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Rating Action:

Moody's revises Transmission Agency of Northern California's outlook to negative, affirms Aa3 rating

02 Apr 2019

Approximately $200 million of debt affected

New York, April 02, 2019 -- Moody's Investors Service revised the rating outlook to negative from stable and affirmed the Aa3 rating on NCTA - California-Oregon Transmission's (Transmission Agency of Northern California or TANC) $200 million of revenue bonds.

RATINGS RATIONALE

Today's rating action reflects Moody's view that the utility operating environment in California has become more challenging as legislators and other policy makers look for viable alternatives involving the application of inverse condemnation while simultaneously balancing the potential impact on utilities and ratepayers. The potential risk of wildfires related to inverse condemnation could materially impact the utility long-term as the frequency and intensity of these fires increase.

The negative rating outlook considers TANC's wildfire-related liability exposure and risk mitigation strategy relative to the strength of its overall credit profile. TANC is the majority owner and operator of the California-Oregon Transmission Project (COTP), a 339 mile transmission line that runs from Klamath county in southern Oregon to the tesla substation located south of the city of Tracy in San Joaquin county, CA. TANC estimates that roughly 34% of the transmission line runs through 'elevated' Tier 2 fire risk zones and 1% runs through 'extreme' Tier 3 fire risk zones identified on the California Public Utilities Commission (CPUC) Fire Threat Map.

The agency employs an extensive, longstanding fire risk management plan to mitigate its exposure that includes semiannual aerial inspections; a rigorous vegetation management program; as well as limiting crops and vegetation height in orchard areas. TANC has also formed a wildfire advisory committee to ensure compliance with recently enacted laws, strengthen existing practices and monitor relevant legislative and regulatory activities. The COTP line is also constructed entirely of steel lattice or single pole steel structures and the agency maintains a 200-foot right-of-way around transmission line that is kept clear of trees and large vegetation. TANC maintains $35 million in wildfire insurance and it is not the subject of any pending litigation on wildfires or inverse condemnation.

TANC's Aa3 rating is supported by the A1 weighted average credit quality rating of its participating municipal electric utilities and districts. TANC's largest participant Sacramento Municipal Utility District (Aa3 negative) at 27.7% outlook was changed to negative owing to its exposure to wildfire driven primarily from its ownership of the Upper American River Project (UARP), an important hydro generation resource located partially in Tier 2 and Tier 3 fire risk zones according to the CPUC Fire Threat Map. As of December 31, 2018, TANC had approximately $39 million in unrestricted cash on the balance sheet as of fiscal year end 2018 (665 days cash on hand). The agency charges sum-sufficient rates to cover operating expenses, debt service and a return on rate base and its debt ratio continues to decline as existing debt amortizes. Given the A1 participant credit quality and the transmission line's exposure to wildfire risk, the Aa3 rating recognizes the intrinsic value of this particular transmission line in terms of delivering generation resources from the Pacific Northwest into the California market.

The Aa3 rating also incorporates the reduced level of restricted reserve funds, now at 25% of maximum annual debt service as compared to the previous 100% of maximum annual debt service prior to the most recent refunding in 2016. Pursuant to the 2009 Amended Indenture, TANC has discretion on how much reserves it will hold on a series by series basis. The credit view also incorporates TANC's ability to issue additional bonds with a sum-sufficient rate covenant and the lack of any minimum rate covenant.

RATING OUTLOOK

The negative outlook reflects the risks associated with the uncertain magnitude of potential contingent liabilities related to inverse condemnation and the nearby wildfires affecting electric utilities in California, as well as the execution risk around the implementation of legislative and regulatory initiatives at the state level that will significantly mitigate these risks.

FACTORS THAT COULD LEAD TO AN UPGRADE

- An upgrade of TANC's ratings is unlikely in light of the negative outlook. The outlook could be stabilized if regulatory, legislative, or judicial actions are enacted that we believe effectively mitigates the financial impact of a potential wildfire on the utilities.

- Improvement of participants' average credit quality

- Legally restricted reserve levels funded at maximum annual debt service in addition to discretionary liquidity over 200 days cash on hand

- Continued maintenance of high availability factors

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Incurrence of a large unforeseen liability due to wildfire damage

- Deterioration of TANC participants' average credit quality

- Decline in discretionary liquidity to below 200 days cash on hand

LEGAL SECURITY

The bonds are principally secured by the pledge of TANC's revenues, which are primarily derived from a take-or-pay arrangement under Project Agreement No. 3. Each member participant severally agrees to pay TANC its respective participant share of TANC project debt service including TANC project costs, TANC O&M costs and TANC Capital Improvement costs and that these funds are paid as an operating expense of each member participant. The security is also supported by a 25% step-up requirement to support a defaulting member. All project fund accounts, including reserve accounts also act as security for bondholders. TANC's debt service reserve account under the 2016 bonds are funded at 25% of maximum annual debt service.

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 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 transmission contracts pursuant to the state's Constitution or a city's Home Rule Charter.

PROFILE

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. The agency is the majority owner and project manager of the California-Oregon Transmission Project (COTP), a 339 mile, 1,600 MW, 500 kilovolt alternating current transmission line between southern Oregon and central California that began commercial operations in 1993. TANC owns 86.9% of the COTP, with Western Area Power Administration (WAPA) at 9.37% and several regional participants owning the remaining balance of the project. TANC's transmission asset is part of the Control area operated by the Balancing Authority of Northern California.

METHODOLOGY

The principal methodology used in these ratings was US Municipal Joint Action Agencies published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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

Kurt Krummenacker
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

No Related Data.
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