Fitch Upgrades Northern California Power Agency to 'A' From 'A-'

Business Wire, August 18, 2004

CHICAGO -- Fitch Ratings assigns an underlying rating of 'A' to Northern California Power Agency's (NCPA) proposed $85 million series 2004A refunding hydroelectric project number one bonds. Fitch also upgrades the underlying rating of the $416.1 million outstanding parity hydroelectric project number one bonds and $192.3 million of outstanding geothermal project number three bonds to 'A' from 'A-'. The Rating Outlook for NCPA is Stable. Proceeds from the 2004A bonds will be used to refund a portion of NCPA's outstanding 1998 refunding series A hydroelectric project number one revenue bonds. The bonds are being issued by NCPA as variable-rate demand bonds and will be insured by MBIA with liquidity provided by Citibank via a standby bond purchase agreement. Pricing of the bonds is expected the week of Sept. 13, 2004, with Citigroup acting as underwriter.

The upgrades primarily resulted from a combination of improved credit factors realized by the agency and the members, as well as changing energy market factors over the past several years. Primary drivers for the upgrade, include:

--Strengthening credit profile of most member systems, including the recent upgrade and positive outlook of Silicon Valley Power- NCPA's largest project participant.

--Improved operating performance of the hydroelectric and geothermal projects with significant improvement to the operating performance and life expectancy of the geothermal project.

--Increased competitive value of NCPA projects and favorable price stability, in comparison with volatile natural gas fired generation.

--Growing importance of NCPA's 'green/renewable' generating projects as many member cities enact renewable portfolio standards.

--Members rising reliance on NCPA for marketing, scheduling, legislative/ regulatory, and administrative ancillary services in an increasingly complicated California market.

The rating upgrades also reflect the strong financial performance and improved liquidity position over the past few years of the agency and most of its members, as well as NCPA's highly qualified and proactive management team. NCPA's competitive power costs are attributable to reduced debt service costs and low variable operating costs. In particular, the geothermal project continues to perform well beyond initial expectations due to water injection technology that is expected to add an additional 14 years of capacity and energy output to members, through 2030, well beyond the project's final debt maturity of 2010.

Ongoing credit factors that underpin NCPA's ratings include, strong take-or-pay contracts with a 25% step-up provision (where power costs are paid as operating and maintenance expenses of each participant's utility system); a similar mix of participants within each project; and an integration of the facilities with each member's resources, providing them with a favorable power supply mix relative to the California market. Additionally, these system-like qualities warrant analyzing the projects as a utility system as opposed to separate project financings and provides greater stability and security to the credit ratings.

Credit concerns include the hydropower projects' exposure in dry water years and participant retail rates that, while generally favorable compared with neighboring investor-owned utilities, are slightly above regional averages. In addition, the relatively small size of many of the participants and service area wealth indexes that, with few exceptions, lag state and national levels are factored into the ratings. It should also be noted that beginning in 2005, Pacific Gas & Electric Co.'s (PG&E) energy support for an allocation from the Western Area Power Administration (WAPA) to NCPA will no longer be available, requiring the agency and its members to procure additional resources to replace a portion of WAPA's low cost power. Through discussions with various members and NCPA management, Fitch believes that the members are addressing this issue adequately on an individual basis by adding thermal units locally (e.g., SVP and Roseville) or via NCPA's power pool.

NCPA is a joint power agency that provides 14 members and four associate members, based in Northern California, with a portion of their energy requirements through a mix of hydroelectric, geothermal, and gas projects, as well as purchased power. In addition to generation, NCPA provides marketing, legislative/regulatory, and administrative ancillary services.