NEW YORK--()--Fitch Ratings assigns an 'A' rating to the $117.91 million Oklahoma Municipal Power Authority (OMPA) power supply system revenue bonds, series 2013A.
OMPA expects to price the bonds during the week of Dec. 17. Proceeds will primarily be used to fund construction of a new approximately 100 MW simple-cycle combustion turbine generating facility and other capital improvements to the power supply and transmission system.
The Rating Outlook is Stable.
The bonds will be secured by the net revenues of the authority, including payments received under power sales contracts with the 39 participating trusts operating municipal utility systems, as well as all funds established by the resolution.
KEY RATING DRIVERS
LOW COST WHOLESALE SUPPLIER: OMPA provides low cost wholesale energy supply ($55.2/MWh in 2011) to participating municipalities located predominately throughout rural Oklahoma. Power and energy is primarily supplied to 39 municipalities pursuant to long-term, take-or-pay power sales contracts.
DIVERSIFIED POWER SUPPLY RESOURCES: Power supplied by OMPA is derived from a portfolio of owned assets and purchased power agreements, which is well diversified in terms of fuel mix, asset concentration, counterparties and operator. Capacity is balanced among natural gas-fired (47%), coal-fired (26%), and renewable (23%) resources. Moreover, no single resource accounts for more than 18% of the authority's total capacity.
STRONG DOMINANT MEMBER: The OMPA membership is dominated by its largest member, Edmond, OK, a vibrant diversified community that has experienced broad economic growth over the last decade. Edmond accounts for approximately 34% of OMPA's total billings and has consistently reported demographic and economic metrics well above the state and national averages.
RESTRICTIVE FINANCIAL POLICIES: OMPA's financial profile is below average for the 'A' rating category and has been shaped by financial policies that have produced very competitive wholesale rates, but tight debt service coverage (DSC) and high leverage. Fitch calculated metrics for 2011 included DSC of 1.05x, debt to funds available for debt service (FADS) of 13.0x, and net assets to capitalization of 3.7%. Liquidity was solid at 128 days cash on hand.
MANAGEABLE CAPITAL PROGRAM: Capital spending following the completion of the John W. Turk, Jr. power plant later this year should be manageable over the intermediate term. Planned additions through 2015 are limited to the new peaking capacity.
WHAT COULD TRIGGER A RATING ACTION
CREDIT SUPPORTIVE FINANCIAL POLICIES: The adoption and implementation of financial policies more supportive of credit quality and financial metrics would be viewed positively.
OMPA supplies wholesale power and energy to Oklahoma-based municipalities and public trusts operating municipal electric systems. The authority began providing service to 26 cities in 1985, and currently provides wholesale power supply to 39 public trusts pursuant to long-term take-and-pay power sales contracts.
PROTECTIVE POWER SALES CONTRACT TERMINATION PROVISIONS
The term of the OMPA power supply contracts extends through Dec. 31, 2027, and thereafter until terminated by either party. Although this could result in termination well before the schedule maturity of the series 2013A bonds, the contracts provide that, if termination notice is given by a participating trust, OMPA may increase that trust's wholesale rate to recover the corresponding share of debt service incurred on behalf the trust prior to termination. Fitch views this provision as vital to its rating and expects that the provision would be invoked.
DIVERSE MEMBERS DOMINATED BY EDMOND, OK
The participating cities are geographically dispersed throughout the state and range widely in size. OMPA's largest participating community, Edmond, OK, is a vibrant diversified community that has experienced broad economic growth over the last decade. However the remaining communities are predominately rural with regional economies heavily dependent upon agriculture and/or activities related to the oil and gas industry. Collectively, the participating trusts serve approximately 114,000 largely residential and commercial customers, and a total population of approximately 250,000.
WELL DIVERSIFIED AND SUFFICIENT POWER RESOURCES
OMPA's portfolio of power supply resources is well diversified. OMPA's owned resources have historically been anchored by its interests in three large coal and lignite-fired generating stations, which have provided reliable low-cost supply of baseload energy and capacity.
OMPA's most recent resource acquisitions have contributed to the strong diversity of the portfolio by expanding the authority's access to natural gas fired capacity. In 2008 coal-fired capacity and purchases supplied 47% of the authority's energy requirements. For the eight month period ended Aug. 31, 2012, coal-fired resources supplied only 28% of total requirements, while the newly acquired natural gas-fired units and traditional peaking facilities supplied nearly 51%.
Although only 14.4% of total energy supply in 2011, renewable resources are expected to contribute up to 25% of total energy supply in 2013, easily meeting internal targets without compromising cost.
OMPA's resource portfolio will undergo a number of changes through 2014, including the addition of capacity from the Turk plant, but is expected to remain sufficient to meet supply obligations. Completion of the planned peaking facilities should provide sufficient capacity through 2021.
STABLE AND COMPETITIVE WHOLESALE RATES
The authority has consistently offered very stable and competitive wholesale rates to the participating trusts. Since 2007, rates have remained within the range of $52.5 - $55.2/MWh. Rates are expected to rise through 2016 reflecting increased operating expenses and debt service, but should remain regionally competitive.
Residential rates in 2012 for the five largest participating trusts, including Edmond, are largely in-line with those of neighboring utility systems. However, retail rates at the remaining trusts are well above state averages reflecting the relatively small size of the cities and the effect of annual transfers by the utilities to the respective city. Fitch believes that the risks related to this rate disparity are mitigated by the rural nature of the authority's smallest participants and a heavily residential customer base.
BELOW AVERAGE FINANCIAL METRICS
OMPA's financial profile is below average for the 'A' rating category due, in part, to the authority's strategy of keeping wholesale rates very low and competitive.
Fitch-calculated DSC, which does not reflect deferrals and withdrawals of rate stabilization funds, has been volatile, ranging from .92x to 1.26x in 2007-2011. DSC calculations pursuant to OMPA's resolution have historically been considerably higher at approximately 1.6x, but exclude certain purchased power payments from operating expenses. Cash on hand declined to 128 days at year end 2011, but has been reasonably strong and above rating category medians. OMPA's projected performance is expected to improve modestly through 2022.
OMPA's financial position is supported by the creditworthiness of its participating cities, particularly the six largest, which generally exhibit solid cash flow, modest leverage, and healthy cash balances.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria