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
