Fitch Ratings said Feb. 4 that it affirms its ‘BB’ rating on certain bonds issued by Big Rivers Electric Corp., a western Kentucky power cooperative with one idled coal plant and another that it has considered idling.
The Rating Outlook is Stable for Big Rivers, Fitch noted. 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 and transmission of electricity. The Stable Outlook reflects the beneficial results of Big Rivers’ mitigation plan, which was put in place following the termination of power supply contracts with two large aluminum smelters. Cost reductions, idling of generation, rate increases, and off-system sales and use of reserve funds have combined to provide improved financial stability.
While termination of the smelter agreements has eliminated exposure to volatile smelter sales, it leaves Big Rivers with a significant amount of surplus power for sale, Fitch noted. Some success has been achieved in marketing this power both on a contract basis and into the Midcontinent ISO spot market, but short-term sales expose the cooperative to greater risk. Big Rivers is aggressively pursuing other contract sales opportunities.
Big Rivers and its three member systems are rate regulated by the Kentucky Public Service Commission (KPSC). Rate increases and supportive regulatory policies, in conjunction with the cooperative’s mitigation plan, should allow Big Rivers to meet its near-term financial goals, Fitch said.
Big Rivers, a generation and transmission (G&T) cooperative, provides all-requirements wholesale electric and transmission service to three electric distribution cooperatives pursuant to contracts through Dec. 31, 2043. These distribution members provide service to a total of about 114,000 retail customers located in 22 western Kentucky counties. Kenergy Corp., the largest of the three systems, previously served two large smelters (approximately 65% of G&T revenues), prior to termination of these contracts. This has resulted in a change to Big Rivers’ customer profile which is now more residentially based. Financial performance of the three distribution systems is satisfactory and provides adequate support, Fitch said.
System peak demand, net of smelter load, is now around 700 MW, approximately half of historical demand. Big Rivers is working aggressively to market the excess power under intermediate-term contracts and through spot sales in MISO. Big Rivers has implemented a mitigation plan with the goal of achieving financial savings and benefits that would help lower member rates.
With the end of the smelter agreements, Big Rivers no longer has an immediate market for power from the 443-MW, coal-fired Coleman Station, which began operation in 1969. The plant has been idled and the cooperative continues to evaluate the best use of this facility. Big Rivers has also considered idling Wilson Station (417 MW). However, this more cost-efficient plant continues to operate, since it affords greater operating flexibility and the ability to sell power when demand is sufficient and pricing attractive, Fitch said. Excess capacity and associated energy is sold under contract, through the spot market or retained for future contracted sales.
With the loss of smelter load and revenue, Big Rivers needed to increase its rates and modify its rate structure among its remaining customers. Following KPSC-approved rate increases, wholesale base rates (excluding smelters) now approximate $75 per MWH. By 2020, rates are forecast at about $80 per MWH, and projected to remain fairly steady thereafter. The large industrial rate ‘All-In’ (net) for 2016 is estimated at $63.88 per MWH and for 2020 is estimated at $66.01. Rural retail customers typically pay about 3.5 cents per KWH in addition to the wholesale rate charged.
In 2009, concurrent with the unwinding of a generating asset lease transaction between Big Rivers and E.ON U.S., the KPSC issued rate orders designed to be sufficient to support the cooperative’s financial viability, including the establishment of several reserve funds. These funds will be fully utilized by mid-2016. Thus, Big Rivers’ financial forecast will no longer include these restricted reserves. Once the reserves are fully utilized, the average rural rate is expected to be approximately 11.6 cents per KWH. Management hopes to maintain member rate stability by crediting future surplus revenues to member rates.
While Big Rivers believes rates now in place are sufficient to sustain business operations and maintain reasonable financial ratios, a comprehensive energy sales program remains an important part of the cooperative’s business model.