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
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