Fitch affirms Big Rivers Electric’s 2010A pollution control refunding revenue bonds

NEW YORK–(BUSINESS WIRE)–Fitch Ratings has affirmed the ‘BBB-‘ rating on the $83.3 million County of Ohio, KY’s pollution control refunding revenue bonds (Big Rivers Electric Corporation Project) series 2010A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a mortgage lien on substantially all of the Big Rivers Electric Corporation’s owned tangible assets, which include the revenue generated from the sale or transmission of electricity.

KEY RATING DRIVERS

HEAVY CUSTOMER CONCENTRATION: Big Rivers resumed electric service, through its largest member Kenergy Corp., to two local aluminum smelters (a combined demand of 850 MW at a 98% load factor) following the termination of its generating asset lease in 2009. The smelters accounted for a sizable 67% of total member revenue in 2011.

ABUNDANT LOW COST RESOURCES: Big Rivers benefits from abundant low-cost power resources and an average wholesale rate for rural and large industrial members ($39.07/MWh in 2011, net of credits) that is regionally competitive and among the lowest in the nation. Member retail rates are similarly low and competitive.

SUBJECT TO RATE REGULATION: The electric rates charged by Big Rivers and its members are regulated by the Kentucky Public Service Commission (KPSC), which limits the cooperative’s financial flexibility and may delay the timing or amount of necessary rate increases.

ACCEPTABLE FINANCIAL METRICS: Fitch-calculated financial metrics for 2011 include debt service coverage (DSC) of 1.53x and total debt/funds available for debt service (FADS) of 11.2x, which are acceptable for the current rating category. Including revenues from member rate stability (MRS) reserves, metrics improve to 1.95x (DSC) and 8.8x (debt/FADS).

ENVIRONMENTAL COMPLIANCE PLAN SUBMITTED: Big Rivers has submitted an environmental compliance plan (ECP) to the KPSC for approval that will ensure the cooperative’s ability to operate its units for the long term. The estimated cost of compliance has declined from initial estimates but will be debt funded, increasing leverage.

RELIANCE ON WHOLESALE MARKET: Long-term stability at Big Rivers continues to rely heavily on off-system sales and related margins despite the continued benefit of MRS reserves and a rate adjustment mechanism included in the smelter power sale agreements. Near-term metrics will be stressed by ECP expenditures, low power prices and higher leverage.

WHAT COULD TRIGGER A RATING ACTION

Restrictive Rate Regulation: Future regulatory decisions that prevent the cooperative from adequately recovering costs would likely result in downward pressure on the rating or Outlook.

Deteriorating Operating Conditions: Declining non-smelter member sales, weak surplus energy sales, or constrained smelter operations that reduce financial margins and liquidity could also put downward pressure on the rating or Outlook.

CREDIT PROFILE

Big Rivers is a generation and transmission cooperative based in Henderson, Kentucky. Big Rivers supplies wholesale electric and transmission from its total capacity of 1,819 MW to three distribution cooperatives – Meade County Rural Electric Cooperative Corporation, Jackson Purchase Energy Corporation and Kenergy Corp. Combined, these members provide service to approximately 112,500 retail customers located in 22 western Kentucky counties.

Emergence from Bankruptcy

In September 1996, Big Rivers filed for voluntary Chapter 11 relief under the U.S. Bankruptcy code, generally due to an inability to sell power produced from its excess capacity at prices sufficient to cover its above-market costs. After emerging from bankruptcy in 1998, and in accordance with its plan of reorganization, Big Rivers entered into a 25-year lease of all its generating assets with Western Kentucky Energy Corp. (WKEC). The transaction essentially transferred the operational responsibilities of the assets and related risks in exchange for annual lease payments, and a fixed price purchase power contract with LG&E Energy Marketing, Inc. (LEM).

Unwinding the Lease Transaction

In 2009, the lease with WKEC was effectively unwound, resulting in Big Rivers receiving cash and consideration totaling $865 million and resuming control of its generation fleet. Big Rivers also resumed electric service to two local aluminum smelters that have historically dominated the service area’s electric demand and were supplied by LEM following the reorganization. Going forward, the smelters will again represent a significant portion of the cooperative’s electric demand.

The consideration received in connection with the unwind allowed Big Rivers to pay down approximately $140 million of debt, establish $253 million of rate stabilization reserves and improve system equity from (19%) to approximately 30% at the time of closing.

Financial Performance Acceptable for Rating Category

Fiscal 2011 financial performance was relatively solid and generally on budget. Electric operating margins ($50.9 million) for the year were slightly lower than forecasted. Weaker wholesale prices for power were nearly offset by increased, but more efficient, generation. Net margins for the year were almost on budget ($5.6 million). Actual 2011 figures reported by Big Rivers for conventional TIER (1.12x), DSC (1.47x) and equity/capitalization (33%) were also solidly in line with forecasted performance.

Fitch-calculated ratios for DSC (1.53x) and total debt/FADS (11.2x) were acceptable for the current rating category and do not reflect the inclusion of withdrawals from reserves. Including those revenues, the metrics improve to 1.95x and 8.8x, respectively. Metrics for cash on hand (35 days, excluding reserves) and total liquidity on hand (108 days) remained somewhat low for the cooperative’s operating profile.