Overton Power District (OPD) received a financial blow in May when its credit rating was downgraded by Fitch Rating Agency from ‘stable’ to ‘negative.’ The rating reflects weakness in the District’s cash flow and debt service capability in 2011, continuing into 2012.
According to Fitch, Overton Power’s policy of locking in long term contracts and keeping unchanged projections will not materially change the company's financial outlook in the future. Persistent weakness in OPD's debt service of its outstanding $16 million special revenue bonds, Series 2008, may lead to further downgrades.
Fitch’s credit downgrade is certainly not welcome news, coming on top of a rating downgrade from an ‘A’ to ‘A-‘ by Moody's, another national rating agency. Moving from A to A-, or from stable to negative, signals financial concerns and OPD’s outlook is weak according to experts.
The downgrade is attributable to concerns about OPD's ability to cover its debts. In simple terms, debt coverage measures a company's ability to pay its debts. It is cash flow divided by debt service. The rating agencies do not like what they see in OPD’s future.
Delmar Leatham, General Manager of OPD, said it is not as bad as it looks. “Everybody is in tough shape in this economy. When we lost the income from the Oasis Casino (which closed in 2008) and had about ten percent of our homes go into foreclosure, our income dropped from about $40 million to $35 million. That triggered the downgrade.”
OPD has attempted over time to resolve its debt problems with a variety of cost savings ideas from reducing expenses to reducing staff. OPD also made an agreement with the Colorado River Commission to sell its surplus power. That power, purchased through a long term contract, was sold at a significant loss.
To address the loss of revenue, OPD raised rates in 2011, increasing the base fee it charges residential customers across the board by five dollars from $20 to $25. Business users got a similar increase. It’s expected to generate $800,000 a year in additional income. OPD also increased rates in 2009.
Mesquite’s electric rates average about $150 a month for 1,600 kilowatts of power for residential users. The same usage costs about $90 if it were purchased from nearby Dixie Escalante Power Co-Op in southern Utah. NV Energy, the power company that services much of southern Nevada, has much higher rates than OPD or Dixie Escalante. Its rates are among the highest of the seven western states.
With the explosion of renewable energy projects nationwide, attention has focused on the possibility of those kinds of energy sources around Mesquite. Most recently the Toquop Energy Project garnered attention, followed by the Lincoln County proposed solar project on Flat Top Mesa, and the K Road Solar project on the Moapa Indian Reservation. Unquestionably, a major shift is taking place in energy production that focuses on a move away from fossil fuels like coal and oil toward use of natural gas and other renewables like solar.
Leatham points out that the major stumbling block to the use of renewables like solar are startup costs and government bureaucracy. With the state of the current economy, he says finding dollars to start a renewable energy project can be quite an undertaking.
Indeed, many renewable energy startups have failed, just as many automobile companies failed during the birth of the auto industry in the early 1900s. In North Las Vegas, Amonix, a solar manufacturing plant, recently closed its doors. The company suffered a series of setbacks including the death of its Chief Executive Officer in an airplane crash, a challenging price structure for solar panels, and a low demand for its concentrated photovoltaic systems.
“The global solar industry is facing significant challenges,” said Jen Stutsman, Press Secretary for the U.S. Department of Energy (correction made, 10:20 am, July 30). “However, the United States simply cannot afford to cede America's role in the growing, highly competitive solar industry.”
Last year, the global market for clean, renewable energies reached a staggering $260 billion and is expected to grow into the trillions of dollars in the coming years. America's solar industry now employs over 100,000 workers; that’s expected to double.
The financial weakness at OPD is a double edged sword. Not only can OPD not pursue any renewable energy projects but that translates into Mesquite not having any renewable energy jobs or any job training programs for years to come. The resulting effect is that Mesquite will be left far behind in the shift into the ‘smart power’ grid.
Recently, the U.S. Department of Interior announced a slew of renewable, mainly solar, power projects throughout the western states. The locations were picked based on the area’s proximity to current power grids. That left Mesquite out of the running because it’s too far away from the power grid to make a solar project economical.
Overton Power District currently has no renewable energy projects in its future. The company recently signed a contract to buy power from an out-of-state company through the end of 2017. Any project involving renewable resources like solar or wind energy would have to come after that date, according to Leatham. He explained that utilities lock in rates through long term contracts to avoid price fluctuations. If OPD were to embark on a renewable energy plan, it would have to displace energy set forth in established contracts resulting in a conflict with its current power provider.
While renewable energy projects are popping up all over the state and catching the attention of the public, Mesquite will not likely see any renewable energy unless a major shift in public policy occurs. Several Mesquite mayors in the recent past, including Chuck Horne, Bill Nicholes, and Susan Holecheck, tried to get momentum for renewable energy projects with little success. Past Mesquite City Councils had no appetite for that kind of change. There’s no indication, one way or another, how the current Council feels about renewable energy projects.
