RPT-Fitch rates Nebraska Public Power District refunding revs

Fri Oct 25, 2013 3:16pm EDT

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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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