Fitch Rates Grand River Dam Authority, OK's Revenue Bonds Series 2010A & B 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'A' rating to Grand River Dam Authority (GRDA), OK's $240 million series 2010A and 2010B (federally taxable) revenue bonds.

The bonds are expected to price the week of Nov. 15, 2010. Bond proceeds will be used to fund capital expenditures and make deposits into the debt service reserve account.

In addition, Fitch affirms the $845 million in outstanding parity bonds at 'A'.

The Outlook on all bonds is Stable.

RATING RATIONALE:

--Grand River Dam Authority's (GRDA) 'A' rating is supported by its low cost power supply, a relatively stable economy, and the presence of a power cost adjustment mechanism in its rate structure.

--GRDA's rating benefits from a restructuring of its long-term contracts with members which started in 2005. The bulk of the contracts extend to 2042 (80.2% of revenues and 79.1% of sales) which is a notable structural improvement to GRDA's credit profile compared to contract terms prior to 2005.

--The rating also takes into consideration a sizable increase in debt service from 2009 through 2014 - maximum annual debt service occurred in fiscal 2010 at $143 million - will further pressure GRDA's financial metrics. However, debt service requirements materially decline beginning in 2014, which should provide financial flexibility going forward. However, future capital needs could temper the impact to GRDA's credit profile. Management projects debt service coverage to increase to over 2.0x beginning in 2015 but gradual decline after that.

--The addition of an ownership interest in the natural gas-fired Redbud facility has helped GRDA diversify its generating portfolio, reduce market purchases, and provide increased opportunities to use the Salina pumped-storage hydro facility to enhance reliability.

KEY RATING DRIVERS:

--A return to debt service coverage ratios above 1.0x in fiscal 2010 on an operating basis and meeting of financial projections during a period of high interest costs, use of reserve and replacement funds, and weaker than previously anticipated sales.

--Maintenance of previously instituted rate increases through at least 2014 to ensure margins and coverage ratios are appropriate for the rating level especially given debt costs of GRDA over the medium-term.

--Exposure to coal-fired generation could result in increased costs in the long term pending carbon emission and climate change legislation.

SECURITY:

All bonds are secured by a net revenue pledge of the system.

CREDIT SUMMARY:

GRDA is an agency of the State of Oklahoma tasked with providing wholesale electricity to its customers. It operates three hydroelectric facilities, and manages two lakes, along the Grand River system and these facilities, along with the GRDA Coal-Fired Complex, combine for a total net generation capability of 1,728 megawatts (MW). GRDA transmits and delivers this wholesale electricity the state. GRDA also supplies electricity to municipalities in the surrounding states of Arkansas, Kansas and Missouri.

GRDA is a self-regulated entity and electric rates are independently established by the board. In general, GRDA sets its rates to recover its cost of operations. GRDA utilizes a Power Cost Adjustment (PCA) in its rates to provide a degree of rate flexibility if fuel costs become out of line with projections. The PCA is established every six months to reflect current costs of fuel used in production; however, the Board has the power to implement the PCA on a monthly basis.

Fitch views GRDA's management positively. Over the last five years, it has greatly improved its contract situation with most members by negotiating contracts that extend to bond maturity. Furthermore, management has diversified its resource mix by acquiring an ownership interest in the Redbud plant, a gas-fired facility, added new customers via long-term contracts, and maintained its regionally low rates. Management underscored its ability to act quickly and decisively when it implemented an 11.95% base rate increase in response to 2009 results.

GRDA's financial profile has weakened in recent years. Operating debt service coverage (DSC) was 0.94x in fiscal 2009. However, with the adoption of a new bond resolution in 2008, GRDA did away with a reserve and contingency fund that contained $35 million. GRDA drew down $22 million to make 1.10x coverage in 2009. GRDA had $3 million from an over-funded DSRF and $13.4 million remaining from the reserve and contingency fund to apply in 2010. Year-to-date financial performance through Aug. 31, 2010 shows improvement over fiscal 2009 through the same period. Managements expects DSC to be at least 1.2x for the full fiscal year. Debt service requirements are expected to materially decline beginning in 2014, which should provide financial flexibility going forward. However, future capital needs could temper the impact to GRDA's credit profile. Management projects debt service coverage to increase to over 2.0x beginning in 2015 but gradual decline after that.

Including fiscal 2010 capital expenditures of roughly $123 million, GRDA's capital plan through 2020 is sizable at $927.2 million. Based on the most recent plan, GRDA expects the 2008 and 2010 issuances to cover most costs through 2012. While GRDA has not fully determined how they will fund $608 million of the capital plan starting in 2013, the most recent financial projections assume the use of debt.

GRDA is currently projecting to have adequate capacity through at least 2019. GRDA acquired a 36% interest in the 1,230 MW Redbud combined cycle natural gas fired plant in October 2008, providing GRDA with 442 MW of capacity. The plant has been operating efficiently, with a heat rate of about 7,100 and the Redbud purchase will allow GRDA to reduce dependence on coal and purchased power.

PUBLIC POWER BONDS - KEY CREDIT POINTS:

Public power utility bonds in most cases are unsecured debt obligations supported solely by a pledge of net revenues generated by the utility, including other legal structural protections, such as rate covenants, and debt service reserve fund requirements. Public power utilities (municipal and cooperative) are effectively owned by their customers with a mission to provide essential, reliable, relatively low cost electric service. The average rating is 'A+', compared to their corporate counterparts' average rating of 'BBB+', with approximately 31% rated at or above 'AA-' and 8% rated at or below 'BBB+'. The key credit underpinning supporting the high average rating is their self-regulating authority (or local rate setting ability). Municipal utilities are generally not subject to state/federal regulatory oversight as compared to corporate utilities. This regulatory autonomy provides for a more timely recovery of costs (operating and debt service) through electric rates, and also gives public power issuers the ability to set financial targets/policies as well as renewable energy goals/standards. In addition, public powers' predominantly residential customer composition provides for more stable energy sales and in turn more predictable financial performance. Those with below-average ratings or low investment-grade or below investment-grade ratings generally have a limited economic base, above-average leverage (or debt burden) resulting in a high cost structure that may constrain financial flexibility.

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

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', Oct. 8, 2010.

--'Public Power Rating Guidelines', June 16, 2010.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

Public Power Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=447150

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Contacts

Fitch Ratings
Primary Analyst
Eric V. Espino
Director
+1-212-908-0574
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Senior Director
+1-212-908-0738
or
Committee Chairperson
Chris Jumper
Senior Director
+1-212-908-0594
or
Media Relations
Cindy Stoller
+1-212-908-0526
cindy.stoller@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Eric V. Espino
Director
+1-212-908-0574
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Senior Director
+1-212-908-0738
or
Committee Chairperson
Chris Jumper
Senior Director
+1-212-908-0594
or
Media Relations
Cindy Stoller
+1-212-908-0526
cindy.stoller@fitchratings.com