News Column

Fitch Affirms SPP's Long-Term IDR at 'A'; Outlook Stable

August 29, 2014

NEW YORK--(BUSINESS WIRE)-- 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 $317 million of debt is affected by the rating action.

KEY RATING DRIVERS

--The essential role and services performed by SPP in managing and planning system reliability, lowering costs, and advancing energy policy;

--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 SPP's operating costs, as has been the case historically.

New Day Ahead Energy Market: SPP's new integrated energy market went live in March and includes a real time balancing market, 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 new integrated market will help incorporate renewable generation. SPP projects these markets to generate up to $100 million in average net savings per year within SPP's footprint. Notably, with the rollout of the integrated marketplace, SPP became the primary balancing authority in its footprint by incorporating sixteen previous balancing authorities.

New members to join SPP in 2015: The Integrated System (IS), a high-voltage transmission grid in the upper Great Plains region of the U.S., comprised of The Western Area Power Administration (WAPA), Basin Electric (Basin) and Heartland Power District (Heartland), plans to join SPP next year. SPP's Board of Directors previously approved tariff changes to accommodate the membership of the IS into SPP and full integration into SPP expected by October 2015, pending FERC approval. The IS comprises 9,848 of high-voltage transmission lines in eastern Montana, North Dakota and South Dakota and integrates WAPA's hydropower and Basin Electric's thermal resources. The integration of the IS will leverage existing generation and transmission resources across SPP's footprint and is expected to reduce costs for all members. SPP projects benefits totaling $334.1 million over a 10-year period for its members from the inclusion of the IS.

The voluntary nature of SPP's membership represents a modest credit concern. 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 $81 million of available liquidity including a $30 million unsecured revolving line of credit facility that expires in June 2016 and approximately $51 million of unrestricted cash and cash equivalents. As of June 30, no amounts were outstanding under the facility. Debt maturities over the next five years are manageable and are as follows: $23 million in 2014, $24.3 million in 2015, $24.4 million in 2016, $21.4 million in 2017, and $21.5 million in 2018. 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 $37 million in 2014 and $26 million through 2015 to 2016, a notable reduction when compared to $49.8 million in 2013, due to the completion and successful implementation of the new integrated marketplace in March. Future capital spending needs will be primarily focused on Phase II of the integrated marketplace which includes FERC and member mandated service enhancements that will improve the coordination of next-day generation across the region to maximize cost-effectiveness, provide participants with greater access to reserve energy, improve regional balancing of electricity supply and demand, and facilitate the integration of renewable resources. In the first quarter, SPP issued $37 million of unsecured notes and obtained a $33 million unsecured term loan facility to help prefund capital expenditures through 2016. Going forward, Fitch expects future funding needs to be modest.

SPP is focused on improving transmission reliability by undertaking an integrated approach with members to identify new transmission 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 2013, SPP members completed 101 transmission expansion projects totaling $586 million dollars. The transmission expansion projects help to increase regional efficiency and help facilitate the integration of 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 $696 million through 2019. Projects in the plan include new lines, line rebuilds and upgrades, reactive devices, transformers, substation upgrades and voltage conversions.

RATING SENSITIVITIES

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, a cybersecurity event, or a large departure of members from SPP's service territory could trigger negative rating actions.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating U.S. Utilities, Power and Gas Companies (March 7, 2014);

--'Corporate Rating Methodology'(May 28, 2014);

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=861634

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Daniel Neama

Associate Director

+1-212-908-0561

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Philip W. Smyth, CFA

Senior Director

+1-212-908-0531

or

Committee Chairperson

Glen Grabelsky

Managing Director

+1-212-908-0577

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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