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
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