Heartland credit rating increased, savings realized from bond refunding

Persistence is said to pay off and in Heartland’s case, that’s true as we received two pieces of good news the last week of April – good news that came after a significant amount of planning and sometimes tough decision-making.

The first was Moody’s Investors Service upgrading Heartland’s credit rating from Baa1 to A3 with a stable outlook. The rating reflects the A3 weighted average quality of Heartland’s all requirements members, low leverage, improving financial metrics and relatively diverse energy mix.

“This is great news for Heartland and our customers,” said CEO Russell Olson. “The increased rating is not only based on our financial strength, but the strength of our customers. This is a collective rating we can all be proud of.”

Moody’s rating reflects Heartland’s responsiveness to contracting load to new customers through short-term power purchase agreements and timely and adequate rate increases in the last few years.

“It is satisfying to see that our plan to increase our rating has worked,” added Olson. “A strong rating is crucial and we will continue to make decisions to ensure a strong credit future as well as a strong future for our customers.”

The stable outlook is based on Moody’s expectation that going forward Heartland will maintain sufficient credit metrics.

The principal methodology used in the rating was US Municipal Joint Action Agencies published in October 2012. Heartland, as an “all requirements” joint action agency, is graded based on participant credit quality and cost recovery mechanism, resource risk management, competitiveness, financial strength and liquidity, and willingness to recover costs with sound financial metrics.

“Moody’s specifically looks at things like liquidity, debt ratio, fixed charge coverage ratio, and days cash,” said Heartland CFO Mike Malone. “Heartland has slowly been improving these metrics over time and that is reflected in our rating upgrade.”

Heartland’s credit rating is important for many reasons. A lower rating means increased borrowing costs, which are then passed down to customers. Additionally, certain vendors Heartland contracts with require a minimum rating to transact business. Regional Transmission Organizations such as SPP also require additional collateral dependent upon ratings. Potential customers and their consultants also review a company’s rating.

“A higher rating is beneficial to Heartland and our customers,” Malone said. “Positive change doesn’t happen overnight. It has taken a lot of work by all of us to get here and we look forward to continuing to strengthen our company.”

The higher rating helped lead to Heartland’s second piece of good news – approximately $26.6 million in net present value savings for Public Power Generation Agency from the advanced refunding of $150 million in outstanding bonds. PPGA, the collective group formed to build Whelan Energy Center Unit 2, issued bonds to finance the construction of WEC 2 and will now realize lower interest costs.

Malone noted that PPGA’s credit rating mirrors Heartland’s rating due to Heartland’s 36% ownership interest in the plant. The interest rate obtained in the refunding process is a direct reflection of that rating, similar to a personal credit rating – the better credit rating you have, the lower your interest rate when you take out a loan to purchase a house or a vehicle.

The advanced refunding resulted in gross savings of $41.8 million dollars. That translates to annual gross cash flow savings of approximately $1.5 million from 2018-2031 and bumps up to about $2 million in 2032.

“The refunding is interest rate sensitive and the market was in our favor,” added Malone.  “The net present value savings was much higher than we originally anticipated, coming in at approximately 17.37%. That is real savings for the project and for Heartland.”

Moody’s Investors Service is a leading provider of credit ratings, research, and risk analysis. Moody’s commitment and expertise contributes to transparent and integrated financial markets. The firm’s ratings and analysis track debt covering more than 120 sovereign nations, approximately 11,000 corporate issuers, 21,000 public finance issuers, and 72,000 structured finance obligations. Moody’s Investors Service is a subsidiary of Moody’s Corporation (NYSE: MCO), which reported revenue of $3.5 billion in 2015, employs approximately 10,400 people worldwide and maintains a presence in 36 countries.