Northern California Power Agency — Moody’s affirms Aa3 rating to NCPA hydroelectric

Rating Action: Moody’s affirms Aa3 rating to NCPA hydroelectric revenue bonds, assigns Aa3 to Series 2022 revenue bonds; outlook stableGlobal Credit Research – 01 Mar 2022New York, March 01, 2022 — Moody’s Investors Service (“Moody’s”) has affirmed the Aa3 ratings on Northern California Power Agency’s (NCPA) outstanding Hydroelectric Project Number One revenue bonds. Concurrently, Moody’s has assigned Aa3 ratings to NCPA’s $120.7 million Hydroelectric Project Number One Revenue Bonds, 2022 Refunding Series A and $12.2 million 2022 Taxable Refunding Series B. The ratings outlook is stable. Following the issuance of the 2022 bonds, the project will have approximately $255 million of outstanding debt.RATINGS RATIONALEThe affirmation and assignment of the Aa3 ratings incorporates the strong unconditional take-or-pay power sales agreement with participating members in conjunction with the strong weighted average credit quality of the participants, which include the Santa Clara electric enterprise (Silicon Valley Power) and the Palo Alto combined utility enterprise.Financial metrics are satisfactory if somewhat weak for the rating category, with elevated financial leverage (174% adjusted debt ratio) and fixed obligation charge coverage ratios that have averaged 1.0x over the past decade. However, the strong take-or pay power sales agreement with high credit quality participants combined with a 25% step-up provision supports full cost recovery of all obligations even if the facility is not operating. Additionally, NCPA funds debt service for the project one year in advance, an unusual credit strength.Liquidity is extremely robust, with 2021 financial figures showing 1,137 days cash on hand (adjusted). Notably, we expect cash levels to decline following the 2022 refunding, as well as a much more substantial decline in 2024/2025 with the cash-funded cleanout of the McKays Reservoir and Dam, though liquidity should remain healthy and supportive of the credit rating.Importantly, the rating acknowledges the importance of the project to project participants in supplying non-carbon energy on a long-term basis making it a sustainable and supportive feature of the credit profile. The project has a solid track record of high availability, with average availability of 92% over the last decade. However, the net generation of the project is susceptible to drought conditions in California, which can restrict the water supply for the project. Net generation has fluctuated materially between a high of 945 GWh in 2017 to a low of 164 GWh in 2014; fiscal 2021 net generation (203 GWh) was the third lowest of the last decade. For 2022, NCPA is budgeting for an average water year, though a very rainy December 2021 has made way to an extremely dry start to 2022. Long-term, climate change is likely to continue to result in drier conditions that will lower net generation from the project.RATING OUTLOOKThe stable rating outlook reflects our expectation that participant credit quality will remain stable over the next 12 months. In addition, it reflects NCPA’s close management of the project and its continued long-term value to member utilities despite the susceptibility of its net generation profile to drought conditions in California.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Improvement in the weighted average credit quality of the project participants- Improved fixed obligation charge coverage that is consistently well-above 1xFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Deterioration of the weighted average credit quality of the project participants- A challenge by participants to the terms and conditions of the take-or-pay contract- Substantial reduction in liquidity- Substantial growth in debt from capital and maintenance costs that far exceed current expectationsLEGAL SECURITYThe project revenue bonds are repaid from NCPA revenue pledged in the Trust Estate, which are primarily derived from take-or-pay power sales agreements with various northern California municipal electric utilities. The project participants are the cities of Santa Clara (35.86%); Palo Alto (22.92%); Roseville (12.00%); Lodi (10.37%) Alameda (10.00%); Lompoc (2.30%); Ukiah (2.04%); Plumas Sierra (1.69%), Healdsburg (1.66%); Gridley (1.06%); and Biggs (0.10%). NCPA has pledged in the indenture to establish and collect rates and charges for sum sufficient payment of debt service and operating expenses and other required deposits.USE OF PROCEEDSBond proceeds from the 2022 bonds will be used to refund NCPA’s outstanding Hydroelectric Project Number One Revenue Bonds, 2008 Refunding Series A and Hydroelectric Project Number One Revenue Bonds, 2012 Series A, including the cost of termination of an interest rate swap agreement related to the 2008 bonds.PROFILEThe hydroelectric project is located on the North Fork Stanislaus and the Stanislaus Rivers in Northern California and includes the 189,000 acre foot Spicer Meadows Reservoir, six smaller reservoirs, approximately 10 miles of tunnels, two large generating units and three smaller units and approximately 40 miles of dual circuit 230 KV transmission line. The combined generating capacity of the facility is 259 MW (ISO rating). The project started operations in 1990 and its permanent structures have an estimated useful life of 100 years. The project is licensed to the Calaveras County Water District which has no obligation to the bonds. Pursuant to the power purchase contract, NCPA is entitled to the electrical output of the project through 2032 but has access to it at least until 2034 beyond the debt maturity. NCPA is responsible for the operation of the generation and recreational facilities with the projects and holds the license to the only transmission lines from the project.The Northern California Power Agency (NCPA) is a not-for-profit California Joint Action Agency with 16 members and associate members that includes municipalities, a rural electric cooperative and other publicly owned entities. In addition to constructing electric generating facilities, NCPA provides to its members such services as the purchase, aggregation, scheduling, and management of electrical energy. Each member can choose which project it wants to participate in. The agency has no taxing authority. Both NCPA and participants’ rates are not regulated by the California Public Utilities Commission or the Federal Energy Regulatory Commission (FERC), which is a positive credit feature.METHODOLOGYThe principal methodology used in these ratings was US Municipal Joint Action Agencies Methodology published in August 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1207102. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment…