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HomeMy WebLinkAbout2000-04-03 City Council (10)TO: City of Palo Alto C ty Manager’s Report ...................HONO~BLECITY CO~CIE ATTENTION:FINANCE COMMITTEE 4 FROM:CITY MANAGER DEPARTMENT:UTILITIES DATE:APRIL 3, 2000 CMR:198:00 TITLE:APPROVAL OF AGREEMENT FOR TRANSFER OF RIGHTS AND OBLIGATIONS UNDER AN INTEREST RATE SWAP AGREEMENT RELATING TO HYDROELECTRIC PROJECT NUMBER ONE REVENUE BONDS REPORT IN BRIEF The Northem California Power Agency (NCPA) is planning to enter into a fixed to variable Interest Rate Exchange Agreement (IREA) for an estimated amount up to 20 percent of the outstanding bonds on the Calaveras hydroelectric project ($107 million). Although the IREA introduces new risks to the project participants (including Palo Alto), it is expected to provide significant benefits. Thus, the NCPA Commission voted in October 1999 to authorize the IREA. Benefits will accrue fxom the IREA if variable interest rates are below tile current fixed rates on the bonds, as has been the case over the last 10 years. Risks are also present in IREA since future variable interest rates are unknown. The costs and benefits accruing from the IREA were to be divided according to project participation levels (as outlined in the Third Phase Agreement) of each of the Calaveras hydroelectric project participants. Palo Alto’s participation level in the Calaveras hydroelectric project is 22.92 percent. Subsequently, two of the smaller participants in the project (Healdsburg and Ukiah) decided not to enter into the IREA. This report seeks to transfer the interests of those participants (a combined total of 3.7 percent) equally to the three largest participants in the project (Santa Clara, Palo Alto and Roseville). CMR:198:00 Page 1 of 5 RECOMMENDATION Staff recommends that the City Council approve and authorize the Mayor to execute the Agreement for Transfer of Rights and Obligations under an Interest Rate Exchange Agreement relating to Hydroelectric Project Number One Revenue Bonds (Transfer Agreement). Council’s authorization of the City’s participation in the Transfer Agreement results in the City’s share in the IREA being approximately 24.15 percent. This increased participation is limited to the stream of fixed and variable payments with the counterparty and has no effect on any participants’ obligations to the bondholders or to NCPA with respect to the Calaveras hydroelectric project operation or debt service payments. BACKGROUND In the fall of 1999, NCPA investigated entering into a fixed to variable interest rate exchange agreement for an estimated amount up to 20 percent of the outstanding bonds on the Calaveras hydroelectric project ($107 million). Although the exchange agreement introduces new risks to the project participants (including Palo Alto), it is expected to provide benefits. Thus, under its authority under the NCPA financing agreements, the NCPA Commission voted in October 1999 to authorize the IREA. Under that agreement, Palo Alto has a 22.92 percent interest in the project. The participation percentages for the costs and benefits accruing from the IREA will be divided according to the project participation levels, as outlined in the construction, operation and financing of the Calaveras hydroelectric project (Third Phase Agreement). Subsequently, two of the smaller participants in the project (Healdsburg and Uldah) decided not to enter into the IREA. To enable the remaining participants to go forward with the IREA, the NCPA Commission recommends that a Transfer Agreement to reassign the interests of the two smaller participants to the three largest participants in the project (Santa Clara, Palo Alto and Roseville) be authorized. Since such a recommendation would commit the larger participants to a level greater than that in the Third Phase Agreement, the NCPA Commission cannot authorize the Transfer Agreement. The City Council must authorize the Transfer Agreement, since it was the City Council that authorized the Third Phase Agreement in the first place. No change or amendment to the Third Phase Agreement is required. Under the recommended Transfer Agreement, each of the larger cities would acquire one third of the interest of Healdsburg and Ukiah in the IREA (but not in the hydroelectric project itself). Healdsburg and Ukiah combined have a 3.7 percent interest in the project. Thus, the City’s resulting share in the IREA is proposed to be increased by 1.233 percent. The terms of the IREA could be for up to 15 years. CMR:198:00 Page 2 of 5 DISCUSSION An interest rate exchange agreement, sometimes referred to as an interest rate swap agreement, is a mechanism that allows a party to receive, for example, a stream of fixed rate payments and in return, make a stream of variable rate payments. The other party, referred to as the counterparty (typically a bank or investment banker), receives the variable rate stream of payments and makes the stream of fixed payments. In NCPA’s case, by arranging the fixed rate payments received from the counterparty to matched fixed payments owed to bondholders, NCPA’s payment obligation is effectively converted to a variable