Oklahoma Development Finance Authority, Ratepayer-Backed Bonds, (Oklahoma Natural Gas Company), Series 2022 (Federally Taxable) -- Moody's assigns definitive Aaa (sf) ratings to ONG's natural gas rate-recovery bonds
Rating Action: Moody's assigns definitive Aaa (sf) ratings to ONG's natural gas rate-recovery bondsGlobal Credit Research - 25 Aug 2022New York, August 25, 2022 -- Moody's Investors Service (Moody's) has assigned definitive ratings of Aaa (sf) to three pari-passu tranches of ratepayer-backed bonds (the bonds or RBBs) issued by the Oklahoma Development Finance Authority (the issuer or the ODFA), a public trust and instrumentality of the State of Oklahoma. The ODFA distributed the proceeds from the issuance of the bonds to Oklahoma Natural Gas Company (ONG) to recover certain costs it incurred as a result of winter storm Uri in February 2021. This securitization is the first utility cost recovery charge (UCRC) transaction backed by charges imposed by a natural gas utility that we have rated in over 20 years.ONG is the sponsor of the securitization, and the seller and servicer of the securitization property backing the bonds. ONG is a large, fully regulated, natural gas utility operating in the vast majority of the State of Oklahoma. ONG is the largest division of ONE Gas, Inc (ONE Gas, A3 stable) and an important driver behind the credit quality of ONE Gas.The asset backing the bonds is the securitization property established by the Oklahoma Corporation Commission's (the Commission) irrevocable Financing Order. The securitization property is the right to impose, bill, collect and receive non-bypassable, fixed per-customer securitization charges (the WECs) from current and future natural gas customers within ONG's service area, with certain exceptions, including the right to periodically adjust the WECs through a statutory, mandatory, uncapped true-up adjustment mechanism to ensure timely bond payments until the bonds are repaid in full. The true-up adjustment mechanism is the primary form of credit enhancement supporting the bonds.The complete rating actions are as follows:Issuer: Oklahoma Development Finance Authority, Ratepayer-Backed Bonds, (Oklahoma Natural Gas Company), Series 2022 (Federally Taxable)Ratepayer-Backed Bonds (Oklahoma Natural Gas Company), Series 2022, Tranche A-1, Definitive Rating Assigned Aaa (sf)Ratepayer-Backed Bonds (Oklahoma Natural Gas Company), Series 2022, Tranche A-2, Definitive Rating Assigned Aaa (sf)Ratepayer-Backed Bonds (Oklahoma Natural Gas Company), Series 2022, Tranche A-3, Definitive Rating Assigned Aaa (sf)RATINGS RATIONALEThe ratings assigned to the bonds are based primarily on the following:1) the strength of the State of Oklahoma's Securitization Law and the irrevocable Financing Order issued by the Commission, which together authorize the creation of the securitization property backing the bonds, and strongly protect the securitization property,2) the State of Oklahoma's non-impairment pledge, included in the law that established and governs the ODFA (the Authority Act), strongly protects the securitization property backing the bonds. Under the non-impairment pledge, the State of Oklahoma agrees and pledges to bondholders that it will not limit or alter the rights vested in the issuer under the Authority Act to fulfill the terms of any agreements made with the owners of the bonds or in any way impair the rights and remedies of bondholders, until the bonds are repaid in full. The Financing Order enhances and details the scope of the state's non-impairment pledge,3) the validation of the bonds by the Supreme Court of Oklahoma under which the bonds so approved and the revenues pledged to their payment shall be incontestable in any court in Oklahoma,4) the low probability of a severe decline in the WECs ratepayer base due to customers switching away from natural gas to other energy sources whether voluntarily or due to future laws, rules or regulations that impose restrictions on the use of natural gas in all or part of ONG's service area,5) credit enhancement consisting of a statutory uncapped true-up adjustment mechanism that mandatorily adjusts the WECs at least semi-annually to ensure the WECs collections are sufficient to timely pay interest and principal on the bonds until the bonds are paid in full, and a non-declining debt service reserve subaccount (DSRS) which was fully funded at transaction closing at 0.50% of the initial principal balance of the bonds,6) the remote likelihood of a successful legal, political, or regulatory challenge to the securitization property and other rights that ONG sold to the issuer on the transaction's closing date for the benefit of the indenture trustee on behalf of bondholders,7) the economic stability, diversity, and scale of the ratepayer base in ONG's service territory from whom the WECs will be collected,8) the experience, expertise, and stability of ONG as servicer of the securitization property,9) the low probability that collections arising from the securitization property could fall short of the scheduled interest and principal payments on the bonds, and10) the initial WEC, which ONG expects on an annualized basis to represent approximately 7.0% of the total monthly natural gas bill received by an average residential customer in ONG's service area as of August 2022. The charge is higher than the 5% average across the electric UCRC securitizations we rate. Nevertheless, the charge is a fixed per customer charge and ONG expects that the initial charge will be around $7.3 per month on average for residential customers. Furthermore, if natural gas prices increase in the future resulting in higher bills for residential customers, the charge will account for a smaller percentage of the residential customers bill since it is fixed. On the other hand, if natural gas prices decline in the future resulting in lower bills for residential customers, the charge will account for a larger percentage of the residential customer's bill, but residential customers are less likely to focus on the charge since their natural gas bill is lower.In April 2021, in response to the aftermath of February 2021's winter storm Uri, the Oklahoma Legislature adopted Senate Bill 1050 (SB1050) which was signed into law by the Governor of Oklahoma on 23 April 2021. SB1050 generally authorizes utilities regulated by the Commission to recover extreme purchase and extraordinary costs related to winter storm Uri through the issuance by the ODFA of ratepayer-backed bonds supported by an