The Grand River Energy Center’s new Unit 3 gas plant is expected to begin generating electricity in the summer of 2017.

DALLAS – Oklahoma's Grand River Dam Authority will seek savings through a $460 million advance refunding as the wholesale power provider nears completion of a gas-fired generating unit and repairs another plant damaged by fire.

The issue will come in two series of $440.3 million tax-exempt and $18.4 million of federally taxable bonds. Both series reach final maturity in 2039.

The bonds are scheduled to price through negotiation through book runner Citi, with a retail order period Oct. 25 and institutional pricing the next day.

James Joseph, Oklahoma bond advisor, said the bonds will advance refund all 2008A and 2010A bonds.

"As a result, the final size will be determined by which maturities are included in the transaction after evaluating the savings that can be realized and the amount of original issue premium at which the bonds sell," Joseph said. "That assumes refunding of all the outstanding 2008As and 2010As and includes more 5% coupons than we will ultimately market."

The 2016 Series B bonds are refunding Series 2014C, an issue of federally taxable, variable-rate demand bonds.

"That structure was chosen with the expectation that the bonds would be refunded as fixed-rate obligations once certain contract negotiations were completed," Joseph said. "The resolution of those contracts was necessary to determine whether any or all of that debt would be eligible for long-term, tax-exempt financing."

GRDA's 2014 deal attracted strong demand from investors looking for yield on bonds in the mid to upper end of the ratings scale. Given a continuing shortage of munis, the 2016 issue is expected to similar demand.

"The GRDA has a very stable customer base, good mix of generating sources, and a history of solid debt service coverage," Joseph said. "As a result, we expect a very favorable market reception, particularly among separately managed accounts and institutional buyers.

"The GRDA does not have additional borrowing plans for several years, so this will be an excellent opportunity for investors to add this name to their portfolios," he added.

The bonds get a lift in the form of an upgrade to A-plus from A by Fitch Ratings.

Moody's Investors Service affirmed its equivalent A1 rating. Outlooks are stable.

"The rating upgrade reflects the recent improvement in GRDA's financial profile, as well as Fitch's expectation that the authority will sustain financial metrics supportive of the A-plus rating category," analyst Tim Morilla wrote. "A sizeable reduction in annual debt service obligations contributed to improved Fitch calculated debt service coverage of 1.90x in fiscal 2015."

S&P Global Ratings upgraded GRDA to AA-minus from A-plus. In July, it issued a report saying that a fire at Unit 2 of the Grand River Energy Center would not affect GRDA's rating.

The fire that damaged the coal-fired generator was believed to have been caused by a lightning strike, according to GRDA.

The turbine generator was considered a complete loss. The adjacent Unit 1 suffered no major damage but was taken offline as a precaution.

Costs to the Authority are expected to be limited to the $1.3 million insurance policy deductible, according to Moody's. GRDA plans to rebuild the existing turbine-generator and restore operations by next summer.

To make up for the lost unit, GRDA has been able to buy affordable replacement power in the Southwest Power Pool.

As it begins the process of repairing Unit 2, the GRDA is building a combined-cycle gas fired generation plant at the Energy Center to replace a coal-fired unit.

That project was financed by the 2014 bond issue. Other proceeds from that deal were used to complete emissions control upgrades on Unit 2 before the fire shut it down.

A combined cycle unit produces electricity in two ways: natural gas is first used to fuel a combustion turbine-generator and then heat from that process will be recaptured and used to produce steam to turn another steam turbine-generator.

The new unit, designed by Mitsubishi Hitachi Power Systems Americas, will be powered by Oklahoma natural gas and will be the first of its kind in the western hemisphere, according to GRDA.

As the new gas-fired unit comes on line next July, GRDA plans to take the coal-fired Unit 1 out of commission, thereby reducing emissions.

The new power will become available as GRDA loses its third-largest largest customers, Northeast Oklahoma Electric Cooperative Inc.

Northeast, which was on a year-to-year contract, represents about 8% of GRDA's revenue, according to Fitch.

Maintaining a customer base is one of the credit challenges facing GRDA, analysts said.

"Grand River Dam Authority's inability to maintain financial metrics due to the unexpected loss of an additional large customer, or multiple customers, or inadequate rate-setting resulting from competitive or political pressure could lead to negative rating action," Morilla said.

"Moreover, just 42% of power supply contracts (by revenue) extend through the life of its outstanding and proposed debt," he added.

Among the positive factors is Google's plan to increase its load requirement from GRDA. Google opened a data center in GRDA's service territory in 2011 and has grown to become one of GRDA's top five customers in sales.

"Large customer concentration, however, can potentially create credit pressure because a single large customer may leave the system without compensating the utility," according to Fitch. "While Google's electric load requirement does not currently represent a meaningful customer concentration, continued strong growth may change this view."

GRDA's generating capacity includes hydroelectric facilities, coal-fired generation, natural-gas fired generation and purchased power.

A pumped storage hydroelectric facility, which allows for water to be stored in lower price periods and rerun through turbines when prices are higher is an additional resource, analysts noted.

Coal-fired resources accounted for about 35% of GRDA's total sales requirements in 2015, combined-cycle gas-fired resources 32% and hydroelectric facilities 11%.

Purchased power, including wind resources, accounted for the remainder.

Co-managers on the deal are Barclays Capital, Inc., BofA Merrill Lynch, BOK Financial Securities, Morgan Stanley & Co., and Wells Fargo Securities.

Citi director John Miller and managing director Kristen Johanson are lead bankers on the deal.

Michael Berwanger, managing director at Public Financial Management Inc., is financial advisor.


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