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Rating Action:

Moody's affirms Great River Energy at Baa1; outlook revised to positive

31 Oct 2018

Approximately $1.5 Billion of debt securities affected

New York, October 31, 2018 -- Moody's Investors Service today affirmed the Baa1 ratings for Great River Energy (GRE) first mortgage bonds and senior secured pollution control revenue bonds. Concurrently, GRE's rating outlook was revised to positive from stable.

Outlook Actions:

..Issuer: Great River Energy

....Outlook, Changed To Positive From Stable

Affirmations:

..Issuer: Great River Energy

....Senior Secured First Mortgage Bonds, Affirmed Baa1

....Underlying Senior Secured First Mortgage Bonds, Affirmed Baa1

..Issuer: McLean (County of) ND

....Senior Secured Revenue Bonds, Affirmed Baa1

RATINGS RATIONALE

"The rating actions reflect Moody's view that GRE is benefiting from strengthened financial metrics, on average, with steady contributions from the core utility operations to balance the riskier non-utility activities which can create variability in consolidated net margins", said Vice-President-Senior Analyst, Kevin Rose. "The rating actions also incorporate a view that the positive operating margins from non-utility activities since 2016 can be sustained beyond 2018", Rose added.

GRE's credit supportive attributes include its long-term wholesale power contracts with members, rate autonomy and reasonably competitive power costs. The credit positive attributes help balance credit challenges, including executing a sizable five-year capital spending program with potential investments to meet future environmental regulations and the possibility for wholesale power rate increases to recover those costs. GRE also faces asset concentration risk with about 60% of its power requirements typically derived from one owned coal-fired facility.

GRE exercises its rate autonomy when necessary to sustain utility related financial performance at levels consistent with its objectives of minimum debt service coverage (DSC) and margins for interest (MFI) ratios of 1.17x and 1.1x, respectively. On average for fiscal years 2015-2017, the cooperative's DSC and times interest earned ratio (akin to MFI coverage ratio) were 1.3x and 1.4x, respectively, both in excess of the cooperative's minimum target objectives. For the same period, GRE's funds from operations (FFO) to debt and FFO to interest coverage metrics were 5.6% and 2.2x, respectively, primarily reflecting the variability that nonutility operations can occasionally have on net margins. For example, GRE's consolidated FFO to debt and FFO to interest coverage metrics were 7.6% and 2.6x, respectively, in FY 2017, slightly better than the 7.3% and 2.5x, respectively, in FY 2016. During 2016 and 2017, these metrics benefitted from sound core utility performance and positive contributions to operating margins from GRE's non-utility activities. The more recent metrics represent a marked improvement in both years over 2015 when FFO to debt was just 1.9% and FFO to interest was 1.9x, owing to challenges experienced by the core utility and sizable losses incurred by the non-utility operations, as well as a one-time payment made to terminate an obligation under a purchase power agreement.

GRE's capital spending for 2018-2022 will be focusing on investments in existing transmission and generation assets, including some environmental projects, and the consolidated capital budget calls for almost $800 million in spending during the forecast period. About 45% of the spending during this period will be for transmission projects, primarily to address maintenance and upgrades of existing infrastructure; 27% for generation projects, including environmental and maintenance projects; and the balance for coal mining, information technology and other general purposes. The timing of spending for generation related projects and other general purposes is fairly evenly spread over the forecast period, while transmission spending is somewhat front-end loaded for transmission projects.

GRE faces elevated carbon transition risk with an electric generating profile that is heavily weighted towards coal, which supplied approximately 62% of its requirements in 2017, the substantial majority of which was generated at its critical base-load facility, Coal Creek Station (CCS). While this level of dependence on CCS presents elevated carbon transition risk for GRE, its evolving long-term strategy includes a goal of significantly increasing the amount of renewable resources in its supply mix. The cooperative's existing agreements to purchase wind power position it well for compliance with Minnesota's existing renewable portfolio standards. Longer-term, GRE is voluntarily pursuing a strategy to achieve 50% renewable energy in the cooperative's profile by 2030, with interim targets of 30% by 2020 and 40% by 2025. GRE faces the challenge of maintaining competitive wholesale power rates for its members as it incurs the costs involved in pursuing its renewable strategy and dealing with any future environmental regulations, including the recently proposed Affordable Clean Energy rule. GRE's steps taken to retire the 189 MW coal-fired Stanton Station effective May 2017 and an earlier decision to accelerate depreciation on its coal plants are parts of the mitigation plans to better position the cooperative as environmental regulations unfold over the ensuing years.

