Moody’s Investors Service has affirmed the Baa1 rating on Overton Power District,
NV’s $14.9 million of outstanding special obligation electric system net revenue bonds. Concurrently, we have removed the negative outlook.
SUMMARY RATING RATIONALE
The rating affirmation and removal of the negative outlook reflects a trend of improved debt service coverage and liquidity, although we believe financial operations will remain pressured in the near-term due to increasing transmission fees with limited rate increase plans.
Outlooks are usually not assigned to local government credits with this amount of debt outstanding.
WHAT COULD MAKE THE RATING GO UP
– Trend of customer base growth and diversification
– Improvement in liquidity and debt service coverage ratios with concurrent prudent capital investment
WHAT COULD MAKE THE RATING GO DOWN
– Deterioration of debt service coverage and liquidity
– Loss of major customers
– Improved financial performance resulting in satisfactory debt service coverage and liquidity
– Independent rate setting authority with the ability to implement an automatic cost adjuster
– Economic stabilization within service territory and region
– Increasing transmission costs with no near-term rate increase plans
– Notable concentration among customer base
Recent developments are incorporated in the Detailed Rating Rationale.
DETAILED RATING RATIONALE
SERVICE AREA AND SYSTEM CHARACTERISTICS: LIMITED NEAR TERM ECONOMIC GROWTH
Overton Power District is located in southeastern Clark County (Aa1/Stable), along the Arizona border and approximately 65 miles northeast of the City of Las Vegas (Aa2/Stable). The district operates a distribution only electric system, encompassing 1,900 square miles and serving the City of Mesquite and unincorporated communities of Bunkerville, Moapa, Glendale, Logandale and Overton. Approximately 70% of the district’s power needs are met by a take-or-pay contract with Arizona Public Service that expires in 2017. The district is currently seeking bids for a new contract for post-2017 power supply. The remaining power supply is primarily provided via purchases from federally-owned hydroelectric projects. In addition, peaking needs, about 5% of annual purchases, are met by NV Energy.
The primarily residential customer base consists of 14,785 meter connections and is moderately concentrated.
The top ten customers compose about 30% of total annual consumption. The largest customer is Primex, a plastics manufacturer which accounted for approximately 8% of energy sales in 2015. The economy in and around the service territory has been slow to recover from the recession. Modest near term load growth is currently projected around 1.5% per year, mostly due to commercial and industrial growth, while residential connections are expected to remain flat.
DEBT SERVICE COVERAGE AND LIQUIDITY: COVERAGE IMPROVES IN RECENT YEARS AFTER
FALLING BELOW RATE COVENANT
Overton Power District closed fiscal years 2013 and 2014 with satisfactory coverage levels of 1.46x and 1.39x, respectively, through a combination of expenditure cuts and a rate increase in 2012. This is a favorable development after poor financial performance from fiscal years 2010 through 2012 resulted in debt service coverage falling below the 1.25x rate covenant. Fiscal year 2015 is projected to finish with 1.40x coverage; however, the district was billed for a $450,000 unbudgeted wheeling fee by NV Energy. Annual transmission fees from NV Energy also are reportedly increasing by approximately $600,000. Management does not have any rate increase plans in the near term but plans to absorb these fees through cost cutting measures and savings from the new wholesale power purchase agreement after 2017. The next cost of service study is planned around that time. In addition, the district has the ability to implement an automatic cost adjusting mechanism which has not been imposed in several years. According to data from the Energy Information Administration, prices across all sectors per kilowatt hour averaged 10.18 cents in 2013, which was 13% above the state average for that year, mainly due to higher industrial rates. The average price across all sectors has since fallen to 10.06 cents per kilowatt hour, primarily due to lower residential usage which caused fewer sales at higher rate tiers. Management intends to keep prices at this level through fiscal year 2017. Going forward, we expect coverage to remain satisfactory in the near term but note the uncertainty regarding the sufficiency of actual savings from the new contract and other measures to materially offset these rising costs, especially given the limited rate increase plans.
Corresponding with rising coverage levels, liquidity improved over the last two fiscal years. Fiscal year 2014 ended with an adequate 93 days cash on hand. Cash declined as low as 55 days on hand in fiscal year 2012. We expect liquidity to remain in the 90 day range in the near term.
DEBT AND LEGAL COVENANTS: REFUNDING OF RATED BONDS PLANNED FOR 2015; NO NEW MONEY
The system is moderately leveraged with a debt ratio of 60.2%. The district has $51.5 million of debt outstanding, including $14.9 million in the rated Series 2008 special obligation revenue bonds. The remaining debt consists of
National Rural Utilities Cooperative Finance Corporation (NRUCFC) loans which are on parity with the rated bonds. Management is finalizing plans to refund the rated bonds in 2015 and currently does not plan on issuing any new money debt in the near term, opting to primarily cash fund capital projects. The five-year capital improvement plan currently emphasizes reliability and cyber security projects. The district had roughly $731,000 in capital related expenditures in fiscal year 2014. Projected expenditures through fiscal year 2017 range from $1.5 million to $1.9 million annually.
The bonds include standard legal provisions including a 1.25x annual debt service rate covenant, an additional bonds test of adjusted net revenues historically at least 125% of MADS, or projected for the next fiscal year at least 150% of MADS, and standard three-prong reserve requirement.
All debt is fixed rate with 59% of principal retired in ten years.
The district does not have any debt-related derivatives.
Pensions and OPEB
Pensions and OPEB obligations are currently not a major driver for this credit.
MANAGEMENT AND GOVERNANCE: UNREGULATED RATE SETTING AUTHORITY
Overton Power District is governed by a seven-member Board of Trustees serving staggered two- and four-year terms. Four board members are newly elected as of the most recent election cycle. The board has the authority to approve the district’s budget. Rates are not subject to external regulation and are set by a two-thirds vote of the board.
– Asset Condition (Remaining Useful Life): 45 years
– System Size (O&M in $1000): $29,614
– Service Area Wealth (MFI as % of US): 80.8%
– Total Annual Debt Service Coverage (Fiscal 2014): 1.39x
– Days Cash on Hand (Fiscal 2014): 93
– Debt to Operating Revenues (Fiscal 2014): 1.40x
– Rate Covenant: 1.25x
– Debt Service Reserve Requirement: Funded at lesser of standard 3-prong test
Overton Power District provides electric services to 14,785 customers. The district is located in the eastern portion of Clark County, NV (GO rated Aa1/Stable) approximately 30 miles east of Las Vegas, NV (GO rated Aa2/Stable). The service territory includes the City of Mesquite and the unincorporated communities of Bunkerville, Moapa, Glendale, Logandale and Overton.
The bonds are secured by net revenues of the district’s electric distribution system.
USE OF PROCEEDS
The principal methodology used in this rating was US Municipal Utility Revenue Debt published in December 2014.
Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.