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
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
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,
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology
Rating North American Utilities, Power, Gas, and Water Companies