News Column

Fitch Rates Nebraska Public Power District's 2013 Series A Rfdg Revs 'A+'; Affirms CP at 'F1+'

June 2, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A+' rating to the following Nebraska Public Power District (NPPD) revenue bonds:

--Approximately $202.2 million general revenue bonds, 2014 series A;

--Approximately $24.5 million general revenue bonds, 2014 series B.

The bonds are scheduled to price via negotiation the week of June 9. Proceeds of the 2014 series A and series B Bonds will be used to finance certain capital projects of the district, refund outstanding parity bonds (2005 series A, B-1, B-2 and C and 2006 series A) for cost savings, fund the primary debt service reserve requirement and pay financing costs.

In addition, Fitch affirms the following ratings:

--$1.695 billion in outstanding general revenue bonds at 'A+';

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

The affirmation of the CP notes considers the anticipated effectiveness of a new $150 million revolving credit agreement with U.S. Bank National Association (rated 'AA-/F1+', Stable Outlook) and State Street Bank and Trust Company (rated 'A+/F1+', Stable Outlook).

Fitch also assigns an 'A+' rating to the CP bank note, which is a promissory note evidencing NPPD's obligation to the banks for any draws made on the new revolving credit facility.

The Rating Outlook is Stable.

SECURITY

General revenue bonds are secured by net revenues of the district's electric system (the system). The 2014 series A and series B bonds will also be secured by a cash funded debt service reserve.

The CP notes are secured by funds pledged under the resolution, including net revenues of the district. The notes are subordinate to the pledge securing NPPD's approximately $1.7 billion of outstanding general revenue bonds.

KEY RATING DRIVERS

REGIONAL WHOLESALE PROVIDER: NPPD functions principally as a competitively priced wholesale electric provider serving all or part 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 EXPIRING CONTRACTS: Wholesale contracts with 48 wholesale municipalities, 24 public power districts (PPDs) and one electric cooperative 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 duration of the contracts exposes NPPD to considerable operating risk that has been well managed to date but could ultimately pressure the rating in coming years.

STRONG FINANCIAL PROFILE: Debt service coverage has remained at a healthy level, averaging 1.5x over the prior five years, while liquidity has more than doubled over the same period. The district ended fiscal 2013 with 188 days cash on hand, well above 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 and purchased power agreements. 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 controls expected to meet environmental regulations, although longer-term pressures could require costly investment.

ROBUST LIQUIDITY: 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 approximately 4.2x potential liquidity needs, as of March 31, 2014. The district's own cash and cash equivalents provide .87x the maximum size of the CP program.

RATING SENSITIVITIES

LOSS OF WHOLESALE CUSTOMERS: The district's inability to make measureable near-term progress towards renewing expiring wholesale agreements and stabilizing long-term demand requirements will likely result in negative long-term and short-term 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 the 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 89,600 customers and all-requirements wholesale power supply to 51 municipalities, 24 PPDs and one electric cooperative pursuant to long-term contracts.

The district'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, 24 PPDS and one electric cooperative 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.

While only three customers have exercised either contract provision to date, Fitch remains concerned that sizeable reductions in wholesale requirements could nonetheless ultimately occur, leading to compressed operating margins and ultimately requiring remaining customers to absorb higher electric 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, and improving to 1.7x in fiscal 2013. Management prudently targets a 1.5x coverage ratio. Liquidity has more than doubled since 2008, leading to a robust 188 days cash on hand at the close of fiscal 2013. Other resources, including $47.7 million of additional borrowing capacity under the CP program, $51.4 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 260 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 been similar to adopted wholesale rate hikes. No additional retail or wholesale rate increases were enacted 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 2013 peak demand (2,873 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. However, in the longer term more stringent regulations related to air emissions could require costly investment at GGS and challenge operations at Sheldon.

REPLACEMENT REVOLVING CREDIT FACILITY

The 'F1+' rating on the CP program is supported by NPPD's internal liquidity, which includes an existing $150 million revolving credit facility provided by The Bank of Nova Scotia ($100 million) and U.S. Bank National Association ($50 million), as well as additional own cash and investments. The credit facility, which by resolution is sized to the maximum authorized amount of the CP notes, is available to cover principal payments if rollover proceeds are insufficient to pay amounts due at maturity.

In advance of the existing revolving credit agreement's Aug. 1, 2014 expiration, a new credit agreement with U.S. Bank National Association ($75 million) and State Street Bank and Trust Company ($75 million) will become effective on July 1, 2014. The new facility will similarly be available to cover principal payments if rollover proceeds are insufficient to pay commercial paper amounts due at maturity.

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.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'U.S. Public Power Peer Study Addendum - February 2014' (Feb. 7, 2014);

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

U.S. Public Power Peer Study Addendum -- February 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832639

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Fitch Ratings

Primary Analyst

Christopher Hessenthaler

Senior Director

+1-212-908-0773

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Alan Spen

Senior Director

+1-212-908-0594

or

Committee Chairperson

Dennis Pidherny

Managing Director

+1-212-908-0738

or

Media Relations:

Elizabeth Fogerty, +1-212-908-0526 (New York)

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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