Fitch Affirms SCPPA Gas Project Revs at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms Southern California Public Power Authority's (SCPPA) outstanding $313.49 million series 2007 A and B gas project revenue bonds at 'A'.

The Rating Outlook is Stable.

SECURITY

The bonds are special obligations of the issuer, payable solely from revenues and other funds pledged under the trust agreement. Revenues are derived from the fulfillment of the obligations from each of the transactions varied counterparties. Bondholders also rely on funds pledged under the indenture, which are typically invested by a third party.

CREDIT SUMMARY

Given the structured nature of prepaid natural gas transactions and the different components of pledged revenues, ratings generally reflect Fitch's assessment of the relevant counterparties and structural enhancements. The principal counterparties in the SCPPA Project No. 1 transaction currently include Goldman Sachs Group, Inc. (GSG; rated 'A'/Outlook Stable), Mitsubishi UFJ Securities International plc (MUFJ; not rated), U.S. Bank NA (USB; rated 'AA-/Outlook Stable) and the five municipal gas purchasers - Anaheim, CA ('AA-'/Outlook Stable), Burbank, CA, Colton, CA, Glendale, CA (A+'/Outlook Stable), and Pasadena, CA ('AA'/Outlook Stable).

KEY RATING DRIVERS

MULTIPLE ROLES FOR GAS SUPPLIER: Gas is supplied to SCPPA by J. Aron & Company, who also serves as the transaction interest rate swap provider and debt service account investment agreement provider. Under any event of termination including a payment default by SCPPA or the persistent failure of J. Aron to deliver gas, J. Aron is required to make a termination payment sized in an amount to equal or exceed the cost of redeeming all outstanding bonds. All of J. Aron's obligations are guaranteed by GSG.

STRONG GAS PURCHASERS: Delivered gas is purchased by the five municipal participants, which collectively exhibit credit fundamentals that support the current rating. Additional credit support for the cities of Burbank, Colton, and Pasadena is provided by a mandatory receivables purchase agreement (RPA) with J. Aron. Fitch does not believe that the debt service reserve surety provided by National Public Finance Guarantee Corp. (NPFG) provides any rating enhancement to the structure.

COMMODITY SWAP PROVIDER CUSTODIAL ARRANGEMENT: MUFJ is the transaction commodity swap provider. However, credit exposure to MUFJ is mitigated pursuant to a custodial arrangement that insulates bondholders from any failure by MUFJ to pay under its swap agreement with SCPPA.

RATING SENSITIVITIES

CHANGE IN COUNTERPARTY RATINGS: The long-term rating on Southern California Public Power Authority's gas project revenue bonds will continue to be determined by Fitch's assessment of the transaction structure, the role of the counterparties in the structure, and their credit quality. The current rating is determined by the weakest of the following rated counterparties: Goldman Sachs Group, Inc. and the utility systems of Anaheim, CA and Glendale, CA.

CREDIT PROFILE

SCPPA issued the Project No. 1 bonds in October 2007 to prepay for a specified supply of natural gas to be delivered by J. Aron over a period of approximately 22 years. Pursuant to separate project Gas Supply Contracts (GSC), SCPPA sells the natural gas to the five project participants each of which are obligated to purchase delivered gas as an operating expense of their respective systems.

COMMODITY SWAP AGREEMENT TO HEDGE PRICE RISK

To hedge the risk of changes in gas prices, SCPPA entered into separate commodity swap agreements. These agreements were novated to MUFJ in 2013 and a custodial arrangement has been implemented on the "back-end" commodity swap agreement between MUFJ and J. Aron. The custodial agreement provides for all required payments made by J. Aron on the "back-end" swap to be remitted directly to SCPPA in the event that MUFJ fails to make the corresponding required payment to SCPPA on the "front-end" commodity swap. In short, the arrangement mitigates the risk on non-payment by MUFJ as swap counterparty.

STRUCTURE DESIGNED FOR TIMELY PAYMENT

The bonds are structured with provisions which provide for timely payment of debt service, regardless of changes in natural gas prices or transportation costs, or even the physical delivery of gas by J. Aron (since financial payments will be due by the supplier, in the event of non-delivery of gas for any reason, including during force majeure events).

SCPPA entered into an interest rate swap agreement with J. Aron concurrent with the issuance of the 2007B, which hedges the interest rate risk on the LIBOR floating bonds into a fixed rate paid by SCPPA.

Payments due from J. Aron (guaranteed by GSG) upon early termination, together with other available funds, are also expected to equal an amount sufficient to pay off the bonds plus accrued interest.

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

Applicable Criteria

Criteria for Rating Prepaid Energy Transactions (pub. 10 Jul 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752050

U.S. Municipal Structured Finance Criteria (pub. 23 Feb 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862222

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990988

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990988

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stacey Mawson
Director
+1-212-908-0678
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stacey Mawson
Director
+1-212-908-0678
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com