Fitch Ratings has affirmed the rating on secured debt due 2017 ($491 million outstanding) issued by SteelRiver Transmission Company LLC (SRTC) as follows:
--$562 million senior secured notes at 'BBB-'.
The Rating Outlook is Stable.
SENSITIVITY / RATING DRIVERS
The following are the key rating drivers for the senior secured notes:
--Regulation Provides Revenue Stability: The underlying project company, Trans Bay Cable LLC (TBC), is treated as a regulated utility by the Federal Energy Regulatory Commission (FERC). FERC permits a pass-through of TBC's costs, plus a 13.5% return on equity, irrespective of transmission availability or energy volumes. FERC regulation ensures stable and predictable cash flows.
--Low Counterparty Risk: TBC is a participating transmission owner (PTO) within the control area of the California Independent System Operator, Inc. (CAISO), rated 'A+' with a Stable Outlook by Fitch. As area PTO, TBC is entitled to a share of the total transmission fees collected by CAISO, effectively mitigating revenue, price, and volume risk.
--Low Refinancing Risk: A balloon payment of $376 million, due at note maturity in 2017, is expected to be refinanced. Under the rating case, Fitch evaluated a stressed interest rate environment of 8.7% at refinancing and found sufficient projected cash flow to maintain or exceed the current rating category.
--Favorable Operations Performance: TBC operated at 97.8% and 96.9% average availability, respectively, in 2012 and 2011, including scheduled outages. The project's strong operating performance mitigates lingering concerns about the long-term viability of its construction. In March 2010, TBC commercial operations were delayed due to a high failure rate of certain substation parts. The project was remediated by the contractor.
--Investment-Grade Financial Performance: The front-loaded amortization profile maximizes payments during the rate freeze through 2013 and matches the long-term decline in revenue recovery. Under the rating case, Fitch calculates average debt service coverage of 1.43x, which is in-line with the rating category.
WHAT COULD TRIGGER A RATING ACTION
--Unfavorable changes in FERC regulatory treatment after the rate-freeze ends in November 2013;
--Persistent operating problems could reduce cash flows for debt service;
--Project capital expenditures not recovered in regulated revenues or through sponsor equity;
--A change in the issuer's ownership structure.
The senior notes are secured by a first priority interest in all tangible and intangible assets of SRTC, including: reserve and funding accounts; intercompany note to TBC; and all equity interests in TBC.
The intercompany note, a loan of a portion of the senior secured note proceeds from SRTC to TBC, is secured by a first priority interest in all tangible and intangible assets of TBC, including: all physical assets, Transmission System Rights (the primary revenue generating intangible asset of TBC); and all material agreements and accounts held by TBC, including all revenue, operating, and other agreements.
TBC finished 2012 with 97.8% overall availability, an improvement over 96.9% in 2011. Scheduled maintenance accounted for 1.5% of the down-time, and forced outages accounted for 0.7%. As expected, the project delivered 40% of peak daytime load to the San Francisco peninsula, and 60% of off-peak load during nights and weekends. Utilization has been at the maximum capacity of 400 MW for 95% of the time, also in line with expectations.
TBC plans to file a rate case with FERC in September 2013 as part of its requirement to complete the rate-freeze period in November 2013. TBC reports that it has over-collected revenues above its regulated $132.5 million Transmission Revenue Requirement from CAISO annually, and currently returns over-collections to CAISO during the following year in equal monthly payments. Over-collections were relatively small during the past two years, and Fitch excludes over-collections in its annual DSCR calculations.
Operating expenses in 2012 were virtually flat to 2011, and about 1% below the 2012 budget across the board. All operational issues during the year were promptly addressed by Siemens as operator. The project expects to evaluate any cable-cover erosion during the April 2013 outage, scheduled to last six days. Cable-cover protects the line from damage by foreign elements along the bay floor.
SRTC, the issuer, is a special purpose vehicle created solely to own 100% of TBC, the project company. TBC owns and operates a 53-mile, 400 MW capacity, high-voltage direct current transmission line that runs under San Francisco Bay from Pittsburg, California into San Francisco. TBC provides an essential service, delivering up to 40% of the electricity used in the city and county of San Francisco.
SRTC is indirectly owned by SteelRiver Infrastructure Fund North America LP (the Fund), an unlisted infrastructure fund. The General Partner of the Fund is SteelRiver Infrastructure Partners LP, an investment management firm, and the Limited Partners are a group of public employee and other pensions, and insurance companies in North America and Europe.
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:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Rating Criteria for Availability-Based Infrastructure Projects' (June 19, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Availability-Based Projects
Cynthia Howells, CFA, +1-212-908-0685
One State Street Plaza
New York, NY 10004
Christopher Joassin, +1-312-368-3166
Alberto Santos, +1-212-908-0714
Elizabeth Fogerty, New York, +1 212-908-0526
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