rate. To the extent that the variable rate payments owed by NCPA to the counterparty are lower than the payments owed to the bondholders, NCPA’s effective interest cost is decreased. If, however, the variable rate payments owed by NCPA to the counterparty are higher than the payments owed to the bondholders, NCPA’s interest cost is increased. The expectation is that the rate swap will save NCPA interest costs. In addition, NCPA has no variable rate debt exposure now and the exchange agreement is capped at 20 percent of the hydroelectric project debt. Historically, variable interest rates have remained below fixed interest rates, so the IREA and the Transfer Agreement could allow the City and the other participants in the Third Phase Agreement to reduce their debt service cost. There is a ready market for such exchange agreements and it is easily implemented through a bid process. However, there is the risk that variable interest rates will rise or a counterparty may not perform. The variable rate risk should be viewed in the context that the City’s variable rate exposure is limited to 24.12 percent of its outstanding hyrdoelectric project debt. The remaining 75.88 of the debt will remain fixed. Concern about the ability of the counterparty (the other party in the exchange agreement) to perform is mitigated by requiring an adequate credit rating and trade record, and staff recommends that securitization of the IREA by the counterparty should be obtained. When NCPA proposed the IREA, staff and the City’s Financial Advisor, Stone and Youngberg (S&Y), reviewed the proposal. S&Y raised concerns that a reevaluation of the City’s credit rating may be triggered by replacing fixed rate debt with variable rate debt since the City has designated certain net revenues to cover its debt. Although S&Y confirmed that variable rates have been low over the last ten years, this is not guaranteed in the future and there still exists a possibility of spikes in short-term rates. In comparing the City’s fraction of fixed rate debt to other municipal owned utilities, NCPA’s financial advisor noted that many municipal utilities have some variable rate debt, but that most have less than 20 percent of their total debt variable. Staff recommends that the securitization of the IREA by the counterparty should be obtained. CMR: 198:00 Page 3 of 5 RESOURCE IMPACT If all hydro-project participantswere to agree to the IREA, an estimated benefit of $1.6 million per year in reduced debt service cost would result. This benefit is expected to accrue if the difference between the fixed rate and floating rate remains the same as it has for the last ten years. The City’s share would be $366,720 per year. By executing the transfer agreement, the City’s interest in the transaction increases from 22.92 percent to 24.15 percent, with a corresponding increase in annual debt service savings of $19,733. Staff is comfortable that the IREA and the Transfer Agreement will not result in the.utility having an excessive proportion of variable rate debt. POLICY IMPLICATIONS At the NCPA Commission meeting of October 1999, the City’s NCPA Commissioner authorized Palo Alto’s participation in the IREA that resulted in an increased risk exposure for the City. This decision was made since it appears likely that savings will be realized both for the City and all other hydroelectric project participants. If the City did not participate in the IREA, it was unlikely that this arrangement would have been consummated, resulting in less beneficial financial impacts to other hydroelectric project participants. Additionally, NCPA currently holds no variable rate debt exposure. However, the estimated savings are based on future interest rate projections, which are uncertain and unpredictable. This type of agreement is a departure from historic practice, but does not violate any written policies. The Transfer Agreement, which is the subject of this CMR, adds only a marginal amount of additional risk and benefit as it simply increases Palo Alto’s participation in the IREA from 2’2.92 percent to 24.15 percent. TIMELINE Upon approval of the Transfer Agreement by the.Cities of Santa Clara, Roseville and Palo Alto, the IREA will be completed. The City of Santa Clara Council approved the Transfer Agreement on February 15, 2000. The City of Roseville will be considering the Transfer Agreement at its March 15, 2000 meeting. NCPA will enter into this IREA as soon as the Transfer Agreements from the Santa Clara, Roseville and Palo Alto are approved. ENVIRONMENTAL REVIEW No environmental review is required. CMR:198:00 Page 4 of 5 ATTACHMENTS/EXHIBITS Agreement for Transfer of Rights and Obligations under an Interest Rate Exchange Agreement relating to Hydroelectric Project Number One Revenue Bonds PREPARED BY: Jane Ratchye, Senior Resource Planner REVIEWED BY:Girish Balachandran, Supply Resources Group Manager Carl Yeats, Director of Administrative Services DEPARTMENT HEAD APPROVALi CITY MANAGER APPROVAL: 2H of Utilities cc: Utilities Advisory Commission CMR: 198:00 Page 5 of 5 November 24, 1999 AGREEMENT FOR TRANSFER ,OF RIGHTS AND OBLIGATIONS UNDER AN INTEREST RATE SWAP AGREEMENT