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 January 7, 2016 - 2:16 PM EST
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Fitch Affirms Buckeye Power's (OH) Rating at 'A'; Outlook Revised to Stable

Fitch Ratings affirms the 'A' rating on the following Buckeye Power, Inc. (OH) (Buckeye) revenue bonds:

--$69,790,000 Ohio Air Quality Development Authority, series 2010.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are secured pursuant to Buckeye's existing mortgage and deed of trust which includes a lien on substantially all of the cooperative's assets.

KEY RATING DRIVERS

OUTLOOK REVISED TO STABLE: The change in the Rating Outlook to Stable from Negative is supported by a meaningful improvement in Buckeye's financial metrics, which had suffered due to a large capital improvement program, a dramatic increase in debt, and a slowdown in energy sales. The improved operating performance is largely attributable to stringent cost control, modestly higher member sales, and a series of rate increases. Financial ratios are now generally in line with Fitch's 'A' rated utility medians.

WHOLESALE POWER CONTRACTS: Buckeye provides wholesale electric service to a reasonably diverse group of customers served by 25 local distribution cooperatives, pursuant to all-requirements contracts through 2057.

ENVIRONMENTAL UPGRADES COMPLETE: Buckeye has invested more than $1 billion to upgrade environmental control systems on its coal-fired units over the past 10 years to position itself for continued regulatory compliance. While the strategy was designed to be comprehensive and forward-looking, the Environmental Protection Agency's (EPA) proposed Clean Power Plan (CPP) could add further cost and create some risk.

MARKETING EXCESS ENERGY: Buckeye retains a meaningful amount of surplus energy, which is sold into the PJM Interconnection LLC (PJM) and through contracted sales. Prices received for capacity and energy can be quite volatile, which can affect the cooperative's bottom-line performance.

ELECTRIC RATES STABLE: Buckeye's wholesale rate has steadied, following a period of rapidly rising charges needed to cover costs associated with its large capital program. Rate stability is forecast to continue for several more years with increases tied to normal operating costs.

RATING SENSITIVITIES

DOWNTURN IN FINANCIAL PERFORMANCE: While Fitch expects Buckeye Power, Inc. to maintain the improved financial performance and competitive rates demonstrated in fiscal 2015 following the completion of its environmental and plant upgrade program, a significant weakening of these metrics could result in downward rating action or a negative revision to the Outlook.

CREDIT PROFILE

Buckeye is a not-for-profit generation and transmission (G&T) cooperative that supplies wholesale electricity to approximately 390,000 customers through its 25, largely Ohio-based, electric distribution members. The customer base is primarily residential, equal to 62% of total energy sales, but a few large industries are served. Members exhibit reasonable financial profiles.

Energy needs of the members are met through a combination of owned and purchased resources, with heavy reliance on Buckeye's investment in the coal-fired Cardinal Station Units 2 & 3 (Cardinal 2 & 3), and an 18% interest in Ohio Valley Electric Corporation (OVEC) assets. Renewable power and gas-fired generation provide additional energy sources. Buckeye is an active participant in the wholesale power market, primarily through PJM, on both a short-term and intermediate-term basis, since its current capacity of 2,368 MW is well in excess of members' demand.

MODIFICATIONS TO AEP AGREEMENTS

The Ohio Public Utility Commission (PUC), as part of a state-wide plan, previously ordered AEP Ohio generation to be moved from Ohio Power Company into AEP Genco, an unregulated merchant generating company, effective Jan. 1, 2014. This reduced Ohio Power's generating capacity from 10,000 MW to a minimal amount, which resulted in restructured contracts and obligations of Ohio Power moved to AEP Genco. Buckeye's new power partner continues to provide, at cost, support services and the two parties have negotiated and updated corporate guarantees and contracts. The current station agreement between the two parties, with certain modifications, extends to 2026. Fitch does not see the impact on Buckeye from this updated arrangement as significant.

Recently, AEP said it is considering selling its Ohio merchant generating assets (7,923 MW), which would lead to operational changes for The company has said that the merchant business is no longer seen as fitting within its profile, since AEP is largely a regulated utility while the merchant plants are unregulated and sell power into the competitive market. The ultimate outcome will hinge on PUC actions and its support for having the costs of these assets being paid by Ohio retail customers as a regulated tariff. A final decision is expected by early 2016.

RATES STABILIZE

Buckeye's wholesale rates rose steadily through fiscal 2012, due primarily to costs associated with environmental upgrades. The cost per MWH to members, which was $46.50 in fiscal 2008, increased to $69.80 by fiscal 2012, when the environmental costs were fully embedded in wholesale rates. Since that time, rates have remained relatively flat, and for fiscal 2015 averaged $69.90 per MWH.

Buckeye's forecast assumes modest rate increases, tied to the general cost of utility operation. Rates include a monthly pass-through of fuel and transmission costs. Even with these increases, system-wide rates are expected to remain competitive with other Midwest utilities; however, rate flexibility could be somewhat constrained given the number of prior rate increases. Members' average residential rates are currently around 13 cents per KWH.

CAPITAL EXPENDITURES MODERATE

In fiscal 2001, Buckeye undertook a major capital investment program, which included significant environmental upgrades, improvements to existing assets and the acquisition of new generation. Buckeye completed this extensive capital program at a cost exceeding $1.5 billion. Originally centered on air-quality upgrades at the Cardinal Station, the program evolved over time to include the installation of state-of-the-art emission controls at the OVEC units, as well as the acquisition of additional generating capacity. Following the completion of these projects, capital investments have moderated substantially, allowing debt ratios to gradually improve. No new borrowings are anticipated in 2016. Buckeye continues to monitor the CPP to see what the impact might be on plant operations and system financials. At this time, no dollars have been included in the capital budget for new borrowings.

FINANCIAL RESULTS HEALTHIER

Buckeye's financial metrics continued to improve in fiscal 2015, following a period of weakness earlier in the decade. Net margins for fiscal 2015 were above budget, totaling $49.4 million. Buckeye sold approximately 10.1 million MWHs in fiscal 2015, with approximately 8.6 million MWHs going to members, and about 1.5 million MWHs being sold to other purchasers, primarily the PJM. Excess energy sales currently account for about 15% to 20% of Buckeye's total energy sold.

While revenues from third-party sales declined due to lower energy prices, non-member sales margins still totalled a healthy $8 million this past year. Budget assumptions for fiscal 2016 include an increase in member sales to 9 million MWH, with non-member sales expected to contribute the remainder; budgeted net margins for off-system sales is $11 million. Through the first six months of fiscal 2016, off-system results have trailed budget due to unseasonable weather and lower market clearing prices. Fitch expects that any meaningful shortfall in net margins would likely be made up by rate adjustments to members, cost reductions or recovered in future periods.

Helped by improved cash flow, Fitch-calculated debt service coverage (DSC) for fiscal 2015 rose to 1.33x, compared with roughly 1.00x a few years earlier. Debt-to-FADS has declined from an inflated 13.2x in fiscal 2012, to a more reasonable 7.9x in 2015. Equity-to-capitalization stands at 23.2%. Days cash and investments remains low at 20 days, but total liquidity on hand has increased to around 200 days, more in line with Fitch medians.

Buckeye employs a financial strategy that, while focusing on current financial ratios, emphasizes paying down debt, holding electric rates stable and planning for future debt issuance. The longer-term forecast assumes annual net margins of about $40 million, 1% load growth, no unusual rate increases, with a minimum DSC target of 1.30x.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997583

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997583

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Alan Spen
Senior Director
+1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com


Source: Business Wire (January 7, 2016 - 2:16 PM EST)

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