Fitch Ratings said Feb. 5 that it has affirmed some Big Rivers Electric senior secured bonds at ‘BB’ and that the Rating Outlook is revised to Stable from Negative.
The bonds are secured by a mortgage lien on substantially all of the Big Rivers’ owned tangible assets, which include the revenue generated from the wholesale sale or transmission of electricity. Big Rivers Electric (BREC), which operates in western Kentucky and relies mostly on coal-fired power, has had to work out a “mitigation” plan recently, that includes the idling of one of its coal plants (Coleman), to make up for the loss of power sales to local aluminum smelter operations that have been able to go to the open market for their power.
Fitch said: “The Outlook revision largely reflects the positive effects of Big Rivers’ mitigation plan, which was implemented following the termination of power supply contracts by Alcan and Century Aluminum (approximately 65% of the cooperative’s revenues). Plan-driven cost reductions, idling of plants, rate increases, off-system sales and use of reserve funds have improved financial viability.”
Fitch added: “While termination of the smelter contracts eliminates exposure to the vagaries of commodity-based products, it leaves BREC with a significant amount of surplus power for sale, both on a contract basis and in the spot market. BREC has found some success with contractual sales to other utilities and sales into Midcontinent ISO (MISO), and it continues to seek other sales opportunities.”
Big Rivers and its three members’ electric rates are regulated by the Kentucky Public Service Commission (KPSC). Recently approved rate increases and broadly supportive regulation by the KPSC, along with utility initiatives, should allow BREC to achieve satisfactory financial performance, Fitch wrote. No further rate increases are currently planned.
Continued positive implementation of the mitigation plan, which reduces over reliance on short-term energy sales and provides long-term financial stability, could result in a rating upgrade, said Fitch. Insufficient or untimely support by the KPSC would be viewed unfavorably.
Big Rivers, a generation and transmission cooperative (G&T), provides all-requirements wholesale electric and transmission service to three electric distribution cooperatives pursuant to contracts through Dec. 31, 2043. The distribution members provide service to a total of about 114,000 retail customers located in 22 western Kentucky counties. Senior staff has experienced some recent changes, but appear to be well versed in cooperative and utility matters, Fitch said.
Capacity and energy is provided to the members through a combination of five owned generation stations, one leased plant and purchased power. Net capacity of owned generation equals 1,444 MW.
Part of the mitigation plan assumed that certain generating units would remain idle when market prices did not support the cost of generating. Big Rivers’ revenue requirements in its rate cases assumed that both the Coleman and Wilson coal-fired plants would be idled once the smelters are no longer served. The cooperative continues to evaluate forward bilateral sales agreements, wholesale power contracts and capacity market participation, in light of the 850 MW loss of load to the smelters. The cooperative has sold capacity and energy forward from Wilson under multiple agreements through mid-2016 and it has contracted with a Nebraska consortium to sell 67 MW of power beginning in 2018 and 2019. So Wilson has been reprieved from being idled. BREC and its members have established an economic development incentive rate that is being offered to new and existing businesses.
Big Rivers has also paid off debt, implemented cost-cutting measures, deferred certain maintenance (now caught up), re-negotiated fuel contracts, improved heat rate performance and reduced employee benefits to mitigate the effect on customer rates. It sought and received two rate adjustments to address revenue shortfalls caused by the smelter contract terminations and believes the rate increases will be sufficient to allow the cooperative to viably operate without replacement load, should that become necessary, Fitch said.
The member cooperatives are Jackson Purchase Energy Corp., Kenergy Corp. and Meade County Rural Electric Cooperative Corp.