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.
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
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
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
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.
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.
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
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
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
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.
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.
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.
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:
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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