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
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 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
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.