CEO’s Report: Planning pays off

Stick to the plan.

When things aren’t going as we’d like or tough decisions must be made, it’s tempting to veer off course in search of an easier path.

But it’s important to stick to the plan and keep the big picture in mind.

It certainly wasn’t easy for those of us at Heartland to make some tough decisions to get us where we are today.

It wasn’t easy for our customers either.

But, because we stuck to the plan, today our financial profile is strong.

Fitch affirms rating

Fitch Ratings recently affirmed the credit rating of Heartland at A- with a stable outlook.

The rating reflects the strong wholesale take-and-pay power sales contracts, our independent ability to adjust rates as necessary and low operating cost environment.

While Fitch notes Heartland’s financial profile has been variable in the past, it now remains healthy, largely due to the realignment of our generating portfolio to better match demand.

Fitch noted the coronavirus outbreak only minimally affected Heartland’s 2020 finances. Sales were down slightly from budget for the year, but weather was the biggest driver of demand.

The Fitch report also noted Heartland was not negatively impacted by the recent severe winter weather.

While many utilities are experiencing sharp spikes in costs, Heartland customers will not see rate increases because of the event.

Market participation reduces risks in and of itself. Market prices fluctuate and during the February polar vortex, prices escalated as demand surged. Utilities that depend largely on the market for power were subject to increased prices. Heartland, on the other hand, also sells generation into the market, helping us hold a balanced position. Our diverse resource mix helps protect customers against market swings.

Customers play role

Heartland customers also play a role in our credit rating. Fitch considers customer rate competitiveness, ability to absorb rate increases as well as financial performance.

Overall, Fitch noted Heartland’s overall service territory is very stable, spanning states each with unemployment rates near or below national levels. Heartland’s share of sales to the market has declined in recent years, largely due to our divestiture of Laramie River Station, which also had a positive impact on our rating.

Planning pays off

It’s no secret customers endured some tough years to get where we are today. Rate increases were necessary to improve Heartland’s financials and our credit rating. While not ideal, sticking to the plan led us to today.

Moody’s also recently rated Heartland at A2 with a stable outlook.

A strong credit rating is important for a variety of reasons. Ratings influence borrowing costs, which are in turn passed down to customers. Some industry vendors have minimum rating requirements for doing business. Potential customers also review ratings.

We’ve talked a lot the past several years about the benefits of divesting of LRS and making tough decisions to secure a strong future.

While the talking points may get old, every time we get news such as the Fitch rating, I am assured we made the right, although sometimes tough, decisions.

We stuck to the plan and we are all the better for it.

Moody’s upgrades Heartland rating in advance of bond issuance

Customers’ vigilance influences upgrade

 

Heartland received a rating upgrade from Moody’s Investor Services from A3 Stable to A2 Stable. The upgrade came just before Heartland issued $35 million in taxable debt for the buyout of a transmission service agreement with Nebraska Public Power District.

The major rationale behind the upgrade was the results of Heartland’s divestiture of the Missouri Basin Power Project, resulting in a right-sizing of Heartland’s generation capacity. It also reflects the A2 weighted average credit quality of Heartland’s customers.

Heartland CEO Russell Olson acknowledged the customers’ role in the upgrade.

“The sound financial metrics of our customers helped bolster Heartland’s profile. Their prudence deserves to be recognized.”

The buyout of the no longer needed NPPD agreement leads to the stabilization of otherwise escalating transmission costs and results in cash flow savings. The debt term will match the 13-year term left on the transmission service agreement. Bonds were sold by Dougherty & Company, LLC the week of November 12th.

Heartland will enter into a termination agreement with NPPD effective January 1, 2019.

The stable outlook reflects Moody’s expectation that Heartland’s financial position will remain relatively stable as it deleverages over the coming years.

“Heartland has been working diligently over the past several years to get our financial metrics where they need to be, including implementing rate increases as needed,” said Heartland CFO Mike Malone. “We stuck with our plan and more importantly, our customers trusted us to see it through. The sale of MBPP ensures a bright and stable future.”

Fitch affirmed its rating of Heartland at A-, Stable, also recognizing the sale of MBPP as a major factor as it right-sized a previously long-resource position and eliminated the need to procure longer-term contracted sales, providing funds to pay down debt and bolstering the balance sheet.

Fitch also acknowledged Heartland’s resource portfolio being diverse in type and fuel mix and no longer dominated by coal-fired resources. They also recognized Heartland’s financial metrics improved as a result of periodic rate increases and newly contracted sales.

Read the full report from Moody’s here and the Fitch report here.