OREANDA-NEWS. Fitch Ratings has upgraded the rating on SteelRiver Transmission Co.'s (SRTC) $562 million senior notes ($411.5 million outstanding) to 'A-' from 'BBB'. The Rating is removed from Positive Watch and assigned a Stable Outlook.

The upgrade reflects Fitch's assessment of the project's low cost risk under Fitch's revised availability criteria as well as sustained favorable financial performance. SRTC receives stable cash flow from its subsidiary project company, which is treated as a regulated utility with a full-pass through of costs and regulated rate of return. Fitch assesses refinance risk as low and the long-term financial profile as consistent with the rating.
KEY RATING DRIVERS
Revenue Risk - Stronger
The underlying project company, Trans Bay Cable LLC (TBC), is treated as a participating transmission owner by the Federal Energy Regulatory Commission (FERC). FERC permits a pass-through of TBC's costs and a return on equity (ROE), regardless of transmission availability or energy volumes. FERC regulation provides the basis for stable and predictable cash flows, although the three-year rate-setting cycle adds some uncertainty.

Cost risk: Midrange
Cost risk was assessed as 'Midrange' based on the following cost-risk sub-factors:

Scope risk - Midrange
Capex additions should be fully recovered under the regulatory regime, allowing the project to operate successfully through its operating life.

Cost predictability - Midrange
Operations were recently brought in-house for efficiencies and cost savings. A service agreement is maintained with the prior operator, Siemens, aiding the transition. Land lease costs, specified under long-term contracts, are a significant component of O&M expenses and are recognized within the tariff structure.

Cost volatility - Stronger
The project is able to absorb cost volatility through sufficient revenue as well as the expectation of manageable external shocks given the presence of insurance protections and attention to capital needs. Liquidity support is further provided by a $5 million working capital reserve and favorable net revenue flow.

Debt Structure - Midrange
Fitch expects a balloon payment of $372 million will be refinanced at maturity in 2017. The Fitch rating case evaluated a stressed interest rate environment of 5.4% at refinancing and found sufficient projected cash flow. The notes' liquidity reserves and restricted payment provisions are typical of project finance transactions.

Peer Comparison
SRTC's near-term debt service coverage ratios (DSCRs) compare favorably with similarly rated transmission projects. Higher rated projects have approved rate cases securing revenue for much longer periods of time and do not face refinance risk.

RATING SENSITIVITIES

Negative - A departure from the precedent of TBC's regulatory treatment by FERC in future rate case filings.

Negative - A change in the interest rate environment that materially alters the likelihood of debt refinancing.

SECURITY

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.

CREDIT UPDATE
TBC experienced a four-month outage after an anchor damaged the undersea cable in 2014. The system resumed service in January 2015, and transmission revenue receipt was unaffected during the outage. The $15 million repair cost was largely covered by insurance. The $2.5 million not recovered was added to TBC's regulatory assets, with reimbursement through the tariff expected in the next rate case.

Since the anchor-drag interruption, operational availability has returned to the project's previous favorable levels, averaging 98% for the two most recent quarters. The power modules are reportedly running at a low 0.6% failure rate. In the first quarter of 2015, operations were brought in house with Siemens (the previous operator) retained through a service agreement. The planned transition is expected to achieve efficiencies and operational savings.

TBC's most recent FERC rate settlement was favorable. The three-year settlement specifies the annual transmission revenue requirement, capital structure, and depreciation basis with a term through Nov. 22, 2016. Under the approved rate case, Fitch expects financial performance to be stable over the remaining debt term with an average rating case DSCR of 1.6x.

When the senior notes mature in mid-2017, the financial profile is less certain, as the next FERC rate case will be underway and $372 million of outstanding notes will need to be refinanced. Fitch assessed the issuer's ability to refinance under a set of stresses that included a reduced ROE (12.8%), lower level of O&M cost recovery (97.5%), high refinance interest rates, and 50% equity capitalization. Under these conditions, long-term cash flow over the remaining term of the concession is expected to be sufficient to repay the outstanding debt at a project life coverage ratio of 2x. This suggests refinance risk is low and does not represent a constraint on the rating.

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, CA into San Francisco. TBC provides an essential service, delivering up to 60% of the electricity used in the city and county of San Francisco. TBC collects regulated revenues through transmission fees from the California Independent System Operator (rated 'A+', Stable Outlook.) Revenue is based on traditional regulated rate principals, approved by FERC, which allow for recovery of all prudent operating, maintenance, and financing expenses plus a post-tax rate of return, regardless of actual transmission availability or energy volumes.