RELATING TO HYDROELECTRIC PROJECT NUM:BER ONE REVENUE BONDS Dated as of December 1, 1999 By and Among City of Healdsburg City of Ukiah and City of Palo Alto City of Roseville City of Santa Clara AGREEMENT FOR TRANSFER OF RIGHTS AND OBLIGATIONS UNDER AN INTEREST RATE SWAP AGREEMENT RELATING TO HYDROELECTRIC PROJECT NUMBER ONE REVENUE BONDS This AGREEMENT FOR TRANSFER OF RIGHTS AND OBLIGATIONS UNDER AN INTEREST RATE SWAP AGREEMENT RELATING TO HYDROELECTRIC PROJECT NUMBER ONE REVENUE BONDS (as amended and supplemented in accordance with the terms hereof, the "Agreement"), dated as of December 1, 1999, by and among the City of Healdsburg and the City of Uldah (each, a "Transferring Participant") and theCity of Palo Alto, the City of Roseville and the City of Santa Clara (each, an "Acquiring Participant"), WITNESSETH: WHEREAS, the Northern California Power Agency ("NCPA") is a public entity duly organized and existing pursuant to the Northern California Power Agency Joint Powers Agreement, dated as of July 19, 1968, as amended and supplemented (the "Joint Powers Agreement") and the provisions relating to the joint exercise of powers found in Chapter 5 of Division 7 of Title 1 of the Government Code of the State of California (the "Act"); and WHEREAS, NCPA is authorized pursuant to the provisions of the Joint Powers Agreement and the Act to acquire and construct, or cause to be acquired and constructed, and to operate or cause to be operated,-a project within the State of California for the generation or transmission of electric energy (including a capacity right in such a project) and to sell the capacity and energy of such project; to enter into agreements with respect to any matters relating to the acquisition, construction and operation of such project and the sale of capacity and energy of such project; and to finance the acquisition, Construction and operation of such project through the issuance of bonds, notes and other evidences of indebtedness under the Act; and to issue bonds to refund such bonds, notes or other evidences of indebtedness; and WHEREAS, NCPA and the cities of Alameda, Biggs, Gridley, Healdsburg, Lodi, Lompoc, Palo Alto, Roseville, Santa Clar~i, and Ukiah and the Plumas-Sierra Rural Electric Cooperative (collectively, the "Project Participants") have entered into the Agreement. for Construction, Operation and Financing of the North Fork Stanislaus River Hydroelectric Development Project, dated as of September 1, 1982, as amended (the "Member Agreement"), to provide for the construction, operation, and financing of the North Fork Stanislaus River Hydroelectric Development Project (the "Project"), the sale by NCPA of capacity and energy of the Project to the Project Participants, and the security for the bonds, notes and Other evidences of indebtedness to be issued to finance the Project; and WHEREAS, the city of Healdsburg has a 1.66% Project Entitlement Percentage (as defined in the Member Agreement) in the Project pursuant to the Member Agreement and the City of Ukiah has a 2.04% Project Entitlement Percentage in the Project pursuant to the Member Agreement; and WHEREAS, pursuant to an Indenture of Trust, dated as of March 1, 1985 (as amended and supplemented, the ’:Indenture"), between NCPA and State Street Bank and Trust Company, N.A., as successor Trustee, NCPA has issued its bonds (the "Bonds") to finance the cost of acquisition and construction of the Project or to refund any outstanding bonds; and WHERAS, NCPA has authorized certain officers of NCPA to enter into one or more interest rate swap agreements with respect to the outstanding Bonds as authorized by Sections 5922 and 53534 of the California Government Code; and WHEREAS, the terms and conditions of each such interest rate swap shall be as set forth in the ISDA Master Agreement, as amended and supplemented by the S~hedule to the Master Agreement, in the form approved by NCPA (such ISDA Master Agreement, as so amended and supplemented, being referred to as the "Swap Agreement"); and WHEREAS, each such interest rate swap shall constitute a transaction under the Swap Agreement (a "Transaction"), the specific terms of which shall be contained in a Confirmation (a "Confirmation") to be delivered on the date such Transaction is agreed upon by the parties; and WHEREAS, the NCPA’s obligations under each Transaction will be a special, limited obligation payable solely from amounts received from the Project Participants pursuant to the Member Agreement and available for such purpose pursuant to the Indenture; and WI-IEREAS, under the Member Agreement, each of the Project Participants shall be entitled to its Project Entitlement Percentage of any payments made to NCPA under the Swap Agreement and shall be obligated to pay its Project Entitlement ~Percentage of any payments required to be made by NCPA under the Swap Agreement; and WHEREAS, the Transferring Participants have determined to transfer their respective rights, benefits and obligations under the Member Agreement with respect to the Swap Agreement to the Acquiring Participants on the terms and conditions herein contained; and WHEREAS, each of the Acquiring Participants has