NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has affirmed the 'BB' rating on Big Rivers Electric
Corporation's$83.3 million County of Ohio, KY's pollution control
refunding revenue bonds series 2010A.
The Rating Outlook remains 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 (BREC) is, and expects to, remain in compliance with all debt
covenants associated with both long-term and short-term debt. BREC's
indenture and the RUS, CFC and CoBank loan agreements require that
margins for interest ratio (MFIR) of at least 1.10x be maintained each
KEY RATING DRIVERS
IMPACT FROM LOSS OF SMELTER AGREEMENTS: Alcan Primary Products
Corporation (Alcan) and Century Aluminum Company's (Century) aluminum
smelting facilities, served by Big Rivers, through its largest member
Kenergy Corp., have historically accounted for approximately 65% and 70%
of Big Rivers' total energy sales and revenues, respectively.
Termination of these agreements has left the generation and transmission
(G&T) cooperative with a significant amount of surplus power. Management
is working to implement a long-term mitigation plan.
INCREASED RELIANCE ON WHOLESALE MARKETS: Long-term financial stability
at Big Rivers will be influenced by the cooperative's ability to make
greater off-system sales, both on a contract basis and in the spot
market. BREC is in the early stages of developing and implementing this
marketing strategy, and has found some success with future, agreed-upon
sales to new utilities and sales into the Midcontinent ISO (MISO).
Available cash reserves will partially mitigate this risk, but low power
prices could stress results.
RATE REGULATED; REQUEST PENDING: Electric rates charged by Big Rivers
and its members are regulated by the Kentucky Public Service Commission
(KPSC). An October 2013 rate order provided BREC with revenues to
largely offset the loss of Century. A second rate order relating to the
loss of Alcan is currently pending. The outcome of this decision could
have a material effect on the cooperative's ability to pay costs,
including debt service.
LIQUIDITY TO DECLINE BUT SHOULD REMAIN SUFFICIENT: Big Rivers reported
unrestricted cash reserves of approximately $107 million at Dec. 31,
2013, excluding $125 million of restricted reserve funds, with a portion
to be used primarily for rate stabilization. Over the next few years,
BREC expects to use the $125 million of restricted reserves to lessen
the impact of rising electric rates due to a reduction in smelter sales;
but overall liquidity should remain satisfactory, between cash and a $50
million line of credit with CFC.
OUTLOOK HINGES ON STABILIZATION OF REVENUES: Resolution of the Negative
Outlook hinges on BREC's ability to stabilize revenue through
KPSC-approved rate increases and the implementation of a successful
mitigation plan. Revenue stability achieved through rate increases and
long-term power sales agreements would likely stabilize the Outlook,
while a reliance on volatile short-term sales and possible insufficient
regulatory support would put downward pressure on the rating.
Big Rivers provides wholesale electric and transmission service to three
electric distribution cooperatives. These distribution members provide
service to a total of about 113,000 retail customers located in 22
western Kentucky counties. Kenergy Corporation, the largest of the three
systems, serving 55,200 members, is unique in that its electric load and
revenues have been dominated by two large aluminum smelters. BREC is a
member/owner of ACES Power Marketing, which supports its energy
CENTURY AND ALCAN TERMINATE AGREEMENTS
Under the power sales contracts between Kenergy and the smelters, which
were to expire on Dec. 31, 2023, the smelters had been required to
take-or-pay for specific quantities of energy, irrespective of their
needs. The contracts further provided for termination on one years'
notice without penalties, subject to certain conditions including the
termination and cessation of all aluminum smelting operations at the
On Aug. 20, 2012, Century issued a notice to terminate its take-or-pay
power contract with Kenergy and Big Rivers stating its intent to close
its Hawesville, KY smelter. As a result of the termination notice, Big
Rivers began implementing its formal load concentration mitigation plan
which included, filing for a $68.6 million general rate increase;
pursuing replacement load for Century's 482 MW; and negotiating an
arrangement to allow the Hawesville smelter to purchase power at market
price and remain in operation.
