Fitch Rates Nebraska Public Power District's 2016 General Revs 'A+'; Outlook Stable

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

--Approximately $70,855,000 general revenue bonds 2016 series C;

--Approximately $42,425,000 general revenue bonds 2016 series D;

--Approximately $56,610,000 general revenue bonds 2016 series E (Taxable).

Proceeds of the 2016 series C and D bonds will be used to finance certain capital improvement projects of the district, refund outstanding commercial paper notes and pay issuance costs. The 2016 series E bonds will be used to fund a portion of the district's postemployment benefits costs and pay issuance costs.

In addition, Fitch has affirmed the following ratings:

--$1.6 billion in outstanding general revenue bonds at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of NPPD's electric system (the system). The 2016 series C, D and E 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 directly or indirectly all or parts of 86 of Nebraska's 93 counties. NPPD's expansive service area has remained relatively stable with an agriculture-centered economy that continues to report exceptionally low unemployment.

RENEWAL OF WHOLESALE CONTRACTS: Long-term wholesale contracts with the vast majority of NPPD's wholesale customers, including 37 municipalities, one cooperative and 23 public power districts (PPDs) representing nearly half of NPPD's total revenue base were recently extended for an additional 20 years. Extension of the contracts is considered by Fitch to be positive development as it should provide greater certainty related to long-range resource planning efforts, and stabilize future energy sales and related revenues.

SOLID FINANCIAL PROFILE: Fitch calculated debt service coverage (DSC) continues at a healthy level, averaging 1.61x over the prior six years, while liquidity has more than doubled over the same period to a more robust 250 days of cash on hand at the close of fiscal 2015. Both metrics compare well to Fitch's median ratios of 1.34x and 109 days cash for comparably rated wholesale systems. Projected year-end financial results for 2016 show debt service coverage approximating 2.0x while liquidity declines to a still healthy level in excess of 150 days of cash.

DIVERSIFIED POWER SUPPLY RESOURCES: Power supplied by NPPD is derived from a fairly diverse portfolio of owned generating assets and purchased power agreements expected to be sufficient for the long term. Available capacity is varied 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 existing environmental regulations. Potential costs to comply with the Environmental Protection Agency's (EPA) Clean Power Plan (CPP) are well beyond the current planning period but could ultimately be meaningful.

RATING SENSITIVITIES

IMPROVING FINANCIAL TRENDS: Continuation of Nebraska Public Power District's current trends, including steady increases in available liquidity, maintenance of solid cash flow metrics, gradually improving leverage ratios and preservation of competitive wholesale and retail rates would be viewed favorably and should provide needed flexibility to comply with future environmental regulations.

LOAD REDUCTION: Considerable use of the load release provision included in the recently signed wholesale contracts, while not anticipated, could reduce energy sales over time, further narrowing the base on which fixed costs must be recovered and resulting in downward rating pressure.

CREDIT PROFILE

STABLE SERVICE TERRITORY

NPPD is Nebraska's largest electric utility, operating principally as a wholesale system providing all-requirements power supply to 46 municipalities, 24 PPDs and one electric cooperative pursuant to wholesale power 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 NPPD's customer base. The state's unemployment rate has remained well below 5%, including during the most recent economic recession.

EXTENSION OF WHOLESALE CONTRACTS ALLEVIATES RATING PRESSURE

NPPD entered into new 20-year wholesale power contracts (the 2016 contracts) with all but 10 of its current wholesale customers, whereby remaining customers will continue purchasing their total demand and energy requirements from NPPD. Conversely, nine of the 13 wholesale customers that have provided notice required under the 2002 contracts and are expected to level off or reduce requirements by various amounts over a five-year period beginning in fiscal 2017. Fitch does not expect the loss in load will be meaningful to NPPD as combined revenue from the nine customers accounted for less than 5% of total revenue in fiscal 2015.

MANAGEABLE CAPITAL NEEDS

Capital improvement program costs through 2022 appear manageable. NPPD expects to fund about $282 million worth of capital projects within the next two years, a portion ($48.4 million) of which will be for Southwest Power Pool (SPP)-authorized transmission projects, a majority of which are reimbursed by SPP. Additional capital expenditures extending to 2018 -2021 could be as much as $675 million depending in part on regulatory developments. Long-term debt issuance, including proceeds from the 2016 series C and D, will continue to fund the majority of capex. Excess cash flow will support the balance of planned spending.

Scheduled amortization of existing principal payments should offset planned debt issuance over the next two years and allow for continued improvement in leverage ratios. NPPD's debt burden and equity position are favorable relative to most wholesale systems rated by Fitch.

For more information on Fitch's Long-Term Rating on NPPD, see the new Issue Report 'Nebraska Public Power District' dated Jan. 22, 2016, available at 'www.fitchratings.com'.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/site/re/864007

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013142

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013142

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Christopher Hessenthaler
Senior Director
+1-212-908-0773
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Kathy Masterson
Senior Director
+1-512-215-3730
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Christopher Hessenthaler
Senior Director
+1-212-908-0773
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Kathy Masterson
Senior Director
+1-512-215-3730
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com