Fitch Ratings has upgraded the rating to ‘AA’ from ‘AA-‘ on the following bonds issued by the Southern California Public Power Authority (SCPPA), CA:
$125.5 million (Milford Wind Corridor Phase II Project) revenue bonds series 2011-1;
- $114.0 million (Linden Wind Energy Project) revenue bonds series 2010A and 2010B;
- $386.2 million (Windy Point/Windy Flats Project) revenue bonds series 2010-1).
The Rating Outlook has been revised to Stable from Positive.
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
Upgrade reflects participant credit quality: The rating is directly linked to the credit quality of LADWP. The rating on LADWP’s power revenue bonds was upgraded to ‘AA’.
Renewable wind 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.
1. Milford II Wind Energy project
The Milford II wind energy project is a 102-MW nameplate capacity wind generation project located near Milford, UT. SCPPA used bond funds to prepay for a fixed amount of energy from the project to be delivered through 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.
2. Linden Wind Energy project
The Linden wind energy project is a 50-MW project located in Klickitat County, WA. The project is owned by SCPPA and operated by Cannon Power Services Company. 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’).
3. 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. 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.
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, elevated leverage levels and large ongoing capital needs.
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