Fitch Ratings assigns the following ratings to the Southern California
Public Power Authority, CA (SCPPA):
--$69,100,000 million power project revenue bonds (Palo Verde Project),
subordinate series 2008A and series 2008B bank bonds at 'AA-'.
The Rating Outlook is Stable.
The Palo Verde Project 2008 subordinate refunding series A and series B
bonds (Palo Verde) bonds are scheduled to be remarketed on June 7, 2012
with a closing on June 14, 2012. The remarketing is in connection with a
replacement of the outstanding Citibank letter of credit (LOC) with an
LOC provided by Barclays. The bank bond rating is assigned and reflects
the underlying rating on the bonds, in the event they become bank bonds.
Fitch expects to release a rating on the bonds that reflects the credit
enhancement of the LOC later this week.
KEY RATING DRIVERS
PARTICIPANT CREDIT QUALITY: The rating reflects the credit profiles of
the largest participants in SCPPA's Palo Verde Project and their
respective participation shares in the project.
SOLID PROJECT OPERATIONS: SCPPA owns a 5.91% interest in the Palo Verde
Nuclear Generating Station. The project has three units that began
operations between 1986-1988 and have licenses to operate until
2045-2047. Palo Verde provides participants with competitively priced,
carbon-free energy, which is increasingly valuable in California's
TAKE OR PAY OBLIGATIONS: Bondholders are secured by an absolute and
unconditional take-or-pay obligation of the project participants, paid
as an operating expense, for their share of Palo Verde project costs as
outlined in the 10 power sales contracts (PSC).
IMPLIED STEP-UP PROVISION: The PSCs are viewed as having an implied
step-up provision through the ability to amend the budget for unexpected
costs, including those from a member default.
LACK OF DEBT SERVICE RESERVE: In the event of a participant default,
there could be a delay between the time of the default and the
authority's ability to collect revenues from non-defaulting participants
through a mid-year budget amendment. Reserves at the project are healthy
and could cushion the timing delay but the reserves are not legally
required by the Indenture and no debt service reserve fund is in place.
WHAT COULD TRIGGER A RATING CHANGE
CHANGE IN PARTICIPANT CREDIT QUALITY: The rating is based on the credit
quality of the project participants together with the implied step-up
provisions that mitigate the impact of a payment default. A change in
the credit quality, especially of the larger project participants, could
affect the rating.
DECREASE IN PROJECT RESERVES: Healthy project reserves provide a timing
buffer in the event that a participant defaults and an amended budget
process is needed. A significant decrease in project reserves would be a
rating concern, although no change in overall reserves levels is
The 2008 subordinate series A and series B bonds are special limited
obligations of SCPPA and payable solely from revenues received from the
members participating in the Palo Verde project and the funds
established under the master and supplemental trusts. There are no
senior lien bonds outstanding. The series 2008 bonds are the only debt
related to the SCPPA Palo Verde project and have a final maturity of
July 1, 2017.
The bonds do not have a debt service reserve fund.
SCPPA Project Supported by Power Supply Contracts
SCPPA is a joint-action agency that owns and operates electric
generation, transmission, and physical gas assets on behalf of its 14
members, all of whom are municipal electric utilities in southern
California. All of SCPPA's projects are financed and secured on an
individual project basis. There is no other source of revenues 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 Palo Verde Project, there are 10 project
participants. The largest participants are Los Angeles Department of
Water and Power at 67% (LADWP; power revenue bonds rated 'AA-'),
Imperial Irrigation District at 6.5% (rated 'A+'), and Riverside at 5.4%
(rated 'AA-'). Pasadena (rated 'AA'), Glendale (rated 'A+'), and Burbank
(not rated by Fitch) each account for 4.4% of the project. Vernon (not
rated) accounts for 4.9%, and the cities of Asuza, Banning and Colton
(not rated) each account for 1%.
Power Supply Contract Terms and Amended Budgeting Process
Each of the 10 participants have signed PSC's that govern the
obligations of the project participants in addition to the bond
indenture. Participants are required to pay operating and fixed
(including debt) costs of the project as outlined by an annual budget
prepared by SCPPA. Payment by participants to SCPPA is unconditional and
considered take-or-pay, whereby members are required to make a payment
whether or not the Palo Verde project is operational or power is
received. Obligations to SCPPA by participants constitute operating
expenses of each respective utility system.
The PSCs do not include explicit step up requirements in the event a
participant defaults. However, the structure of the PSC, through the
amended billing procedures, provides protection if a member defaults and
additional costs need to be allocated to non-defaulting participants.
SCPPA sends a consolidated bill to participants on a monthly basis. In
the event of nonpayment by a participating member, SCPPA's board is
required adopt an amended budget after 30 days notice that will cover
the remaining fiscal year. 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 absence of a debt service reserve fund for the bonds is of some
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 the project are sizable and could be
tapped to cover any potential cash flow shortfall in the event of
smaller participant defaults.
Palo Verde Project Reserves
The project maintains an operating fund and a reserve and contingency
fund that would both be viewed as providing available funds to cover
cash shortfalls prior to an amended budget. At the end of fiscal 2011,
the two funds totaled approximately $76 million and have maintained at
least this amount for the past four years. In addition, revenue
collections at the project support a strong repair and replacement
component in the budget, providing a healthy debt service coverage ratio
of over 2.0 times (x). Fitch views the consistent reserve levels as
providing some protection against the timing risk of the amended budget
Project Operations Strong Since Operations Began
The Palo Verde project has provided participants with a delivered cost
of power of between $40-$50/MWh over the past five years. The debt
associated with the project will amortize in 2017, which will provide a
slight reduction (around $7/MWh) in the cost of power. Project
availability of the three units at the project ranged between 81.6% and
96.7% in 2011. The project provides a cost-competitive, carbon-free
resource, which is of increasing value in the California marketplace,
given the states regulatory requirements regarding the reduction of
greenhouse gas emissions.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria, this action was additionally informed
by information from Creditscope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', Jan. 11, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012.
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
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