Advertisement

IN DEPTH: Can Paducah Power Even Lower Rates?

IN DEPTH: Can Paducah Power Even Lower Rates?
Advertisement
By Matt McClain
Sep. 22, 2014 | PADUCAH, KY
By Matt McClain Sep. 22, 2014 | 11:38 AM | PADUCAH, KY
The Paducah Power Board of Directors met Monday in Paducah to discuss the Prairie State Energy Campus, the power plant that supplies power to Paducah Power System. Ray McLennan, the Power System's Board Chair has stepped down, resigned from the board entirely, and then walked out of the room. You can read more on that meeting by clicking the link at the bottom of this story.



The reason for all the discussions taking place, is the high prices that the just over 20,000 customers of Paducah Power have been paying due to ongoing complications with Prairie State and the demands by customers, Paducah Chamber, and Paducah City Officials for lower electric bills.



Last week, Paducah Mayor Gayle Kaler called for lower electric rates, and changes on the Board of Directors of Paducah Power System. Kaler has the legal authority to replace people on the power company's board, but has stopped short of saying she will do that. Also last week, the Paducah Chamber of Commerce sent a letter to Paducah Power expressing its concern over the high prices, and asking for lower prices.



The call for lower rates, however, might be more difficult than hoped for. If the electric rates are lowered, according to the credit ratings agencies, it could send Paducah Power's credit rating lower, driving up the cost to borrow money in the form of having to pay a higher interest rate, or when refinancing current bonds.  Those higher costs would then have to be paid by passing the costs on to electric customers.



Regarding the Prairie State Energy Campus, there have been several reported hiccups along the way to its completion. So many that in February, 2013, the St. Louis Post-Dispatch reported that Peabody Energy -- the company that originally pitched the idea of Prairie State to electric providers across the Midwest -- is being investigated by the Securities and Exchange Commission (SEC) over the $5 billion plant. The company sold off all but around 5% (less ownership than Paducah Power's roughly 8% stake) in Prairie State. The report says Peabody promised to comply with the investigation. The SEC has yet to release its findings in the investigation. The Prairie State CEO, Peter DeQuattro, resigned abruptly in May, 2014 without a reason being given. A nationwide search has been underway for his replacement. An explosion took place (pictured) at one of the two mega electric generators at Prairie State earlier in 2014, leaving the plant unable to generate half it's reported ability of power generation for weeks.



The original estimate in 2004 for constructing the Prairie State plant was $1.8 billion, according to a report by The Institute for Energy Economics and Financial Analysis. By 2007, the report says the estimated cost rose sharply to over $4 billion, then eventually to the actual cost of around $5 billion sometime in 2010. Throughout that time frame, the Post-Dispatch reports Peabody continually told all the electric providers financing the plant, that it was still a good deal.



Paducah Power System owns a percentage (through KMPA) that's roughly about 8% of the Prairie State Energy Campus. The electric company is responsible for about $441 million through the Kentucky Municipal Power Agency it formed, along with Princeton Power, to help pay for the $5 billion dollar plant in Southern Illinois. Paducah Power is also responsible for $162.1 million in outstanding electric revenue bonds, which also includes construction of Paducah Power's natural gas peaking plant.



The more than $600 million in debt has hurt Paducah Power's credit rating over the past few years.  The debt roughly translates to about $27,200 for each of the roughly 22,000 Paducah Power customers to pay back through their electric rates, BEFORE interest.  In March, 2013, the latest credit rating for Paducah Power, Moody's Investor Services downgraded Paducah Power's credit rating and in a statement said in part:



"The downgrade to A3 from A2 primarily reflects Paducah Power System's increased risk profile now that it has transitioned to being an electric generation owner from a distribution only utility. While the board of PPS has implemented internal financial policies and the system benefits from the enterprise risk management policies of Kentucky Municipal Power Agency (A3/stable), the overall risk profile of PPS is more commensurate with an A3 rating given its current and projected financial and liquidity position. Furthermore, the utility currently has a long power supply profile, low projected load growth, and higher than expected long-term base load power costs. In addition, financial margins are tighter than projected and projected rate increases will drive retail rates even higher than their already above average level compared to other utilities in the region."



