Moody’s upgrades Big Rivers Electric Corporation senior secured rating to Baa2; outlook is stable

03 Oct 2022

SOURCE: Moody’s

New York, October 03, 2022 — Moody’s Investors Service (“Moody’s”) today upgraded the rating of Big Rivers Electric Corporation (BREC)’s $83.3 million senior secured 10-year term loan, due 2030 to Baa2 from Baa3. The rating outlook is stable.

RATINGS RATIONALE

The upgrade to Baa2 principally reflects the cooperative’s continually improving financial profile and cash flow credit metrics.  During the three-year period ending FY 2021, BREC achieved a funds from operations (FFO) coverage of interest expense of 3.0x, FFO to debt ratio of 9.1% and debt service coverage ratio (DSCR) of 1.7x, based on Moody’s standard adjustments. These credit metrics strongly position BREC within the Baa rating category and reflects Moody’s expectation that BREC will likely continue to record similar cash flow metrics in 2022 and beyond. The improved cash flow profile is somewhat dampened by BREC’s continued large regulatory asset balance related to the early retirement of its coal power plants. Despite several years of reducing the balance, including an accelerated write-down in FY 2021, BREC had a net balance of approximately $362 million at FYE 2021.    

The upgrade further acknowledges the continued credit supportive regulatory treatment from the Kentucky Public Service Commission (KPSC), the execution of strategies by management to better align its power supply capacity with its changing load profile, ongoing efforts to reduce carbon emissions, and the successful management of its upcoming debt maturities and maintenance of sound liquidity.

Big River’s status as a rate regulated electric generation and transmission (G&T) cooperative represents a unique risk relative to its G&T cooperative peers.  However, this risk continues to be mitigated by a history of credit supportive decisions from the KPSC, including the KPSC’s approval of rate recovery for BREC’s  regulatory assets.  Also, unlike its G&T peers, Big Rivers remains highly dependent upon sales and revenues from large load industrial customers, whose financial performance can be affected by global economic trends that can be difficult for the customer and BREC to manage.  These considerations are mitigated by BREC’s financial performance which is stronger than other similarly rated G&T cooperatives.

The rating action recognizes the significant progress made by management to create a better balance between its available generation capacity and its load profile.  This has been achieved by retiring certain legacy coal generating assets and entering into several long-term power supply contracts with industrial loads to shore up demand, benefitting from the strong economic growth expected in the western Kentucky region.   Among the most meaningful of these supply contracts include a full-requirements power supply contract with Nucor Steel, owned by Nucor Corporation (Baa1 Stable), which is constructing a $1.5 billion steel plate manufacturing mill within its member (Meade County Rural Electric Cooperative) service territory, with the contact taking effect in 2023. BREC also has secured a 20-year power agreement with Blockware, a crypto currency mining company for its new crypto currency facility in Paducah, KY.  BREC is expected to benefit from additional industrial load from a new $500 million paper mill being constructed by Pratt Paper within the Kenergy member service territory. These load supply agreements are in addition to approximately 340 MW of previously arranged power sales contracts to wheel power to two municipal entities in Kentucky, and for financially settled power sales agreements with three Nebraska entities.

The upgrade also acknowledges measures taken by BREC to reduce carbon emissions with the retirement of its coal units and the increase in supply diversity. BREC targets the reduction of carbon emissions by 70% in its supply stack by 2030, with the retirement of approximately 508 MW in coal-fired electric generation, the conversion of the Robert Green coal plant to a natural gas plant, and the termination of an operating agreement with Henderson Municipal Power & Light, KY(A3 stable) which eliminated 187 MW of additional coal capacity. BREC will also phase in nearly 260 MW of solar capacity pursuant to several third-party power purchase agreements in the near term.

Read the full press release from Moody’s here.