Oklahoma DOT bringing revenue bond deal

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The Oklahoma Department of Transportation will price $193 million of revenue bonds in two series Tuesday.

The $171 million of Series B bonds for projects and $22.3 million of Series C taxable refunding bonds will be issued through the Oklahoma Capitol Improvement Authority headed by Gov. Kevin Stitt.

The Oklahoma Department of Transportation manages highways, including this Tulsa-area junction.

The bonds are pricing via negotiation with senior manager JPMorgan and co-managers BOK Financial Securities, Morgan Stanley and Stifel.

Mike Newman, managing director at Hilltop Securities, is financial advisor, working with Andrew Messer, Oklahoma deputy state treasurer for debt management.

Series B, maturing serially through 2040, will provide new money for projects.

Series C reaches final maturity in 2025 refinancing 2012 bonds for net present value savings.

Both series carry ratings of AA-minus from S&P Global Ratings and Fitch Ratings, with stable outlooks.

The ratings are one notch below the state’s AA issuer rating because debt service on the bonds is subject to appropriation by the Legislature.

Analysts credit the state’s conservative budget practices, honed by the 2008 financial crisis and the collapse in oil prices that began in July 2014, bringing brought years of revenue emergencies to the state.

Before the current crisis hit, Oklahoma established a rainy day fund that has already been tapped.

“These factors are critical to the rating given the sizable economic concentration in natural resource development and growth prospects for revenue that are heavily influenced by market cycles,” according to Fitch. “The state has made significant progress in restoring reserves following the oil market collapse in 2015 and 2016 but may be more hard pressed to restore fiscal balance after the current downturn if the revenue trough is more severe than currently projected and oil market weakness remains in the longer term.”

On April 3, Stitt said the state was expected to “experience a revenue failure” of about $416 million for the fiscal year ended June 30, due to fallout from the COVID-19 pandemic.

Under normal circumstances, the revenue failure would have forced 6.2% budget cuts to all state agencies. However, Stitt called on the state legislature to tap into the state’s rainy day fund which had a balance of $806 million. Up to $302 million was constitutionally available to the legislature to supplement the fiscal year 2020 budget.

The COVID-19 pandemic coincided with turmoil in the energy markets that has bankrupted major players in the state including Oklahoma-based Chesapeake Energy.

Chesapeake, founded by the late Aubrey McClendon, pioneered the extraction of gas from shale rock, a process invented by the U.S. Department of Energy that reinvigorated oil and gas production across the country. However, “fracking” as it is commonly known is unprofitable for most producers at current prices, leaving many investors standing in line in bankruptcy court.

Not counting federal offshore areas, Oklahoma was the nation's fourth-largest crude oil producing state in 2019 and the third-largest natural gas producer.

The city of Cushing, in central Oklahoma, is a major crude oil trading hub connecting Gulf Coast producers to Midwest refining markets. The Cushing hub manages supply from several major pipelines from Texas and Canada. About 24% of the state's gross domestic product is directly tied to natural resource development, and multiplier effects boost the concentration still further.

After the 2014 to mid-2016 slump that cooled the state’s economy and strained financial operations, crude oil prices and production improved beginning in 2017. In 2019, the active rig count steadily declined, but crude oil production surged to its highest recorded level in May of that year.

Volatility and shrinking demand related to the pandemic, along with fallout from disputes between OPEC and Russia over prices and production and dwindling oil storage capacity, brought West Texas Intermediate spot prices to a negative $36.98 per barrel on April 20.

“This extraordinary drop was not foreseen in prior forecasts,” Fitch said. Prices have plateaued at about $40 per barrel since then. Oklahoma's board of equalization forecast WTI at $26 per barrel on average for fiscal year 2021 in April, down from the $55 per barrel in its February forecast.

“Commensurate with weak oil prices, decimated demand, and a lack of storage capacity, Oklahoma's rig count has fallen to minimal levels, averaging 11 rigs in August compared to just over 100 one year prior,” Fitch said.

By August, the state had recovered 45% of non-farm payrolls lost in April compared to the US median of 51%, Fitch said.

“Monthly unemployment data from the U.S. Bureau of Labor Statistics show the state well-positioned compared to the nation with a 5.6% unemployment rate for the month of August, compared to 8.5% for the nation,” according to Fitch.

Federal aid measures signed in March are supporting state budgets this year, with political uncertainty about future support.

The Families First Coronavirus Response Act raised the Federal Medical Assistance Percentage for Medicaid for every quarter of the national emergency declared on March 13. FMAP is the rate at which the federal government reimburses states for Medicaid spending.

Under the Coronavirus Aid, Relief and Economic Security Act enacted on March 27, the U.S. Treasury Department distributed $150 billion to state and local governments under a population-based formula. The CARES ACT limits the use of funds to coronavirus expense reimbursement rather than to offset state tax revenue losses.
Oklahoma received $1.2 billion of funds under the act and has so far spent $585 million of the allocation, with $250 million of funds going to cities and counties not directly eligible for CARES funding.

The Oklahoma Transportation Commission that supervises ODOT has vowed to press on with critical highway projects despite the pandemic.

In September, the commission voted to award a contract for a $90 million project to widen I-44 and replace five bridges in Tulsa.

Commissioners also approved contracts for an $18 million project to rehabilitate nearly six miles of I-40 pavement near Okemah and a $6 million project to resurface eight miles of US-69 between Oktaha and Muskogee.

In its Oct. 5 meeting, the commission was told that Oklahoma would receive a $22 million Better Utilizing Investments to Leverage Development grant for upgrades and preservation of the historic US-281/Route 66 Bridgeport Bridge in Caddo and Canadian counties.

“This BUILD grant for the Bridgeport Bridge will allow us to restore that landmark bridge to its full carrying capacity while preserving the historic character of the structure,” said ODOT executive director Tim Gatz. “We will do everything we can to have this bridge upgrade completed before the Route 66 Centennial celebration in 2026.”

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