agreed to acquire its Transferred Percentage (as defined below) of the rights, benefits and obligations of the Transferring Participants under the Member Agreement with respect to the Swap Agreement on the terms and conditions contained herein, including the obligation to make payments with respect to such Transferred Percentages to the extent that the Transferring Participants’ are obligated to make payments under the Member Agreement with respect to such Transferred Percentage; and WHEREAS, the transfer to the Acquiring Participants of the rights, benefits and obligations of the Transferring Participants under the Member Agreement with respect to the Swap Agreement does not relieve the Transferring Participants of their respective obligations under the Member Agreement or the Indenture; NOW THEREFORE, the parties hereto do agree as follows: 1.Definitions. Unless otherwise defined herein, terms used herein which are defined in the Preambles to this Agreement shall have the meanings set forth in such Preambles and terms used herein which are defined in the Member Agreement shall have the same 2 meanings herein as are given such terms in the Member Agreement. In addition, the following terms shall, for all purposes of this Agreement, have the following meanings: "Transferred Percentage." means, as of any date of determination and with respect to each Acquiring Participant, such Acquiring Participant’s participation in the rights, benefits and obligations of the Transferring Participantsunder the Member Agreement with respect to the Swap Agreement identified and set forth opposite the name of such Acquiring Participant in Appendix A hereto, as such Appendix A shall be amended from time to time in accordance with Section 8(a) hereof. 2.Purpose. The purpose of this Agreement is to provSde for the transfer of the Transferring Participants’ rights, benefits and obligatipns under the Member Agreement with respect to the Swap Agreement to the Acquiring Participants and to establish the terms and conditions of such transfer. The obligations of the Acquiring Participants hereunder are the several obligations of each Acquiring Participant with each Acquiring Participant being entitled to the benefits, and obligated with respect to payments, relating to its Transferred Percentage and no Acquiring Participant shall be entitled to the benefits, or obligated for payments, relating to the Transferred Percentage of any other Acquiring Participant. 3.Consent to Assignments. The Acquiring Participants hereby consent to the pledge and assignment to NCPA, to any Trustee for any Bonds, and to the counterparty under the Swap Agreement of all of the Transferring Participants’ right, title and interest in, to and under this .Agreement, including all or any portion of the payments received or to be received hereunder from the Acquiring Participants. Upon notice from a Transferring Participant or from NCPA or any Trustee or the counterpart), under the Swap Agreement, in each case who is an assignee of such rights, each Acquiring Participant shall make payments due by it hereunder directly to the Trustee. Such pledge and assignment shall be made effective for such time as the assigning Transferring Participant shall determine and provide. 4. Transfer of rights, benefits and obligations under the Member Agreement with respect to the Swap Agreement. (a) Subject to the terms-and conditions of this Agreement, each Tr£tusferfing Participant hereby sells, transfers, assigns and conveys to each of the Acquiring Participants, and each of the Acquiring Participants hereby accepts, such Acquiring Participant’s Transferred Percentage of the rights, benefits and obligations of the Transferring Participants under the Member Agreement with respect to the Swap Agreement. (b) Each Transferring Participant shall direct NCPA to provide to each Acquiring Participant such Acquiring Participant’s Transferred Percentage of the rights, benefits and obligations of the Transferring Participants under the Member Agreement with respect to the Swap Agreement, subject to the terms of this Agreement. 5.Rates and Charges. (a) Each Acquiring Participant shall pay for the Transferred Percentage acquired by it pursuant to this Agreement, in accordance with the provisions of Section 6 hereof, such amounts as the Transferring Participants are obligated to pay with respect to such Transferred Percentage under the Member Agreement. In the event any Transferring Participant pays any amount under the Member Agreement with respect to the Transferred Percentage of any Acquiring Participant, the Acquiring Participant shall repay such amounts to such Transferring Participant, together with interest thereon from the date of payment, to the extent permitted by law, at an annual rate to be established by the Commission of NCPA at the time of the adoption of the then most recent annual budget. (b) Each Acquiring Participant shall make .payments under thi.’s Agreement solely from the Acquiring Participant’s. Revenues and as an operating expense of the Acquiring such Participant’s Electric System. Nothing herein shall be construed as prohibiting an Acquiring Participant from using