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Rating Action:

Moody's affirms Associated Electric Cooperative (MO) at Aa3 for secured debt; outlook stable

26 Oct 2018

Approximately $71.55 million of debt securities affected

New York, October 26, 2018 -- Moody's Investors Service today affirmed Associated Electric Cooperative, Inc.'s (AECI) senior secured rating at Aa3 for $71.55 million of tax exempt Pollution Control Refunding Revenue Bonds (series 2008), due December 1, 2034, which were previously issued by the Missouri Environmental Improvement and Energy Resources Authority on AECI's behalf, and concurrently affirmed AECI's Issuer Rating at A1. AECI's rating outlook is stable.

RATINGS RATIONALE

"The rating actions reflect the strong likelihood for maintaining sound key financial cash flow and equity metrics owing to AECI's good prospects for sales growth and its manageable multi-year capital spending program," said Vice President-Senior Analyst, Kevin Rose. "AECI also has relatively low production costs and demonstrates a consistent willingness to exercise its rate setting flexibility under conservative managerial strategies," Rose added.

AECI's ratings continue to incorporate our long held view that the generation and transmission (G&T) cooperative's credit quality benefits from a sound G&T cooperative governance structure and a low business risk profile. The latter is characterized by strong relationships AECI has with its member owners under long-term power supply contracts through May 2075. AECI's history of strong and predictable cash flow is highly likely to be sustained through the 2018-2022 forecast period, to support a front-end loaded five-year capital spending program aggregating about $600 million over that period. Good sales growth prospects since registering the 580 megawatt Dell Plant in the MISO market and signing a medium-term power sale agreement with an aluminum smelter in its service territory, along with a manageable capital expenditure program, increase the likelihood for AECI to maintain its solid coverage metrics and further strengthen its equity ratio.

By achieving solid net margins over a multi-year period, AECI's times interest earned ratio and debt service coverage ratio averaged 1.5x and 1.4x, respectively, during 2015-2017. These levels, which include our standard adjustments, are in excess of the minimum covenant levels typical for the industry and provide consistent support for AECI's sound credit quality. AECI's funds from operations (FFO) has averaged $142 million during 2015-2017, reflecting benefits of depreciation associated with past investments and consistently solid net margins. AECI's FFO to debt and FFO to interest for 2015-2017 averaged 7.3% and 2.7x, respectively, which are further evidence of the cooperative's strong credit quality. The cooperative's equity to total capitalization ratio improved modestly again to 24.8% at the end of FY 2017 compared to 24.1% at the end of FY 2016 and averaged 24.1% over 2015-2017 which is consistent with AECI's board of directors' targets.

AECI also maintains sound liquidity to meet short term working capital requirements, near term maturities of long-term debt, and routine annual returns of member capital, which are akin to common dividends for shareholders. To supplement its cash on hand, AECI currently has $625 million of committed liquidity facilities with six different financial institutions, the substantial majority of which was undrawn as of September 30, 2018. Additionally, AECI has set aside about $408.7 million of restricted cash for the payment of future debt service on the debt securities with the Rural Utilities Service, and has $112.9 million available in its Generation, Environmental and Insurance Fund and $14.6 million in another deferred revenue fund. AECI can use the latter funds to offset cost pressures, help maintain sound financial performance and keep wholesale rates competitive.

AECI has elevated exposure to carbon transition risk with 2017 energy from coal-fired plants representing about 73% of total energy generated from its owned resources. However, the proposed Affordable Clean Energy (ACE) rule provides more time and flexibility to achieve carbon emission reductions, making it a credit positive for entities like AECI with a high dependence on carbon-emitting generation capacity. Still, we see risks for AECI relating to the uncertainties surrounding overall cost and operating effects that may result from future environmental regulations and the potential for incremental litigation to occur and create additional regulatory uncertainty. Owing to the time horizon for these credit challenges and our assessment of the conservatism of AECI's management and its board, Moody's does not currently consider them to be undue rating constraints.

Rating Outlook

AECI's stable rating outlook reflects our view that the cooperative can maintain its sound financial profile through conservative governance, executing its planned capital expenditures program and autonomously raising rates in a timely way as needs arise. The outlook also takes into account the likelihood for benefits of additional time to cope with challenges relating to compliance with the recently proposed ACE rule as a replacement for the Clean Power Plan that has been under a Supreme Court stay since 2016.

What Could Change the Rating -- Up

The Aa3 rating for AECI places it among the two of our highest rated cooperatives. Because of the overhang of what future environmental regulations might mean for its credit profile, we do not see the rating being upgraded in the intermediate term. However, the rating could be raised if electricity sales increase at a faster than anticipated rate reflecting sustained growth in the economy, the cooperative reaching stronger financial metrics, including AECI's equity to capitalization ratio towards 30% or more, and greater clarity around and effective management of future environmental risks, particularly given AECI's dependence on coal generation resources.

What Could Change the Rating -- Down

Although we do not foresee a rating downgrade in the next 12-18 months, greater than expected construction costs, for example from unforeseen environmental capital expenditures could move the rating downward, particularly if financial metrics noticeably deteriorate. In addition, any movement to subject AECI to rate regulation and/or member unrest in response to higher than expected rates would be credit negative developments. From a financial metrics perspective, if the cooperative's funds from operations (FFO)/Debt and FFO/Interest were to weaken significantly for more than two consecutive fiscal years to less than 6% and 2.0x, respectively, then the rating could be subject to a downgrade.

Associated Electric Cooperative, Inc. is a non-profit, electric generation and transmission cooperative (G&T co-op), which is owned by six regional G&T co-ops and 51 local electric distribution cooperative systems situated throughout Missouri, Oklahoma and Iowa. Its headquarters are in Springfield, Missouri.

The principal methodology used in these ratings was US Electric Generation & Transmission Cooperatives published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kevin Rose
Vice President - Senior Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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