irrevocable financing order. SB1050 also permits the Commission to approve an irrevocable non-bypassable utility customer charge to pay principal of, interest on, and associated financing costs of such bonds. SB1050's new provision of Oklahoma law, "February 2021 Regulated Utility Consumer Protection Act," is codified as Title 74, Oklahoma Statutes 2021, Section 9070, et seq. (the Securitization Law).Under the Securitization Law, if the Commission determines that certain criteria set forth in the Securitization Law are met, the Commission may issue a financing order that, among other things, authorizes (i) a regulated utility to sell to the ODFA securitization property, (ii) the ODFA to issue bonds secured by the securitization property to finance the purchase of such property from such utility; and (iii) the petitioning utility to bill and collect the revenues authorized by the financing order, as servicer on behalf of the ODFA, until such bonds are paid in full.Similar to other UCRC securitizations we rate, this securitization benefits from a non-impairment pledge from the State of Oklahoma, which strongly protects the recovery property backing the bonds. However, while in other UCRC transactions the state pledge is part of the securitization law, in this transaction the state pledge is part of the Authority Act that governs the ODFA. Nevertheless, the protection provided to bondholders by the state's pledge is similar to other UCRC transactions we rate.Unique to this transaction, the Securitization Law requires that the bonds, including the rights embedded in the securitization property, pledged revenues, other bond collateral and the state pledge, must be validated by the Supreme Court of Oklahoma. The Securitization Law further provides that "a judicial determination of the validity of the Bonds  conclusive as to the Issuer, the State, its officers, agents and instrumentalities, and all other persons, and thereafter the Bonds so approved and the revenues pledged to their payment shall be incontestable in any court in Oklahoma". On 24 May 2022, the Supreme Court of Oklahoma approved the bonds in an opinion holding that the proposed issuance of the bonds has been properly authorized under the Securitization Law and the Oklahoma Constitution. The approval of the issuance by the Supreme Court of Oklahoma enhances (i) the legal protection to bondholders against potential future legal challenges, and (ii) the strength of the state pledge which was a meaningful part in the briefing provided by the issuer to the Supreme Court of Oklahoma.The securitization property backing the bonds applies to ONG's service area. The WEC is fixed per-natural gas customer. The Financing Order, coupled with the Securitization Law, provides that the WECs are non-bypassable. Non-bypassable means that the issuer is entitled to collect the WECs from all of ONG's existing and future retail natural gas consumers within ONG's service area as it existed on the day of the Financing Order, except for small number exempted consumers. The exempted consumers represented less than 5% of ONG's total number of customers in 2021. The issuer is authorized to collect the WECs even if consumers elect to purchase natural gas from a different natural gas provider.Under the Financing Order a different charge will be assessed on each customer rate class, using the revenue allocation methodology approved by the Financing Order. Based on the Financing Order, which is similar to ONG's 2021 revenue allocation, about 80% of the charge will be collected from residential customers and the remaining from commercial and industrial customer. The revenue exposure to residential customers is relatively high compared with other electric UCRC securitizations we rate and is a credit positive. Commercial and industrial customers are more likely to switch energy sources compared with residential customers.Since the charge is fixed per customer, a key economic risk is a significant decline in the ratepayer base. The ratepayer base is sensitive to many factors, including service area population and household formation growth, Oklahoma's economy which may impact population migration, disconnects due to switching to any other energy sources such as electricity and changes in the service area. Future state and/or federal legislation that limits natural gas usage could also adversely impact the ratepayer base. Considering historical and forecasted economic growth, population and customer growth, as well as the likelihood for restrictive measures and the likelihood of customers switching away from natural gas to other energy sources, the risk of a severe decline in the ratepayer base is low.The Securitization Law and Financing Order authorize a mandatory, uncapped true-up adjustment mechanism. The true-up adjustment mechanism mandatorily adjusts the WECs at least semi-annually to ensure sufficient collections to make timely payments of interest and scheduled principal on the bonds as well as associated ongoing financing costs until the bonds are repaid in full. Additionally, the Financing Order authorizes mandatory quarterly and more frequent interim true-up adjustments to the WECs at any time, if the servicer deems necessary, to ensure sufficient collections to make timely payments on the bonds and associated ongoing financing costs as well as replenish any draws on the capital subaccount.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was "Utility Cost Recovery Charge Securitizations Methodology" published in February 2021 and available at https://ratings.moodys.com/api/rmc-documents/70479. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Factors that would lead to an upgrade or downgrade of the ratings:DownFactors or circumstances that could drive the rating down are a significant decline in the ratepayer base in ONG's service territory, unanticipated consumer delinquencies and defaults, laws or regulations that will significantly restrict natural gas usage, extreme weather fluctuations, or natural disasters or pandemics affecting the servicer's ability to accurately forecast the number of natural gas customers.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.Moody's did not use any models, or loss or cash flow analysis, in its analysis.Moody's did not use any stress scenario simulations in its analysis.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Giyora Eiger VP - Senior Credit Officer Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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