Fitch Ratings affirms the 'A' rating on the following Buckeye Power,
Inc. (OH) (Buckeye) revenue bonds:
--$69,790,000 Ohio Air Quality Development Authority, series 2010.
The Rating Outlook is revised to Stable from Negative.
SECURITY
The bonds are secured pursuant to Buckeye's existing mortgage and deed
of trust which includes a lien on substantially all of the cooperative's
assets.
KEY RATING DRIVERS
OUTLOOK REVISED TO STABLE: The change in the Rating Outlook to Stable
from Negative is supported by a meaningful improvement in Buckeye's
financial metrics, which had suffered due to a large capital improvement
program, a dramatic increase in debt, and a slowdown in energy sales.
The improved operating performance is largely attributable to stringent
cost control, modestly higher member sales, and a series of rate
increases. Financial ratios are now generally in line with Fitch's 'A'
rated utility medians.
WHOLESALE POWER CONTRACTS: Buckeye provides wholesale electric service
to a reasonably diverse group of customers served by 25 local
distribution cooperatives, pursuant to all-requirements contracts
through 2057.
ENVIRONMENTAL UPGRADES COMPLETE: Buckeye has invested more than $1
billion to upgrade environmental control systems on its coal-fired units
over the past 10 years to position itself for continued regulatory
compliance. While the strategy was designed to be comprehensive and
forward-looking, the Environmental Protection Agency's (EPA) proposed
Clean Power Plan (CPP) could add further cost and create some risk.
MARKETING EXCESS ENERGY: Buckeye retains a meaningful amount of surplus
energy, which is sold into the PJM Interconnection LLC (PJM) and through
contracted sales. Prices received for capacity and energy can be quite
volatile, which can affect the cooperative's bottom-line performance.
ELECTRIC RATES STABLE: Buckeye's wholesale rate has steadied, following
a period of rapidly rising charges needed to cover costs associated with
its large capital program. Rate stability is forecast to continue for
several more years with increases tied to normal operating costs.
RATING SENSITIVITIES
DOWNTURN IN FINANCIAL PERFORMANCE: While Fitch expects Buckeye Power,
Inc. to maintain the improved financial performance and competitive
rates demonstrated in fiscal 2015 following the completion of its
environmental and plant upgrade program, a significant weakening of
these metrics could result in downward rating action or a negative
revision to the Outlook.
CREDIT PROFILE
Buckeye is a not-for-profit generation and transmission (G&T)
cooperative that supplies wholesale electricity to approximately 390,000
customers through its 25, largely Ohio-based, electric distribution
members. The customer base is primarily residential, equal to 62% of
total energy sales, but a few large industries are served. Members
exhibit reasonable financial profiles.
Energy needs of the members are met through a combination of owned and
purchased resources, with heavy reliance on Buckeye's investment in the
coal-fired Cardinal Station Units 2 & 3 (Cardinal 2 & 3), and an 18%
interest in Ohio Valley Electric Corporation (OVEC) assets. Renewable
power and gas-fired generation provide additional energy sources.
Buckeye is an active participant in the wholesale power market,
primarily through PJM, on both a short-term and intermediate-term basis,
since its current capacity of 2,368 MW is well in excess of members'
demand.
MODIFICATIONS TO AEP AGREEMENTS
The Ohio Public Utility Commission (PUC), as part of a state-wide plan,
previously ordered AEP Ohio generation to be moved from Ohio Power
Company into AEP Genco, an unregulated merchant generating company,
effective Jan. 1, 2014. This reduced Ohio Power's generating capacity
from 10,000 MW to a minimal amount, which resulted in restructured
contracts and obligations of Ohio Power moved to AEP Genco. Buckeye's
new power partner continues to provide, at cost, support services and
the two parties have negotiated and updated corporate guarantees and
contracts. The current station agreement between the two parties, with
certain modifications, extends to 2026. Fitch does not see the impact on
Buckeye from this updated arrangement as significant.
