NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following Oklahoma Municipal Power Authority's (OMPA, or the authority) revenue bonds:
--approximately $91,620,000 power supply system revenue refunding bonds series 2014A;
--approximately $35,215,000 power supply system revenue refunding bonds series 2014B.
The bonds are scheduled to price via negotiation on Oct. 28-29, 2014. Proceeds of the series 2014A bonds will be used to advance refund outstanding series 2008A bonds ($87.3 million). Proceeds of the series 2014B bonds will be used to current refund outstanding series 2001B ($25.6 million) and 2003A bonds ($16.1 million).
In addition, Fitch has affirmed the 'A' rating on the following OMPA revenue bonds, with par amounts as of Oct. 1, 2014:
--$212,185,000 power supply system revenue bonds series 2005A, 2013A, and 2013B.
Fitch does not rate the authority's $512 million of other outstanding revenue bonds, a portion of which will be refunded with proceeds of the current issuances.
The Rating Outlook is Stable.
The bonds are secured by OMPA's net revenues, including payments received under power sales contracts (PSCs) with 39 participating trusts operating municipal electric utilities, as well as funds established by the resolution.
KEY RATING DRIVERS
Low-Cost Wholesale Supplier: OMPA provides a low-cost wholesale energy supply ($6.46/kWh in 2013) to 39 participating trusts located predominantly in rural Oklahoma, pursuant to long-term, take-and-pay PSCs that underpin its credit quality. The use of public trusts is somewhat unique to Oklahoma, which limits the ability of cities to enter into certain long-term contracts.
Diversified Power Supply Resources: A well-diversified portfolio of owned generating assets and purchased power agreements benefits the authority's wholesale rate competitiveness and stability. Capacity is balanced between natural gas-fired (46.5%), coal-fired (22.7%), renewable (24.2%), and other (6.6%) resources. Moreover, no single resource accounts for more than 16% of the total.
Below-Average Financial Metrics: The policies shaping OMPA's low wholesale rates also drive a below-average financial profile, including tight cash flows and high leverage for the rating category. Fitch-calculated metrics for 2013 include 1.24x debt service coverage, 14.6x debt to funds available for debt service, and 3.4% equity to capitalization. Cash on hand continued a multiyear decline to 102 days.
Strong Largest Member: Edmond, OK, a vibrant community experiencing broad economic growth, is integral to OMPA's overall credit quality. Edmond accounts for approximately one-third of the authority's total sales. The remaining trusts are predominantly rural and small; twenty-five serve populations of fewer than 3,000 people.
Credit Supportive Financial Policies: The adoption and implementation of policies that bring financial metrics more in line with rating category medians would support credit quality at current levels.
Edmond Credit Quality: The unlikely deterioration in Edmond's credit quality could lead to negative rating action, given its overall importance to the authority.
OMPA supplies wholesale power and energy principally to Oklahoma-based public trusts operating municipal electric utilities, pursuant to long-term take-and-pay PSCs that underpin the authority's credit quality.
WELL-DIVERSIFIED POWER RESOURCES
The flexibility gained from OMPA's power supply supports reliability and rate stability as fuel prices change. The authority's portfolio of owned generating assets and purchased power agreements is well diversified by fuel mix, asset concentration, counterparties, and operator. Furthermore, recent and planned 2015 capacity additions are sufficient to meet its needs over the next 10 years. A corresponding deleveraging through scheduled debt amortization should ultimately benefit the authority's balance sheet metrics.
Historically, OMPA's owned resources had been anchored by interests in three large coal- and lignite-fired generating stations: Oklaunion 1, Dolet Hills 1, and Pirkey 1. These resources continue to provide the authority with a reliable, low-cost supply of baseload capacity and energy.
More recent acquisitions have expanded access to natural gas-fired facilities. Natural gas-fired resources supplying half of the authority's 2012 energy, one-quarter in 2013, and nearly 40% in 2014 demonstrate its increasing fuel and resource flexibility.
STABLE AND COMPETITIVE WHOLESALE RATES
OMPA's wholesale rates (6.46/kWh in 2013) remain competitive with other providers, largely as a result of its diverse power supply, as noted. Changing fuel prices and the commercial operation of new resources have resulted in larger rate increases more recently. However, projected rates remain competitive at a peak of just $7.27/kWh by 2029.
By contrast, retail rates for the three largest participating trusts representing more than half of OMPA's system requirements are one-fifth above the state average, according to data provided by the Energy Information Administration. Retail rates at the remaining trusts are also above state averages, reflecting their relatively small size and the effect of annual transfers to the city general funds. High retail rates that ultimately limit the authority's revenue-raising flexibility over the longer term would be a rating concern.
BELOW-AVERAGE FINANCIAL METRICS
OMPA's financial profile compares unfavorably with Fitch's 'A' wholesale medians, largely due to the authority's strategy of keeping wholesale rates low. Its modest ratios are a rating concern, particularly as the authority has not implemented comprehensive financial policies or targets. While not expected, any weakening of financial metrics could result in negative rating action. More favorable financial trends would support credit quality at the current rating level.
Fitch-calculated debt service coverage, which does not reflect the use of rate stabilization funds, has ranged from 1.06x - 1.24x over the past five years, including 1.24x in 2013. Expected coverage of 1.1x in 2014 is consistent with OMPA's long-term forecast through 2029. Debt to funds available for debt service is 14.6x and the ratio of equity to capitalization is 3.4%. Fitch's respective 'A' wholesale medians are 1.30x, 9.2x, and 15.7%.
Cash on hand (102 days) is below the rating category median (170 days), after having averaged a more robust 152 days during the prior five years. However, the authority's $11 million rate stabilization fund provides a tool to manage uneven cash flows.
AMENDED POWER SALES CONTRACTS
A steady increase in the number of participating trusts receiving all-requirements power supply is a positive indication of OMPA's rate competitiveness and services. The authority has entered into 13 new PSCs since 1985 when it began serving 26 cities, including two since 2011. Collectively, the participating trusts serve a total population of approximately 250,000.
The PSCs extend indefinitely, unless terminated by either party with 15-years' notice, pursuant to a 2005 amendment. Should a participating trust elect to terminate its PSC, OMPA may increase that trust's wholesale rate to recover its corresponding share of debt service prior to termination. This provides additional bondholder protections.
EDMOND DOMINATES MEMBERSHIP
OMPA's largest participating trust representing about one-third of total sales, Edmond, OK, is integral to the authority's overall credit quality. Edmond is a vibrant, diversified community that has experienced broad economic growth over the past decade while maintaining above average economic metrics. Moreover, the integrated utility, including water and wastewater systems, exhibits a favorable financial position, including an average of over 2.5x debt service coverage and more than 200 days cash on hand.
The remaining communities are predominately rural with regional economies heavily dependent upon agriculture and the oil and gas industry. A highly residential and commercial sales composition is favorable, but 25 of the participating trusts serve populations of fewer than 3,000 with minimal record-keeping capabilities. Accordingly, any unlikely deterioration of Edmond's credit quality, however unlikely, is a rating sensitivity.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'Grand River Dam Authority, Oklahoma' (Sept. 25, 2014);
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014).
Applicable Criteria and Related Research:
Grand River Dam Authority, Oklahoma
U.S. Public Power Peer Study -- June 2014
U.S. Public Power Peer Study Addendum - June 2014
U.S. Public Power Rating Criteria