BRADENTON, Fla. - When an attorney in Kentucky suggested that the Paducah Power System file for bankruptcy to get its ratepayers relief from high electric bills, the suggestion made sense to some utility customers.
The suggestion also caught the attention of rating agency analysts monitoring Paducah Power's finances and debt, most of which funds 80% of its power needs from the troubled Prairie State Energy Campus in Illinois.
"Why don't we immediately bankrupt this company and start getting our rates down quickly?" local attorney Mark Bryant suggested to Paducah City Commissioners during a Sept. 23 meeting.
Paducah Power has $32 million in assets and about $600 million in debt, he also said.
Like other communities that bought into Prairie State, Paducah has seen higher than anticipated costs from the coal-fired generating plant in Washington County, Ill., which has been more expensive to build and operate than owners anticipated.
The 1,600-megawatt power station and coal mine, promoted and developed by the for-profit Peabody Energy Corp., was funded with $4.5 billion of debt issued by public utilities in Illinois, Indiana, Kentucky, Missouri, and Ohio to finance their ownership interests.
When problems in Paducah boiled over in recent months, and talk of bankruptcy emerged, it also delayed refinancing of bonds tied to Prairie State, and helped lead to a shake-up in PPS's management.
At the September City Commission meeting, utility officials were asked explain why residents are still seeing high bills and why Prairie State has not reached its promised output potential to help stabilize power rates.
Nurse Vicki Holland, who said she worked three jobs last winter to pay her $900 monthly electric bill and nearly $1,000 mortgage, promised to take legal action if she couldn't pay her bills and lost her home.
Paducah resident Gayle Frye said ratepayers in Batavia, Ill., filed a lawsuit over their costs tied to Prairie State. "What can we do?" she asked commissioners.
Since then, the general manager of the Paducah Power System has resigned as did the chairman of the PPS board.
"It's unfortunate but the talk of bankruptcy makes our task a little more difficult, and its created obstacles to refinancing," said Mark Crisson, who took over as the interim general manager in mid-October.
Rating agency analysts have already called to ask if the utility is considering filing for bankruptcy, Crisson said in a recent interview with The Bond Buyer.
Crisson, former chief executive officer of the American Public Power Association, came out of retirement to help Paducah deal with costs related to the controversial Prairie State project while the utility conducts a search for a permanent manager.
Because of the recent talk about bankruptcy, refinancing the utility debt is not feasible, Hilliard Lyons Managing Director Greg Phillips told the utility board on Sept. 29.
"The markets are aware of the current events in Paducah," Phillips said. "Of particular concern to the markets is the concerted push by a local contingent to seriously entertain filing for Chapter 9 bankruptcy.
"The credit markets are looking for things to settle down, and if it settles down, refinancing may once again become viable," he added.
Crisson said that he hopes PPS can consider a refinancing in the first quarter of next year.
Paducah Power charges a base electric rate, combined with a varying power cost adjustment that together have boosted power bills in order to cover operating and debt costs.
"What we want to do is to try to identify steps we can take to support leaving the PCA at the current level while maintaining debt service coverage and adequate cash balances," Crisson said. "We intend to present a plan in a couple of weeks to achieve those objectives."
The power board has already delayed taking action on a recent power cost adjustment in response to calls for ratepayer relief.
But in not making the adjustment, the board leaves itself in danger of not meeting debt service coverage levels.
Crisson said his plan is aimed at ensuring coverage levels are adequate. It will include potentially refinancing or restructuring PPS's debt obligations, determining if surety bonds can be used to free up cash reserves, bringing in a different company to help the utility manage its wholesale market portfolio, and possibly selling some assets.
Some of the plan, though, depends on stabilizing operations at Prairie State, which Crisson said is out of PPS's control.
Prairie State hired Donald Gaston as the new president and chief executive officer on Oct. 23. Gaston most recently was director of fossil generation for the Public Service Enterprise Group, one of the 10 largest electric companies in the U.S. and New Jersey's oldest and largest publicly owned utility.
Paducah, a city in western Kentucky with a population of 25,000 and the seat of McCracken County, joined nearby Princeton, which has 6,250 residents, to form the Kentucky Municipal Power Agency in 2005.
KMPA was created as a joint action agency by the power boards of the two cities to finance their share of costs in Prairie State.
KMPA issued $491.4 million in 35-year bonds in 2007 and 2010 to finance ownership costs that entitle Paducah to 104 megawatts and Princeton to 20 megawatts from Prairie State. Kentucky Municipal Power's bonds are rated A3 by Moody's and A-minus by Standard & Poor's.
The two cities are responsible for paying debt service on the bonds through agreements with KMPA. Paducah Power also has $164.25 million in outstanding bonds largely issued to build a local generating plant to provide energy needs at peak times.
Some of changes that Paducah Power wants to achieve, such as lowering its costs and billing rates, could be difficult since its costs are higher than most other communities that bought into Prairie State, according to David Schlissel, director of resource planning analysis for the nonprofit Institute for Energy Economics and Financial Analysis.
PPS "bought more power than needed because someone gave them the bright idea that they could sell excess into market and make a profit," Schlissel said in an interview Tuesday. "Other communities have other sources of power so they can blend high Prairie State costs in with lower cost generation sources.
"In Paducah, it's the sole source so they are stuck with Prairie State," he added.
Other factors increase the problems that Paducah faces, including the lower energy output at Prairie State than PPS's consultants predicted at this stage.
PPS must also abide by rules governing the complex wholesale power market, said Schlissel. That means PPS buys electricity from Prairie State at higher rates, than it can sell elsewhere into the power grid.
It also cost more to build Prairie State than originally estimated, which raised borrowing costs, he said, adding, "On average, their debt service is 56% of monthly costs," he said.
Schlissel said he attended the Sept. 23 meeting in Paducah when residents complained about how power costs were affecting them.
"The people of Paducah are really hurting," he said. "Something has to be done to help these people and it has to be a long-term solution."
Because of wholesale power market restrictions, PPS may be limited as to its options for selling energy, said Schlissel, who released
Schlissel also said PPS could consider defaulting on its obligations and negotiating with bondholders to reduce debt costs.
"Bankruptcy is an option, and it's something they need to evaluate," he said.
Crisson, however, does not think bankruptcy is an option because the utility can develop a plan to strengthen its financial position and competitive position, he said.
"I've got to focus on the future," said Crisson. "It'll be a challenge but we've got a good team together, and community leaders understand the need to work through the situation.
"For our part, we're putting together a workable plan, and we'll communicate that to our customers so they know what's going on," he added.
Crisson said he will present PPS's action plan to the utility board on Nov. 12, and he will meet with rating agency analysts to discuss the plan in detail.
"We're going to move forward here," said Crisson. "My priority, when the board approves the plan, will be to communicate it and implement it."
