OREANDA-NEWS. Fitch Ratings assigns an 'A-' rating to the Kansas Power Pool's (KPP or agency) proposed $15.25 million electric utility revenue bonds Series A, 2015, due January 2031.

The bonds are expected to price the week of July 13, 2015. Proceeds will be used to fund the acquisition of an undivided 3.3% ownership interest in the Dogwood Energy Station, fund a debt service reserve fund and pay the costs of issuance.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by power supply system net revenues, including payments received by KPP pursuant to power purchase contracts with its full requirements members.

KEY RATING DRIVERS

STABLE POWER POOL OPERATIONS: The rating reflects the general creditworthiness of the 23 full requirements members participating in KPP, which provides power supply pursuant to unconditional take and pay long-term power purchase contracts (PPCs).

UNLIMITED CONTRACT STEP-UP PROVISION: The PPCs provide a de facto unlimited step-up among KPP's 23 full requirements members, whereby if one member defaults, other members are required to incur the redistributed costs, including debt service.

FACILITY OUTPUT DEDICATED: KPP is purchasing an additional 3.3% interest in the Dogwood Energy Facility, a 650 megawatt (MW) combined-cycle natural gas fired generating facility. The purchase will increase KPP's undivided interest in the project to 10.3% (approximately 67 MW) all of which is dedicated to fulfilling ongoing member power requirements. Remaining requirements are met largely through purchased power arrangements, reducing operating risk.

COMPETITIVE POWER POOL ECONOMICS: KPP provides its participants with affordably priced all-requirements power supply. The average cost of delivered energy was $62.61 per MWh in 2014. Although average costs are expected to climb through 2019, the wholesale rate should remain competitive when compared to other regional power suppliers.

STRENGTHENED LIQUIDITY: Days cash on hand (DCOH) continues to improve, growing to 92 days in fiscal 2014 versus just 13 days in 2011. KPP maintains a $6.0 million undrawn line of credit with Bank of the West (rated 'A' with a Stable Outlook by Fitch) increasing total liquidity on hand to 131 days.

LIMITED MEMBER BASE: The KPP members all operate municipally-owned electric distribution systems, the largest of which have experienced reasonably steady energy sales and stable financial performance. At the same time, KPP's all-requirements members are small in size (151 to 7,651 meters) and scattered throughout rural and agricultural regions of Kansas.

RATING SENSITIVITIES

CHANGES IN MEMBER CREDIT QUALITY: The credit quality exhibited by the Kansas Power Pool's members going forward will be a key factor in future KPP rating actions, including the degree to which the all-requirements members are willing and able to increase rates to support KPP's debt and financial targets.

CHANGES IN POWER SUPPLY RESOURCES: Future power supply decisions, including the procurement of new generating resources, which result in a meaningful weakening of KPP's financial metrics or increase in operating risk over the near term could put downward pressure on the rating.

CREDIT PROFILE

KPP is a municipal energy agency created under the laws of the State of Kansas in May 2005 to provide its members with a pooling of resources and collective resource planning for current asset operations and future resources to meet system growth. KPP has evolved over time to a membership base of 31 municipally-owned retail electric systems ranging in size from 151 meters to 7,651 meters. Of the 31 members, 23 cities have signed 20 year all-requirements PPCs with KPP. Wholesale rates are set by KPP at a level sufficient to generate a minimum target debt service coverage ratio of 1.3x.

KPP initially relied exclusively on market-based energy contracts and member-owned generation under contract to meet the energy requirements of its membership. KPP made its first foray into the direct ownership of generation during 2012 with the acquisition of a 7.0% undivided interest in Dogwood, a natural gas plant located in Pleasant Hill, MO. KPP has entered into an agreement to acquire an additional 3.3% undivided interest in Dogwood for $13.2 million in a transaction expected to close on July 30, 2015.

Stable Member Credit Quality

KPP's financial profile is supported by the creditworthiness of its members, each of which own and operate an electric utility system and exhibit strong cash flow, low leverage, and healthy cash balances. In relation to Fitch 'A-' category medians for debt service coverage and liquidity, the majority of members are clustered closely to these benchmarks exhibiting favorable metrics that are supportive of the agency's rating.

Solid Agency Financial Performance

KPP's historical balance sheet and credit measures for the period 2008-2011 largely reflect the agency's start-up nature and initial status as a non-asset owning JAA. KPP's financial profile evolved during 2012 when the agency issued approximately $35 million of electric revenue bonds to fund the initial Dogwood acquisition. Since then, Fitch-calculated DSC and coverage of full obligation (adjusted for purchased power) have approximated 2.0x and 1.15x, respectively, in 2013 and 2014. For fiscal 2014, KPP reported audited operating income of $3.3 million on total revenue of $63.7 million, versus income of $3.9 million on revenue of $74.2 million for the same period in 2013.

KPP has made considerable progress in its efforts to build liquidity to a level sufficient to mitigate the risks associated with its reliance on purchased power and increased investment in Dogwood. In particular, liquidity has been accumulated by historically setting rates at a level in excess of the 1.1x debt-service coverage requirement in the Resolution. KPP's unrestricted cash reserve balance at Dec. 31, 2014 was $14.6 million or 92 days cash on hand. Fitch notes management has met its stated liquidity goal (90 days by 2019) four years ahead of schedule.