any other funds and revenues for purposes of satisfying any provisions of this Agreement. (c) The Acquiring Participants shall make payments under this Agreement whether or not the Project is completed, operable, operating or retired and notwithstanding the suspension, interruption, interference, reduction or curtailment of Project output or the capacity and energy of the Project in whole or in part for any reason whatsoever~ Such payments are not subject to any reduction, whether by offset or otherwise, and are not conditioned upon performance by NCPA or any Project Participant, including any Transferring Participant, under this Agreement, the Member Agreement, the Sv;,ap Agreement or any other agreement. (d) Each Acquiring Participant covenants and agrees to establish and collect fees and charges for electric capacity and energy furnished through facilities of the Acquiring Participant’s Electric System sufficient to provide Reventies to such Acquiring Part.icipant adequate to meet its obligations under this Agreement and to pay any and all other amounts payable from or constituting a charge or lien upon any or all the Acquiring Participant’s Revenues. (e) Each Acquiring Participant covenants and agrees that it shall, at all times, operate the properties of its Electric System, and the business in connection therewith, in an efficient manner and at reasonable cost and shall maintain its Electric System in good repair, working order and condition, 6.Annual Budget and Billing Statement. The Transferring Participants and the Acquiring Participants acknowledge that the Member Agreement provides that, prior to the beginning of each NCPA fiscal year, the Commission of NCPA will adopt an annual budget for such fiscal year for costs and expenses relating to the Project and shall promptly give notice to each Project Participant of its projected share of such costs and expenses. Each Transferring Participant will direct NCPA to give notice to each of the Acquiring Participants of the projected share of such costs and expenses related to the Transferred Percentage of such Acquiring Participant and to prepare a billing statement, based on estimates, to be sent to each of the Acquiring Participants not later than the fifteenth (15th) day of each calendar month showing the amount payable by the Acquiring Participant of costs payable under. Section 5(a) of this Agreement by the Acquiring Participant for the second succeeding calendar month, and the amount of any credits or debits as a result of any appropriate adjustments. Amounts shown on the billing statement are due and payable thirty (30) days after 4 the date of the billing statement. Any amount due and not paid by an Acquiring Participant within thirty (30) days after the date of the billing statement shall bear interest fi:om the due date until paid, to the extent permitted by law, at an atmual rate to be established by the Commission of NCPA at the time of adoption of the then most recent annual budget. On or before the day five (5) calendar months after the end of each NCPA fiscal year, the Transferring Participants shall direct NCPA to submit to each of the Acquiring Participants a.statement of the aggregate monthly costs related to the Transferred percentage of such Acquiring Participant for such fiscal year. If the actual aggregate monthly costs and other amounts payable for any fiscal year with respect to the Transferred Percentage of an Acquiring Participant exceeds the billings to such Acquiring Participant with respect to .its Transferred Percentage, the deficiency shall be added to such Acquiring Participant’s immediately succeeding billing statement. If the actual aggregate monthly costs and any Acquiring Participant’s obligations with respect to its Transferred Percentage, and any adjustment of or credit to an Acquiring Participant’s obligations with respect to its Transferred Percentage, are less than the billings to the Acquiring Participant, such excess shall be credited to the Acquiring Participant’s billing statement for such period (not to exceed.the immediately succeeding six months) and in such amounts as shall be determined by NCPA. If an Acquiring Participant questions or disputes the correctness of any billing statement by NCPA with respect to its Transferred Percentage, it shall pay the amount claimed when due and shall within thirty (30) days Of the receipt of such billing statement request an explanation from NCPA. If the bill is determined to be incorrect, the Transferring Participants shall direct NCPA to issue a corrected bill and refund any amount which may be due the Acquiring Participant with respect to its Transferred Percentage, which refund shall bear interest from the date NCPA received payment until the date of the refund, to the extent permitted by law, at an annual rate to be established by the Commission of NCPA at the time of adoption of the then most recent annual budget. If NCPA and an Acquiring Participant fail to agree on the correctness of a bill with respect to its Transferred Percentage, within thirty (30) days after the Acquiring Participant has requested an explanation, each Acquiring Participant agrees to, and the Transferring Participants shall cause NCPA to, promptly submit the dispute.to arbitration under section 1280 et seq. of the Code of Civil Procedure. 