Fitch Ratings has assigned an 'A' rating to Oklahoma Municipal Power
Authority's (OMPA, or the authority) $121.355 million power supply
revenue refunding bonds, series 2016A.
The bonds may be scheduled to price via negotiation the week of July 25,
2016 in the event of a forward delivery or the week of Aug. 29, 2016 for
a current refunding. Proceeds of the series 2016A bonds will be used to
current refund outstanding series 2007A bonds ($135.375 million). The
2007A bonds are not rated by Fitch.
In addition, Fitch affirms the 'A' rating on OMPA's $328.065 million of
outstanding power supply system revenue bonds (series 2005A, 2013A,
2013B, 2014A and 2014B).
Fitch does not rate the authority's $349.780 million of other
outstanding revenue bonds (including the 2007A bonds to be refunded).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by OMPA's net revenues, including payments
received under power sales contracts (PSCs) with 42 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 (6.34 cents/kWh in 2015) to 42 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 supports the
authority's wholesale rate competitiveness and stability. Generation
capacity is balanced by fuel type between natural gas (53.2%), coal
(17.9%), renewable (22.7%), and other (6.2%) resources. Moreover, no
single resource accounts for more than 15% of the total.
BELOW-AVERAGE FINANCIAL METRICS: The policies shaping OMPA's low
wholesale rates also drive a below-average financial profile, including
tight coverage and high leverage for the rating category.
Fitch-calculated metrics for 2015 include 1.16x debt service coverage,
13.3x debt to funds available for debt service, and 4.5% equity to
capitalization. Cash on hand continued a multiyear decline to 90 days,
but is expected to improve slowly as a result of newly adopted
strategies.
STRONG LARGEST MEMBER: Edmond, OK, a vibrant community experiencing
broad economic growth, supports OMPA's overall credit quality. Edmond
accounts for more than one-third of the authority's total sales. The
remaining trusts are predominantly rural and small; 25 serve populations
of fewer than 3,000 people.
RATING SENSITIVITIES
CREDIT SUPPORT STRATEGIES: The recent adoption and implementation of
strategies to improve the Oklahoma Municipal Power Authority's financial
metrics, including an increase in budgeted debt service coverage and
rate stabilization funds, should support credit quality at current
levels. Any failure of these strategies to produce metrics more in line
with category medians could result in downward rating pressure.
EDMOND CREDIT QUALITY: The unlikely deterioration in the City of Edmond,
Oklahoma's credit quality would be viewed negatively, given its overall
support to the authority.
CREDIT PROFILE
OMPA supplies wholesale power and energy principally to Oklahoma-based
participating trusts operating municipal electric utilities, pursuant to
long-term, take-and-pay PSCs that underpin the authority's credit
quality. Oklahoma municipalities are not permitted to enter into certain
long-term contracts. Therefore, public trusts were established that
lease and operate the municipal electric utilities. The leases each have
a term that is not less than the respective PSC. Payments from the
trusts to OMPA are made as an operating expense of the system.
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, OMPA estimates that recent 2015 capacity additions are
sufficient to meet its needs through 2024.
Historically, OMPA's owned resources had been anchored by interests in
four large coal- and lignite-fired generating stations: Oklaunion 1,
Dolet Hills 1, Pirkey 1, and Turk. These resources continue to provide
the authority with a reliable, low-cost supply of baseload capacity and
energy.
Recent capacity additions, including the Charles D. Lamb Energy Center
(103 MW natural gas-fired facility) completed in May 2016, and low gas
prices have increased OMPA's reliance on natural gas-fired facilities
over the past three years. Natural gas-fired resources supplied 60% of
the authority's 2015 energy, up from approximately 25% in 2013. .
STABLE AND COMPETITIVE WHOLESALE RATES
OMPA's wholesale rates (6.34 cents/kWh in 2015) remain competitive with
other providers, largely as a result of its diverse power supply, as
noted. Although the commercial operation of new resources resulted in
large rate increases in 2012-2013, increases have been more moderate
over the past two years.
OMPA has previously used its rate stabilization fund (RSF) to minimize
changes in the wholesale rate. The Board of Directors approved a
resolution in June 2016 to increase the RSF balance by contributing 10%
of off-system margins each year. Historically, off-system margins have
averaged approximately $5 million per year and OMPA management has an
RSF target balance of $20 million. The most recent draw from the RSF was
$2.75 million in 2014 and OMPA management does not expect to draw on the
fund in 2016. The 2015 RSF balance was $10.95 million.
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. Recently adopted strategies should lead to stronger financial
metrics over time, but the improvement is expected to be slow.
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 1.16x in 2015. The authority plans to manage rates
to achieve 1.10x-1.15x debt service coverage over the next five years,
consistent with its new strategy.
Leverage remains relatively high as debt to funds available for debt
service totalled 13.3x in 2015 and the ratio of equity to capitalization
was 4.5%. Fitch's respective 'A' wholesale medians are 1.42x, 8.9x, and
23.1%. However, Fitch expects that deleveraging through scheduled debt
amortization over the next five years should ultimately benefit the
authority's balance sheet metrics.
Cash on hand (90 days at the end of fiscal 2015) is slightly below
Fitch's rating category median (93 days), as well as historical
2011-2013 levels when cash on hand averaged 118 days. Cash levels are
also expected to improve slowly with OMPA's new strategies, as well as a
reduction in coal inventories.
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 16 new PSCs
since 1985 when it began serving 26 cities, including two in 2015 and
one in 2016. Collectively, the participating trusts serve a total
population of nearly 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 more than one-third of
total sales, Edmond, OK, is important 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 3.1x 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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008984
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008984
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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