AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on the following bonds issued by the Southern California Public Power Authority (SCPPA), CA:
--$151.9 million Apex power project revenue bonds, series 2014A;
--$157.6 million Apex power project revenue bonds, series 2014B (taxable).
The Rating Outlook has been revised to Positive from Stable.
SECURITY
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 payment obligation is payable from its power system revenues.
KEY RATING DRIVERS
POSITIVE OUTLOOK REFLECTS PARTICIPANT CREDIT QUALITY: The rating is directly linked to the credit quality of LADWP (power revenue bonds rated 'AA-'/Outlook Positive), the sole participant in the Apex Power Project. The Positive Outlook reflects Fitch's revision of the Rating Outlook to Positive on LADWP's power revenue bonds on April 28, 2016.
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 power sales agreement that remains in effect until the bonds are fully repaid. Payments are on parity with LADWP's $8 billion of outstanding on-balance sheet debt.
LARGE DIVERSE SERVICE AREA: LADWP's greater Los Angeles service territory is broad, mature, and diverse, with stable customer growth. Load growth is projected to be modest at less than 1% annually.
UNIQUE, ADJUSTABLE RATE STRUCTURE: A five-year rate package approved in March 2016 provides strong revenue recovery to LADWP and funding for planned capital investment. Adjustable rate mechanisms provide revenue protection from variable sales and costs. The adjustable rate components provide approximately 49% of power revenues.
STRONG FINANCIAL MARGINS: Financial margins for bondholders are consistently strong with over 2.2x debt service coverage of revenue bonds over the past five years. Cash flow after debt service payments provides capacity to support an 8% transfer to the general fund, and to fund a robust portion of the system's large capital needs. Liquidity is healthy with 252 days operating cash at the end of fiscal 2015.
RATING SENSITIVITIES
CHANGES IN LADWP CREDIT QUALITY: The ratings are based on the credit quality of the Los Angeles Department of Water and Power (LADWP) and the unconditional obligation of LADWP to pay debt service on the bonds. LADWP's ability to demonstrate continued strong financial margins during the ramp-up of increased capital spending in the next two years will likely result in a rating upgrade of its power revenue bonds as well as the SCPPA Apex power project revenue bonds.
CREDIT PROFILE
SCPPA is a joint-action agency that owns and operates electric generation, transmission, and physical gas assets on behalf of its 12 members consisting of 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 other than the payments made directly from members that participate in each specific project. In the case of the Apex Power Project, LADWP is the only member participant.
ABSOLUTE AND UNCONDITIONAL POWER SALES AGREEMENT
SCPPA and LADWP have a power sales agreement (PSA) that will remain in place through the final long-term bond maturity. SCPPA sells 100% of the output of the Apex Power Project to LADWP. The PSA is an unconditional, 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. Therefore, the credit rating of the bonds is based on the credit quality of LADWP.
LADWP has covenanted in the PSA 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 $8 billion as of June 30, 2015.
APEX POWER PROJECT
The Apex Power Project is a natural gas-fired, combined-cycle generating facility with a nameplate rating of 531 MW. The plant's availability factor was 94.04% in fiscal 2015 with a competitive heat rate of 7,152 Btu/kWh.
The Apex Power Project is a key component of LADWP's power resource strategy. LADWP needs additional gas-fired generation capacity to support its growing renewable energy portfolio, as required by California law. LADWP generates approximately 20% of its power supply from renewable sources, and will increase to 33% by 2020 and 50% by 2030. 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 will divest its 477 MW share of the Navajo coal-fired generating station in mid-2016, 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. Apex accounts for around 9% of LADWP's power supply.
SLIM FINANCIAL PERFORMANCE TYPICAL FOR JOINT-ACTION PROJECT
As a joint-action agency, SCPPA and its associated projects typically report slim financial margins, as payments from members are meant to cover only associated costs. Debt service coverage for the Apex Power Project was 2.28x in the first full year of operations, fiscal 2015, but is expected to be closer to 1.0x in future years. The first principal payment on the bonds occurred on July 1, 2015, which is in fiscal 2016. The high debt service calculation in fiscal 2015 reflected the collection of revenues needed to make the July 1, 2015 payment. Cash reserves at the project are modest with 70 days cash on hand at the end of fiscal 2015.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003688
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003688
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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