OREANDA-NEWS. 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.