Fitch Ratings-New York-05 July 2018: Fitch Ratings has upgraded the following bonds issued by Big Rivers Electric Corporation (BREC) to 'BBB-' from 'BB': --$83 million County of Ohio pollution control revenue bonds, series 2010A. The Rating Outlook is revised to Stable from Positive.
SECURITY The bonds are secured by a mortgage lien on substantially all of BREC's owned tangible assets, which include the revenue generated from the wholesale sale and transmission of electricity.
KEY RATING DRIVERS IMPROVED, SUSTAINABLE FINANCES: The rating upgrade to 'BBB-' reflects the solid financial results achieved in fiscal 2017, which included higher liquidity and lower leverage, and expectations for sustained improvement over the near term. BREC's improved performance is largely attributable to the full implementation of the cooperative's risk mitigation strategy and approved rate plan.
MANAGING POWER SUPPLY: The upgrade also reflects BREC's ongoing and successful management of its long resource position with reduced exposure to short term market sales over the next few years. Roughly 90% of BREC's capacity will be committed to serving its members and contracted load by 2020 as a result of existing and announced contracts with regional public power utilities and the closure of marginal generating capacity.
DECLINING LEVERAGE: BREC's leverage profile improved in 2017 as a result of better financial margins than in previous years. Fitch-calculated leverage improved to 9.9x in 2017, and Fitch expects this trend will continue with sustained pro forma financial margins and scheduled debt amortization expected to outpace new debt.
REGULATED UTILITY, SUPPORTIVE REGULATION: BREC and its three member systems are regulated by the Kentucky Public Service Commission (KPSC). However, supportive regulatory policies and successful rate recovery efforts point to a constructive regulatory environment. BREC's last rate order, received in 2014, approved rates at levels that allow it to cover total fixed costs on a self-sustaining basis. On the member level rates are set for full cost recovery.
ADEQUATE LIQUIDITY TO IMPROVE: Unrestricted cash and short-term investments totaled $65 million at fiscal end 2017, or about 70 days cash on hand. Cash balances are expected to improve with forecasts showing greater financial margins by 2019. A $100 million senior secured credit agreement provides added liquidity. RATING SENSITIVITIES
IMPROVED MARGIN AND REVENUE STABILITY: The failure of Big Rivers Electric Cooperative to sustain its improved revenue profile and margins, as well as its reduced reliance on short-term market sales could result in ratings pressure over time.
REDUCED LEVERAGE: Fitch would view positively greater than anticipated reductions in system debt and leverage over time.
CREDIT PROFILE BREC, a non-profit generation and transmission (G&T) cooperative formed in 1961, provides allrequirements wholesale electric and transmission service to three electric distribution cooperatives pursuant to all-requirements contracts through Dec. 31, 2043. These distribution members provide service to a total of approximately 116,000 retail customers located in 22 western Kentucky counties. Financial performance of the three distribution systems is satisfactory and provides sufficient support for the rating.
IMPROVED FINANCIAL MARGINS BREC filed a rate case with the Kentucky Public Service Commission (KPSC) in 2013 requesting an increase in rates to levels that would provide full cost recovery of system obligations. The KPSC granted the new rates in 2014, but the full effect of the increases were not realized until fiscal 2017, as previously set aside reserves were used to reduce rates paid by Members over several previous years.
Financial results improved in fiscal 2017 with Fitch-calculated debt service coverage totaling 1.30x, and coverage of full obligations of 1.19x. Margins were aided by short-term market sales, but such sales comprised a limited portion of total margin and the ratios do not include the small amount of remaining mitigation reserve funds that were still available in fiscal 2017. Liquidity remained near historical levels at 71 days cash.
Member rates have been set to allow for full cost recovery, which is an important rating factor and basis for the investment grade rating. However, despite the ramp-up of newly contracted sales over the next few years, Fitch believes the stronger financial margins are sustainable over the intermediate to longer term.
WELL MANAGED SUPPLY BREC has historically provided capacity and energy to its members through a combination of multiple owned generation stations, one leased plant and power purchases for a total resource base of 1,352 MW in 2017. After the loss of load attributable to the two large aluminum smelters leaving the system, system peak demand has declined to around 650 MWs, or roughly half of historical demand. BREC implemented a mitigation plan with the goal of achieving financial savings and benefits that would help lower member rates including aggressively marketing the excess power under intermediate-term contracts and through spot sales in MISO. Existing customer growth coupled with the signing of contracts with Kentucky Municipal Energy Agency (KyMEA, A/Stable), a consortium of Nebraska based utilities, and the recently announced full requirements contracted sales to the city of Owensboro, KY (for 165 MW beginning in 2020) significantly increases intermediate-term contracted sales. In addition, BREC idled the 443 MW coal-fired Coleman Station and terminated the lease/contract with the city of Henderson, KY (187 MW as of June 1, 2018), reducing its total capacity to a manageable 10% of total expected peak demand by 2020.
The Nebraska wholesale customers began receiving energy in 2018, but full requirements capacity and energy (85 MW) will phase in over time. The KyMEA contract begins in mid-2019 for 100MW of firm purchase, which is followed by the city of Owensboro's agreement to purchase full requirements from BREC in mid-2020.
IMPROVING LEVERAGE, MANAGEABLE CAPEX BREC's leverage profile is elevated but improving. At Dec. 31, 2017, BREC had approximately $820 million of total debt outstanding, including $20 million in outstanding lines of credit. All of the outstanding debt consists of fixed rate bonds and loans, maturing no later than 2032 and includes a bullet maturity of $246 million due in 2023. BREC expects to refinance this large payment with long-term, fully amortizing bonds.
Debt has been on a slow decline since 2012. However, Fitch-calculated leverage ratios, which exclude transferred reserve funds from revenue, remained high through 2016. Leverage, as measured by net adjusted debt to adjusted FADS, peaked at over 20.0x in 2015. As reliance on reserve transfers declined through 2017, leverage was a more manageable 9.9x. While total debt is not expected to decline much over the intermediate term, a sustained improvement in financial margins should allow for a continued decline in leverage over time. Equity to capitalization approximated 37% in 2017. Anticipated capital spending through 2022 is estimated to total $174 million and will be funded with a combination of new debt and internal sources.
Contact: Primary Analyst Andrew DeStefano Director +1-212-908-0284
Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004
Secondary Analyst Dennis M. Pidherny Managing Director +1-212-908-0738
Committee Chairperson Joanne Ferrigan Senior Director +1-212-908-0723Additional information is available on www.fitchratings.com