TEXT-Fitch affirms Southwest Power Pool at 'A'
July 13 - Fitch Ratings has affirmed the ratings of Southwest Power Pool (SPP) as follows: --Issuer Default Rating (IDR) at 'A'; --Senior Secured Debt at 'A+'; --Senior Unsecured Debt at 'A'; --Short-term IDR at 'F1'. The Rating Outlook is Stable. Approximately $182.2 million of debt is affected by the rating action. Key rating drivers include: --The predictability and sustainability of cash flows derived from regulated tariffs and service contracts; --The relatively low business risk of its transmission operations; --The solid credit worthiness of its members; --A supportive federal regulatory environment at the Federal Energy Regulatory Commission (FERC). SPP operates under FERC-approved Open Access Transmission Tariffs (OATT) that provide for the full recovery of all costs including scheduling transmission and monitoring activities. Fitch's expectation is that the FERC will permit tariffs, as necessary, to recover increases in SPP's operating costs, as has been the case in the past. Fitch's rating concerns include the voluntary nature of SPP's membership. Transmission services costs, which are largely fixed costs, would be borne by the remaining members, on a pro rata basis, should an SPP member leave. However, the risk of departure of a member is mitigated by the requirement that the exiting member must pay a fee equal to its share of SPP's outstanding debt and other committed expenses as an 'exit charge'. Similarly, SPP's exposure to a market participant's payment default is minimized by the collateral requirements as well as bylaws that allow for costs of the default to be spread among the remaining market participants. SPP's current liquidity position is sufficient with $94 million of available liquidity including a $20 million unsecured revolving line of credit facility that expires in June 2013 and approximately $74 million of cash and cash equivalents. As of Dec. 31, 2011, no amounts were outstanding under the facility and Fitch notes that SPP has never drawn on the revolver. Debt maturities over the next five years are manageable and are as follows: $11.2 million in 2012, $12.7 million in 2013, $18 million in 2014, $14.3 million in 2015, and $11.4 million in 2016. Maturing debt is expected to be funded by a mix of internally generated cash and cash on hand. SPP's capital expenditures are forecasted to approximate $86 million in 2012 and $46 million through 2013 to 2014, a notable reduction when compared to $79.4 million in 2011. Future capital spending needs will decrease due to the recent completion of the company's new operations center in West Little Rock, Arkansas, and upon implementation of new software systems and engineering work for the development of the new day ahead energy markets in 2014. SPP recently completed construction on a new corporate center in West Little Rock, Arkansas for $62 million dollars and the project was on-time and on-budget. SPP employees will officially move in on July 16, 2012, which will consolidate operations from the three current facilities in Maumelle and Little Rock. The new building will allow for the consolidation of existing operations into a single location and includes a central operations and data center. Funding for the building construction was completed through private placement debt issuances. Financing for the implementation of the new energy markets will require additional borrowings. SPP is focused on improving transmission reliability by undertaking an integrated approach to the reliability and the transmission expansion projects. Investment in these projects is the responsibility of its members and therefore not a credit concern for SPP, since it is not responsible for funding the new transmission projects. In 2011, SPP members completed 99 transmission expansion projects totaling $496 million. Going forward, SPP has identified the need for significant transmission upgrades within their service area totaling more than $1.7 billion including $251 million over the next five years and $1.5 billion over the next 10 years. Projects in the plan include new lines, line rebuilds and upgrades, reactive devices, transformers, substation upgrades and voltage conversions. 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. Applicable Criteria and Related Research: --'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012); --'Corporate Rating Methodology' (Aug. 12, 2011); --'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2011). Applicable Criteria and Related Research: Recovery Ratings and Notching Criteria for Utilities Corporate Rating Methodology Rating North American Utilities, Power, Gas, and Water Companies