GRE continues to maintain adequate liquidity, reporting cash on hand of approximately $219.8 million available for utility operations at September 30, 2018. The coop maintains a syndicated $400 million unsecured revolving credit facility that expires on May 31, 2021 and also has a $30 million short-term facility with CoBank, which expires October 31, 2019. GRE has a history of routinely extending the CoBank facility on an annual basis. As of September 30, 2018, there were no outstanding balances under the credit facilities; however there was a $13 million commitment to several letters of credit issued under the CoBank facility. GRE is in compliance with covenants under the syndicated facility, which includes a minimum margins for interest (MFI) coverage ratio of 1.1x. GRE also has a member investment program under which members invest funds with GRE and receive investment earnings based on the cooperative's blended rate of return for specified investments less administrative costs. These funds are used by GRE to reduce its short-term borrowings. Raising large amounts of equity capital to meet the spending needs is not an option for GRE or the cooperative sector generally. As such, GRE is likely to continue to periodically use its liquidity facilities to fund short-term working capital needs, to meet its $170 million of current maturities of amortizing long term debt as of September 30, 2018 and as a bridge for future capital investments, pending long-term debt issuance. GRE is not a borrower under the RUS loan program nor does it currently return "patronage" capital (akin to common dividends) back to its member-owners. The plan is to start returning patronage capital not later than 2020, once the standalone utility equity to capitalization ratio exceeds 20%.

Rating Outlook

GRE's positive rating outlook reflects our view that future wholesale rate actions will be taken as necessary to support financial performance of the core G&T business and that recent improvement in operating performance by the non-utility activities is likely to be sustained to keep GRE's future consolidated financial metrics at recently improved levels. The likelihood for less variability in performance by the less predictable non-utility activities, in our view, improves GRE's prospects for a higher rating.

What Could Change the Rating -- Up

If GRE sustains the recent positive operating margin contributions by non-utility activities to the consolidated GRE financial results then its prospects for a rating upgrade would improve. Additionally, sustaining the cost savings from the early retirement of the Stanton Station, while maintaining efficient commercial operating status at the coal-fired Spiritwood and Coal Creek Stations would be credit positive developments. Moreover, the GRE ratings could be upgraded by management demonstrating an ability to carry out the GRE capital expenditure program while achieving consolidated financial performance that sustains key metrics at recent stronger levels. In terms of financial metrics, demonstrated ability to maintain FFO to debt and equity to total capitalization metrics on a three-year-average Moody's adjusted basis of at least 6% and 20%, respectively, would help support a positive rating action.

What Could Change the Rating -- Down

A downgrade of GRE's ratings is unlikely over the next 12 to 18 months owing to the positive outlook. However, any unexpected sustained operating performance challenges at the Coal Creek and Spiritwood Stations, and/or less conservative strategies for non-utility activities would be credit negative. In terms of financial metrics, the inability to sustain on average the FFO to debt and FFO to interest metrics at a minimum of 5% and 2.0x, respectively, could lead to a downgrade.

Headquartered in Maple Grove, Minnesota, Great River Energy is a not-for-profit electric generation and transmission cooperative providing wholesale electric power to its 28 distribution members who are its owners. GRE also has a subsidiary, Midwest AgEnergy Group, LLC (MAG), which is a biofuels enterprise owned by GRE and other accredited investors, including ag producers and businesses. In turn, MAG has two subsidiaries, Blue Flint Ethanol LLC (Blue Flint) and Dakota Spirit AgEnergy Finance, LLC (DSAF). Also, DSAF has a subsidiary, Dakota Spirit AgEnergy, LLC (DSA). Blue Flint and DSAF (through DSA) conduct very similar operations, each having capacity to produce 65 million gallons of undenatured ethanol per year, as well as dry and modified distillers grain for livestock and corn oil for biodiesel production. Together with its non-utility subsidiaries, GRE reported consolidated operating revenues of $1.27 billion in 2017.

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
Infrastructure 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
Infrastructure 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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