Fitch Ratings has affirmed Southwest Power Pool's (SPP) Long-Term Issuer
Default Rating (IDR) at 'A'. The Rating Outlook is Stable. Additionally,
Fitch has affirmed SPP's Short-term IDR at 'F1'. Approximately $268
million of debt is affected by today's rating action. A full list of
rating actions follows at the end of this press release.
KEY RATING DRIVERS
SPP's ratings and Stable Outlook reflect its essential role in managing
and maintaining the reliability of the regional transmission system, the
full and timely recovery of its costs through Federal Energy Regulatory
Commission (FERC) regulated tariffs and service contracts, and the solid
investment-grade credit worthiness of its members.
Open Access Transmission Tariff: SPP operates under a FERC-approved Open
Access Transmission Tariff (OATT) that provides for the full recovery of
all costs, including scheduling, transmission and monitoring activities.
Fitch expects FERC will continue to permit tariffs as necessary to
recover SPP's operating costs, as has been the case historically.
Addition of New Members: SPP meaningfully expanded its service territory
in October 2015 with the addition of the Integrated System (IS) as a
full member. The IS is a high-voltage transmission grid in the upper
Great Plains region of the U.S., composed of The Western Area Power
Administration (WAPA), Basin Electric (Basin) and Heartland Power
District (Heartland). The IS adds more than 5,000MW of peak demand and
9,500 miles of high-voltage transmission lines in eastern Montana, North
Dakota and South Dakota to SPP's footprint and integrates WAPA's
hydropower and Basin Electric's thermal resources. The integration
leverages existing generation and transmission resources across SPP's
footprint and reduces costs for all members. SPP estimates benefits
totaling $334.1 million over a 10-year period for its members from the
inclusion of the IS. Notably, WAPA is the first federal agency to join a
regional transmission organization.
Voluntary membership: The voluntary nature of SPP membership is a modest
credit concern, in Fitch's opinion. Transmission services costs, which
are largely fixed would be borne by the remaining members, on a pro rata
basis, should an SPP member leave. The departure risk is mitigated by
the requirement that the exiting member pay a fee equal to its share of
SPP's outstanding debt and other committed expenses as an 'exit charge'.
Similarly, SPP's exposure to a market participant's payment default is
minimized by the collateral requirements as well as bylaws that allow
for costs of the default to be spread among the remaining market
IEM: SPP's integrated energy market (IEM) system went live in 2014; the
IEM includes a real time balancing market with five minute generation
dispatch, a day-ahead market with congestion hedging, and a related
operating reserves market that increase market efficiencies and lower
power costs for respective members. The IEM leverages resource diversity
over a larger geographic area, facilitates greater penetration of
renewable energy and provides market participants with approximately
$422 million in net savings annually. Notably, with the rollout of the
IEM, SPP became the primary balancing authority in its footprint by
incorporating 16 balancing authorities.
Declining Capex: SPP plans to spend $71 million on capex through 2018, a
decrease of 19% when compared to the prior three-year period. The
expected capex reduction is primarily due to the completion of the IEM
system in 2014. Capital spending will be primarily focused on
information technology investments and to a lesser extent, marketplace
enhancements and regulatory reliability investments. SPP's $33 million
unsecured term note facility was drawdown in full in March to help
prefund capital expenditures through 2016.
Strong Summer Reserve Margin: SPP expects the reserve margin to be 28%
this summer, more than double the 12% annual reserve margin requirement.
SPP's generating mix is changing with increased wind and natural gas
generation replacing less efficient coal fired generation due to strong
wind resources and low gas prices. SPP has 12.4 GW of wind generating
capacity in service with an additional 33.8GW in various stages of
development. Due to abundant wind resources within SPP's footprint wind
generation has steadily increased and comprised 14% of SPP's total
generating resource mix for 2015, an increase of approximately 2% when
compared to the prior year.
Transmission Investments: SPP identifies new transmission projects
needed to maintain reliability, increase regional efficiency and
facilitate the integration of renewable generation, specifically wind
within its footprint, but investment in these projects is the
responsibility of its members and therefore not a credit concern for
SPP. In 2015, SPP members completed 93 transmission expansion projects
totaling $856 million. Going forward, SPP has identified the need for
new transmission upgrades totalling approximately $520 million through
2020. Projects in the plan include new lines, line rebuilds and
upgrades, reactive devices, transformers, substation upgrades and
Fitch's key assumptions within the rating case for SPP include:
--Timely recovery of all operating costs under FERC-approved Open Access
--Debt maturities of $24 million in 2016, $21 million in 2017, and $21
million in 2018 are repaid with available cash;
--Capital Expenditures of $22 million in 2016, $26 million in 2017, and
$23 million in 2018.
Positive Rating Action: No positive rating actions are expected at this
Future developments that may, individually or collectively, lead to a
negative rating action includes:
--An unexpected change in the rate design of the FERC-approved OATT
--A cybersecurity event;
--A large departure of members from SPP's service territory.
SPP's current liquidity position is sufficient with $64 million of
available liquidity as of June 30, 2016, wholly comprised of
unrestricted cash and cash equivalents. SPP is currently in the process
of procuring a new $30 million three-year unsecured revolving credit
facility to replace their previous $30 million unsecured credit facility
which matured in June. SPP expects to close on the new credit facility
in September. Debt maturities over the next four years are manageable
and are as follows: $24 million in 2016, $21 million in 2017, $21
million in 2018, $22 million in 2019. Maturing debt is expected to be
funded by a mix of internally generated cash and cash on hand.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Southwest Power Pool
--Long-term IDR at 'A';
--Senior secured debt at 'A+';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1'.
The Rating Outlook is Stable.
Disclosure: There were no financial statement adjustments made that were
material to the rating rationale outlined above.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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