On Jan. 31, 2013, Alcan delivered notice to Big Rivers' of its decision
to terminate its power supply agreement with Big Rivers, noting, in
particular, a Feb. 28, 2013 rate filing by Big Rivers, and sizeable
anticipated rate increases. Alcan stated that the planned rate increase
would make its smelting facility unprofitable, and that all smelting
operations would be ceased at the end of the one-year notice period.
As a result of this second termination notice, Big Rivers expanded its
effort in implementing its mitigation plan which included filing for a
$70.4 million general rate increase; pursuing replacement load for
Alcan's 368 MW; developing a 2014 budget and 2015-2017 financial plan
with Alcan buying its power at market based rates; and using reserve
funds to offset the requested rate increase until those funds are
depleted in April 2015.
CENTURY AGREES TO ACQUIRE ALCAN ASSETS
On April 29, 2013, Century announced that its wholly owned subsidiary
had entered into a definitive agreement to acquire substantially all of
the assets of the Sebree aluminum smelter from a subsidiary of Rio Tinto
RATE RELIEF GRANTED; ADDITIONAL RELIEF PENDING
On Oct. 29, 2013, a final KPSC order in the Century case was issued
which granted $54.2 million of the final requested $68.6 million, equal
to a 15.5% base rate increase. Fitch views the KPSC's decision as
supportive of credit quality as the decision will enhance cost recovery.
Higher rates related to the second $70.4 million rate request (Alcan
case) were put into effect by Big Rivers on Feb. 1, 2014, subject to
refund. The KPSC has until April 27, 2014 to issue a final rate order.
An equally supportive decision will be necessary to stabilize Big
Rivers' financial profile.
MITIGATION PLAN-ADDITIONAL ELEMENTS
Big Rivers provides capacity and energy to its members through a
combination of four-owned generation stations, one leased station and
contracted capacity from the Southeast Power Administration (SEPA). The
generating stations include the Coleman Station (Units 1, 2 and 3),
Wilson Station (Unit 1), Green Station (Units 1 and 2) and Reid (Units 1
and 2). Net capacity of owned generation is 1,444 megawatts (MW), net
capacity of leased generation equals 197 MW, with contracted capacity
from SEPA at 178 MW. Eight of the nine units are scrubbed. Peak demand,
net of smelter demand, was recently at 800 MW. BREC is a member of MISO,
since December 2010.
With a combined net capability of 443 MW, the Coleman plant is located
next to the Century smelter. With the new smelter agreements, Big Rivers
will no longer have an immediate market for the 482 MW of power that up
to now has been sold to Century Kentucky. Since the production cost of
Coleman is among the highest on Big River's system, the cooperative has
decided to temporarily idle the Station through 2014, or until market
BREC is also considering idling the Wilson Station (417 MW), given the
smelter's plan to rely on alternative power supply purchases. BREC's
desire to idle the two plants, rather than employ a shutdown strategy,
is that it would provide the coop with greater flexibility to sell power
from these units when demand is sufficient and pricing favorable; such
as during the recent cold wave, pending the ability to enter into
longer-term supply arrangements. Management expects to rely mostly on
power from the Green Station, a two unit, 454 MW station, which has the
ability to burn high sulfur, low cost coal.
As a member of MISO, Big Rivers was required to submit its revised
generation plan to MISO for approval. Upon review, MISO determined the
Coleman plant was needed for reliability and designated Coleman as a
system support resource. The associated cost of keeping the Station open
is being recovered from Century.
Big Rivers has held discussions with a number of interested parties
about possibly contracting for a portion of the cooperative's available
capacity. Some future-dated transactions have been contracted for. BREC
is also a finalist in several power RFP's. Even with the temporary
idling of the Coleman and Wilson stations, BREC expects to have 156 MW
of available capacity, which should be sufficient to meet their the
members' needs through 2021.
Part of the mitigation plan is a reduction in staff. The majority of
these employees worked at the power stations.
