SAN FRANCISCO--()--Fitch Ratings affirms its 'AA-' rating on the outstanding $163.6 million Southern California Public Power Authority (SCPPA) transmission project revenue bonds (Southern Transmission System [STS] Project), series 2011A. SCPPA has approximately $592 million of outstanding STS project parity debt that is not rated by Fitch.
The Rating Outlook is Stable.
Bonds are payable solely from revenues received from the members participating in the STS project and the funds established under the master and supplemental trusts.
The series 2011A bonds have a cash funded debt service reserve fund equal to $7.7 million, or 25% of maximum annual debt service.
KEY RATING DRIVERS
STRONG PARTICIPANT CREDIT QUALITY: The rating reflects the credit profiles of the largest participants in the SCPPA STS project and their respective participation shares in the project. Project participants rated 'AA-' or higher by Fitch account for 93.22% of the project.
TAKE OR PAY CONTRACTS: Bondholders are secured by an absolute and unconditional take-or-pay obligation of the project participants, paid as an operating expense, for their share of projects costs as outlined in the transmission service contracts signed in 1983 with each participant and terminating in 2027, the same year of final debt maturity.
IMPLIED STEP-UP PROVISION: The transmission service contracts are viewed as having an implied step-up provision through the ability to amend the budget for unexpected costs, including a participant default.
STRONG MARKET VALUE: The STS project provides SCPPA members with 500-kilovolt (kv) transmission capacity to import power from other SCPPA projects, primarily the Intermountain Power Project and wind generation secured under long-term contracts. The transmission line was upgraded in 2010, funded with additional debt that does not extend beyond the 2027 contract termination date.
WHAT COULD TRIGGER A RATING CHANGE
CHANGE IN PARTICIPANT CREDIT QUALITY: The rating is based on the credit quality of the project participants together with the implied step-up provisions that mitigate the impact of a payment default. A change in the credit quality, especially of the larger project participants, could affect the rating.
SCPPA Project Supported by Power Supply Contracts
SCPPA is a joint-action agency that owns and operates electric generation, transmission, and physical gas assets on behalf of its 14 members, all of whom are municipal electric utilities in southern California. All of SCPPA's projects are financed and secured on an individual project basis. There is no other source of revenues for each of the SCPPA projects than the payments made directly from those members that participate in each specific project.
In the case of the STS project there are six project participants. The participants are Los Angeles Department of Water and Power at 59.53% (LADWP; power rev bonds rated 'AA-' by Fitch), Anaheim at 17.65%(rated 'AA-'), Riverside at 10.16% (rated 'AA-'). Pasadena at 5.88% (rated 'AA'), Glendale at 2.27% (rated 'A+'), and Burbank at 4.5% (not rated by Fitch).
Power Supply Contract Terms and Amended Budgeting Process
Each of the six participants has signed a transmission service contract that governs the obligations of the project participants in addition to the bond indenture. Participants are required to pay operating and fixed (including debt) costs of the project as outlined by an annual budget prepared by SCPPA. Payment by participants to SCPPA is unconditional and considered take-or-pay, whereby members are required to make a payment whether or not the transmission line is operational. Obligations to SCPPA by participants constitute operating expenses of each respective utility system.
The transmission service contracts do not include explicit step up requirements in the event a participant default. However, the structure of the contract, through the amended billing procedures, provides protection if a member defaults and additional costs need to be allocated to non-defaulting participants. SCPPA sends a consolidated bill for all projects to participants on a monthly basis.
In the event of nonpayment by a participating member, SCPPA's board is required to adopt an amended budget after 30 days notice that will cover the remaining fiscal year. In the amended budget, the payment shortfall would be reallocated to all project members, including the defaulting member. If the defaulting member continued to default on its payment, those amounts would be amended in the following month and the process would continue.
The debt service reserve fund for the series 2011A bonds provides a cushion in the event of a potential timing delay between when a default would occur and the time it would take to collect the amended bills. Non-legally required reserves at SCPPA are sizable and could be tapped to cover any potential cash flow shortfall in lieu of using the debt service reserve fund.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Guidelines' (Jan. 11, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'US Public Power Peer Study' (June 18, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
U.S. Public Power Peer Study -- June 2012