The ratings agency went on to say "The rating also factors Paducah's large off balance sheet leverage ($441 million) given its take-or-pay contracts with the Kentucky Municipal Power Agency (KMPA, rated A3/stable), a joint action agency that issued revenue bonds on behalf of its two members to purchase a partial ownership share of the Prairie State Project. The KMPA bonds began to fully amortize in FY 2013. Given minimal load growth, financial margins may be pressured if rates are not adequately adjusted as projected. The rating further considers the expected long-term favorable economics of the Prairie State Project and its strategic importance in Paducah's power supply mix as a reliable long-term base load resource."



"The rating could be downgraded if the utility does not adequately adjust its rates to meet its projected financial metrics. Any narrowing of financial metrics below FY 2012 levels would negatively pressure the credit."



The ratings agency did have some positive things to say about Paducah Power's financial position, and also listed some challenges:



STRENGTHS:



• Unregulated rate setting process with no state or city commission review & near-monopoly role in service area not subject to competition



• No General Fund transfers can be mandated pursuant to state statute



• Stable and primarily residential service area with no customer concentration as the top 10 customers are diverse and account for about 17% to 18% of annual sales and revenues; Paducah (rated Aa3) McCracken County (rated Aa3)



• Demonstrated willingness to raise rates to maintain financial metrics evidenced by rate raising history coupled with board adopted financial policies to meet a minimum a 1.20 times debt service coverage ratio and maintain liquidity above $8.3 million



• Prairie State Project has several unique advantages supporting its long-term economic value, including prepaid and favorably priced coal supply; location of coal reserve and mine near coal-fired generation facility, which eliminates rail transportation risk; and advanced environmental controls, which meet current federal and state standards for pollution control



CHALLENGES:



• Maintenance and continued improvement of internal liquidity position to balance increased risks of generation ownership and current generation profile



• Above average leverage given debt financing of new generation assets, both on and off balance sheet



• Retail rates are above average and are expected to increase further in the next two years



• Significant off balance sheet liability of about $441 million associated with the 104 MW of generation ownership in the Prairie State Project through KMPA



• Concentrated power generation profile with Prairie State accounting for half of capacity and nearly all of annual energy needs



• Maintaining financial metrics at or near current levels given the Prairie State bonds have begun to fully amortize in FY 2013, one year after Paducah's on balance sheet debt began to fully amortize in FY 2012



In past interviews with West Kentucky Star, Paducah Power officials have told us that longer term forecasts for power rates indicate Paducah Power is in a better position aligned with Prairie State, because of all the environmental regulations being forced on the power industry as a whole. Indeed, tougher regulations are being implemented on the power industry by the Federal Government, which according to many experts in the power generating business, is expected to drive up power costs across the nation.



The EPA has implemented "The Clean Power Plan" that they say "cuts carbon pollution." The EPA says on their website: "Power plants are the largest source of carbon pollution in the U.S., accounting for roughly one-third of all domestic greenhouse gas emissions. Nationwide, the Clean Power Plan will help cut carbon pollution from the power sector by 30 percent below 2005 levels."



One of the authors of the Institute's report, David Schlissel, is expected to be in attendance at Tuesday evening's Paducah City Commission meeting where Paducah Power General Manager David Clark is expected to address the Commission about the rate issues.



Can Paducah Power's rates be lowered?  While staying as a partial owner of Prairie State, that very difficult question to answer would be technically yes, but according to Moody's, at the very real risk of having the company's credit rating downgraded which would drive up interest rates on borrowed money.  The extra cost in interest rates would then in turn have to be passed on to Paducah Power customers. 



Did Peabody mislead the now owners of Prairie State (the municipal electric companies like Paducah Power across the Midwest that have an ownership stake in the plant)? That remains to be seen in a yet to be released SEC investigation. 



Did Paducah Power make a mistake by gambling that electric rates across the country would rise with all the new EPA regulations going into effect, leaving Paducah with cheaper prices by comparison?  We're all about to find out over the coming few years.







On the Net:

Read more about the SEC investigation from the St. Louis Post-Dispatch by Clicking HERE
Read more about the EPA's New Regulations going into effect by Clicking HERE
Read more about Moody's latest Credit Rating for Paducah Power by Clicking HERE
Read more about the Institute's report on Prarie State by Clicking HERE
Read More about Paducah Power's Board Meeting Monday by Clicking HERE
ADVERTISEMENT
Advertisement


Latest Southern Illinois
ADVERTISEMENT
ADVERTISEMENT

Latest Southern Illinois

Advertisement
ADVERTISEMENT