7.Obligations in the Event of Default under this Agreement. (a) Upon failure of an Acquiring Participant to make any payment in full when due under this Agreement, NCPA or a Transferring Participant shall make written demand upon the Acquiring Participant, and if said failure is not remedied within thirty (30) days from the date of such demand, such failure shall constitute.a default at the expiration of such period. Notice of such demand shall be provided to NCPA and to each other Transferring Participant by the Transferring Participant making such written demand. (b) Upon the failure of an Acquiring Participant to make any payment, which failure constitutes a default under this Agreement, the Transferring Participants shall cause NCPA to .sell and transfer for the Acquiring Participant’s account all or a portion of the Acquiring Participant’s Transferred Percentage for all or a portion of the remainder of the term of this Agreement, including, if so directed by the Transferring Participants, such a sale to any or all of the Transferring Participants. The Transferring Participants shall not permit NCPA to sell 5 such fights to a defaulting Acquiring Participant’s Transferred Percentage, directly or indirectly, in any manner, and shall not take or permit to be taken any other action or actions, which would result in any of the Bonds being treated as an obligation not described in Section 103(a) of the Internal Revenue Code of 1986, as amended. Notwithstanding that all or any portion of an Acquiring Participant’s Transferred Percentage is so sold or transferred, the Acq ".uiring Participant shall remain liable to pay the full amount of its obligations under Section 5 hereof as if such sale or transfer had not been made, except that such liability shall be discharged to the extent that NCPA shall receive payment from the purchaser or transferee thereof.. (c) Upon the failure of an Acquiring Participant to make any payment which failure constitutes a default under this Agreement and causes NCPA to be in default under the Swap Agreement or any Bond Resolution, the Transferring Participants may (in addition to the remedy provided by subsection (b) of this Section 7) terminate the provisions of this Agreement insofar as the same entitle the Acquiring Participant to .its Transferred Percentage. Irrespective of such termination, the obligations of the defaulting Acquiring Participant under this Agreement shall continue in full force and effect. (d) If NCPA fails to act in accordance with the direction of the Transferring Participants, the Transferring Participants shall consent to the Acquiring Participants initiating and maintaining a suit directly against NCPA to enforce this Agreement. 8.Obligations in Event of Default under the Member Agreement. (a) To the extent that any Transferring Participant’s Project Entitlement Percentage is increased pursuant to Section 7(d) of the Member Agreement, each Acquiring Participant’s Transferred Percentage shall be increased by the amount of each increase in the Transferring Participant’s Project Entitlement Percentage multiplied by such Acquiring Participant’s Transferred Percentage; provided, however, that the sum of such increases for each Acquiring Participant shall not exceed, without written consent of the Acquiring Participant, an accumulated maximum of 25% of the aggregate amount of such Acquiring Participant’s Transferred Percentages transferred hereby, as initially set forth in Appendix A. (b) The Member Agreement provides that if a Project Participant shall fail or refuse to pay any amounts due to NCPA, the fact that the other Project Participants have increased their obligations to NCPA pursuant to Section 7 of the Member Agreement shall not relieve’ the defaulting Project Participant of its liability under the Member Agreement and that the nondefaulting Project Participants may recover from such defaulting ProjectParticipant any increased obligations resulting from such default. Each Transferring Participant hereby assigns to each Acquiring Participant all of its right of recovery from a defaulting Project Participant with respect to its Transferred Percentage to the extent of any increase in the Acquiring Participant’s obligations hereunder caused by the defaulting Project Participant. (c) If the Transferring Participants’ rights under this Agreement are assigned to NCPA or a Trustee for any Bonds or a counterparty under the Swap Agreement, NCPA, or to the extent provided in the related Bond Resolution, such Trustee or such counterparty shall have the right to initiate and maintain suit to enforce this Agreement. 6 9. Transfers, Sales and Assignments of Transferred Percentages. Each Acquiring Participant has full and unfettered rights to make sales, transfers and exchanges (collectively "assignments") of its Transferred Percentage except as expressly provided otherwise in this Agreement. Notwithstanding any other provision of this Agreement, no Acquiring Participant shall assign, sell, transfer or exchange any portion Of its Transferred Percentage, directly or indirectly, in any manner, and shall not take or permit to be taken any other action or actions, which would result in any of the Bonds being treated as an obligation not described in Section 103 (a) of the Internal Revenue Code of 1986, as amended. 