Fitch rates Nebraska Public Power District refunding revs

Reuters

NEW YORK, October 25 (Fitch) Fitch Ratings assigns an 'A+' rating to the

following Nebraska Public Power District (NPPD, or the district) revenue bonds:

--Approximately $122,535,000 general revenue bonds, 2013 series A.

The bonds are scheduled to price via negotiation the week of Oct. 28. Proceeds

will be used to refund outstanding parity bonds, including 2008 series A bonds

issued with a bullet maturity due Jan. 1, 2014.

In addition, Fitch affirms the following ratings:

--$1.8 billion in outstanding general revenue bonds at 'A+';

--$150 million commercial paper notes, series A at 'F1+'.

The Rating Outlook is Stable.

SECURITY

Net revenues of the system, after provision for operation and maintenance

expenses. The 2013 series A bonds will also be secured by a cash funded debt

service reserve.

KEY RATING DRIVERS

REGIONAL WHOLESALE ELECTRIC PROVIDER: NPPD functions principally as a

competitively priced wholesale electric provider serving all or parts of 86 of

Nebraska's 93 counties. The district's vast service area has remained relatively

stable with an agriculture-centered economy that continues to report

exceptionally low unemployment.

PRESSURE FROM EXISTING CONTRACTS: Wholesale contracts with 48 municipalities and

24 public power districts (PPDs) representing nearly half of the district's

total revenue base could begin expiring on Dec. 31, 2021, well before the

majority of the district's outstanding debt matures. The shorter duration of the

contracts exposes NPPD to considerable operating risk that has been well managed

to date, but could ultimately pressure the rating in the near term.

STRONG FINANCIAL PROFILE: NPPD's financial metrics continue to outperform

Fitch's rating category medians. Debt service coverage has averaged 1.5x over

the prior five years, despite a nominal decline in fiscal 2012, while liquidity

has more than doubled over the same period. The district ended fiscal 2012 with

153 days cash on hand, compared to the rating category median of 96 days. Fitch

expects similar results to continue based on the district's financial forecast

through 2020.

DIVERSIFIED POWER SUPPLY RESOURCES: Power supplied by NPPD is derived primarily

from a portfolio of owned generating assets. Available capacity is fairly

diverse by fuel type and number of units with no single resource accounting for

more than 25% of total available capacity. NPPD's coal-fired generating

resources are equipped with environmental controls expected to meet current

environmental regulations, but longer term pressures could require costly

investment.

POTENTIAL RATE PRESSURE: Both wholesale and retail rates have risen considerably

in recent years, which could ultimately limit the district's ability to enact

additional increases in future years, particularly against the backdrop of

contract renewal negotiations with wholesale customers. Wholesale rates are

still considered competitive, but retail rates are somewhat high in comparison

to other regional providers.

SHORT-TERM RATING: The 'F1+' rating on the CP program is supported by NPPD's

ample internal liquidity sources - including a $150 million revolving credit

facility - equal to over 3.0x potential liquidity needs, as of Dec. 31, 2012.

The district's own cash and cash equivalents alone are 1.3x the maximum size of

the CP program.

RATING SENSITIVITIES

LOSS OF WHOLESALE CUSTOMERS AND LOAD: The district's failure to make measureable

near-term progress towards renewing expiring wholesale agreements and

stabilizing long-term demand requirements is likely to result in negative rating

action. Although potential termination remains over eight years away, the

prevailing uncertainty of the district's service requirements is likely to

increasingly frustrate long-term planning efforts.

LOAD REDUCTION: While not anticipated, considerable use of a load release

provision in the wholesale contracts could reduce sales over time, further

narrowing the base on which fixed costs must be recovered.

CREDIT PROFILE

NPPD is Nebraska's largest electric utility, providing retail service to about

89,400 customers and all-requirements wholesale power supply to 51

municipalities, 24 PPDs and one electric cooperative pursuant to long-term

contracts.

The system's considerable service area excludes the state's two largest cities,

Omaha and Lincoln, but nonetheless includes a substantial population estimated

at 600,000. Steady growth in employment throughout the service territory's

predominantly agriculture-centered economy has resulted in exceptionally low

unemployment and overall stability among the district's customer base. The

state's unemployment rate has remained below 5%, including during the recent

economic recession.

