Fitch Downgrades Big Rivers Electric Corp, KY's 2010A Pollution Control Rfdg
Rev Bonds to 'BB'
NEW YORK -- February 6, 2013
Fitch Ratings has downgraded the rating on Big Rivers Electric Corporation's
$83.3 million County of Ohio, KY's pollution control refunding revenue bonds
series 2010A to 'BB' from 'BBB-'.
The Rating Outlook is revised to 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
sale or transmission of electricity.
SPECULATIVE GRADE RISK: The rating downgrade and Outlook revision reflect
Fitch's view that the credit quality of Big Rivers has become increasingly
speculative, following the recent decisions by Alcan Primary Products
Corporation (Alcan) and Century Aluminum Co. (Century) to terminate their
respective power supply agreements with Big Rivers.
SALES DOMINATED BY SMELTERS: Alcan and Century both own and operate large
aluminum smelting facilities served by Big Rivers, through its largest member
Kenergy Corp. Together the two facilities account for approximately 65% and
70% of Big Rivers' total energy sales and revenues, respectively.
INCREASED RELIANCE ON WHOLESALE MARKET: Long-term stability at Big Rivers is
likely to become increasingly reliant on less predictable off-system sales and
related margins following closure of the smelting facilities. The use of cash
reserves will partially mitigate this risk, but prevailing low power prices
will stress results.
ABUNDANT LOW COST RESOURCES: Big Rivers benefits from abundant low-cost
coal-fired power resources and an average wholesale system rate ($39.07/MWh in
2011, net of credits) that is regionally competitive and among the lowest in
SUBJECT TO RATE REGULATION: The electric rates charged by Big Rivers and its
members are regulated by the Kentucky Public Service Commission (KPSC), which
could limit the cooperative's financial flexibility and may delay the timing
or amount of necessary rate increases.
LIQUIDITY SOLID BUT FINANCIAL RESULTS UNCERTAIN: Big Rivers reported cash of
$113.25 million at Sept. 30, 2012, excluding restricted funds available for
member rate mitigation. Funds are available to support operations and may be
used to meet the cooperative's June 2013 scheduled debt maturity ($58.8
million). Longer-term financial forecasts are being developed.
WHAT COULD TRIGGER A RATING ACTION
INABILITY TO FIND ACCEPTABLE PURCHASERS: Extended overreliance on short-term
power sales as a replacement for the Century and Alcan agreements to meet debt
INSUFFICIENT REGULATORY SUPPORT: Inadequate or untimely support by the KPSC
would be viewed negatively.
IMPLEMENTATION OF REASONABLE MITIGATION PLAN: Implementation of a mitigation
plan that maintains reasonable financial and operating stability would be
supportive of credit quality.
Big Rivers provides wholesale electric and transmission service to three
electric distribution cooperatives. These distribution members provide service
to a total of about 112,500 retail customers located in 22 western Kentucky
counties. Kenergy Corporation, the largest of the three systems, is unique in
that its electric load is dominated by two aluminum smelting facilities, owned
and operated by Alcan and Century.
CENTURY AGREEMENT TERMINATED AUGUST 2012
Under the power supply agreements between Kenergy and the smelters, which
expire in 2023, the smelters are required to take-or-pay for specific
quantities of energy, irrespective of their needs. The contracts further
provide for termination on one years' notice without penalties subject to
certain conditions including the termination and cessation of all aluminum
smelting operations at the relevant facilities.
On Aug. 20, 2012, Century issued a notice to terminate its power agreement
with Big Rivers and stated its intent to close its Hawesville, KY smelter.
Century claimed that the smelter was not economically viable despite electric
rates well below the national average.
BIG RIVERS IMPLEMENTS MITIGATION PLAN
Big Rivers began looking into alternative arrangements with other power
purchasers to redeploy its excess generating capacity immediately after the
Century notice, consistent with the mitigation plan previously developed by
management to address the potential loss of aluminum smelter load. In
addition, Big Rivers has also filed for an increase in rates with the Kentucky
Public Service Commission to eliminate anticipated short-falls in revenue as a
result of the loss of the Century smelting load. The filing, submitted on Jan.
15, 2013, requests an increase in total revenue of $74.5 million or 21.4%.
ALCAN FOLLOWS WITH TERMINATION NOTICE
Alcan delivered notice to Big Rivers' on Jan. 31, 2013 of its decision to
terminate its power supply agreement noting, in particular, the Jan. 15, 2013
rate filing and anticipated increase in electric rates. Similar to the Century
notice, Alcan stated that the planned rate increase would make the smelting
facility in Robards, KY unprofitable, and that all smelting operations would
be ceased at the end of the one-year notice period.
Closure of the smelting facilities has significant potential implications for
Big Rivers, which has acknowledged that the termination notices are valid.
Besides the impact of the loss of some 1,400 plant workers, the remaining
residential and commercial customers of Big Rivers will most likely have to
absorb meaningfully higher rates, with the increase reflecting the amount,
pricing and contractual provisions of surplus power sold to new customers.
Big Rivers has redoubled its efforts to secure alternative power supply
customers in the wake of the Alcan notice, but future firm contractual
arrangements are unlikely over the near term. As a result, it is expected that
Big Rivers will seek to modify its request for rate relief from the KPSC to
reflect the loss of the full smelter load over time.
Fitch notes that Big Rivers and Kenergy have also reportedly entered into
negotiations with Century to enter into an agreement to assist Century to
access market power in order to keep the smelting operations open beyond Aug.
20, 2013. Alcan has requested a similar accommodation. Fitch expects that any
such accommodation would be part of broader plan to address the operating and
financial effect on Big Rivers
FUTURE FINANCIAL RESULTS UNCLEAR
Big Rivers margins are expected to remain adequate to service financial
obligations through at least August 2013 since both Century and Alcan remain
obligated to make all required payments to Kenergy. For the nine months ended
Sept. 30, 2012, Big Rivers reported operating revenue, earnings before
interest, taxes and depreciation and net margins, that were all largely in
line with budget, and the same nine month period through 2011.
Positively, Big Rivers reported cash and cash equivalents of $113.25 million
at Sept. 30, 2012, excluding additional amounts held as special, restricted
funds available for member rate mitigation. Big Rivers' unrestricted funds are
available to support operations and may be used to meet the cooperative's June
2013 scheduled debt maturity ($58.8 million).
As time passes, however, it will be necessary for Big Rivers' to develop and
implement a revised business and financial plan that captures the related
regulatory decisions, contractual negotiations and anticipated revenue
volatility, and for Fitch to assess the impact on the cooperative's ability to
meet scheduled debt service payments.
For additional information on the rating, see Fitch's report, 'Big Rivers
Electric Corporation', dated Aug. 31, 2011.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this
action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria'(June 12, 2012);
--'Big Rivers Electric Corporation'(Aug. 31, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
Big Rivers Electric Corporation
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Alan Spen, +1-212-908-0594
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Dennis Pidherny, +1-212-908-0738
Christopher Hessenthaler, +1-212-908-0773
Elizabeth Fogerty, New York, +1 212-908-0526
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