OPD5 Retains ‘A’ Rating From Fitch
By Vernon Robison
Overton Power District #5 (OPD5) has maintained its current ‘A’ credit rating amid an extensive review of the district’s financials completed by national credit rating agency Fitch Ratings.
In a Fitch report, released on Jan. 24, the agency affirmed the same “Outlook Stable” rating that the district received in its last rating by the company in February of 2020.
The report took into account approximately $31.9 million of secured debt, which was privately held for the district by the National Rural Utilities Cooperative Finance Corporation (CFC) when the review took place.
But it also anticipated $26 million in new debt, which the OPD5 was anticipating to take for needed capital improvements. The board went forward with that capital funding package in a meeting last month.
The capital improvements planned include a number of projects that will improve the system reliability throughout the district, said OPD5 General Manager Mendis Cooper in an interview last week. But these improvements also have a dual purpose, he said.
“Of course, our primary purpose is to be in the business of selling power, and whenever we can remedy problems that might prevent us from doing that, it is a good thing,” Cooper said. “But the dual purpose is to meet demands of growth that is coming to our area. We have seen a phenomenal amount of growth here, and these projects will prepare for more of that trend.”
Even so, the anticipation of the new debt did not affect the district’s credit rating in the report. “Fitch expects leverage to increase as the district increases borrowing and executes its capital plans,” the report states. “However, the district’s ample liquidity, which has been purposefully growing for future (capital expenditures), in addition to its expected strong margins, should maintain the leverage ratio within the given rating.”
The report lauded an existing power supply agreement with Morgan Stanley Capital Group as a key element in maintaining the credit rating. “The Morgan Stanley contract has been considerably less expensive than OPD5’s previous power supply contracts,” the report stated.
This has allowed the district to keep rates relatively low, with residential rates staying slightly below the state average. “The last rate increase was in 2012 and a cost of rate study completed in 2018 supported a moderate reduction in rates in 2019,” the report stated. “OPD5 does not have any further rate changes planned at this time.”
The report did reflect a shade of uncertainty in reference to the Morgan Stanley contract. The contract is set to expire in 2024. “Hence, discussions regarding the pricing of a new power contract will play a key role in the district’s financial profile post fiscal 2024,” the report states.
Cooper said that he was pleased with the results of the report. “We did talk to them during the process about what it would take for us to get an upgrade in rating,” Cooper said. But the answer to that question dealt with larger economic factors, far beyond the local district’s control, Cooper said. These factors involved risks pertaining to a lack of diversification in the regional economy.
“While customer growth has been strong, averaging above 2 percent over the past five years, the service area has historically suffered from high unemployment rates, particularly during economic downturns,” the report stated. Because of its heavy dependency on the gaming and hospitality industries, the local and regional economies present a risk to OPD5, the report said.
The report cited that in 2020 Clark County was hit hard during the pandemic, “reaching 14.7 percent unemployment which was 181 percent of the national average.” “Due to the challenges associated with the service territory area, rating action upgrade above ‘A+’ is unlikely,” the report stated.
Even so, Cooper said that the review process with Fitch had yielded some valuable information. The district voluntarily has hired the company on a regular basis to perform the in-depth review and give a credit rating as a way of getting independent and expert feedback to ensure the district is on the right track.
“Nine or ten years ago, there were people in the community who were questioning the finances of the district and whether inappropriate things were being done,” Cooper said. “This is just a way to proactively reassure people that we are doing what we are supposed to be doing. Between this and our annual audit, there are some checks and balances in place that people can see.”
“Plus, it is a really good service to have, as a manager,” Cooper added. “The information we get from this is a valuable reaffirmation from some pretty smart people on Wall Street.”