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Rating Action:

Moody's assigns Baa1 rating to County of Ohio, Kentucky bonds to be issued on behalf of Big Rivers Electric Corp.

Global Credit Research - 10 May 2010

$83.3 million of securities affected

New York, May 10, 2010 -- Moody's Investors Service assigned a Baa1 senior secured rating to a proposed offering of $83.3 million of County of Ohio, Kentucky (the county) Pollution Control Refunding Revenue Bonds (Big Rivers Electric Corporation Project) to be issued on behalf of Big Rivers Electric Corporation (BREC). The rating outlook for BREC is stable. Proceeds from the issuance of these bonds will be used to refund $83.3 million in aggregate principal amount of PCRBs, Series 2001A (Big Rivers Electric Corporation Project) outstanding, which were previously issued on behalf of BREC by the county. The prior bonds were Periodic Auction Reset Securities that were insured as to the payment of principal and interest when due by Ambac Assurance Corporation. The Baa1 rating for the proposed offering represents the relative standing of the PCRBs as standalone senior secured obligations of BREC, ranking on parity with all of BREC's existing debt under its first mortgage bond indenture dated as of July 1, 2009, as supplemented and amended.

At the same time, Moody's notes that BREC may decide to deliver the bonds with an unconditional senior unsecured guaranty from National Rural Utilities Cooperative Finance Corporation (NRUC: senior unsecured A2; stable outlook). Under this scenario, the NRUC guaranty would result in a rating of A2 for the proposed PCRBs, consistent with NRUC's current senior unsecured debt rating, and BREC's senior secured debt rating of Baa1 would become the underlying rating for the proposed PCRBs.

"The Baa1 senior secured rating for BREC considers the financial benefits of several steps it took to unwind a lease and other transactions with E.ON U.S. LLC and two affiliates (E.ON) in 2008 and 2009 wherein its prior deficit net worth turned substantially positive, cash receipts were utilized to reduce debt, and two committed bank credit facilities aggregating $100 million were established to improve liquidity" said Vice President, Kevin Rose. BREC and E.ON completed the unwinding of the transactions effective July 16, 2009. "Revenues generated from competitively priced power sold under long-term wholesale contracts with the three member owners should continue to generate FFO to interest and debt metrics in support of the Baa1 senior secured rating level, while capital expenditures are largely met with internally generated funds", Rose added.

A significant constraint to BREC's rating is that one of its member owners, Kenergy Corp., makes a high concentration of its sales to two aluminum smelters (Century Aluminum Company and Rio Tinto Alcan), both of whom face credit challenges due to the significant volatility in both metal prices and demand. In addition, these smelters have the option to terminate their respective power purchase arrangements, subject to a one-year notice and other conditions. BREC's rating is further constrained because its rates are regulated by the Kentucky Public Service Commission, which is atypical for the cooperative sector and can sometimes pose challenges in implementing timely rate increases when needed to recover higher costs of service.

The stable rating outlook for BREC is based on its successful completion of the unwind transactions, thereby improving its financial profile and repositioning itself to continue efficiently meeting the needs of its members in the future.

Under the potential scenario where NRUC's senior unsecured guaranty forms the basis for the rating of the PCRBs, we note that NRUC's A2 senior unsecured debt rating is based on its high quality asset portfolio; an excellent competitive position that includes an ability to raise margins on member loans; a strong track record in managing credit restructurings; an improved risk management program and a declining exposure to the more volatile telecommunications sector. The rating also takes into account NRUC management's attempts in recent years to reduce the degree of single obligor exposure within the loan portfolio; the company's reliance on capital markets to fund its lending business, continuing high leverage and the challenges associated with managing certain problem loans.

The stable rating outlook for NRUC incorporates our view that modest loan growth among rural electric cooperatives will help maintain strong asset quality within the loan portfolio. To that end, we believe that the telecom portfolio, a source of loan portfolio weakness, will continue to represent less than 10% of the total loan portfolio. The stable outlook factors in NRUC's plans to lower leverage through the offering of member capital securities and through the change in NRUC's patronage retention cycle, and incorporates an expectation that NRUC will maintain sufficient liquidity as well as access to private sources of funding to mitigate the firm's reliance on wholesale funding.

For more information on NRUC, please refer to the Analysis dated December 10, 2009 and the most recent Credit Opinion dated December 9, 2009. Both can be found on moodys.com under the National Rural Utilities Cooperative Finance Corporation heading.

The principal methodology used in rating BREC is 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.

The last rating action for BREC was July 14, 2009 when Moody's assigned a (P)Baa1 senior secured rating to proposed PCRBs representing a standalone senior secured obligation of BREC.

The principal methodologies used in rating NRUC are U.S. Electric Generation & Transmission Cooperatives, published in December 2009 and Rating Methodology: Analyzing the Credit Risks of Finance Companies, published in October 2000, and both are 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.

The last rating action for NRUC was November 24, 2009 when the ratings were affirmed with a stable rating outlook.

Big Rivers Electric Corporation is an electric generation and transmission cooperative headquartered in Henderson, Kentucky and owned by its three member system distribution cooperatives— Jackson Purchase Energy Corporation; Kenergy Corp; and Meade County Rural Electric Cooperative Corporation. These member system cooperatives provide retail electric power and energy to more than 111,000 residential, commercial, and industrial customers in 22 Western Kentucky counties.

Based in Herndon, Virginia, National Rural Utilities Cooperative Finance Corporation is a private, not for profit cooperative association exclusively serving rural electric, service, and telecommunication utilities. The principal purpose of the company is to provide its members with a source of financing to supplement the loan programs of the Rural Utilities Service of the United States Department of Agriculture.

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

New York
William L. Hess
Managing Director
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Baa1 rating to County of Ohio, Kentucky bonds to be issued on behalf of Big Rivers Electric Corp.
No Related Data.
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