July 11 (The following statement was released by the rating agency)
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 $268 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 investment-grade 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 $126 million of available liquidity including a $30 million unsecured revolving line of credit facility that expires in June 2016 and approximately $96 million of cash and cash equivalents. As of June 30, no amounts were outstanding under the facility and Fitch notes that SPP has never drawn on the current revolver. Debt maturities over the next five years are manageable and are as follows: $12.7 million in 2013, $23 million in 2014, $24.3 million in 2015, $21.4 million in 2016, and $18.4 million in 2017. Maturing debt is expected to be funded by a mix of internally generated cash and cash on hand.
New Day-Ahead Market in 2014: SPP is developing new integrated energy markets, including a day-ahead market with congestion hedging, and a related operating reserves market to increase market efficiencies and lower power costs for respective members. The markets are expected to be in service in 2014, and are projected to generate up to $100 million in average net savings per year within SPP's footprint.
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. The new building includes a central operations and data center.
SPP's capital expenditures are forecasted to approximate $51 million in 2013 and $41 million through 2014 to 2015, a notable reduction when compared to $78.34 million in 2012. Future capital spending needs will decrease as a result of the completion of the company's new operations center in West Little Rock, AR, and upon implementation of new software systems and engineering work for the development of the new day-ahead energy markets in 2014. Funding for the new corporate center was financed through the issuance of $65 million of unsecured notes in 2010. SPP issued $100 million of unsecured notes in the second quarter of 2012 to fund capital expenditures related to the implementation of the new energy markets in 2014. Going forward, Fitch expects future funding needs to be modest.
SPP is focused on improving transmission reliability by undertaking an integrated approach to the reliability and 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 2012, SPP members completed 111 transmission expansion projects totaling $1.04 billion dollars, more than double the amount spent in 2011. The transmission expansion projects help to increase regional efficiency and to add renewable generation, specifically wind, to SPP's footprint. New wind generation will help SPP's member states meet their respective RPS requirements.
Going forward, SPP has identified the need for significant transmission upgrades within their service area totaling approximately $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.
Positive Rating Action: No positive rating actions are expected at this time. Negative Rating Action: An unexpected change in the rate design of the FERC-approved OATT tariff and a large departure of members from SPP's service territory could trigger negative rating actions.