Fitch Affirms Overton Power Dist. No. 5, NV's Revs at 'BBB+'; Outlook Revised to Positive

Fitch Ratings has affirmed the 'BBB+' rating on the following Overton Power District No. 5, Nevada (OPD5) revenue bonds:

--$14.9 million special obligation revenue bonds, series 2008.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by and payable from net revenues of the district's electric system. In addition, the bonds share a parity mortgage and security interest in the district's facilities with approximately $36.1 million of National Rural Utilities Cooperative Finance Corporation (CFC) notes.

KEY RATING DRIVERS

RELATIVELY SMALL DISTRIBUTION SYSTEM: OPD5 is a relatively small distribution system serving a predominately residential customer base of 14,500 in a rural service territory northeast of Las Vegas. The utility's rate base is moderately concentrated with the top 10 customers accounting for approximately 27% of MWh sales and operating revenues in 2014.

STABILIZING FINANCIAL PERFORMANCE: The Positive Outlook reflects Fitch's expectation that future financial performance will support debt service coverage of 1.3x or better, similar to results in 2013 and 2014. OPD5's financial results improved and stabilized in 2013 following a multiyear period of very thin coverage of around 1x.

SOUND LIQUIDITY: The district's available cash increased to approximately $7.6 million or 93 days cash on hand in 2014. A $5 million line of credit with CFC provides additional support, raising liquidity on hand to 155 days.

UNCERTAIN LONG-TERM POWER SUPPLY: The district's wholesale power supply contract with Arizona Public Service (APS) expires at year-end 2017. Management plans on securing a post-2017 power supply by the end of summer 2015 and noted that all options remain available, including the potential addition of owned solar and natural gas resources.

STABILIZING SERVICE TERRITORY: The district's service territory was significantly affected by the recession and has lagged the nation and surrounding metro areas in its recovery. However, local conditions appear to be improving, with a growing customer base, modest MWh sales growth following several years of decline, and on-going development in the area that may add a few significant customers.

RATING SENSITIVITIES

FINANCIAL STABILITY & POWER SUPPLY: Continued financial stability, together with a favorable resolution of OPD5's post-2017 power supply, would likely lead to a rating upgrade over the next two years.

CREDIT PROFILE

OPD5 is located approximately 65 miles northeast of Las Vegas and provides electric service to a largely residential customer base of 14,523 (2014). OPD5's exclusive service territory is largely rural but includes the city of Mesquite, NV (population: 18,262), which has been the focal point for most of OPD5's customer growth.

The local economy appears to be stabilizing after a slow recovery that lagged the nation and nearby metro areas. This improvement is apparent in the recent uptick in customer growth, which had slowed during and directly after the recession, and in the modest 0.7% growth in MWh sales in 2014 following five consecutive years of decline.

OPD5's rate base is moderately concentrated with its top 10 customers accounting for approximately 27% of MWh sales and operating revenues in 2014. Management reports that several significant customers could establish operations within the district over the next 18 months, positively affecting sales and revenues.

IMPROVED FINANCIAL PERFORMANCE

Financial operations improved in 2013 and remained stable in 2014 following rate increases in 2011 and 2012. Operating margins improved to 14% in 2014 compared 9.9% in 2012. Stronger operations bolstered debt service coverage, raising coverage levels to 1.35x and 1.42x in 2014 and 2013, respectively, a considerable improvement compared to the near 1x coverage in the preceding three years.

OPD5's liquidity levels remain sound. At the end of 2014, cash on hand was approximately $7.6 million or 93 days. Liquidity needs are further supported by a $5 million line of credit with CFC that raised overall liquidity levels to 155 days in 2014.

Management's financial forecast shows relatively stable operations through 2017 with an assumed 1% annual MWh sales growth rate. Debt service coverage levels are expected to remain above 1.30x and cash levels above $7 million over the projected timeframe.

MEDIUM-TERM POWER SUPPLY CONTRACT

The district's principal power supply contract with APS is relatively short-term when measured against similar systems, which exposes it to some degree of longer-term cost uncertainty. However, management intends to begin sourcing replacement power later this year, with an expectation that the power supply decision may be made by the end of the summer.

Management plans to hire an independent consultant to assist with the decision-making. At this point all options remain available, and management stated that they would consider making a change in the operating profile by taking on generating resources, including solar and natural gas.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 16, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'U.S. Public Power Peer Study Addendum - February 2015' (Feb. 9, 2015).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

U.S. Public Power Peer Study Addendum -- February 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861490

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983251

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