OREANDA-NEWS. July 28, 2015. Fitch Ratings has affirmed the 'AA+' rating assigned to Omaha Metropolitan Utilities District, NE's (OMUD) implied gas revenue bond obligations. Fitch's rating is assigned to implied obligations, since none of its debt is publicly held.

The Rating Outlook is Stable.

KEY RATING DRIVERS

GAS DEPARTMENT OPERATIONS: The natural gas division is a separate self-supporting enterprise fund of the Omaha Metropolitan Utilities District (the district) which was created by the state to provide natural gas service to the Omaha metropolitan area.

SOLE RATE-SETTING AUTHORITY: The district has authority over rate-setting, and has historically recovered costs on a timely basis.

MINIMAL LONG-TERM DEBT OUTSTANDING: The gas department does not have any publicly held debt and finances its capital plan almost entirely from internally generated cash. Debt outstanding is limited to a \\$1.4 million loan with the Nebraska Energy Office.

STRONG SERVICE AREA: The district's service territory is very stable with lower unemployment and higher wealth levels compared with the U.S national averages. The customer base is primarily residential and commercial accounts served are diverse.

COMPETITIVE RATE STRUCTURE: The district is the area's exclusive service provider, with consistently lower rates than neighboring Black Hills Energy (BHE), and other utilities around the country. Rate increase activity has been modest in recent years, supporting financial performance.

IMPROVED LIQUIDITY POSITION: The district's cash position remains strong relative to historical levels at 104 days on hand at year end 2014 but remains weak for the rating category. Liquidity is further supported by access to internal and external short-term borrowing arrangements, and a willingness to recover costs through rate increases.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY AND LIQUIDITY: The Omaha Metropolitan Utilities District's ability to maintain the gas district's current financial flexibility as evidenced by timely cost recovery, low leverage and strong liquidity will continue to be a key rating factor and essential to fund ongoing capital expenditures. Significant declines in liquidity and narrowing of operating margins, while not anticipated, would pressure the current rating level.

CREDIT PROFILE

OMUD, created in 1913, is a public utility owned by the district that provides water and natural gas service to the Omaha metropolitan area. The water and natural gas divisions are separate self-supporting enterprise funds of the district. While some short-term cross-subsidization between both departments remains, management's strategy of increasing utility rates to achieve more independent and self-sustaining cash flow for both funds has been successful.

STABLE SERVICE AREA

The utility primarily serves the city of Omaha, the largest city in Nebraska, with an estimated population of 895,151 (2013) for the Omaha MSA. Omaha exhibits a strong and diverse economy, where local unemployment levels (3.1% as of March 2015) are low compared to the national average and per capita personal income exceeds (1.25x) the national average of \\$53,700. The gas utility's stable service area, combined with its competitive utility rates, provide it with considerable rate-making flexibility if needed.

OMUD is the fifth largest municipal gas utility in the country and serves a diverse customer base including four Fortune 500 companies, Mutual of Omaha, Kellogg, and the University of Nebraska at Omaha, all of which are headquartered in Omaha.

GAS SUPPLY REQUIREMENTS

The district relies on prepaid gas purchase contracts with the Central Plains Energy Project (CPEP) for approximately 37% of its gas supply requirements. The balance, mostly for seasonal deliveries, is purchased from a portfolio of suppliers in the U.S. and Canada that consist of short-term, staggered contracts. Fitch views the short-term nature of the remaining gas supply agreements as credit neutral because of the district's mechanism of monthly pass-through of gas costs.

STRONG, STABLE FINANCIAL PERFORMANCE

Operating margins in 2013 and 2014 were very strong (\\$29-\\$30 million) reflecting both higher weather-driven sales and modest rate increases. Cold winter weather resulted in degree days of over 6,300 in both years, versus 4,550 in 2012. Gas sales rose 31% in fiscal 2013 and remained relatively flat in fiscal 2014 driven by weather and modest customer growth (1.3%) to a much lesser extent. Management budgets for a 1% growth rate in sales over the next five years which is certainly achievable given the stability of the service area.

Fiscal 2014 ended with \\$67 million in unrestricted cash, a significant improvement over fiscal 2011 (\\$10 million). The increase in cash reflects a combination of rate increases, repayment of funds owed by the water department, and payments made by CPEP to compensate for a reduction in gas deliveries. The district's available cash represents 104 days of operating expenses, below its target of 150 days, as well as rating category medians. Additional borrowing capacity under its \\$30 million line of credit increases liquidity to 151 days.

MANAGEABLE CAPITAL PLAN

The district's capital plan is manageable and projected to be funded primarily through cash flow from operations. The district has budgeted \\$47.5 million in 2015 to be spent on capital projects infrastructure upgrades and improvements related to meter equipment, and replacement or installation of new gas mains. Annual expenditures are further projected to remain approximately \\$50 million through 2019.

The district is considering a long-term debt financing (\\$44 million) in 2017, the proceeds of which would be used to accelerate the planned replacement of cast iron gas mains over a 15-year period. Collections pursuant to its gas infrastructure rider would be collected over a 25-30 year and used as the principal source of repayment. Fitch views management's plan to fund future capital needs through the collection of infrastructure fees and on a pay-as-you-go basis as prudent and manageable.