EXPIRATION OF WHOLESALE CONTRACTS APPROACHING

Wholesale contracts for 48 of the municipalities and 24 PPDS served by NPPD

representing nearly half of the district's total revenue base expire as soon as

Dec. 31, 2021, if customers elect to provide the required five years notice to

terminate. The contracts also currently permit wholesale customers to reduce

requirements from NPPD by as much as 10% annually with three years written

notice.

No customers have exercised either contract provision to date, but Fitch remains

concerned that sizeable reductions in wholesale requirements could nonetheless

occur, leading to compressed operating margins and ultimately requiring

remaining customers to absorb higher rates needed to support the district's

outstanding fixed obligations. Fitch notes that approximately half of the

district's currently outstanding debt matures beyond 2021 and additional

long-term maturities are anticipated.

The customers' obligation to provide five years notice when terminating

contracts provides some comfort as it allows NPPD time to adjust its power

supply resource plan accordingly and moderate the impact of any load loss.

However, as the termination date approaches prevailing uncertainty related to

the district's service requirements could frustrate long-term resource planning

and result in additional cost and rate pressures.

The district's competitive wholesale rates and reportedly good relations amongst

its customers should aid the district in its efforts to extend the expiring

contacts. Nevertheless, Fitch will continue to monitor the district's ability to

retain its existing wholesale customers and assess management's response to

changes in customer composition and load reduction.

ROBUST FINANCIAL METRICS

Debt service coverage has remained relatively strong, averaging nearly 1.5x over

the prior five years, about even with management's stated target. Liquidity has

more than doubled since 2008, leading to a robust 153 days cash on hand at the

close of fiscal 2012. Other resources, including $47.7 million of additional

borrowing capacity under the district's commercial paper program, $51.4 million

of unused capacity under a revolving credit agreement and a secondary debt

service reserve account that can be used at the board's discretion provide the

district with a substantial 225 days of liquidity.

Financial projections through fiscal 2020 indicate little change in financial

performance. Annual debt service coverage rises slightly in fiscals 2016-2017,

but averages closer to 1.5x through the forecast period. In addition, liquidity

should remain at a sound level given the healthy excess annual cash flow after

satisfying all obligations, including debt service and projected pay-go for

capital projects. Fitch considers the assumptions included in the forecast to be

reasonable and the projected results achievable.

RISING RATES

The board's demonstrated willingness to raise base rates in recent years is

viewed favorably. NPPD's wholesale rates, despite rising by an annual average of

about 8.5% over the prior six years, have remained relatively competitive in

comparison to other regional wholesale systems. Conversely, the district's

retail rates are high compared to other regional retail systems, which could

limit future flexibility. Retail rate increases in recent years have tracked

wholesale rate hikes. No additional retail or wholesale rate increases are

planned for fiscal 2014, and financial projections through fiscal 2020 project

nominal base rate increases averaging about 2% annually.

AMPLE CAPACITY

NPPD meets the majority of its customers' load requirements with a fairly

diverse resource portfolio expected to be sufficient to meet future load growth

for at least the next 10 years. The system's 3,684 MW of total resources

exceeded 2012 peak demand (3,030 MW) by a significant margin. The largest owned

baseload resource is the 1,365 MW, coal-fired, steam-electric generating Gerald

Gentleman Station (GGS) consisting of two units.

Both GGS and the district's other coal-fired station, Sheldon Station, units one

and two, are reportedly positioned well to meet existing and anticipated

environmental regulations. Management believes that existing pollution control

equipment and the planned installation of mercury control equipment at a modest

cost will make the facilities compliant with the Mercury and Air Toxics

Standards (MATS) Rule that takes effect in 2015. Longer term however, more

stringent regulations related to air emissions could require costly investment

at GGS and challenge operations at Sheldon.

Capital costs over the next two years are expected to be sizeable, estimated at

$725 million. However, much of the planned spending will be for SPP authorized

transmission projects, which should be fully funded over time by transmission

revenues derived from SPP market participants. Additional capital costs

extending to 2016-2020 could be as much as $900 million, but will depend largely

on the district's ability to renew its expiring wholesale contracts.

Contact:

Primary Analyst

Christopher Hessenthaler

Senior Director

+1-212-908-0773

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

Secondary Analyst

Alan Spen

Senior Director

+1-212-908-0594

Committee Chairperson

Dennis Pidherny

Managing Director

+1-212-908-0738

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:

elizabeth.fogerty@fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

This rating action was informed by information identified in Fitch's U.S. Public

Power Rating Criteria.

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