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 February 4, 2016 - 3:44 PM EST
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Fitch Affirms Southern California Public Power Auth's Apex Power Proj Revs at 'AA-'; Outlook Stable

Fitch Ratings has affirmed its 'AA-' ratings 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 is 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

PARTICIPANT CREDIT QUALITY: The rating reflects the credit quality of LADWP (power revenue bonds rated 'AA-'/Outlook Stable), the sole participant in the Apex Power Project.

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 own $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. Steady load growth of around 1% annually is expected to be offset by investments in energy efficiency.

LADWP STRONG FINANCIAL MARGINS: LADWP's financial margins for bondholders are consistently strong with over 2.0x coverage of revenue bonds. Liquidity is healthy with 243 days operating cash at the end of fiscal 2015.

EVOLVING POWER SUPPLY: California legislation adopted over the past decade requires costly changes to the state's power supply mix. LADWP continues to acquire renewable resources and replace existing coal-fired capacity with lower carbon emitting resources, as evidenced by the Apex Power Project contract with SCPPA signed in 2014. As a result, LADWP is well positioned to comply with the state's environmental goals.

LARGE CAPITAL NEEDS: Capital investment in the LADWP system has been robust in recent years and high levels of investment are projected to continue. The debt-financed portion of its very large $8 billion capital plan is significant at $4.7 billion over the next five years, which will increase LADWP's leverage from already above-average levels.

RATING SENSITIVITIES

SINGLE PARTICIPANT CREDIT QUALITY: The rating on the Southern California Power Project's Apex power project bonds is based on the credit quality of Los Angeles Department of Water and Power and the unconditional obligation of the utility to pay debt service on the bonds. A change in the credit quality of LADWP would affect the rating on the Apex power project 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 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 this will increase to 33% by 2020. 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 is planning to divest its 477 MW share of the Navajo coal-fired generating station, 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=999075

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999075

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Peter Fitzpatrick, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com


Source: Business Wire (February 4, 2016 - 3:44 PM EST)

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