OREANDA-NEWS. Fitch Ratings has upgraded the following electric revenue bonds issued by M-S-R Public Power Agency (MSR), CA:

--\$127.4 million San Juan Project subordinate lien revenue bonds, series 2008L and 2011O.

The Rating Outlook is revised to Stable from Positive.

SECURITY
Bondholders are secured revenues received pursuant to absolute and unconditional take-or-pay power sales agreements with the three project participants that extend for the life of the bonds. The agreements include a 25% step-up provision in the event of a participant default. Participant payments related to the project are made as operating expenses of their respective retail electric systems.

KEY RATING DRIVERS

JOINT POWERS AGENCY: MSR is a joint powers agency (JPA) established to acquire and manage electric power generation and transmission for its three members. The San Juan Project includes MSR's 146 megawatt (MW), or 28.8% ownership interest, in San Juan Unit 4, a coal-fired generating unit located in New Mexico.

MEMBERS DRIVE PROJECT CREDIT QUALITY: The upgrade to 'A+' reflects the credit profiles of MSR's three member systems, including the recent upgrade of Modesto Irrigation District (MID; 50% share) to 'A+'. The remaining members, City of Redding (15%) and Silicon Valley Power (SVP; 35%), are also rated 'A+'/Outlook Stable.

SOLID SECURITY FEATURES: Bondholders are secured by revenues received from absolute and unconditional take-or-pay power sales agreements with the three members that extend for the life of the bonds. The agreements include a 25% step-up provision in the event of a participant default. Payments for the San Juan Project are made as operating expenses of the respective retail electric systems.

STABLE, THIN COVERAGE LEVELS: MSR's consolidated financial performance remains stable with thin but adequate Fitch-calculated debt service coverage of 1.14 times (x) in 2014. Liquidity levels remain satisfactory with 99 days cash on hand at the end of 2014.

OBLIGATIONS UNAFFECTED BY PLANNED DIVESTITURE: MSR's planned divestiture of its interest in San Juan Unit 4 and the associated Southwest Transmission Project (STP) would not affect the obligations of the members under the take-or-pay power sales agreements and does not affect the rating on the bonds. Fitch expects that debt service on the outstanding bonds would continue to be paid by the participants as scheduled regardless of any asset sales or the related terms. The asset sales are expected to be completed by 2017 (San Juan Unit No. 4) and the end of 2015 (STP).

RATING SENSITIVITIES

CHANGE IN PARTICIPANT CREDIT QUALITY: The M-S-R Public Power Agency rating will continue to reflect the underlying credit quality of the project participants. Credit drivers for the participants include financial performance, as well as the timeliness of rate changes to recover costs associated with increasing amounts of renewable energy, meeting greenhouse gas emissions, and other system-related capital improvements.

CREDIT PROFILE

MSR is a joint action agency that provides power supply to its three member-participants.

SAN JUAN PROJECT

San Juan is operated by Public Service Company of New Mexico (PNM) and served by a coal mine located adjacent to the plant. San Juan Unit 4 has maintained solid operating performance in recent years with an availability factor that ranged from 74.7% (2013) to a high of 93.1% (2011) with the variation largely due to planned maintenance activity. In 2014, the availability factor was 79.2%.

Single-unit outage risk is mitigated by a reserve-sharing agreement MSR has with Tucson Electric Power, the owner of San Juan Unit 1 and Unit 2, and by the fact that the project accounts for a relatively limited portion of each utility's overall power supply. MSR owns transmission capacity in the Southwest Transmission Project which delivers the power into California.

The San Juan Plant has been the subject of environmental regulation for haze emissions (NOx) since at least November 2006. An agreement between the primary parties in the dispute -- the EPA, Public Service Co. of New Mexico (PNM), and New Mexico -- has been reached. The agreement requires the installation of selective non-catalytic reduction equipment at two of the four San Juan units (units 1 and 4) by early 2016 and the retirement of the other two units (units 2 and 3) by the end of 2017.

SAN JUAN PROJECT DIVESTITURE

MSR is currently negotiating the divestment of its interest in the coal-fired unit due to national and state environmental regulations and the plant's elevated power costs. Negotiations regarding the restructured ownership of San Juan remain underway, although management reports that the general framework has been largely agreed upon by the various parties. The restructuring agreement, if finalized by MSR and the other interested parties, would require approval by the New Mexico Public Regulation Commission and FERC to take effect.

If the restructuring agreement is finalized and approved, MSR would exit the project at year-end 2017 without paying a material exit fee or paying the capital costs needed to comply with the haze regulation. If the restructuring agreement fails, MSR would likely remain a participant in the project until its outstanding debt is fully paid off in 2022.

MSR is also negotiating the sale of the STP, which brings power from San Juan into California. A request for proposal was issued in late 2014 and negotiations are currently underway with a potential counterparty. Management expects the sale to occur by the end of 2015. Following the sale, MSR plans to sell the power related to San Juan into the market or make alternative delivery arrangements to the members.

DEBT TO REMAIN OUTSTANDING

MSR's debt associated with San Juan and STP is expected to remain outstanding whether or not the agency sells its interest in San Juan or the STP. Importantly, the obligation of the participants to pay debt service on the bonds under the terms of the take-or-pay power sales agreements would not be affected by any asset sales or MSR's exit from project. Fitch expects that debt service will continue to be paid as originally scheduled. Fitch views the strength of the take-or-pay agreements supporting the debt and the credit quality of the member-participants as an important mitigant to concerns regarding the potential sale of the debt-financed assets.

ADEQUATE FINANCIAL PERFORMANCE

As a joint action agency, MSR collects only the amount of revenues from its members necessary to cover costs, including debt service. Debt service coverage levels are relatively thin, averaging 1.23x from 2010-2014, but remain adequate for the rating. Satisfactory liquidity levels help offset concerns regarding narrow coverage levels. At the end of 2014, MSR had 99 days cash on hand or approximately \$28.7 million in unrestricted cash and investments.