News Column

Fitch Affirms Utah Associated Municipal Power Systems Payson Revs at 'A'; Outlook Stable

February 28, 2014

Fitch Ratings has affirmed the 'A' rating on the following Utah Associated Municipal Power Systems (UAMPS, or the system) revenue bonds:

--$70,510,000Payson Power Project refunding revenue bonds, series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of UAMPS' Payson project, principally derived from take-or-pay power sales contracts (PSCs) with each of 16 project participants.

KEY RATING DRIVERS

PROJECT-BASED WHOLESALE AGENCY: UAMPS is a project-based joint action agency serving 45 mostly small, unrated members through 15 separate projects. The Payson project, a 143MW combined cycle plant, began commercial operations in June 2004.

TAKE-OR-PAY CONTRACTS: Take-or-pay PSCs with 16 project participants underpin the project rating. The PSCs have been in force for over a decade and extend well beyond the final maturity of the bonds. Moreover, a 25 percent step-up provision provides a degree of bondholder protection against a default by one or more participants. Bondholders do not have direct exposure to any single participant.

IMPROVING PARTICIPANT FINANCIALS: The largest participants' measurably stronger financial metrics enhance the project's overall credit quality. Debt service coverage, liquidity, and equity ratios all improved during the past two years. In addition, the participants retain full rate-setting authority, which provides flexibility to ensure adequate and timely rate recovery.

HEALTHY SERVICE TERRITORY: The project participants' small - but growing - mainly residential customer bases define a healthy service territory. Income levels are average and there is some concentration of largest ratepayers. However, very low unemployment rates demonstrate the economic stability of the region.

SATISFACTORY PROJECT OPERATIONS: Project performance has been satisfactory in recent years and the cost of project power declined to a recent low of $59.11/MWh (2013). UAMPS prefunds the project's manageable long-term capital needs through rates.

RATING SENSITIVITIES

CONTINUED PARTICIPANT STRENGTHENING: Consistent improvements across each of the largest participants' financial performances could eventually lead to positive rating action. The participants' aggregate financial positions are measurably stronger, as noted. However, some outlier metrics for individual participants temper the overall positive momentum.

CREDIT PROFILE

UAMPS was established in 1980 as an energy services interlocal entity to finance, acquire, and operate various projects for the generation and transmission of electricity to its 45 members. The members choose to participate in any of UAMPS' 15 separate projects.

Fitch's principle rating considerations for UAMPS' Payson project are the PSCs and the financial and operating performances of the 16 participants. Additional rating considerations include the project operations and UAMPS' financial position, including its sources of liquidity.

STEP-UP PROVIDES PROTECTION

A 25 percent step-up provision in the PSCs provides some bondholder protection against a default by several smaller members. In addition, the step-up would cover a default by the largest participant. Consequently, bondholders do not have direct exposure to any single participant.

UAMPS has a take-or-pay PSC with each of its 16 members who are participants in the Payson project. The PSCs terminate at the later of Feb. 17, 2049 or the final maturity of all outstanding project bonds.

IMPROVED PARTICIPANT METRICS

The aggregate financial position of the seven largest participants representing 85 percent of total entitlement shares measurably improved in the past two years. This ultimately enhances bondholder security by bolstering UAMPS' underling revenue base.

The participants' Fitch-calculated coverage of full obligations increased to a healthy 1.55x and 1.57x in fiscal years 2012 and 2013, respectively, from an average of 1.09x in fiscal years 2009- 2011. Cash on hand likewise increased to an average of 133 days in fiscal years 2012 and 2013 from below 100 days in each of the prior three fiscal years. Leverage metrics also improved, as minimal participant debt continued to amortize.

Tempering the participants' overall positive momentum were some outlier financial metrics at individual systems. For instance, the largest participants' cash on hand averaged 139 days in fiscal 2013 but ranged as low as 10 days. Over time, more uniform improvement across all participants could lead to positive rating action.

ECONOMIC STABILITY

The generally small project participants are nevertheless growing and operate in a stable economic environment that ultimately benefits project fundamentals. The largest participants' megawatt- hour sales increased by 3.9 percent in 2013 over the prior year. The weighted unemployment rate is a very low 3.2 percent (November 2013), and largely residential customers provide for greater predictability of revenues. Income levels are average.

SATISFACTORY PROJECT OPERATIONS

Project operations have been satisfactory. The availability factor has averaged over 90 percent since 2008. The capacity factor, which has tracked Utah market prices, has lagged industry averages for natural gas-fired, combined cycle plants. However, the cost of power has improved in recent years to $59.11/MWh (2013).

Maintenance-related and other typical capital needs total a manageable $31.9 million through 2027. UAMPS prefunds all planned spending through rates.

SATISFACTORY PROJECT FINANCIALS

The Payson project generates satisfactory financial margins and UAMPS has various sources of liquidity to provide additional support.

Project debt service coverage averaged 1.34x annually with little variation in fiscal years 2009-2013. Cash balances were effectively breakeven; equity remained with the project participants. However, UAMPS accrues funds in a major overhaul reserve account (currently $5.4 million) and maintains two system wide line of credit facilities totaling $25 million to manage cash flows.

This rating action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria.

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study Addendum - February 2014' (Feb. 7,);

--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013);

--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);

--'Utah Associated Municipal Power Systems (Payson Power Project Revenue Bonds)' (March 8, 2012).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study Addendum -- February 2014

Additional information is available at 'fitchratings.com'.

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