10. Sale of Eledtric System. No Acquiring Participant shall sell, transfer, assign ownership of or otherwise dispose of all or substantially all of its Electric System to another entity until it has first complied with the provisions of Section 10. A consolidation with. another governmental entity or change in governmental form is not deemed a transfer of ownership. ,~ (1) Such sale, transfer, assignment or disposition shall be under terms and conditions that provide assurance that the obligations of the Acquiring Participant under this Agreement, and that the Transferring Participants’ obligations under the Member Agreement with respect to the Acquiring Participant’s Transferred Percentage will be promptly and adequately met. The Transferring Participants or NCPA maY require that sufficient moneys of the Acquiring Participant to discharge such oblightions be irrevocably set aside and maintained, in a trust account, as a condition to the transfer of the Acquiring Participant’s Electric System, if no other adequate assurance is available. (2) Each Acquiring Participant shall give ninety (90) days advance written notice to the Transferring Participants and NCPA of any proposed transfer pursuant to this Section 10. Appendix A to this Agreement shall be amended.as appropriate to reflect any transaction pursuant to this Section t0. 11. Direction and Review. All directions to NCPA with respect to the Swap Agreement and all meetings of NCPA in connection therewith shall be as provided in Section 12 of the Member Agreement and for such purposes, the Transferring Participants agree that each Acquiring Participant may vote on matters relating to the Swap Agreement at such meetings of the Project Participants pursuant to Section 12 of the Member Agreement with respect to its Transferred Percentage as if it had the Project Entitlement Percentage equal to its Transferred Percentage of the Transferring Participants’ Project Entitlement Percentage, and the voting rights of the Transferring Participants shall be reduced accordingly, unless the Project Participants agree at such meeting that voting will be on a one member one votebasis, with a majority vote of those present required for action, in which.case the Acquiring Participants shall be entitled to one vote; provided that the. Transferring Participants shall not agree that voting shall be on a one member one vote basis unless the Acquiring Participants direct the Transferring Participants to do so. 7 12. Term. (a) This Agreement shall become effective for all purposes upon the execution hereof by the Acquiring Participants and the Transferring Participants and delivery to the other parties hereto by each Transferring Participant and Acquiring Participant of. an opinion of an attorney or firm of attorneys acting as counsel to such Transferring Participant or Acquiring Participant in substantially the form attached hereto as Appendix B. (b) Swap Agreement. The term of this Agreement shall continue until the termination of the 13. Termination and Amendments. This Agreement shall not be subject to termination by any party under any circumstances, whether based upon the default of any. other party under this Agreement, the Swap Agreement or any other instrument, or otherwise, except as specifically provided herein. 14. Miscellaneous. The headings of the sections hereof are inserted for convenience only and shall not be deemed a part of this Agreement. If any one or more of the covenants or agreements provided in this Agreement to be performed should be determined to be invalid or contrary to law, such covenant or agreement shall be deemed and construed to be severable from the remaining covenants and agreements herein contained and shall in no way affect the validity of the remaining provisions of this Agreement. This Agreement may be executed in several counterparts, all or any of which shall be regarded for all purposes as one original and shall constitute and be but one and the same instrument. IN WITNESS WHEREOF each Transferring Participant and each Acquiring Participant has executed this Agreement by its duly authorized officers, and caused its official seal to be affixed hereto, all as of the date first above written. CITY OF HEALDSBURG CITY OF PALO ALTO By By And And [SEAL][SEAL]. CITY OF UKIAH CITY OF ROSEVILLE By By And And [SEAL][SEAL] CITY OF SANTA CLARA By And [SEAL] 9 APPENDIX A TRANSFERRED PERCENTAGES Each of the Acquiring Participants shall have the Transferred Percentage of the City of Healdsburg’s 1.66% Project Entitlement Percentage and the City of Uldah’s 2.04% Project Entitlement Percentage of the benefits, rights and obligations of such Transferring Participants under the Member Agreement with respect to the Swap Agreement. Acquiring Participant City of Palo Alto City of Roseville City of Santa Clara Transferred Percentage 33.3333% 33.i333% 