Fitch Affirms SteelRiver Transmission Co.'s Senior Secured Notes at 'A-'; Outlook Stable
KEY RATING DRIVERS
SRTC's rating reflects the status of Trans Bay Cable's (TBC) transmission system as a regulated utility that earns stable revenue from an 'A+' rated transmission system operator. The regulated cost-of-service methodology reimburses the system for all operating costs and invested capital and provides a FERC-approved rate of return on equity, regardless of the system's availability or utilization. Refinance risk is low, as SRTC has closed on a new series of notes that will retire the existing notes, pending a delayed draw scheduled to fund at the existing notes' maturity.
Dependable Revenue, Strong Counterparty (Revenue Risk: Stronger): TBC is a participating transmission owner that earns a FERC-approved Transmission Revenue Requirement (TRR) from the California Independent System Operator (CAISO, rated 'A+'/Stable Outlook). The TRR is based on a pass-through of TBC's costs (including interest on debt obligations), a return on equity, and a return of capital investment via depreciation regardless of the system's availability or utilization. The methodology to determine TBC's revenue provides stable and predictable cash flows, though the anticipated three-year rate-setting cycle adds some uncertainty.
Cost Risk - Stronger: Cost risk was assessed as 'Stronger' based on the following cost-risk sub-factors:
Moderately Complex Operations (Scope Risk: Stronger): TBC is responsible for the full scope of O&M and lifecycle responsibilities. Among the portfolio of availability-based projects, ongoing operations and future capital projects are considered moderately complex. However, all capital expenditure (capex) additions should be fully recovered under the regulatory regime, allowing the project to operate successfully through its operating life.
Costs Fairly Predictable (Cost Predictability: Stronger): The technology utilized in the system is relatively complex, suggesting potentially lower cost predictability. This risk is mitigated by TBC's proven track record of successful operations and the continued involvement of the original operator and technology provider, Siemens.
Strong Protections (Cost Volatility and Structural Protections: Stronger): TBC is able to absorb cost volatility through the O&M and lifecycle cost recovery built into the revenue framework. TBC's comprehensive insurance program, uninterrupted revenue flows, working capital facility, and ongoing attention to capital needs reduce the risk of short-term cost fluctuations.
Low Refinance Risk (Debt Structure: Midrange): The notes are fixed rate, contain typical project finance structural features (such as liquidity reserves and restricted payment tests), and mature in June 2017 with a balloon payment of $372 million. The remaining balance will be repaid with proceeds from new issuances at SRTC and TBC. The new transaction has closed and will fund on a delayed draw basis concurrent with maturity of the existing notes.
Financial Analysis: The risk of payment default is low given that there are three quarterly payments remaining prior to the final balloon payment at maturity. Fitch projects debt service coverage in 2016 and 2017 to average 1.70x, providing a comfortable cushion on the remaining payments.
Peer Group: SRTC's rating is on par with other privately rated transmission projects with similar near-term DSCRs, and is rated above projects with more operational risk, exposure to merchant pricing, or lower projected DSCRs.
Negative - A near-term adverse change in TBC's regulatory treatment by FERC.
Negative - Deterioration in the credit quality of the lenders who will fund the new SRTC notes would raise the risk that such lenders may not meet their funding obligation resulting in insufficient funds to repay the balloon at maturity.
SUMMARY OF CREDIT
Over the past year, TBC has continued to operate the transmission system at a high performance level. In March, 2015, operations of the system transitioned from Siemens (which has served as operator since commercial operations began) to TBC. Since that time, operations have continued without interruption, and availability (adjusted for scheduled outages) has continued to consistently top 99%. TBC is proactive in its approach to maintenance and system enhancements. Over the past year, this has included successful completion of its annual CAISO maintenance audit, installation of a new grid monitoring technology, and the addition of a testing and development system to improve reliability and reduce the risk of new technology implementation.
At fiscal year-end 2015, TBC's 12-month backward-looking DSCR was 1.67x. This increased to 1.76x over the past 12 months through June 2016, as cash available for debt service topped $100 million due to modestly favourable results for operating and capital expenses.
There are three quarterly payments remaining on the SRTC notes prior to maturity on June 30, 2017, at which time a balloon payment of approximately $372 million is due. As TBC is still operating under its 2013 approved rate case, there is a high level of certainty regarding the level of the TRR available to repay operating expenses and fund the remaining quarterly payments. In order to repay the $372 million balloon due at maturity, SRTC and TBC entered into separate note purchase agreements with private placement investors to facilitate the refinancing of their debt at a level that will exceed the existing notes' outstanding balance.