NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA-' rating on the following outstanding Southern California Public Power Authority (SCPPA), CA's revenue bonds:
--$58.44 million power project revenue bonds (Palo Verde Project), subordinate series 2008A and series 2008B underlying rating and the bank bond rating associated with the outstanding bonds.
The bank bond rating is assigned to the series 2008A&B bonds, but will only become applicable if the bonds cannot be remarketed and are purchased by the bank providing the liquidity facility.
The Rating Outlook is Stable.
The bonds are special limited obligations of SCPPA and payable solely from revenues received from the members participating in the Palo Verde project and the funds established under the master and supplemental trusts. There are no senior lien bonds outstanding. The series 2008 bonds are the only debt related to the SCPPA Palo Verde project and have a final maturity of July 1, 2017.
KEY RATING DRIVERS
STRONG PARTICIPANT CREDIT QUALITY: The rating reflects the credit profiles of the largest participants in SCPPA's Palo Verde Project and their respective participation shares in the project. Project participants rated 'AA-' or higher by Fitch account for 77% of the project.
SOLID PROJECT OPERATIONS: SCPPA owns a 5.91% interest in the Palo Verde Nuclear Generating Station (PVNGS). The project has three units that began operations from 1986 to 1988 and have licenses to operate until 2045-2047. Palo Verde provides participants with competitively priced, carbon-free energy, which is increasingly valuable in California's energy market.
UNCONDITIONAL TAKE-OR-PAY OBLIGATIONS: 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 Palo Verde project costs as detailed in the 10 power sales contracts (PSC).
IMPLIED STEP-UP PROVISIONS: The PSCs are viewed as having an implied step-up provision through the ability to amend the budget for unexpected costs, including those from a participant default.
SUFFICIENT LIQUIDITY: Reserves at the project are healthy and provide sufficient cushion in the event of a timing delay due to a participant default and the resulting budget amendment.
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.
DECREASE IN PROJECT RESERVES: Healthy project reserves provide a timing buffer in the event that a participant defaults and an amended budget is needed. A significant decrease in project reserves would be a rating concern, although no change in overall reserve levels is anticipated.
SCPPA Project Supported by PSCs
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. The only source of repayment for the SCPPA projects are the payments made directly from participating members of each specific project.
In the case of the Palo Verde Project, there are 10 project participants. The largest participants are Los Angeles Department of Water and Power at 67% (LADWP; power revenue bonds rated 'AA-'), Imperial Irrigation District at 6.5% (rated 'A+') and Riverside at 5.4% (electric revenue bonds rated 'AA-'). Additional rated participants include Pasadena (power revenue bonds rated 'AA') and Glendale (electric revenue bonds rated 'A+', Negative Outlook). The remaining participants are Burbank (not rated by Fitch) and Vernon (not rated) accounting for 4.4% and 4.9% of the project, respectively, and the cities of Azusa, Banning and Colton (not rated), each accounting for 1%.
PSCs Terms and Amended Budgeting Process
Participants are obligated to make payments on a take-or-pay basis, whether or not the project is operating or operable. Payments under the PSC are made as an operating expense of each system. In LADWP's case, the payment is on parity with its own debt obligations. In all other cases, the payments are made prior to the electric system's own debt payments. The purchasers have covenanted under their PSCs to set and collect rates for their electric services that are sufficient to cover their obligations.
The PSCs do not include explicit step-up requirements in the event of a participant default. However, the structure of the PSCs provides protection through an amended billing procedure. 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 distribute the amounts not paid over the remaining fiscal year. In the amended budget, the 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.
Non-legally required reserves at the project are sizable and could be used to cover any potential cash flow shortfall in the event of smaller participant defaulting. The project maintains an operating fund and a reserve and contingency fund that would both be viewed as providing available funds to cover cash shortfalls prior to an amended budget. The two funds totaled approximately $63 million at fiscal year-end 2013 and have maintained at least this amount for the past four years. Fitch views the consistent reserve levels as providing some protection against the timing risk of the amended budget process.
Project Operations Strong
The Palo Verde project has provided participants with a delivered cost of power of approximately $40/MWh over the past five years. Operations over the past few years have been strong, with an average capacity factor of approximately 90%. The project provides a cost-competitive, carbon-free resource, which is of increasing value in the California marketplace, given the state's regulatory requirements regarding the reduction of greenhouse gas emissions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'U.S. Public Power Peer Study Addendum - February 2014' (Feb. 7, 2014);
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013);
--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study Addendum -- February 2014
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)
U.S. Public Power Peer Study -- June 2013