Fitch Rates SCPPA Southern Transmission Project Rev Bonds 'AA-'; Outlook Stable

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

--Approximately $116.8 million Southern Transmission Project revenue bonds series 2015C.

Proceeds of the series 2015C bonds will be used to refund outstanding series 2008B bonds and pay the costs of issuance. Bonds are expected to price during the week of Feb. 23, 2015. The series 2015C bonds will not have a debt service reserve fund.

Fitch also affirms the following outstanding ratings:

--$230.1 million Southern Transmission Project revenue bonds series 2011A, 2015A and 2015B rated 'AA-'.

SCPPA has other parity bonds outstanding for the Southern Transmission Project that are not rated by Fitch.

The Rating Outlook is Stable.

SECURITY

Bonds are special limited obligations of SCPPA and payable solely from revenues received from the members participating in the Southern Transmission Project.

KEY RATING DRIVERS

STRONG PARTICIPANT CREDIT QUALITY: The rating reflects the credit profiles of the largest participants in the project. Those participants rated 'AA-' or higher by Fitch account for 93.2% of the Southern Transmission Project.

TAKE-OR-PAY OBLIGATION: Bondholders are secured by an absolute and unconditional take-or-pay obligation of project participants, paid as an operating expense, for their share of project costs as outlined in the transmission service contracts between each participant and SCPPA.

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 Southern Transmission Project provides SCPPA members with 500-kilovolt (kv) transmission capacity to import power from other SCPPA generation projects, primarily the Intermountain Power Project and wind-generation purchase power agreements.

MODEST LIQUIDITY: Liquidity at the project is minimal. General reserves held by the members at SCPPA should cushion any potential timing delay between a participant default and any required budget amendment.

RATING SENSITIVITIES

CHANGE IN PARTICIPANT CREDIT QUALITY: The rating largely reflects the credit quality of the project participants and the implied step-up provision which mitigates the impact of a participant default. Any change in credit quality of the project participants, especially the larger participants, could therefore affect the rating.

DECREASE IN SCPPA RESERVES: Healthy reserves held at SCPPA provide a timing buffer in the event that a participant defaults and an amended budget process is needed. Although no change in overall reserve levels is anticipated, a significant decrease in reserves would be a rating concern.

CREDIT PROFILE

SCPPA Project Supported by Transmission Service Contracts

SCPPA is a joint-action agency that owns and operates electric generation, transmission, and physical gas assets on behalf of its 12 members, 11 municipal electric utilities and one irrigation district all located in southern California. All of SCPPA's projects are financed and secured on an individual-project basis. There is no other source of revenue 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 Southern Transmission Project, there are six project participants. The largest are the Los Angeles Department of Water and Power (LADWP; power revenue bonds rated 'AA-' by Fitch), Anaheim (electric revenue bonds rated 'AA-'), Riverside (electric revenue bonds rated 'AA-'), Pasadena (electric revenue bonds rated 'AA'), Burbank (not rated by Fitch), and Glendale (electric revenue bonds rated 'A+').

TRANSMISSION SERVICE CONTRACT TERMS

Each of the participants has executed transmission service contracts with SCPPA that govern the obligations of the project participants in addition to the bond indentures. Participants are required to pay operating and fixed (including debt) costs of the project as outlined by an annual budget prepared by SCPPA. The transmission service contracts expire in 2027 or at such later date that all debt associated with the project is retired. All project-related debt is scheduled to mature by July 1, 2027 and all bonds but the series 2015C bonds will mature by July 1, 2023. 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 defaults. However, the structure of the contracts, 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 of its 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 that will cover the remaining fiscal year after 30 days' notice. 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.

PROJECT ESSENTIALITY

The project provides an essential transmission link into California that allows project participants to deliver power from other SCPPA investments to meet their retail electricity requirements. The Southern Transmission Project is a 488-mile, 500-kv transmission line that imports power primarily from the Intermountain Power Project (IPP) in Utah. The same six project participants have power sales contracts to purchase the output of the IPP through June 15, 2027. The purchasers and IPP are in the process of amending the power sales contracts to allow for project conversion to natural gas in the future.

As wind development has occurred across the western U.S., the project was upgraded to 2,400 megawatts (MW) (from 1,920 MW) in 2010, funded with additional debt that did not extend the final maturity of project-related debt. The increased capacity provides additional transmission capacity to deliver wind energy from the Milford wind project in Utah, purchased by SCPPA under a prepaid purchase power agreement with deliveries scheduled through 2031.

SLIM FINANCIAL PERFORMANCE TYPICAL FOR JOINT-ACTION PROJECT

As a joint-action agency, SCPPA and its associated projects report slim financial margins, as payments from members are meant to cover only associated costs. Debt service coverage for the Southern Transmission Project was 1.01x in both fiscal 2014 and 2013.

Cash reserves at the project are typically modest given the transmission nature of the project and limited operations. Cash dipped to a very low $146,000 at year-end fiscal 2014. The drop was due to a $3 million invoice paid to IPP in fiscal 2014 but recovered from participants in fiscal 2015.

The series 2015A,B&C bonds do not have a debt service reserve fund. The series 2011A STS bonds have a reserve equal to 25% of maximum annual debt service. The absence of a debt service reserve fund for the series 2015 bonds is of some concern, given the 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 the event of smaller participant defaults.

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' (June 12, 2014);

--'2015 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 10, 2014).

Applicable Criteria and Related Research:

2015 Outlook: U.S. Public Power and Electric Cooperative Sector (Steady as She Goes)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=831228

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980155

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Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78746
or
Secondary Analyst
Stacey Mawson
Associate Director
+1-212-908-0678
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78746
or
Secondary Analyst
Stacey Mawson
Associate Director
+1-212-908-0678
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com