WHOLESALE AND MEMBER RATES WILL INCREASE
Non-smelter wholesale member rates (blended rate) approximated $39 per
MWH in 2011 and $42.2 per MWH in 2012. Preliminary results were $48.1
per MWH in 2013, and are forecasted at $60.1 per MWH in 2014, before
rising to about $99 per MWH by 2017, reflecting the loss of the smelter
CAPITAL EXPENDITURES MODERATE
Estimated costs for environmental compliance have recently been reviewed
and reduced from the prior estimate of $285 million. Elimination of
expenditures for Cross State Air Pollution Rule (CSAPR) provided a major
cost saving. The total capital cost for MATS compliance plan is now
estimated at $24 million. An application to RUS to obtain long-term
financing for MATS was submitted in June 2013. Capital expenditures
remained low at $29.7 million in 2013, versus $39.8 million in 2012.
FINANCIAL RESULTS ADEQUATE
Preliminary results for calendar year 2013 show total operating revenues
of $552.3 million, net margins of $8.6 million and a times interest
earned ratio (TIER) of 1.20x. This compares with 2012 of revenues
totaling $568.3 million, net margins of $11.3 million, TIER of 1.25.
This is in line with KPSC's allowed TIER allowance of 1.20x.
Expenditures in 2013 include all severance costs related to employee
Results for 2013 benefited from higher revenues associated with rates
approved by the KPSC, higher off-system sales and patronage capital
associated with the 2012 RUS Series 'A' note refinancing. MWH sales to
non-members increased significantly, together with a sizeable increase
For 2014, which assumes reduced sales by Big Rivers to the smelters and
100% of the current Alcan rate case, revenues would total $374.3
million, net margins are estimated at $6.8 million and TIER would equal
1.16x. Financial results and ratios beyond 2014 are expected to be
designed to provide a balance between reasonable financial strength and
competitive electric rates. DSC is projected to be around 1.40x in 2013
and is expected to approximate 1.25x or slightly higher in future years.
Long-term debt totaled $854 million as of Dec. 31, 2013, compared with
$845 million the year earlier. The final debt maturity of different
series bonds outstanding ranges from July 2021 to June 2032. In a PSC
order issued on March 26, 2013, Big Rivers' was permitted to pay-off the
$58.8 million in pollution control floating rate demand bonds, series
1983 coming due by using $60 million of July 2012 proceeds from a
secured loan with CoBank. The bonds matured June 1, 2013. BREC plans on
trying to implement further options with RUS to spread out annual debt
Big Rivers was also authorized by the KPSC to use the $35 million
Transition Reserve funds for capital expenditures, rather than having to
keep these funds set aside to pay potential costs associated with a
reduction in loads at the smelters. There currently remains $11 million
in this reserve.
Big Rivers has a $50 million line of credit with CFC that expires July
2017. A line of credit with CoBank was terminated by BREC in 2013.
Long-term forecasts assume a balance of about $100 million of cash and
MEMBERS' FINANCIALS REMAIN STEADY
Kenergy is the largest of the three member systems, reflecting service
to the smelter loads. Excluding the smelters, most of Big Rivers'
service is provided to retail customers and a few large industrials.
Member debt service coverage for the years 2010-2012 approximated 1.60x,
with equity to capitalization approximating 35%. The most recent
residential retail rate increase for the three systems ranged between
15.9% and 18.3% in August 2013, and captured the planned loss of
revenues from the Century smelter. Overall profits from the smelter
sales were relatively modest, but closure of the two facilities could
have had an impact on the surrounding communities' economies.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--2014 Outlook: U.S. Public Power and Electric Cooperative Sector, Dec.
--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013);
--'U.S. Public Power Peer Study Addendum -- June 2013' (June 13, 2013).
Applicable Criteria and Related Research:
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm
U.S. Public Power Peer Study -- June 2013
U.S. Public Power Peer Study Addendum -- June 2013
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Alan Spen, +1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
York, NY 10004
Relations, New York
Elizabeth Fogerty, +1-212-908-0526
Source: Fitch Ratings