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NCPA - Lodi Energy Center (Indenture Group B) -- Moody's affirms the Aa2 rating on NCPA's Lodi Energy Center Indenture B Revenue Bonds; outlook stable

·13 min read

Rating Action: Moody's affirms the Aa2 rating on NCPA's Lodi Energy Center Indenture B Revenue Bonds; outlook stable

Global Credit Research - 17 Dec 2020

New York, December 17, 2020 -- Moody's Investors Service has affirmed the Aa2 rating of Northern California Power Agency (NCPA) - Lodi Energy Center (Indenture Group B)'s Revenue Bonds of approximately $105 million. The outlook is stable.

RATINGS RATIONALE

The Aa2 rating of NCPA - Lodi Energy Center (LEC) reflects the strong take-or-pay power sales agreement with the California Department of Water Resources (CDWR, Aa1/stable), who acts as the sole obligor under the Indenture B obligation. LEC's strong credit quality is due to the strong take-or-pay nature of the water supply contracts from which debt service payments are derived, and the critical, long run importance of the CDWR's water supply to its contractors. The rating is constrained by the lack of debt service reserve fund for the Indenture B bonds, in addition to historically weak but expected fixed obligation charge ratios with an average of 1.05x over the last three fiscal years (2018-2020). However, this is mitigated by the strong credit quality of the sole obligor and the historically strong operating track record of NCPA.

RATING OUTLOOK

The stable rating outlook reflects our expectation that CDWR's credit quality will remain stable over the next 12-18 months. In addition, we expect that the LEC project will continue to show a consistent operating track record following the recent turbine failure, while continuing to recover debt service as well as operating expenses from its participating member.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

- Improvement in the credit quality of CDWR

- Funding of debt service reserve at maximum annual debt service

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

- Deterioration in the credit quality of CDWR

- Terms and conditions of take-or-pay contract are being challenged

LEGAL SECURITY

Bond security is the pledge of NCPA's revenues in the Trust Estate, which are primarily derived from unconditional take-or-pay power sales agreements with the CDWR. Payments under the power sales agreement between NCPA and CDWR is a first priority payment from the CDWR's California Water Resource Development Bond Fund and is senior to the CDWR's general obligation debt service payments.

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. NCPA's rate-setting process is not regulated by the California Public Utilities Commission (CPUC).

The indenture includes provision for an O&M reserve equal to 60 days of O&M which has a step-up provision across indenture groups A, B and C to ensure the reserve is fully funded. There is no debt service reserve for indenture B. A contingency reserve fund is available for untimely delivery of federal Bond Anticipation Bonds (BAB) subsidy payments.

PROFILE

Lodi Energy Center (LEC) is a 302 MW gas-fired, combined cycle power plant that uses a Siemens STG6-5000F turbine which includes fast start capability and the latest pollution control equipment. Project capacity and energy has been sold to 13 participants. The project started commercial operations in 2012 and is currently the largest power plant and most efficient combustion turbine in NCPA's generation facilities fleet.

The turbine has an evaporative cooling system and dry low-NOx combustors to control air emissions; a 3-pressure Benson design heat recovery steam generator; as well as a selective catalytic reduction (SCR) and CO catalyst to further control for NOx and Co emissions. The plant is interconnected with Pacific Gas & Electric Company (PG&E) and the California ISO. LEC was constructed in Lodi, California on city owned land and the project is owned and operated by NCPA. The LEC project is located adjacent to NCPA combustion turbine #2.

METHODOLOGY

The principal methodology used in this rating 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 DISCLOSURES

For 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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gayle Podurgiel Lead Analyst Project Finance Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Angelo Sabatelle Additional Contact Project Finance JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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