33.3334% 100.0000% Interest in Swap Agreement 1.2333333% 1.2333333% 1.2333334% 3.7000000% A-1 APPENDIX B Northern California Power Agency 180 Cirby Way Roseville, California 95678 [Strike name of Participant on whose behalf opinion is being delivered] City of Healdsburg City of Palo Alto City of Roseville City of Santa Clara City of Ukiah Ladies and Gentlemen: We serve as counsel to [Insert Name of Project Participant] (the "Participant") in connection with the Agreement for Transfer of Rights and Obligations Under an Interest Rate Swap Agreement Relating to Hydroelectric Project Number One Revenue Bonds, dated as of December 1, 1999 (the "Agreement"), among the Participant and certain other entities. We have examined the proceedings of the Participant with respect to the authorization, execution and delivery of the Agreement, and such other certificates, documents, records and proceedings as we have deemed necessary or appropriate for the purposes of this opinion. Capitalized terms used herein and not otherwise defined shall have the meanings given such terms pursuant to the Agreement. On the basis of the foregoing and examination of applicable California and federal law, we are of the opinion that: 1. The Participant is a mtmicipal corporation duly created, organized and existing under the laws of the State of California. 2.The Participant has full legal right, power and authority to enter into the Agreement and to carry Out and consummate all transactions contemplated thereby, and the Participant has complied with the provisions of applicable law, in all matters relating to such transactions. 3.The Agreement has been duly authorized, executed and delivered by the Participant, is in full force and effect as to the Participant in accordance with its terms and, assuming .that the other parties to the Agreement have all the requisite power and authority, and B-1 have taken all necessary action,, to execute and deliver such Agreement, constitutes the legal, valid and binding obligation of the Participant enforceable in accordance with its terms. 4. Payments by the Participant under the Agreement will constitute an operating expense of the Electric System of the Participant. Payments by the Participant under the Agreement are to be made solely from the Revenues of the Participant’s Electric System as provided in Section 5(b) of the Agreement. The opinion expressed in paragraph 3 above is qualified to the extent that the enforceability of the Agreement may be limited by any applicable bankruptcy, insolvency, debt adjustment, moratorium, reorganization, or other similar laws affecting creditors’ rights generally or as to the availability of any particular remedy. This opinion is rendered only with respect to the laws of the State of Califomia and the United States of America, and is addressed only to the parties named above. No other person is entitled to rely on this opinion, nor may you rely on it in connection with any transactions other than those described herein. Very truly yours, B-2 TABLE OF CONTENTS Page 2. 3. 4. o 6. 7. 8. 10. 11. 12. 13. 14. DEFINITIONS .......................................................’ ......................................................~ .....2 PURPOSE ..........................................................................................................................3 CONSENT TO ASSIGNMENTS ......................................................................................3 TRANSFER OF RIGHTS, BENEFITS AND OBLIGATIONS UNDER THE MEMBER AGREEMENT WITH RESPECT TO THE SWAP AGREEMENT. ..............3 RATES AND CHARGES ..............’ ....................................................................................3 ANNUAL BUDGET AND BILLING STATEMENT ......................................................4 OBLIGATIONS IN THE EVENT OF DEFAULT UNDER TI-IIS AGREEMENT .........5 OBLIGATIONS IN EVENT OF DEFAULT UNDER THE MEMBER AGREEMENT ...................................................................................................................6 TRANSFERS, SALES AND ASSIGNMENTS OF TRANSFERRED PERCENTAGES ...............................................................................................................6 SALE OF ELECTRIC SYSTEM ......................................................................................7 DIRECTION AND REVIEW ............................................................................................7 TERM ................................................................................................................................7 TERMINATION AND AMENDMENTS .........................................................................8 MISCELLANEOUS ..........................................................................................................8 APPENDIX A- SCHEDULE OF TRANSFERRING PARTICIPANTS AND TRANSFERRED PERCENTAGES ..............................................................................A-1 APPENDIX B - FORM OF OP]2qION OF COUNSEL ............................................................B-1 -i- An extra section break has been inserted above this paragraph. 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