Moody's Investors Service said it downgraded the senior secured rating of $83.3 million of county of Ohio, Ky., pollution control refunding revenue bonds (Big Rivers Electric Corporation project) to Baa2 from Baa1.
Concurrently, the rating for the bonds, which were previously issued by the county on behalf of Big Rivers Electric Corporation (BREC), was placed under review for further downgrade.
The rating actions primarily reflect increased financial and operating risks for BREC due to the August 20, 2012 announcement by Century Aluminum Company (Caa1 senior unsecured; stable) that its subsidiary, Century Aluminum of Kentucky issued a 12-month notice to terminate its power contract with BREC for its Hawesville, Ky., smelter.
In its announcement, Century cited that its smelter is not economically viable with its current power rate and under current market conditions.
"On a combined basis, one of BREC's three member-owners, Kenergy Corp., has been serving two aluminum smelters (Century and Rio Tinto, A3 senior unsecured; stable) comprising roughly two-thirds of BREC's annual energy sales and accounting for just under 60% of its system demand", said Kevin Rose, vice president-senior analyst. "Energy sales to Century alone accounted for approximately 30% of BREC's 2011 electric energy revenues of approximately $562 million", Rose added.
Although Century is required to pay a fixed demand charge for power (482 MW at 98% capacity factor) during the 12-month notice period, it is not required to continue operating the smelter plant. Despite the fact that BREC will continue receiving fixed demand revenues over the next 12 months, the review for possible downgrade will consider the extent to which it can overcome revenue shortfalls to be created by the anticipated loss of a significant portion of its energy load.
Among the possible mitigating steps BREC might take would be using cash reserves established to partially compensate for loss of smelter load; entering into bilateral sales arrangements; making short-term off system sales in the wholesale market; participating in the capacity markets; temporarily idling generation; selling generating assets; and seeking emergency rate increases through filings with the Kentucky Public Service Commission (KPSC).
With respect to the latter possibility, Moody's notes that BREC is among the few electric generation and transmission cooperatives subject to rate regulation, which can sometimes pose challenges in implementing timely rate increases.