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Fitch Affirms Northern California Power Agency Geothermal Project & Hydroelectric Project at 'A'

Posted on: Monday, 24 September 2007, 18:00 CDT

Fitch Ratings affirms its underlying rating of 'A' on Northern California Power Agency's (NCPA) $490.08 million outstanding hydroelectric project number one bonds and $126.5 million of outstanding geothermal project number three bonds. The Rating Outlook for NCPA is Stable.

The ratings reflect the underlying credit quality of the project participants, the provisions of the unconditional take-or-pay power purchase agreements with 25% step-up provisions, consistently strong project operations and competitive project economics, and the favorable positioning of the project participants within California's changing regulatory framework. The rating additionally incorporates NCPA's experienced management team, a broad array of services that meet the operational and planning needs of its smallest members and NCPA's proactive legislative and regulatory efforts that benefit all of its members. These system-like qualities at the NCPA level have resulted in Fitch's analysis of the projects as a utility system as opposed to separate project financings and provide greater stability and security to the credit ratings.

Credit concerns include the need for additional generation, with associated financing, specifically for renewable generation, by many of the members. The incremental costs of new generation combined with the costs of compliance with the state's developing regulatory focus on reducing carbon emissions are likely to place cost pressure on all utilities in the state, including NCPA members. Rate competitiveness of the members and political will for raising rates varies across members.

The geothermal project is a 114 MW project owned and operated by NCPA in northern California. Availability factors at the project have exceeded 95% in four of the past five years. The project provides a renewable resource for the 12 NCPA members that are project participants. The average project cost in fiscal 2007 was 4.8 cents per kWh. Project costs will drop substantially in fiscal 2011 when the debt associated with the project matures. There are no plans to releverage the project. Based on current estimates of the steam field, the project is expected to continue producing energy through 2032, albeit at slightly declining levels as the steam fields are depleted. These estimates take into consideration various operating protocols and water injection practices enacted by NCPA to preserve the life of the project.

The hydroelectric project is a 252 MW project in central California. Like the geothermal project, it provides a competitively-priced, renewable resource to 11 project participants. The project cost of 8.9 cents per kWh in fiscal 2007 was higher than normal due to low water flows on the river. In 2006, the average project cost was 3.9 cents per kWh. Availability factors on the project have been over 95% the past four years. Costs are expected to remain relatively stable and output of the facility will vary with annual water conditions.

Financial performance at the NCPA level is consistent and is based on recovering only sufficient revenues from members to cover costs. Debt service coverage on a consolidated basis (for all projects) was 1.02x in fiscal 2006. Project participants pay NCPA costs as an operating expense of their system and have covenanted in the power purchase agreements to maintain rates sufficient to pay their obligations to NCPA. Furthermore, the NCPA power is generally an attractively priced and renewable resource in the overall portfolio of most of the participants, which provides additional comfort that project participants will honor these obligations. The members' remaining power supply is reasonably priced and fairly diverse, including supplies from the Western Area Power Administration.

Liquidity is adequate with unrestricted cash of approximately $62 million as of June 30, 2006, or 101 days operating cash. In addition to its unrestricted cash, NCPA maintains a general operating reserve that allows each member to maintain liquidity at the agency level, which can be used for any purpose authorized by those members (operations or debt service). As of June 30, 2006, the general operating reserve held $68.6 million.

NCPA is a joint power agency that provides 16 members in Northern California, with a portion of their energy requirements through a mix of hydroelectric, geothermal, and natural gas-fired projects, as well as purchased power. In addition to generation, NCPA provides marketing, legislative/regulatory, and administrative ancillary services.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

Source: Business Wire

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