outlook of Hoosier Energy Rural Electric Cooperative, Inc. (Hoosier), to positive from stable. The positive outlook affects the Baa2 issuer rating and the Baa1 secured rating of Hoosier's backed pollution control bonds.

The change in outlook reflects the continued stabilization of the company's credit profile following a challenging 2009 when the company worked to eliminate significant off-balance sheet liabilities related to its leveraged lease agreements with John Hancock Life Insurance Company. Hoosier agreed to make a one-time payment to John Hancock and, as a result, the leveraged lease agreement is now completely "unwound" and terminated. Moody's previously confirmed Hoosier's ratings at the time of this announcement (see press release dated January 5, 2010). Since that time the company has continued to successfully weather moderate economic softness in its service area with limited negative effect and has taken modest steps to improve its liquidity profile including the receipt of additional long-term financing from the Rural Utilities Service (RUS) and the pay-down and extension of certain external credit lines.

Hoosier continues to have strong investment-grade attributes including the long-term all-requirements wholesale power contracts in place with its 18 members (through 2040) including rate setting flexibility. In the short-term, volatility in fuel and purchased power costs are managed and passed on to members without regulatory review through the company's power-cost adjustment (PCA) mechanism. Additionally, given the moderate level of surplus (non-member) power sales that Hoosier engages in, margins and member rates can be impacted by demand and pricing in MISO but this volatility is also effectively captured through the PCA, providing additional stability. Hoosier's credit metrics are also very healthy for the current Baa2 issuer rating category. At year-end December 31, 2009, Hoosier reported FFO to debt of 9% and equity to capitalization of 14%, in line with the A and Baa rating categories, respectively, for electric cooperatives.

Challenges to the rating are longer-term in nature and consider the company's relatively small size and geographic concentration. Hoosier's capital spending will also be elevated over the next several years with a focus on environmental upgrades to its coal-fired generating facilities. Given this capex outlook, we are expecting a free cash flow deficit through 2012 that will need to be funded externally; as such, liquidity will continue to be an important focus for the rating.

Hoosier currently maintains committed bi-lateral lines of credit totaling $240 million, of which approximately $111 million was drawn at April 30, 2010 (Hoosier also maintained a cash balance of $125 million at the same date). Approximately $103 million of the drawn bank debt represents the refinancing of auction-rate tax-exempt notes previously bought-in due to re-marketing difficulty in 2008. We note that Hoosier continues its efforts to put in place a new indenture that will allow for the issuance of new secured debt without requesting a lien accommodation from RUS. We expect that the $103 million will remain drawn until such time as the new indenture is put in place, possibly late 2010.

The $240 million of credit lines are comprised of several agreements with staggered maturities (approximately $170 million of the lines expire from February 2011 to May 2012). Previously, the heavy reliance on substantially drawn short-term bilateral credit facilities to provide liquidity was considered a material weakness in the company's liquidity profile. However, in January 2010, the company received approximately $120 million of long-term financing from RUS which allowed for the partial pay-down of these credit lines. Additionally, Hoosier has taken a modest step to lengthen its bank-line expiration schedule by arranging a $70 million committed line expiring in April 2013; however, we highlight the fact that this line contains a material adverse event clause for ongoing borrowings, as do two of the other three bi-lateral credit lines which continues to be a credit negative from a liquidity point of view since usage could be denied at a time when most needed.

We believe further improvement is likely following the establishment of the new indenture and terming out of the $103 million of tax exempt securities temporarily refinanced under the bank lines. As such, the rating could be upgraded given further progress in meeting this goal; however, this will also need to be coupled with a stabilization of the Indiana economy given the high level of industrial demand in the region. A limiting factor going forward will continue to be the large capital spending plan and potential for more stringent environmental requirements given the company's concentration in coal-generating facilities.

The last rating action for Hoosier occurred on January 5, 2010, when Moody's confirmed the ratings with a stable outlook.

The principal methodology used in rating Hoosier was Moody's U.S. Electric Generation & Transmission Cooperatives, published in December 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Hoosier Energy Rural Electric Cooperative, Inc., is an electric generation and transmission cooperative headquartered in Bloomington, Indiana. Hoosier supplies energy to 18 distribution cooperatives. For the year-ended December 31, 2009, Hoosier reported revenues of $575 million and total debt of $1.0 billion.

New York
James O'Shaughnessy
Analyst
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael G. Haggarty
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Changes Outlook of Hoosier Energy to Positive
No Related Data.
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