News Column

Fitch Affirms Northern California Power Agency, CA's Various Project Rev Bonds; Outlook Stable

May 13, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the rating on Northern California Power Agency, CA's (NCPA) various project revenue bonds as follows:

--$250.4 million Lodi Energy Center (LEC) revenue bonds, Issue One series 2010A and 2010B at 'A';

--$420.6 million Hydroelectric Project Number One revenue bonds at 'A+';

--$31.9 millionGeothermal Project revenue bonds at 'A+'.

The Rating Outlook on all bonds is Stable.

SECURITY

Bonds are secured by unconditional payments made by the participants in each project. Each project participant is responsible for their percentage share of the project (joint but not several), although the obligation is subject to step-up provisions (as described below) by the performing participants in the event of default by any participant.

KEY RATING DRIVERS

TAKE-OR-PAY OBLIGATIONS: The project participants have an absolute and unconditional take-or-pay obligation for their share of each project's costs as per their respective Power Sales Agreements (PSA). All PSAs extend over the life of the respective bonds and are payable as an operating expense for each participant.

STEP-UP PROVISIONS APPLY: The LEC PSA includes a 35% step-up provision that protects bondholders against a default by any participant responsible for debt service payments on Issue One bonds. The PSA also includes an unlimited O&M expense step-up provision against a default by any participant. The geothermal and hydroelectric projects have a 25% step-up provision for all costs.

LEC OPERATIONAL: LEC began commercial operations in November 2012 and benefits from solid operating performance to date. The rating reflects the underlying credit quality of the participants and the strong economics of the project given LEC's position as one of the most efficient natural gas plants in the region with the ability to cost-effectively meet participants' base and peaking power needs.

COMPETITIVELY PRICED CARBON-FREE ENERGY: The geothermal and hydroelectric projects provide members with competitively priced, carbon-free energy, which is increasingly valuable in California's energy market. The ratings on the geothermal and hydroelectric bonds reflect the underlying credit quality of the participants and the projects' valuable attributes as a baseload renewable resource with a history of strong operating performance.

JOINT ACTION AGENCY SUPPORT: NCPA provides its membership with a broad array of services, including a power pool, legislative and regulatory representation, financial planning, and modeling assistance for its smallest members. Fitch views these system-like qualities as providing greater stability and security to the ratings.

RATING SENSITIVITIES:

PARTICIPANT CREDIT QUALITY: The ratings on each project are based on the credit quality of the underlying participants together with the step-up provisions that mitigate against a payment default. A change in the credit quality, especially of the larger project participants could affect the rating of each project.

CREDIT PROFILE

FULL-SERVICE AGENCY

NCPA is a joint-power agency that serves a population of approximately 650,000 through its 14 members and one associate member in Northern California. NCPA has a mix of hydroelectric, geothermal, and gas projects, as well as purchased power.

In addition to generation, NCPA provides marketing, legislative/regulatory, and administrative ancillary services to its members. NCPA is governed by a commission made up of one commissioner from each of the members (typically one council or board member). The NCPA Commission has exhibited continuity and active participation in the ongoing industry issues facing California, both of which are viewed as positive credit factors.

UNCONDITIONAL TAKE-OR-PAY OBLIGATIONS

NCPA has project agreements with its members that are participants in each respective project. The project agreements extend through the life of the debt related to each project and require unconditional payments sufficient to pay operations and debt service on the bonds, regardless of project operation.

The unconditional nature of the contracts links the rating on the bonds to the underlying credit quality of the project participants, giving consideration to the requirement of a step-up in the event of a participant default.

ADEQUATE FINANCIAL PERFORMANCE

As a joint-action agency, NCPA is designed to run at or near the break-even point financially. NCPA bills members for actual costs, and therefore, there is very little excess cash flow generated. This is consistent with other power joint-action agencies. Fitch looks through to the credit quality, financial strength, and liquidity of the underlying members.

Fitch-calculated debt service coverage, on a consolidated basis across all of NCPA's projects, was 1.38x in fiscal 2013. Coverage at each individual project was over 1.17x on a stand-alone basis in fiscal 2013.

GEOTHERMAL PROJECT

The geothermal project is located on federal land about 70 miles north of San Francisco. Geothermal project operations have been excellent, with availability factors above 95% in the last five years.

A recent upgrade of the turbines for units 1 and 2, financed with a private placement of debt worth approximately $12.4 million, was the last significant capital project expected over the next decade or so. The upgrade is expected to extend the project's life to at least 2037 with output expected to decline at approximately 2.3% annually from about 109 megawatts (MW) in 2014.

HYDROELECTRIC PROJECT

The hydroelectric project is located on the North Fork Stanislaus and the Stanislaus Rivers (located near Murphys, CA), and is licensed to the Calaveras County Water District through 2032. Under contract, NCPA operates and receives power from the project through 2032. The facility has a net capability of 252 MW. The project provides a unique resource in its ability to meet peak demand from a carbon-neutral resource.

Project operations have been strong, with availability factors over 93% in all of the past five years. The project's operating costs are minimal. The largest costs are in the fixed debt service payments ($36.4 million, or 77%, of total costs in fiscal 2013).

LEC PROJECT

NCPA owns and operates the LEC, which began commercial operations in November 2012. The agency sold the project's capacity and energy to 13 LEC participants pursuant to the PSA. Eleven participants are responsible for Issue One bond debt service payments (Group A), including Silicon Valley Power (SVP) and Lodi, the two largest, which account for 25.8% and 9.5% of the project's share and 46.15% and 17.02% of Group A's cost share, respectively. The California Department of Water Resources (DWR, Electric Power Fund bonds rated 'AA', Stable Outlook) and the Modesto Irrigation District (MID, rated 'A', Positive Outlook) are the remaining participants in LEC, accounting for 33.5% and 10.7% of the project's share, respectively.

Participants benefit from LEC's heat rate at 6,824 Btu/kWh, which is one of the lowest in the region, and from its ability to provide base load, peak load and ancillary services to meet the demand, energy, and reliability requirements of the participants.

Transmission constraints have limited the projects operational capacity to 280 MW rather than its designed capacity of 298 MW. However, NCPA plans to finance $7 million in transmission upgrades in the area that will allow the project to run at its full capacity. The upgrades will be made over the next three years and will be funded from operations.

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

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria' (Mar. 18, 2014);

--'Revenue-Supported Rating Criteria' (June 3, 2013).

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=829938

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

Matthew Reilly

Director

+1-415-732-7572

Fitch Ratings, Inc.

650 California St.

San Francisco, CA 94108

or

Secondary Analyst

Kathy Masterson

Senior Director

+1-512-215-3730

or

Committee Chairperson

Christopher Hessenthaler

Senior Director

+1-212-908-1773

or

Media Relations:

Elizabeth Fogerty, +1-212-908-0526 (New York)

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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