DALLAS — Moody's Investors Service downgraded the Unified Government of Wyandotte County and Kansas City, Kan., to A3 from A2 ahead of a $186.5 million refunding of utility system and improvement bonds.
The downgrade affects $268 million of outstanding debt and "reflects Moody's view of the Board of Public Utilities' risk profile as it executes its environmental compliance plan to install air quality control equipment at its primary coal-fired baseload plant, Nearman Creek Power Station, and converts its other coal-fired baseload units at Quindaro Power Station to burn only natural gas," analysts wrote.
Standard & Poor's affirmed its A-plus rating on the bonds with a stable outlook.
The utility board for the combined governments plans to upgrade the generating station by installing air quality control equipment including a selective catalytic converter and other equipment, analysts said.
The conversion is part of a settlement reached with the Sierra Club under federal regulations of mercury and toxic elements.
The utility is also converting two coal-fired units at Quindaro to natural gas.
Bond proceeds will refund some of the board's Series 2004 bonds and fund $110 million of the $250 million environmental upgrades to Nearman Creek.
"These investments should also help BPU comply with for future air quality standards like the return of the Cross State Air Pollution Rule (CSAPR) and future carbon emission legislation," wrote analysts John Medina?and Dan Aschenbach.
The Nearman upgrade is estimated to cost $250 million, with the first $110 million funded with the current debt issue. BPU also expects to borrow about $50 million for transmission and distribution system improvements and $13 million for water system improvements.
"All of these new borrowings will increase BPU's debt ratio above the current 49%, but the debt ratio should remain below 65%, per BPU's financial policies," the Moody's analysts said.
Rising debt service costs for environmental compliance are to be recovered with the environmental surcharge, which allows BPU to pass through environmental costs to customers with 120-days' notice rather than requiring city council approval.
"This is a key credit strength given the length of time and politicized nature of raising BPU's base retail rates,"analysts said.
The downgrade came as the Obama Administration announced sweeping proposals June 2 to change regulations of coal-fired power plants, requiring carbon dioxide emissions reductions of 30% by 2030 from 2005 levels.
In response to the EPA's announcement, the American Public Power Authority said that public utilities such as Wyandotte County's should be allowed to continue operating coal-fired plants that have been rehabilitated.
"Regulations have to be considered comprehensively," said APPA president Sue Kelly. "Otherwise we run the risk of high electricity rates for customers, undue revenue losses for utilities that must be paid for by local communities and other adverse economic impacts, causing an unintended backlash that would help no one."
The BPU provides electric and water service within Wyandotte County to about 65,000 electric and almost 50,000 water accounts.