Fitch Rates Grand River Dam Authority, OK's 2014 Revs 'A'; Outlook to Positive

Fitch Ratings has assigned an 'A' rating to the following Grand River Energy Authority, Oklahoma (GRDA, or the authority) revenue bonds:

--$315,000,000 series 2014A;

--$125,000,000 series 2014B (federally taxable).

The bonds are scheduled to price via negotiation on Oct. 7, 2014. Bond proceeds will be used principally to finance construction of a nominal 495MW combined-cycle electric generation plant (Unit 3) and make environmental retrofits to an existing plant (Unit 2), both on the site of the authority's Grand River Energy Complex (GREC). The authority will ultimately retire GREC Unit 1.

In addition, Fitch has affirmed the 'A' rating on the following GRDA revenue bonds, with par amounts as of Sept. 1, 2014:

--$538,750,000 series 2008A;

--$162,185,000 series 2010A;

--$77,130,000 series 2010B (federally taxable).

The Rating Outlook has been revised to Positive from Stable.

SECURITY

The bonds are secured by a senior lien on GRDA's net revenues, including net transfers from its rate stabilization account.

KEY RATING DRIVERS

Rating Outlook to Positive: GRDA's power supply plan and associated financing costs, together with forecast rate increases and additional customer contract renewals, position the authority as a potentially 'A+' rated entity. Continued, healthy sales growth would further support the authority's financial position.

Very Low Customer Rate: GRDA supplies wholesale and retail electric power to 104 customers from a diverse set of generating assets. The authority's very low customer rate registering three-quarters of the state average anchors its competitive position.

Forecast Financial Improvement: Forecast metrics are comfortably above Fitch's 'A+' rating category medians, including the new bonds. As expected, GRDA's financial position strengthened in 2013 after a four-year spike in annual debt service moderated its metrics through 2012. Forecast coverage improves to an average of 1.74x annually through 2018 and cash on hand remains near 160 days; its equity to capitalization ratio falls to a still solid 34% in 2014, before trending higher.

Mixed Customer Base: A mixed customer base remains a credit concern. The authority's largest customers are highly concentrated and their individual credit quality varies. Moreover, just 37% of contracts (by revenue) extend through the life of its outstanding and proposed debt.

Offsetting Revenue Protections: Long-term contracts to 2042 with most municipal customers (40% of sales) and limitations on retail choice for industrial customers strengthen GRDA's revenue stream. Historical write-offs have been negligible.

RATING SENSITIVITIES

Financial Gains and Customer Retention: A clear trend of improved financial ratios, in part, from forecast rate increases; additional customer contract renewals to protect its revenue base; and a stable political environment could lead to positive rating action.

CREDIT PROFILE

GRDA supplies wholesale and retail electric power to 104 customers, principally in 24 northeastern Oklahoma counties. However, its service territory indirectly extends to 75 of Oklahoma's 77 counties and to portions of three neighboring states.

The authority's diverse resource base currently consisting of seven coal, natural gas, and hydroelectric assets provides for a very low rate that underpins its competitive position and provides its customers with an economic incentive to continue working with the authority. According to data provided by the Energy Information Administration (EIA), the authority's 2012 average retail rate was 5.49 cents/kWh versus the 7.49 cents/kWh state average.

FORECAST FINANCIAL IMPROVEMENT

The authority's financial trajectory is becoming clearer, as it has now resolved major decisions about its future power supply. The forecast improvement in GRDA's financial metrics could ultimately contribute to positive rating action.

Lower debt service requirements, even with the addition of the series 2014 bonds; two planned rate increases in the next five years (5%, 2016 and 0.5%, 2019); and continued sales growth bolster GRDA's forecast cash flow metrics by upwards of 50% beginning in 2014 to levels commensurate with a higher rating. It has been the authority's goal to generate stronger debt service coverage metrics after sizable debt maturities in 2009-2012 tempered its financial metrics.

Forecast debt service coverage averages 1.74x annually through 2018, compared with a Fitch-calculated average of 1.14x annually from 2009-2013. Moreover, GRDA intends to maintain an average of about 160 days cash on hand during the period. Its ratio of equity to capitalization remains strong at a minimum of 34%, including the new debt, and gradually trends higher. By comparison, Fitch's 'A+' rating category medians for debt service coverage, cash on hand, and the ratio of equity to capitalization are 1.33x, 97 days, and 11.9%, respectively.

MIXED CUSTOMER PROFILE

GRDA's customer profile is mixed. It presents some unique challenges in the public power sector. However, various offsets help provide the authority with greater revenue predictability over the long term. In addition, sales growth has averaged 3% annually since 2004, versus 1.7% and 0.4% for the state and nation, respectively, according to EIA data.

GRDA customer contract revenues extending beyond 2041 (the year its series 2014 bonds fully mature) represent just 37% of the total. The authority's 10 largest customers are highly concentrated at two-thirds of total operating revenues, and their credit quality varies.

By contrast, GRDA has established long-term, all-requirements contracts with most municipal customers to 2042 (40% of sales). Regional sales growth continues, and Oklahoma state law does not permit retail choice of wholesale electric providers. Industrial customers make an initial decision of wholesale providers, but they are prohibited from switching suppliers without mutual consent of all interested parties.

A longer term contract arrangement with Northeast Oklahoma Electric Cooperative, its third largest customer representing 9% of revenues, would aid GRDA's resource planning and financial forecasting and would be viewed positively by Fitch. GRDA has served NEO since 1946.

Additional information is available at 'www.fitchratings.com'.

This rating action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria.

Applicable Criteria and Related Research:

--'Fitch Rates Oklahoma's $45MM ODFA Bonds 'AA'; Outlook Stable' (Aug. 22, 2014);

--'Stillwater Utilities Authority, Oklahoma' (July 15, 2014);

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'Western Farmers Electric Cooperative' (Feb. 27, 2013).

Applicable Criteria and Related Research:

Stillwater Utilities Authority, Oklahoma

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752226

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Peer Study Addendum - June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Western Farmers Electric Cooperative

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=697470

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=876894

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