Recently, AEP said it is considering selling its Ohio merchant
generating assets (7,923 MW), which would lead to operational changes
for The company has said that the merchant business is no longer seen as
fitting within its profile, since AEP is largely a regulated utility
while the merchant plants are unregulated and sell power into the
competitive market. The ultimate outcome will hinge on PUC actions and
its support for having the costs of these assets being paid by Ohio
retail customers as a regulated tariff. A final decision is expected by
early 2016.
RATES STABILIZE
Buckeye's wholesale rates rose steadily through fiscal 2012, due
primarily to costs associated with environmental upgrades. The cost per
MWH to members, which was $46.50 in fiscal 2008, increased to $69.80 by
fiscal 2012, when the environmental costs were fully embedded in
wholesale rates. Since that time, rates have remained relatively flat,
and for fiscal 2015 averaged $69.90 per MWH.
Buckeye's forecast assumes modest rate increases, tied to the general
cost of utility operation. Rates include a monthly pass-through of fuel
and transmission costs. Even with these increases, system-wide rates are
expected to remain competitive with other Midwest utilities; however,
rate flexibility could be somewhat constrained given the number of prior
rate increases. Members' average residential rates are currently around
13 cents per KWH.
CAPITAL EXPENDITURES MODERATE
In fiscal 2001, Buckeye undertook a major capital investment program,
which included significant environmental upgrades, improvements to
existing assets and the acquisition of new generation. Buckeye completed
this extensive capital program at a cost exceeding $1.5 billion.
Originally centered on air-quality upgrades at the Cardinal Station, the
program evolved over time to include the installation of
state-of-the-art emission controls at the OVEC units, as well as the
acquisition of additional generating capacity. Following the completion
of these projects, capital investments have moderated substantially,
allowing debt ratios to gradually improve. No new borrowings are
anticipated in 2016. Buckeye continues to monitor the CPP to see what
the impact might be on plant operations and system financials. At this
time, no dollars have been included in the capital budget for new
borrowings.
FINANCIAL RESULTS HEALTHIER
Buckeye's financial metrics continued to improve in fiscal 2015,
following a period of weakness earlier in the decade. Net margins for
fiscal 2015 were above budget, totaling $49.4 million. Buckeye sold
approximately 10.1 million MWHs in fiscal 2015, with approximately 8.6
million MWHs going to members, and about 1.5 million MWHs being sold to
other purchasers, primarily the PJM. Excess energy sales currently
account for about 15% to 20% of Buckeye's total energy sold.
While revenues from third-party sales declined due to lower energy
prices, non-member sales margins still totalled a healthy $8 million
this past year. Budget assumptions for fiscal 2016 include an increase
in member sales to 9 million MWH, with non-member sales expected to
contribute the remainder; budgeted net margins for off-system sales is
$11 million. Through the first six months of fiscal 2016, off-system
results have trailed budget due to unseasonable weather and lower market
clearing prices. Fitch expects that any meaningful shortfall in net
margins would likely be made up by rate adjustments to members, cost
reductions or recovered in future periods.
Helped by improved cash flow, Fitch-calculated debt service coverage
(DSC) for fiscal 2015 rose to 1.33x, compared with roughly 1.00x a few
years earlier. Debt-to-FADS has declined from an inflated 13.2x in
fiscal 2012, to a more reasonable 7.9x in 2015. Equity-to-capitalization
stands at 23.2%. Days cash and investments remains low at 20 days, but
total liquidity on hand has increased to around 200 days, more in line
with Fitch medians.
Buckeye employs a financial strategy that, while focusing on current
financial ratios, emphasizes paying down debt, holding electric rates
stable and planning for future debt issuance. The longer-term forecast
assumes annual net margins of about $40 million, 1% load growth, no
unusual rate increases, with a minimum DSC target of 1.30x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997583
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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