Moody's Investors Service said it has downgraded to A3 from A2 the rating on the outstanding Southern California Public Power Authority's (SCPPA) $101.8 million San Juan Project revenue bonds.
The rating outlook is stable.
The rating downgrade to A3 reflects the significant expected compliance costs that SCPPA will bear as part of a U.S. Environmental Protection Agency (EPA) settlement related to regional haze reduction and the San Juan coal-fired generating unit SCPPA owns.
SCPPA has 41.8% ownership interest in Unit No.3. In addition, there remains significant uncertainty surrounding how SCPPA will legally finance its share of the compliance costs. The uncertainty relates to whether the legal provisions of Senate Bill 1368 will preclude SCPPA's ability to issue revenue bonds. SB 1368 establishes a performance standard for all base load generation resources seeking long term investment in California.
The performance standard is that greenhouse emissions must be equal or lower than those of a combined cycle natural gas plant on a Mwh basis.
There also remains uncertainty about SCPPA participants future exposure to a new complicated carbon cap and trade program. California's new cap and trade program we expect to reduce the economic value of the plant to the SCPPA participants.
While the state's new carbon cap and trade program had its first auction in November 2012 and reportedly there were relatively few problems, the program is complicated and subject to unintended consequences.
Also recognized in the rating is the lower weighted A2 average credit quality of SCPPA-San Juan project participants. The A2 weighted average rating of the participants now reflects a previous rating action that had lowered the rating on the project's largest participant, the Imperial Irrigation District to A1 from Aa3.
The A3 rating on the SCPPA-San Juan bonds also reflects San Juan Unit 3's satisfactory operating record; SCPPA's prudent management of the project including maintaining satisfactory liquidity; and the bonds are well secured by take-or-pay contracts with several municipal electric utilities with an average weighted rating of A2.
SCPPA had acquired with the original 1993 San Juan Power Project bonds a 41.8% undivided ownership in the 497 MW San Juan Unit No. 3 coal fired generating station located in New Mexico. Unit 3 is part of a four-unit coal-fired generation facility.
