Fitch Affirms Southern CA PPA Transmission Project Revs at 'AA-'; Outlook Stable.
--$54.7 million Mead Adelanto project revenue bonds, series 2012A and series 2012B (taxable);
--$16.5 million Mead Phoenix project revenue bonds, series 2012A and 2012B (taxable).
The Rating Outlook is Stable.
The bonds are special limited obligations of SCPPA and payable solely from revenues received by SCPPA from the members participating in the Mead Adelanto and Mead Phoenix projects, respectively.
KEY RATING DRIVERS
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%, and 71.3% of the Mead Adelanto and Mead Phoenix 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 and requirement to amend the budget for unexpected costs, including a participant default. The implied unlimited step-up limits bondholder exposure to individual members.
MODEST PROJECT LEVEL LIQUIDITY AND NO RESERVE FUND: Liquidity at each project is typically minimal, and none of the bonds rated by Fitch have 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.
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. Any meaningful shift in credit quality among the members could result in a corresponding change in the ratings.
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 the bonds.
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 'AA'), City of Anaheim (electric revenue bonds 'AA-'), City of Riverside (electric revenue bonds 'AA-'), City of Pasadena (electric revenue bonds 'AA'), City of Glendale (electric revenue bonds 'A+'), and City of Burbank (not rated by Fitch).
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 date that all debt associated with the project is retired. The Mead Adelanto and Mead Phoenix project-related debt is scheduled to mature 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.
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 project level and the absence of a debt service reserve fund for the bonds. Fitch assumes that SCPPA's general reserves could be used to address the timing delay.
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 LADWP 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 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 May 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 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 Mead Adelanto and Mead Phoenix in fiscals 2013 and 2014.
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.
STRONG LADWP CREDIT QUALITY
LADWP provides retail electric service to a large and diverse service area with over 1.5 million 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 March 26, 2018.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Oct 5, 2018|
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