July 15, 2016 - 1:02 PM EDT
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Fitch Affirms Southern CA PPA Transmission Project Revs at 'AA-'; STS Project Outlook to Positive

Fitch Ratings has affirmed affirms its 'AA-' rating on the following outstanding Southern California Public Power Authority, CA (SCPPA) bonds:

--$73,110,000 Mead Adelanto project revenue bonds series 2012A and series 2012B (taxable);

--$22,180,000 Mead Phoenix project revenue bonds series 2012A and 2012B (taxable);

--$293,115,000 Southern Transmission System (STS) project transmission subordinate lien revenue bonds series 2011A, 2015A, 2015B and 2015C.

SCPPA has other parity bonds outstanding for the Southern Transmission Project that are not rated by Fitch.

The Rating Outlook for the STS project transmission bonds is revised to Positive from Stable. The Rating Outlook for the Mead Adelanto and Mead Phoenix bonds is Stable.

SECURITY

The bonds are special limited obligations of SCPPA and payable solely from revenues received by SCPPA from the members participating in the Mead Adelanto, Mead Phoenix, and STS projects, respectively. While the STS project bonds have a subordinate lien on revenues, there are no senior lien bonds outstanding.

KEY RATING DRIVERS

POSITIVE OUTLOOK FOR STS: The Positive Outlook on the STS project bonds reflects Fitch's Rating Outlook for LADWP, the largest project participant at 59.5%.

STRONG PARTICIPANT CREDIT QUALITY: The ratings reflect 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 the 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. The implied unlimited step-up limits bondholder exposure to individual members.

MODEST LIQUIDITY AND NO RESERVE FUND: Liquidity at each project is typically minimal, and only one series of the bonds rated by Fitch has a debt service reserve fund. General reserves are held by the members at SCPPA. Although not pledged, Fitch believes the reserves would be used to cushion any potential timing delay between a participant default and the amended budget process.

RATING SENSITIVITIES

CHANGE IN PARTICIPANT CREDIT QUALITY: The ratings are based on the credit quality of the project participants together with the implied step-up provisions that mitigate the impact of a payment default. The Positive Outlook for the Southern California Public Power Authority (SCPPA), CA's Southern Transmission System (STS) project revenue bonds reflects the Positive Outlook on the Los Angeles Department of Water and Power (LADWP), CA's power revenue bond and the large share of STS for which LADWP accounts. An upgrade of LADWP's power revenue bond rating is expected to result in a rating upgrade on SCPPA's STS project revenue bonds.

DECREASE IN SCPPA RESERVES: Healthy reserves held at the SCPPA provides a timing buffer in the event that a participant defaults and an amended budget process is needed. A significant decrease in general reserves would be a rating concern, given the absence of debt service reserve funds for all series of bonds but the STS project revenue bonds, series 2011.

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 - 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 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 of the City of Los Angeles (LADWP; power revenue bonds rated 'AA-' by Fitch), City of Anaheim (electric revenue bonds rated 'AA-'), City of Riverside (electric revenue bonds rated 'AA-'), City of Pasadena (electric revenue bonds rated 'AA'), City of Glendale (electric revenue bonds rated 'A+'), and City of 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 has 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. The transmission service contracts expire in 2027 or at such later date that all debt associated with the project is retired. STS project-related debt is scheduled to mature by July 1, 2027 (all bonds but the series 2015C bonds expire by July 1, 2023) and Mead Adelanto and Mead Phoenix debt by July 1, 2020.

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 amended billing procedures in the contracts provide protection if a member defaults and additional costs need to be allocated. In the event of nonpayment by a participating member, SCPPA's board is required to adopt an amended budget after 30 days. 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. The potential delay between a default and collection of the amended bills poses a credit concern given the typically low liquidity levels at the projects and the absence of a debt service reserve fund for most series of bonds. Fitch assumes that SCPPA's general reserves could be used to address the timing delay.

STS PROJECT

STS is a 488-mile, 500-kV, DC transmission line that imports power primarily from the Intermountain Power Project (IPP) in Utah. Similar to the transmission service contracts that support SCPPA's STS project revenue bonds, the same project participants have power sales contracts to purchase the output of IPP through June 15, 2027. The purchasers and IPP have amended the power sales contracts to allow for project conversion to natural gas in the future, which causes no change to the existing contracts through June 15, 2027.

As wind development has occurred across the western U.S., the STS project was upgraded to 2,400 megawatts (MW) (from 1,920 MW) in 2010, funded with additional debt that did not extend the final maturity of project-related debt past 2027. The increased capacity allows for the delivery of wind energy from the Milford wind project in Utah, purchased by SCPPA under a prepaid purchase power agreement with deliveries scheduled through 2031.

STS members include LADWP (59.5%), Anaheim (17.6%), Riverside (10.2%), Pasadena (5.9%), Burbank (4.5%) and Glendale (2.3%). Together, Pasadena and LADWP account for 65.4% of the project. The high percentage of these two participants and the implied step-up provisions in the transmission service contracts account for the Positive Outlook on the STS project bonds, given the Positive Outlook on LADWP's power revenue bonds.

MEAD ADELANTO AND MEAD PHOENIX PROJECTS

The Mead-Adelanto project is a 202-mile, 500-kV, AC transmission line that extends from Southern California to Nevada with a transfer capability of 1,291 megawatts (MW). The Mead-Phoenix project is a 256-mile, 500-kV, AC transmission line that extends from near Phoenix, AZ to Nevada with a transfer capability of 1,923 MW. The Mead-Adelanto project is operated by the Los Angeles Department of Water and Power and the Mead-Phoenix project is operated by the Salt River Project, AZ and the Western Area Power Administration.

Both projects include nine SCPPA participants. The series 2012 bonds are secured by the 1992 transmission service contracts that include LADWP's percentage shares of the Mead-Adelanto and Mead-Phoenix projects of 35.7% and 25.5%, respectively. In April 2016, LADWP secured additional percentage shares of both projects, purchased by SCPPA from the Modesto Irrigation District, CA, but these newly acquired percentages are separately secured by 2016 transmission service contracts between SCPPA and LADWP. The overall credit quality of the remaining project participants securing the series 2012 bonds is considered supportive of the ratings.

SLIM FINANCIAL PERFORMANCE TYPICAL FOR JOINT ACTION PROJECT

As a project-based joint-action agency, certain SCPPA individual projects report slim financial margins, as payments from members are meant to only cover associated project costs. Debt service coverage is typically right above 1.0x but may be below 1.0x if SCPPA and project participants decide to use cash reserves to offset participant billings as occurred at STS in fiscal 2015 and Mead Adelanto and Mead Phoenix in fiscals 2013 and 2014.

None of the bonds have a debt service reserve fund, except the series 2011A STS bonds, which have a reserve equal to 25% of maximum annual debt service. The absence of a debt service reserve fund for the bonds is of some credit 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 Fitch believes would be tapped to cover any potential cash flow shortfall in the event of smaller participant defaults.

LADWP CREDIT QUALITY IS STRONG

LADWP is the largest city-owned municipal utility in the United States with 1.5 million electric customers. For more information on Fitch's rating for LADWP's power system, see Fitch report Los Angeles Department of Water & Power, California Power System' dated May 4, 2016.

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=1008994

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008994

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 78746
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:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]


Source: Business Wire (July 15, 2016 - 1:02 PM EDT)

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