RATING ACTION AFFECTS $396.7 MILLION REVENUE BONDS OUTSTANDING
NEW YORK, Aug 2, 2011 -- Moody's Investors Service has affirmed the credit rating of Aa3 on
the Transmission Agency of Northern California's outstanding
$396,675,000 Transmission Project Revenue Bonds. The bonds have a stable
The bonds previously issued were for the purpose of constructing and
maintaining the Central Oregon Transmission Project (COTP) , a 339-mile 500 kv
transmission line and related facilities interconnecting the power markets of
northern California and the Pacific Northwest.
The rating affirmation takes into consideration the very strong
long-term economic value of the Central Oregon Transmission Project to the
participants which is heavily weighted in the rating; the limited
competitive risk and the strong COTP operational performance record; the
sound take-or-pay contract terms; fully funded maximum annual debt service
reserve and the A1 weighted average underlying rating of the TANC participants.
Also considered is the agency's weak debt structure with significant auction
rate securities and variable rate debt.
The credit rating outlook is stable reflecting the sound performance
record including high availability of the COTP; the long-term economic value of
the project to member utilities; and the A1 credit quality of participants.
What Could Change the Rating UP: The rating could be upgraded if the
participant's credit quality improved and the performance record continued to
What Could Change the Rating DOWN: The credit rating could go down if the
project performance record weakened or TANC participant's credit quality
deteriorated. Also, TANC's inability to move forward on its plan to restructure
its auction rate securities and other variable rate debt should rating triggers
or weaker liquidity providers prevail would be a cause of a rating downgrade.
1. FY 2012 budget with FY 2013 projections include a small reduction in both
revenue requirements and debt service costs. No major capital improvement
projects are projected. CIP for 2013 is at $2.8 million.
2. A new joint powers agency was formed called the Balancing Authority of
Northern California. TANC had to modify some of its agreements to reflect the
operation of the COTP in BANC area.
3. Turlock Irrigation District, California (12.3% of agency obligation) was
downgraded from A1 to A2 in July 2011.
4. Dexia, TANC's liquidity facility provider for the standby bond purchase
agreement related to the 2002 Series A Variable Rate Demand Obligations, was
downgraded to A3 from A1 in July 2011 but still maintains a P-1 rating.
BOND SECURITY PROVISIONS:
Bond security is the pledge of TANC's revenues, which are primarily derived from
take-or-pay agreements with a 25% step-up requirement with various northern
California public utilities. The contract payments are O&M expenses of the
participants. The bonds are authorized by the indenture of Trust and by Articles
10 and 11 of Chapter 3 of Division 2 of Title 5 of the Government Code of the
State of California. Payments under the Project Agreement No.3 take-or-pay
contracts are required even if the project is inoperable or terminated. The
contracts have not been tested in state courts but the participants have
authorization as electric utilities to enter into the contracts pursuant to the
state's Constitution or a city's Home Rule Charter.
The project participants are: Sacramento Municipal Utility District (27.56%);
Santa Clara (20.47%); Modesto Irrigation District (MID) (21.30%);
Turlock Irrigation District (12.54%);Redding (8.41%); Palo Alto; (3.68 %);
Plumas-Sierra (0.147%); Roseville (2.11%); Lodi (1.92%); Alameda (1.23%); Lompoc
(0.19%); Ukiah (0.19); Healdsburg (0.25).
TANC 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. Fully funded maximum annual debt service reserve on outstanding debt;
TANC has option structuring future debt issuance with debt service reserves at
25% maximum annual debt service. Current debt service reserve is at maximum
annual debt service which represents level debt service.
INTEREST RATE DERIVATIVES:
TANC's variable rate and auction rate debt is fully hedged. TANC's 2002 Series A
Variable Rate Demand Revenue Bonds are supported by a liquidity facility
provided by Dexia (rated A3/P-1). TANC has begun the process to assess the
replacement of the liquidity facility should Dexia remarketing rates remain
high. TANC's 2003 A auction rate securities failed auction rate formula is
currently 225% of 1 month LIBOR or 40bps.
TANC has interest rate swap agreements with Goldman Sachs Mitsui
Marine Derivatives in notional amount of $76,190,000 related to the 2002A bonds.
The market exposure is negative at $19.5 million with termination event
triggered if TANC rating falls below A3. In connection with the 2003 A and B
bonds, TANC has an agreement with J.P. Morgan Chase Bank in notional amount of
$109,020,000 and market exposure at negative $9.5 million. Interest rate swap
with Citibank has notional amount of $72.7 million and market exposure of
negative $6.5 million. Additional termination triggering event would be if
either SMUD(rated A1) , MID(rated A2), TID (rated A2) or Santa Clara's( rated
A1) rating fell below A3.
