Fitch Rates SCPPA, CA's Apex Power Project Rev Bonds 'AA-'

AUSTIN, Texas--()--Fitch Ratings assigns an 'AA-' rating to the following Southern California Public Power Authority (SCPPA), CA revenue bonds:

--Approximately $155.065 million Apex power project revenue Bonds, series 2014A;

--Approximately $166.97 million Apex power project revenue bonds, series 2014B (taxable).

The Outlook is Stable.

SECURITY

The bonds are payable solely from revenues received by SCPPA pursuant to a power sales agreement (PSA) with the Los Angeles Department of Water and Power (LADWP). LADWP's obligation in the power sales agreement to pay project operations and debt service is unconditional.

KEY RATING DRIVERS

PARTICIPANT CREDIT QUALITY: The rating reflects the credit quality of timely payments from LADWP (power revenue bonds rated 'AA-' by Fitch), the sole participant in the Apex Power Project.

TAKE OR PAY OBLIGATION: Bondholders are secured by an absolute and unconditional take-or-pay obligation from LADWP's power system with payments made as an operating expense as outlined in the PSA. Payments are on parity with LADWP's own $7.39 million outstanding on-balance sheet debt.

STRONG, DIVERSE SERVICE AREA: LADWP's greater Los Angeles service territory is broad, mature, and diverse, with stable customer growth. Load growth has historically been steady and is expected to remain modest (below 1%) given extensive investments in energy efficiency programs.

LADWP FINANCIAL MARGIN IMPROVEMENT: LADWP's financial margins were healthy in fiscal 2013 due to a mid-year rate increase, and are expected to remain in line with the rating category.

COSTLY CHANGES TO POWER SUPPLY: California legislation requires costly changes to LADWP's power supply mix, both in terms of operating and capital costs. LADWP continues to invest in generation resources to comply with the state's environmental goals.

HIGH DEBT LEVELS: LADWP's anticipated debt issuance to fund its very large $8.2 billion capital plan is significant, at around $5 billion over the next five years. The planned debt will increase leverage from already high levels.

RATING SENSITIVITIES

PARTICIPANT CREDIT QUALITY: The rating is based on the credit quality of LADWP and the unconditional obligation of the utility to pay debt service on the bonds. A change in the credit quality of LADWP would affect the rating on the Apex power project bonds.

CREDIT PROFILE

SCPPA is a joint-action agency that finances the acquisition and construction of electric generation, transmission, and physical gas assets on behalf of its 12 members. Eleven of the members are municipal electric utilities in southern California and one is an irrigation district. LADWP is a member of SCPPA and participates in various joint projects with SCPPA and other members.

APEX POWER PROJECT

Apex is a natural gas-fired, combined cycle generating facility with a nameplate rating of 531 MW. Apex began commercial operation in May 2003 and is located in unincorporated Clark County, Nevada, approximately 30 miles from Las Vegas. The plant configuration consists of two combustion turbine generators and a heat recovery steam turbine generator, all manufactured by General Electric (GE). This is a common technology and configuration in the industry.

The plant's operating history has been good. Over the past five years, the availability factor averaged around 90% annually. The availability was lower at 74% in 2012 due to a major inspection done by GE. Availability was back to 90% in 2013. While an independent engineer's report regarding the condition of the assets was not provided in connection with this financing, LADWP engaged an engineer to perform an assessment of this project and the other short-listed projects as part of review process. Bondholders are not taking operational risk on this financing; LADWP is taking the risk of poor operating performance. Apex is expected to account for around 9% of LADWP's power supply. The Wood Group has operated the plant since it became operational in 2003 and will remain as the operator through an Operation and Maintenance contract through 2017.

Transmission capacity is in place to bring the power to the Mead Substation via two transmission agreements with Nevada Power through 2023. SCPPA owns sufficient firm transmission rights from Mead to LADWP. Water supply for plant cooling is provided by the Southern Nevada Water Authority (SNWA) and a contract is in place through 2038. SCPPA will sell 50 MW of off-peak power to Silver Stream Energy Services (the power is ultimately provided to SNWA for its pumping needs) at a market based price for the life of the debt.

POWER SALES AGREEMENT - PAYMENT OBLIGATION IS UNCONDITIONAL

SCPPA and LADWP have entered into a power sales agreement that will remain in place through final long-term bond maturity. SCPPA will sell 100% of the output of the Apex Power Project to LADWP. Unlike SCPPA's other projects that have multiple members, the Apex Power Project only has one member - LADWP. Therefore the credit rating of the bonds is based on the credit quality of LADWP.

LADWP has covenanted in the power sales agreement to set rates and charges sufficient to meet their obligations, to make payments due as an operating expense of the electric system, and to not take any action that would impact the tax-exempt nature of the bonds. The payment obligation under the PSA is on par with LADWP's own on-balance sheet power system debt of $7.39 million.

The PSA is an unconditional, or 'take-or-pay', obligation. LADWP is required to make payments to SCPPA for the fixed and operating costs of the project, which include debt service, whether or not the project is operational. LADWP bears all operational and delivery risk.

LADWP CREDIT QUALITY IS STRONG

Los Angeles is the commercial and cultural center of a very large, diverse economy. The area is starting to benefit from property market improvements despite an unemployment rate that remained high at 8.5% in November 2013. LADWP provides retail electric service in the city of Los Angeles to 1.48 million customers, or a population of 3.8 million. The system had a peak of 5,782 MW and a load factor of 53.6% in 2013. The customer base is extremely diverse, with a strong commercial presence. However, retail sales have been soft in the past five years due to the weak economy, conservation efforts, and energy efficiency investments. Load growth is projected to be minimal, with planned additional investments in energy efficiency programs.

LADWP was in the market for a gas-fired generation resource in the 300 - 575 MW range. LADWP and SCPPA completed a competitive request for proposal process that resulted in 19 bids. The proposals were considered based on a number of criteria, including location, size, price, transmission, flexibility, and proximity to other assets. The decision to pursue the purchase of the Apex power project was the result of this process.

LADWP needs additional gas-fired generation capacity to support its growing renewable energy portfolio, as required by California law. LADWP currently generates 20% of its power supply from renewable sources and this will increase to 33% by 2020. Natural-gas fired generation provides a competitively priced balancing resource to back-up renewable energy sources, thereby enhancing the overall reliability of LADWP's resource portfolio. In addition, LADWP is planning to divest its 477 MW share of the Navajo coal-fired generating station by 2015 as required by California law, given the higher greenhouse gas emissions of coal-fired generation as compared to gas-fired. The acquisition of Apex will replace the lost Navajo capacity.

For more information on the ratings for LADWP, please see Fitch's press release: 'Fitch Affirms Los Angeles, CA Power Rev Bonds 'AA-'; Outlook Stable' dated Jan. 30, 2014 and the report: 'Los Angeles Department of Water and Power, CA Power System' dated Feb. 19, 2014 on Fitch's website.

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

This rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria and Revenue-Supported Rating Criteria.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 3, 2013);

--'Los Angeles Department of Water and Power Rev Bonds 'AA-'' (Feb. 19, 2014);

--'U.S. Public Power Rating Criteria' (Dec. 18, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696027

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821811

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson, +1 512-215-3730
Senior Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Stacey Mawson, +1 212-908-0678
Associate Director
or
Committee Chairperson
Dennis Pidherny, +1 212-908-0738
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson, +1 512-215-3730
Senior Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Stacey Mawson, +1 212-908-0678
Associate Director
or
Committee Chairperson
Dennis Pidherny, +1 212-908-0738
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com