The lack of planning for renewable energy and forward thinking poses problems for OPD. According to most major research, utilities must proactively change their business models to meet consumer needs and demands. Developing a major, innovative spirit in a utility has numerous challenges.
Leatham, who has been with OPD for 35 years, says in order to keep rates low, long term contracts are a necessity. For a consumer, the city, or a business, bringing in any renewable resource would have to go through OPD. The earliest OPD could bring in any major renewable resources would be January 1, 2018. Residents and businesses of Mesquite would not see any major changes until that time even if a movement was soon made to install or connect to renewable energy projects.
That sentiment is partially shared by the largest electric utility in the state. “There is a cost to investing in renewable energy,” said John Owens of NV Energy. “A rate payer will benefit from energy efficiency but that may lower sales from the utility.” As a result, a utility is forced to decide if offering renewable energy programs will negatively cut into its bottom line financially. The easiest route for a utility is to stick with traditional thinking.
Past problems at OPD show how long term relationships can fall apart to the detriment of the rate payer. In July 2001, OPD entered into a contract with Idaho Energy to purchase 210,000 megawatt hours, at $88.50 per megawatt hour, until June 2011. The long term contract would provide electricity at that price for many years to come.
However, factors in place at that time, mainly the demise of Enron, caused prices to drop to $40 per megawatt hour shortly thereafter. OPD tried to re-negotiate the contract without success. In November 2001, Idaho Electric sued OPD for defaulting on a $2.5 million payment. OPD answered that they entered into the contract when prices were grossly overpriced. Because prices had dropped to $40 per megawatt hour, they wanted out of the contract and were not going to pay.
Idaho Electric sued OPD for breach of contract. The lawsuit was settled when OPD paid $52.5 million to get out of the contract. OPD ended up paying $5.5 million up front and spread the remaining $47 million over equal quarterly installments beginning in October 2003, with an interest rate accruing at six percent per year.
OPD then had to find energy from a different provider. Then-State Senator Warren Hardy, now Mesquite’s current lobbyist, said at the time it was a near death experience for OPD.
The lawsuit and resulting settlement caused major ripples throughout the state and a very contentious relationship split between the City of Mesquite and the OPD. At that time, the Board of Directors for OPD consisted of five members from the Moapa Valley area and Bunkerville only. The City, fearing lack of oversight on OPD, requested a more equitable board.
The highly political issue ended up in the Nevada State Senate where Senate Bill 124 passed in 2009, giving Mesquite a seat on the board plus another at-large seat. That brought the total number of Board members to seven. Mesquite’s current representatives on the Board are David Anderson, Douglas P. Waite and Craig Anderson, owner of Heritage Electric in Mesquite
Most recently, in 2010, OPD was fined $10,000 for failing a compliance audit in accordance with Federal Energy Regulatory Commission rules. The Commission found OPD did not have the proper documentation and plans in place for maintenance and testing protection systems of their transmission facilities, as well as other violations. OPD paid the fine.
A new financial problem may be looming on the horizon in spite of the $800,000 earned by the latest rate increase. In 2014, a major NV Energy power transmission line being built from Northern Nevada will come online. OPD, along with other utilities, may be required to pay a share of the expenses, potentially increasing its costs by $500,000 a year. The District has retained legal counsel to fight the expense.
In 2011, a study conducted by OPD found it needed to generate an additional $2 million to help service its debt load. “Over 62 percent of our costs come from purchasing power,” said Leatham. “With revenue down, we had to start dipping into our cash reserves and that can't go on very long.”
The financial outlook for OPD doesn’t seem to get any better for the long term. Leatham projects that energy sales growth rates and operating revenues for the District will remain flat until about 2018.
Leatham, who has been with OPD for 35 years, is set to retire soon. While he would not name his successor, he said there are several well qualified people at OPD to take over when he leaves. He believes it’s best to promote from within, in order to have effective succession planning that will stay the course OPD is on.
To be sure, rates will go up eventually with all utilities. The State of Nevada is about in the middle average nationally for electricity prices. Most electric utilities will undertake future projects to mitigate the necessity of rate increases. Governor Brian Sandoval issued an executive order in November, 2011 that forms a task force who will report back to him and to the people, providing “a clear direction the State should take in regards to energy.” The order also states that Nevada needs to be an active participant in renewable energy projects.
[Editor’s note: While the residents and businesses of Mesquite are completely dependent on electrical rates determined by Overton Power, this series will look at other electric utilities near our community and their approach to providing power to their customers, their look at the future and how it will affect their customers. The series will finish with a second look at Overton Power District.]