* The average weighted underlying credit quality of the TANC participants is in
the A1 range
* Strong economic take or pay contracts
*TANC's California-Oregon Transmission Project (COTP) holds significant economic
value as a transmission line that connects northern California to the abundant
economic hydro-electric energy from the Pacific Northwest and represents a
significant weight in the rating
*Project performance has been sound since inception with high transmission line
*TANC has conservative budgeting and maintains a sound liquidity level
*TANC participant municipal electric utilities have competitive retail rates on
average significantly lower than neighboring IOU rates
*Continued evolution of transmission regulation in California ( COTP is not part
of Cal ISO)
*Single project risk should COTP become inoperable but participants have a
take-or-pay obligation for all costs
*Significant reliance on auction rate and variable rate debt, although fully
*Uncertain impact of the California ISO Integrated Balancing Authority Area
proposal which may impact all municipal transmission line projects
*Mandatory compliance with electric reliability standards that have been
approved by the North American Electric Reliability Corporation and the Federal
Energy Regulatory Commission (FERC) to promote reliable operation of the bulk
1- COTP TRANSMISSION PROJECT HAS LONG-TERM ECONOMIC VALUE TO TANC PARTICIPANTS
The fundamental credit strength of TANC is the long-term economic value of the
California-Oregon Transmission Project (COTP) which links the low-cost
hydroelectric resources of the Pacific Northwest with central California. COTP
is a 339-mile,1600 MW,500 kilovolt alternating current (AC) transmission project
that has been in commercial operation with a high availability record since
March 17, 1993. TANC participants benefit from wholesale market purchases of
energy and bilateral contracts with Bonneville Power Administration (BPA) (rated
Aaa); City of Seattle (Light) (rated Aa2) and several other Pacific Northwest
utilities. The project is operated in coordination with the Pacific AC Intertie
as part of the 4,800 MW California-Oregon Intertie (COI). Almost 20% of northern
California's peak load can be served by this intertie.
TANC is a joint power agency currently consisting of 15 members. Each member
pays for all costs associated with the operation of TANC and is entitled to an
undivided interest in all rights and properties of TANC.
TANC is governed by a commission with commissioners representing each agency
member. Sacramento Municipal Utility District serves as TANC treasurer and
controller. TANC is part of the Western Area Power Administration sub-control
area of the SMUD control area.
TANC is the major owner and operates COTP (86.9%), with Western Area Power
Administration(WAPA) at (9.37%) and several smaller participants owning the
balance of the project.
2- SIGNIFICANT ECONOMIC VALUE OF THE COTP IS FUNDAMENTAL CREDIT STRENGTH
The significant economic value of the COTP can be estimated by replacement cost
estimates ($500 million as per agency) to build a new transmission line in
California to replicate COTP. Such replacement cost has been estimated to be far
in excess of the current debt outstanding. COTP was the last major transmission
line built in northern California and permitting and constructing a new lines is
limited and expensive.
Another approach to estimate the value of the COTP to TANC members would be to
compare the price of energy traded at the California-Oregon Border (COB) hub
versus an alternative location in California where members could purchase energy
such as the NP-15 hub. Particularly in late Spring when there is excess
hydroelectricity in the Pacific Northwest, there is a significant price
differential which is favorable to TANC members. (COB energy price is in $20/mwh
range while Cal ISO price ranges with natural gas price in $40-$70/mwh price
range). In addition, TANC makes available any excess transmission capability to
third parties. The COTP also provides access to resource diversity to TANC
participants including access to the non-carbon energy resources and also
provides transmission service to transmit energy from owned generation projects
of several TANC members.
3-PARTICIPANT CREDIT QUALITY WEIGHTED AVERAGE CREDIT QUALITY OF A1
The weighted average credit quality of TANC's 15 participants is A1. Over 90% of
the project allocation based on the share of the TANC debt outstanding is that
of the top six electric utilities that have a weighted average rating of A1 on
their electric revenue bonds. Sacramento Municipal Utility District (SMUD, rated
A1) , Modesto Irrigation District (MID, rated A2) and Turlock Irrigation
District (TID, rated A2) are districts governed by independent boards that can
establish rates without external regulation. The other participants are
municipal electric utilities that are also unregulated. Competitive retail
rates, satisfactory financial operations and a still recovering regional economy
are factors that describe the TANC participants.
4-SOUND PROJECT FINANCIAL PERFORMANCE WITH INDEPENDENTLY SET RATES TO RECOVER
The indenture for the TANC Project bonds establishes standard covenants for a
municipal joint power agency. Transmission rates charged participants are to be
sum-sufficient to meet debt service and O&M and other deposits. TANC has an
established sound record of meeting its covenanted debt service coverage
requirement. Financial results for FY 2010 included a debt service coverage
ratio at 1.04 x. Estimated FY 2011; budgeted FY 2012 and projected FY
2013 results indicate same expected coverage ratio. TANC can establish its rates
and charges without state regulatory board approval. TANC charges rates for
service on the basis of the average price per kilowatt-year, as determined by
the annual "cash basis" revenue requirement.
TANC has satisfactory liquidity given the limited operating risks it faces with
a board objective of 60-days cash on hand that it regularly far exceeds. In
2010, adjusted days cash on hand was over 500 days cash on hand. The large
reserve is to mitigate single project risk.
5-CAPITAL PLAN: NO ADDITIONAL BORROWING IN NEXT YEAR
TANC has no new borrowing plans over the near term.
System Description: TANC is a joint powers authority (JPA) consisting of 15
Northern California public power utilities. TANC provides electric transmission
service to be used by its members. TANC is project manager for the COTP. TANC
board is comprised of one commissioner from each member utility.
TANC Rated Debt: as of 5/1/2011:
Series 1990: $19,605,000
Series 2002 A: $76,190,000
Series 2003: A and B; $181,700,000
2009 Series A 119,190,000
TANC Debt Service Coverage, 2010: 1.04 x
TANC Debt Ratio, 2010: 110.6%
Operating Revenues, 2010: $59,449,000
KEY CONTACT: Noreen Roche Carter, Treasurer (916) 732-6509
The principal methodology used in this rating was U.S. Municipal Joint Power
Agencies published in September 2007. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
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MOODY'S AFFIRMS Aa3 RATING ON TRANSMISSION AGENCY OF NORTHERN CALIFORNIA; STABLE OUTLOOK
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