FITCH UPGRADES OVERTON POWER DIST. NO. 5,
NV’S REVS TO ‘A-‘; OUTLOOK REVISED TO STABLE
Fitch Ratings-San Francisco-12 January 2017: Fitch Ratings has upgraded its rating on Overton Power District No. 5, Nevada’s (OPD5) implied revenue bonds to ‘A-‘ from ‘BBB+’.
OPD5’s rating takes into account approximately $48.5 million of secured debt privately held by National Rural Utilities Cooperative Finance Corp., but is assigned to implied obligations given that none of the outstanding debt is publicly held.
The Rating Outlook is revised to Stable from Positive.
The district’s obligations are payable from the electric system’s net revenues.
KEY RATING DRIVERS
RELATIVELY SMALL DISTRIBUTION SYSTEM: OPD5 is a relatively small distribution system serving a largely residential customer base of approximately 14,800 in a rural service area northeast of Las Vegas. The utility’s rate base is moderately concentrated with the top 10 customers accounting for approximately 21.3% of operating revenues in 2015.
POWER SUPPLY SECURED: The district’s new power supply contract with Morgan Stanley Capital Group, Inc. took effect in June 2016 and extends to the end of 2024. The medium-term contract extends beyond the district’s normal five-year agreements, and provides a lower cost of power compared with the previous arrangement.
IMPROVING FINANCIAL PERFORMANCE: The upgrade reflects Fitch’s expectation that financial performance will materially improve as power costs are reduced under the new power supply contract. Projected debt service coverage from 2016-2020 is approximately 1.8x after adjusting for the
revenue loss from an expected decrease in commercial rates.
SOUND LIQUIDITY: The district’s adequate cash levels are expected to increase to approximately 130 days cash on hand in 2016 from 100 days in 2015 as higher financial margins improve the district’s bottom line. Liquidity levels are further strengthened by a $5 million line of credit with CFC.
STABILIZING SERVICE TERRITORY: The district’s service territory was significantly affected by the recession, and its recovery has lagged the nation and surrounding metro areas. However, local conditions appear to have stabilized with a growing customer base, modest MWh sales growth, and
on-going development in the area.
SIGNIFICANT FUTURE DEBT PLANS: The district’s future debt plans are significant with a tentatively planned $80 million issuance by 2022 to finance a cost-saving transmission project. Debt metrics would likely increase to well above the median for the ‘A’ rating category following the issuance.
FINANCIAL PERFORMANCE: Financial performance from Overton Power District No. 5 that is materially weaker than current projections, which reflect debt service coverage of approximately 1.8x and over 100 days cash on hand, could lead to negative rating action.
FUTURE LEVERAGE: The significant increase in leverage expected by 2022 could also negatively pressure the rating if not offset by improved financial performance, which is expected to occur as a new transmission line funded with the proceeds should reduce power supply and transmission costs.
OPD5 is located approximately 65 miles northeast of Las Vegas and provides electric service to a largely residential customer base of 14,763 (2015). OPD5’s exclusive service territory is largely rural but includes the city of Mesquite, NV with an estimated population of approximately 18,000, which has been the focal point for most of OPD5’s customer growth.
The local economy has generally stabilized after a slow recovery that lagged the nation and nearby metro areas. This improvement is apparent in the significantly higher customer growth rates over the past four years, which had slowed during and directly after the recession. In addition, the district’s annual MWh sales increased in both 2015 and 2014 by 1.6% and 0.7%, respectively, following five consecutive years of decline. OPD5’s rate base is moderately concentrated with its top 10 customers accounting for approximately 21.3% of operating revenues in 2015.
MEDIUM-TERM POWER SUPPLY CONTRACT
The district secured a cost-effective power supply contract with Morgan Stanley Capital Group, Inc. that runs from June 2016 through the end of 2024. The new agreement replaced the pre- existing agreement that was set to expire at the end of 2017.
IMPROVED FINANCIAL PERFORMANCE
The district’s financial performance is expected to improve significantly beginning in 2016 as the lower cost of power results in improved margins and higher debt service coverage. Based on actuals through November and management’s projections for December, the district’s debt service coverage ratio in 2016 is projected at 1.85x. Improved cash flow is expected to increase cash reserves with a total ending balance of approximately $10.5 million or 130 days of projected expenses, up from $8.5 million or 100 days cash at the end of 2015.
The improvement is notable given the district’s financial performance over the past five years. Audited financial results were largely stable but below levels commensurate with an ‘A’ category rating from 2013 through 2015. Fitch calculated debt service coverage and coverage of full obligations averaged 1.38x and 1.15x, respectively, during the period.
Management’s financial forecast through 2021 shows financial metrics generally consistent with the projected performance in 2016. Coverage levels remain close to 1.8x, assuming a modest decrease in commercial rates, and cash on hand exceeds 100 days through the forecast period. Projections include an assumed 1% annual increase in MWh sales.