BRADENTON, Fla. — Fitch Ratings placed the A-minus ratings of the Paducah Power System, Ky., on rating watch negative citing to the system's constrained financial position and reliance on the troubled Illinois Prairie State Energy Campus.
The action affects $153 million in 2009A revenue bonds and $1 million in 2010 refunding revenue bonds mostly issued to build a local generating plant to provide energy needs at peak times.
"The negative rating watch reflects PPS's constrained financial position and charged operating environment that could limit the system's return to stability," analyst Ryan Greene said in a report Monday. "An October 2014 rate freeze that remains in effect exacerbates PPS's financial challenges."
Fitch said that base rate increases from November 2012 until April 2014, intended to align with PPS's cost of service, have not sufficiently supported system metrics at previously projected levels.
In October, the power board voted against implementing a quarterly power cost adjustment after public outcry over high electric rates. One local attorney called for the utility to file for bankruptcy in order to obtain relief. The controversy led to the resignation of PPS's general manager and several board members.
Fitch said the failure to implement the power cost adjustment resulted in a $472,000 revenue shortfall compared with what would have otherwise been collected that month.
The shortfall represents 3.2% of funds available for debt service.
"This compounds lackluster unaudited fiscal 2014 results suggesting near 1.2 times debt service coverage and 14 days cash on hand by Fitch's calculation," Greene said. "Fitch's comparable A-minus rating category medians are 1.6 times and 79 days, respectively."
PPS's main source of power comes from a take-or-pay contract with the Kentucky Municipal Power Agency, which Paducah Power and Princeton formed to issue $491.4 million in 35-year bonds to finance a 7.82% interest in the Prairie State project.
Development of the Illinois coal plant was troubled by construction delays and cost overruns that drove up the price for energy beyond what public utilities had expected to pay when they bought into the project.
The take-or-pay contract entitles Paducah to 104 megawatts and Princeton to 20 megawatts from Prairie State.
Fitch said Paducah Power's supply is greater than its need by about 50%, including all sources of capacity and a reserve margin.
"This is a concern in a soft power market where off-system sales are unlikely to generate substantial revenues," said Greene. "Moreover, it adds costs to a rate base evidencing below average wealth and employment indicators."
Mark Crisson, former chief executive officer of the American Public Power Association, took over as the interim general manager in mid-October.
Crisson was expected to present an action plan dealing with PPS's high costs to the board on Wednesday.
The utility is also advertising for a permanent general manager.
