Fitch Affirms Southern California Public Power Auth Wind Project Bonds at 'AA-'; Outlook to Positive

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AA-' rating on the following outstanding Southern California Public Power Authority (SCPPA) bonds:

--$137.4 million (Milford Wind Corridor Phase II Project) revenue bonds series 2011-1;

--$121.8 million (Linden Wind Energy Project) revenue bonds series 2010A and 2010B;

--$427.4 million (Windy Point/Windy Flats Project) revenue bonds series 2010-1).

The Rating Outlook is revised to Positive from Stable.

SECURITY

The SCPPA bonds are payable solely from revenues received from the two members participating in each project: the Los Angeles Department of Water and Power (LADWP) and Glendale Water & Power (GWP; together the members). Pursuant to the SCPPA power supply agreements for each of the three wind projects, the members are unconditionally obligated for their respective share of the project costs (including debt service). Step-up provisions require LADWP to pay the full project costs in the event of non-payment by GWP.

KEY RATING DRIVERS

POSITIVE OUTLOOK REFLECTS PARTICIPANT CREDIT QUALITY: The ratings on the bonds are directly linked to the credit quality of LADWP (power revenue bonds rated 'AA-'/Outlook Positive). The Positive Outlook on these revenue bonds reflects Fitch's revision of the Outlook to Positive on LADWP's power revenue bonds on April 28, 2016.

RENEWABLE WIND ENERGY PROJECTS: The three projects are operating wind projects located in Utah and Washington that provide renewable energy to LADWP and are essential to meeting California's renewable portfolio standard.

UNCONDITIONAL TAKE-OR-PAY AGREEMENTS: Bondholders are secured by absolute and unconditional 'take-or-pay' power supply agreements that extend for the life of the bonds with the two members, LADWP and GWP (rated 'A+').

STEP-UP PROVISIONS OBLIGATE LADWP: The agreements provide additional support through the inclusion of step-up provisions (20% for Milford II, and 100% for Linden and Windy Point) that require LADWP to pay full projects costs in the event of a payment default by GWP. LADWP's obligation to pay is on parity with other similar off-balance sheet obligations and its own outstanding power revenue bonds.

RATINGS DRIVEN BY LADWP RATING: The project ratings are driven by the rating and underlying credit quality of LADWP. LADWP's credit characteristics include a strong and diverse service area with over 1.5 million customers, a unique and adjustable rate structure, strong financial margins, above average debt levels and large ongoing capital needs.

RATING SENSITIVITIES

CHANGES IN LADWP CREDIT QUALITY: The ratings are based on the credit quality of Los Angeles Department of Water and Power (LADWP) and the unconditional obligation of LADWP to pay debt service on the bonds. LADWP's ability to demonstrate continued strong financial margins during the ramp-up of increased capital spending in the next two years will likely result in a rating upgrade of its power revenue bonds as well as the SCPPA wind project revenue 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 revenues for each of the SCPPA projects than the payments made directly from those members that participate in each specific project.

SLIM FINANCIAL MARGINS TYPICAL FOR JOINT ACTION PROJECTS

As a joint-action agency, SCPPA and its associated projects report slim financial margins, as payments from members are meant to only cover associated costs. Debt service coverage is typically slightly above 1.0x, which is the case for each of the three wind projects.

MILFORD II WIND ENERGY PROJECT

The Milford II wind energy project is a 102 megawatts (MW) nameplate capacity wind generation project located near Milford, Utah. SCPPA used bond funds to prepay for a fixed amount of energy from the project to be delivered over 20 years between 2011 and 2031. The project began commercial operation on May 2, 2011. The phase II project is an expansion of the Milford Phase I project (a 203.5 MW project) the output of which is also dedicated to LADWP and GWP through a separate prepaid arrangement.

The project's transmission access directly into California makes the energy eligible as an 'in-state' resource under California's renewable portfolio standard requirement. The two phases of the Milford project share transmission capacity in an 88-mile transmission line that connects into the Intermountain Power Project (IPP) switchyard, a facility in which LADWP owns transmission capacity rights via its IPP agreements. These agreements currently expire on June 15, 2027 (prior to the final maturity on these bonds on July 1 2031). Although SCPPA is working to extend these rights, its payment obligations to bondholders is not dependent on its ability to deliver the energy.

The capacity factor of the project was 19.7% in fiscal 2015 and has been below the initial project estimate of 25.9% since commercial operation. The annual energy output fell below the minimum amount (183,900 MWh annually) required in fiscals 2013 and 2015. The contract permits for make-up deliveries in future years, but if the project owner ultimately fails to perform SCPPA has a security interest in the project.

LINDEN WIND ENERGY PROJECT

The Linden wind energy project is a 50 MW project located in Klickitat County, Washington. The project was developed by Northwest Wind Partners. The project was purchased on Sept. 14, 2010 and is owned by SCPPA and operated by EnXco. Transmission is provided via long-term contracts with Klickitat Public Utility District, WA and the Bonneville Power Administration.

Since the project was purchased prior to June 1, 2010, it is a grandfathered project under California's renewable portfolio standard. This designation allows the energy from a grandfathered project to reduce the amount of total renewable energy needed to be in compliance with the three compliance categories (often referred to as 'buckets').

Project performance has been good since commercial operation began on June 30, 2010, with capacity factors of 34.1% and 28.9% in fiscals 2014 and 2015, respectively. Cost of the energy has ranged between 11.6 cents and 13.8 center per kWh over the last three years. The project is owned by SCPPA, and therefore there are no minimum delivery amounts.

WINDY POINT/WINDY FLATS POWER PROJECT

The Windy Point/Windy Flats Power Project is one of the largest wind farms in the United States, spanning 26 miles along the Columbia River ridgeline in Washington. The 262.2 MW project consists of 114 wind turbines that have been fully operational since March 2010. The project was developed by Windy Flats Partners, LLC (an affiliate of the Cannon Power Group). Cannon Power Group is the project operator as well. Transmission is provided via long-term contracts with Klickitat Public Utility District, WA and the Bonneville Power Administration.

Similar to the Linden project, the energy is grandfathered under California's renewable portfolio standard. Operations have been good with capacity factors of 29.7% and 25.4% in fiscals 2014 and 2015, respectively. The seller has consistently provided the annual minimum delivery to SCPPA of 555,393 MWh in each year of operation.

LAYOFF AGREEMENTS BETWEEN GWP AND LADWP

SCPPA has sold its rights to prepaid energy from Milford II under power sales agreements to LADWP (95.098%) and GWP (4.902%). SCPPA has sold the output of the Linden project to LADWP (90%) and GWP (10%). The output of Windy Point is contracted to LADWP (92.37%) and GWP (7.63%) as well. GWP has contracted the sale of its share from the three projects to LADWP for the term of each project sales agreements. The result is that LADWP pays 100% of project costs, including debt service.

SECURITY INTEREST IN THE EVENT OF NON-PERFORMANCE

SCPPA has a perfected first lien and priority security interest in the Milford II and Windy Point/Windy Flat facilities under the terms of the project purchase agreements that would allow SCPPA to take the assets in the event the seller is unable to meet its obligations under the power purchase agreement. SCPPA also has early buy-out options at certain dates for each of the three projects but the purchase would not change LADWP or GWP's obligations to continue paying debt service on the bonds. The Linden project is already owned by SCPPA.

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 Rates Los Angeles, CA Power Rev Bonds 'AA-'; Outlook Positive' dated April 28, 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=1003686

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003686

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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160429006047/en/

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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