Fitch gives thumbs up to NPPD revenue bonds

Fitch Ratings said Jan. 16 that it has assigned an ‘A+’ to certain Nebraska Public Power District (NPPD) revenue bonds.

At the same time, Fitch promised to keep an eye on several NPPD contracts that are scheduled to expire by the end of 2021.

The rating applies to about $171m general revenue bonds, 2015 series A.

The bonds are scheduled to price via negotiation on or about Jan. 21, 2015. Proceeds of the 2015 series A bonds will be used to refund outstanding parity bonds (2005 series C, 2006 series A, 2007 series B, 2008 series B, 2009 series C, and 2012 series C) for cost savings, fund the primary debt service reserve requirement and pay financing costs.

In addition, Fitch affirmed the rating for $1.7bn in outstanding general revenue bonds at ‘A+’. The outlook is stable, Fitch said.

The ratings service noted that NPPD functions principally as a competitively priced wholesale electric provider serving directly or indirectly 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.

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,” Fitch said in its Jan. 16 rating.

The contracts also currently permit wholesale customers to reduce requirements from NPPD by as much as 10% annually with three years written notice, Fitch said.

While only five customers (accounting for less than 4% of NPPD’s total revenues) 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.

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,” Fitch said.

But NPPD has a strong financial profile and a diversified power generation portfolio, Fitch stated.

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.

The system’s 3,626 MW of total resources exceeded the 2014 estimated peak demand (2,807 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 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 the Clean Power Plan proposed rule could require costly investments at both plants.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.