AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA-' rating on the following outstanding Southern California Public Power Authority, CA (SCPPA):
--$91,985,000 Mead Adelanto project revenue bonds series 2012A and series 2012B (taxable);
--$28,175,000 Mead Phoenix project revenue bonds series 2012A and 2012B (taxable);
--$116,505,000 STS project transmission revenue bonds series 2011A.
The Rating Outlook is Stable.
Bonds are special limited obligations of SCPPA and payable solely from revenues received from the members participating in the Mead Adelanto, Mead Phoenix, and Southern Transmission System (STS) projects, respectively.
KEY RATING DRIVERS
STRONG PARTICIPANT CREDIT QUALITY: The rating reflects the credit profiles of the largest participants in each of the projects and their respective project participation shares. Project participants rated 'AA-' or higher by Fitch account for 66.8%, 71.3%, and 93.2% of the Mead Adelanto, Mead Phoenix and STS projects, respectively.
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's 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 projects provide SCPPA members with 500-kilovolt (kv) transmission capacity to import power from out-of-state SCPPA owned generation projects.
SUFFICIENT LIQUIDITY: Liquidity at each project is minimal. General reserves held by the members at SCPPA should cushion any potential timing delay between a participant default and 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 ratings.
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. A significant decrease in reserves would be a rating concern, although no change in overall reserve levels is anticipated.
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 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 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 Mead Adelanto and Mead Phoenix projects, there are nine project participants. The largest participants are 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'), Glendale (electric revenue bonds rated 'A+', Negative Outlook), and Burbank (not rated by Fitch). The STS project has six project participants. In order of size, the participants are LADWP, Anaheim, Riverside, Pasadena, Burbank, and Glendale.
TRANSMISSION SERVICE CONTRACT TERMS
Each of the participants have 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. 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 lines are 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 adopt an amended budget after 30 days notice that will cover 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.
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 only cover associated costs. Debt service coverage is typically right above 1.0x. However, in fiscal 2013 the Mead Adelanto and Mead Phoenix projects showed below 1.0x coverage based on member billings (audited revenues) but the bills to members were intentionally reduced to account for guaranteed investment contract (GIC) funds released related to the final maturity on July 1, 2013 of the series 1989 bonds.
The Mead Adelanto and Mead Phoenix 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 Mead Adelanto and Mead Phoenix 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'.
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 Criteria' (March 18, 2014);
--'U.S. Public Power Peer Study' (June 13, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study -- June 2014