Standard & Poor’s on Friday revised its outlook to negative from stable on $83.3 million pollution control refunding revenue bonds issued for Big Rivers Electric Corp., Ky. At the same time, S&P affirmed its BBB-minus issuer-credit rating on the cooperative.

The bonds were sold in 2010 by Ohio County, Ky., and the proceeds were used to refund auction-rate securities.

“The outlook revision reflects our concerns about the strength and stability of the utility’s revenue stream following its leading customer’s issuance of a 12-month notice to terminate its power contract,” said S&P analyst David Bodek.

The notice covers Century Aluminum Co.’s smelter, which is required to pay a base energy charge that covers its share of Big Rivers’ fixed and variable costs over the 12-month notice period.

If the smelter plant does not operate during the period, Century must still pay its share of fixed costs. Big Rivers has accepted the termination notice. Bodek said before sending its termination notice, Century claimed that its smelting facilities required significant electric rate concessions to remain viable.

“Although the smelting plant has been operating at levels that exceeded its threshold electric contract requirements, the company cited sharp declines in aluminum prices and [Big River’s] electric rates as factors that are degrading its Hawesville facilities’ profitability,” he said.

The concessions were not accepted because other customers would have to bear the cost. Century accounted for 30% of the utility’s 2011 operating revenues.

“We view the pending loss of Century as having the potential to convert substantial amounts of the utility’s generation capacity into surplus,” Bodek said.

The departure could also shift Century’s costs to remaining customers. Henderson, Ky.-based Big Rivers is a generation and transmission cooperative that produces and procures electricity for sale to three distribution cooperative members, and their 112,900 retail customers.

The smelters entered into take-or-pay power contracts, but they are allowed to terminate their obligations without penalty if they provide a year’s notice and cease operations. Big Rivers will file for rate relief to the Kentucky Public Service Commission to compensate for the loss of Century, which will reallocate costs historically borne by Century to remaining customers by raising their rates.

Bodek said the utility’s remaining smelter, Rio Tinto Alcan Inc., might resist efforts to absorb costs as a result of Century’s departure. Many of the counties that the cooperative serves also have household median income levels that are 20% to 30% below the national median.

Big Rivers is also evaluating shutting down power plants to reduce costs, market exposure, and to mitigate the financial impact on remaining customers.

The utility could also temper the costs if it can remarket some or all of the generation output, Bodek said. It reported $794 million of loans and the outstanding bonds as of June 30, which consisted of.

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