THIN ICE Bond publication article underscores PPS problems A recent article about Paducah Power System in a publication for bond investors offers some new insights into the local utilitys predicament, and raises some concerns. In fact it suggests Paducah Powers financial situation may be more tenuous than has generally been reported. Specifically, the article in The Bond Buyer suggests that the recent decision by PPS not to raise its Power Cost Adjustment charge (PCA) has put the utility at risk of violating bond covenants on debt service coverage. The PCA is an add-on charge to the base rates charged Paducah Powers customers. It is a product of Paducah Powers star-crossed investment in the Prairie State Energy Campus. PPS sells power it gets from its interest in Prairie State and uses the proceeds to buy power for PPS customers. Because Prairie State is not producing the amount of power that developers had promised, and because PPS gets a lower price for the power it sells from Prairie State than what it pays to buy power for its customers, it has been forced to assess the PCA to make up for its losses. The PCA surcharge has at times exceeded 30 percent of the base, stoking furor among Paducah customers, who now pay some of the highest electric rates in the state. A formula PPS uses to calculate the PCA called for another increase in October, but the utilitys board opted not to put it into effect. The Bond Buyer article says that, in not making the adjustment, the board leaves itself in danger of not meeting debt service coverage levels. The article goes on to say that PPS is considering taking on more debt in the form of surety bonds as a way to free up cash. It quotes PPS Interim General Manager Mark Crisson as saying, What we want to do is to try to identify steps we can take to support leaving the PCA at the current level while maintaining debt service coverage and adequate cash balances. We intend to present a plan in a couple of weeks to achieve those objectives. We dont find that encouraging. If we read it correctly what it says is the best PPS hopes to achieve through financial engineering is holding rates at the current level. While that may seem better than the alternative, rates at the current level are not tolerable. A story in the Sun last week detailed the impact the current rates are having on local businesses. Baptist Health Paducah has seen its power bill increase by $800,000 this year due to rate increases and PCAs Paducah Power has already imposed. Local businessman David Perry was forced to shut down a laundromat his company has operated since the 1950s due largely to the soaring power costs. He says he is considering relocating his dry cleaning facility outside the city as well because of the high power rates in the PPS service area. We suppose you have to start somewhere but in the end just stabilizing rates is not enough. If businesses start shutting down or leave the city because rates are prohibitive - as is already beginning to happen - a sort of death spiral begins, as fewer and fewer customers force the utility to keep raising rates to make ends meet. The magnitude of this crisis is hard to overstate. Another interesting tidbit in The Bond Buyer article has to do with PPS little-used peaking power plant. The plant has long been represented and reported as an investment of $100 million. Turns out its a lot more than that. According to the article, PPS has $164.25 million in outstanding bonds largely issued to build the peaking plant. We have in the past urged PPS to retain experts to sell the peaking power plant. As it stands it is a $160 million stranded asset. Well further opine that if PPS cannot operate this plant profitably (right now it barely operates it at all) and cannot sell it at a price that substantially retires its bonded indebtedness, then PPS truly is bankrupt. If so it should face that reality and act accordingly. PPS does say it will present a recovery plan to the community soon, and we await that with interest. But we continue to believe in the end PPS must restructure, at the very least shedding assets like the peaking plant. Stabilizing rates at current levels is not enough. The utility must substantially reduce its debt. Thats the only route to permanent rate relief.
Posted on: Tue, 11 Nov 2014 14:15:52 +0000
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