Fitch Affirms Southwest Power Pool's Long-Term IDR at 'A'; Outlook Stable
KEY RATING DRIVERS
SPP's ratings and Stable Outlook reflect its essential role in managing and maintaining the reliability of the regional transmission system, the full and timely recovery of its costs through Federal Energy Regulatory Commission (FERC) regulated tariffs and service contracts, and the solid investment-grade credit worthiness of its members.
Open Access Transmission Tariff: SPP operates under a FERC-approved Open Access Transmission Tariff (OATT) that provides for the full recovery of all costs, including scheduling, transmission and monitoring activities. Fitch expects FERC will continue to permit tariffs as necessary to recover SPP's operating costs, as has been the case historically.
Addition of New Members: SPP meaningfully expanded its service territory in October 2015 with the addition of the Integrated System (IS) as a full member. The IS is a high-voltage transmission grid in the upper Great Plains region of the U. S., composed of The Western Area Power Administration (WAPA), Basin Electric (Basin) and Heartland Power District (Heartland). The IS adds more than 5,000MW of peak demand and 9,500 miles of high-voltage transmission lines in eastern Montana, North Dakota and South Dakota to SPP's footprint and integrates WAPA's hydropower and Basin Electric's thermal resources. The integration leverages existing generation and transmission resources across SPP's footprint and reduces costs for all members. SPP estimates benefits totaling $334.1 million over a 10-year period for its members from the inclusion of the IS. Notably, WAPA is the first federal agency to join a regional transmission organization.
Voluntary membership: The voluntary nature of SPP membership is a modest credit concern, in Fitch's opinion. Transmission services costs, which are largely fixed would be borne by the remaining members, on a pro rata basis, should an SPP member leave. The departure risk is mitigated by the requirement that the exiting member 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.
IEM: SPP's integrated energy market (IEM) system went live in 2014; the IEM includes a real time balancing market with five minute generation dispatch, a day-ahead market with congestion hedging, and a related operating reserves market that increase market efficiencies and lower power costs for respective members. The IEM leverages resource diversity over a larger geographic area, facilitates greater penetration of renewable energy and provides market participants with approximately $422 million in net savings annually. Notably, with the rollout of the IEM, SPP became the primary balancing authority in its footprint by incorporating 16 balancing authorities.
Declining Capex: SPP plans to spend $71 million on capex through 2018, a decrease of 19% when compared to the prior three-year period. The expected capex reduction is primarily due to the completion of the IEM system in 2014. Capital spending will be primarily focused on information technology investments and to a lesser extent, marketplace enhancements and regulatory reliability investments. SPP's $33 million unsecured term note facility was drawdown in full in March to help prefund capital expenditures through 2016.
Strong Summer Reserve Margin: SPP expects the reserve margin to be 28% this summer, more than double the 12% annual reserve margin requirement. SPP's generating mix is changing with increased wind and natural gas generation replacing less efficient coal fired generation due to strong wind resources and low gas prices. SPP has 12.4 GW of wind generating capacity in service with an additional 33.8GW in various stages of development. Due to abundant wind resources within SPP's footprint wind generation has steadily increased and comprised 14% of SPP's total generating resource mix for 2015, an increase of approximately 2% when compared to the prior year.
Transmission Investments: SPP identifies new transmission projects needed to maintain reliability, increase regional efficiency and facilitate the integration of renewable generation, specifically wind within its footprint, but investment in these projects is the responsibility of its members and therefore not a credit concern for SPP. In 2015, SPP members completed 93 transmission expansion projects totaling $856 million. Going forward, SPP has identified the need for new transmission upgrades totalling approximately $520 million through 2020. Projects in the plan include new lines, line rebuilds and upgrades, reactive devices, transformers, substation upgrades and voltage conversions.
Fitch's key assumptions within the rating case for SPP include:
--Timely recovery of all operating costs under FERC-approved Open Access Transmission Tariff;
--Debt maturities of $24 million in 2016, $21 million in 2017, and $21 million in 2018 are repaid with available cash;
--Capital Expenditures of $22 million in 2016, $26 million in 2017, and $23 million in 2018.
Positive Rating Action: No positive rating actions are expected at this time.
Future developments that may, individually or collectively, lead to a negative rating action includes:
--An unexpected change in the rate design of the FERC-approved OATT tariff;
--A cybersecurity event;
--A large departure of members from SPP's service territory.
SPP's current liquidity position is sufficient with $64 million of available liquidity as of June 30, 2016, wholly comprised of unrestricted cash and cash equivalents. SPP is currently in the process of procuring a new $30 million three-year unsecured revolving credit facility to replace their previous $30 million unsecured credit facility which matured in June. SPP expects to close on the new credit facility in September. Debt maturities over the next four years are manageable and are as follows: $24 million in 2016, $21 million in 2017, $21 million in 2018, $22 million in 2019. Maturing debt is expected to be funded by a mix of internally generated cash and cash on hand.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Southwest Power Pool
--Long-term IDR at 'A';
--Senior secured debt at 'A+';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1'.
The Rating Outlook is Stable.