News Column

Fitch Rates Intermountain Power Agency (UT) 2014 Series A&B Rev Rfdg Bonds 'AA-'; Outlook Stable

May 5, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA-' rating to Intermountain Power Agency's (IPA or the agency) proposed approximately $85 million subordinate power supply revenue refunding bonds, 2014 series A&B. The bonds are expected to price on May 13, 2014.

Bond proceeds will refund the outstanding 2009 series A&B subordinate lien bonds for savings.

Fitch also affirms its 'AA-'rating on IPA's outstanding $673 million subordinate lien bonds.

The Rating Outlook is Stable.

SECURITY

The bonds and notes are secured by revenues from the long-term Power Sales Contracts (PSCs) between IPA and its power purchasers. All senior lien debt has been repaid. The senior lien will remain open, but the agency has no plans to issue additional bonds under this lien.

KEY RATING DRIVERS

EFFICIENT POWER PROJECT: IPA owns the Intermountain Power Project (the project), a two-unit coal-fired plant that has historically exhibited solid operational performance above industry averages. Performance returned to more normal levels in fiscal 2013, after performance in 2011 and 2012 was below average due to extended unit outages.

STRONG PURCHASERS: Project participants include 36 entities throughout Utah and California. The current rating largely factors in the financial strength of IPA's six California purchasers, who are entitled to 75% of project generation and purchase almost 100% of power output.

FAVORABLE POWER SALES CONTRACTS: The power purchasers are unconditionally obligated to pay all costs of operation, maintenance and debt service, whether or not the project is operating, pursuant to strong take-or-pay power sales contracts (PSCs) with implied step-up provisions.

LIMITED IMPACT OF ENVIRONMENTAL RULES: IPA's existing pollution-control equipment meets the requirements under EPA's Mercury and Air Toxic Standards (MATS) rule. Additionally, IPA's California purchasers have been allocated sufficient carbon allowances through 2020 to allow for a phased-in transition away from existing coal-based resources. Discussions between IPA and its purchasers at this point are ongoing.

DECREASING LEVERAGE: The agency has been rapidly paying down outstanding debt. IPA's publicly held debt has been reduced by more than 60% in the past 10 years and senior debt has been fully replaced with subordinate debt issued under a more flexible indenture. The commercial paper program, which constitutes 28% of outstanding debt, is IPA's only exposure to variable-rate obligations.

RATING SENSITIVITIES

PERFORMANCE OF CALIFORNIA PURCHASERS: Deterioration in the credit quality of the California purchasers could lead to a change in IPA's rating, particularly the largest purchasers -- the Los Angeles Department of Water and Power (LADWP; 'AA-'/ Outlook Stable) and Anaheim Public Utilities Department ('AA-'/Outlook Stable).

CREDIT PROFILE

The project, operated by LADWP, has historically had a high degree of availability that exceeds industry averages in addition to a high capacity factor that indicates its competitive cost position in the region. Performance metrics have returned to more normal levels in fiscal 2013, after a prolonged, unplanned outage in fiscal 2012 significantly weakened operations for the period. The outage resulted from a generator failure at Unit 1, causing it to become inoperable. Unit 1 was repaired and put back in use, and unit design was updated at both units.

The PSCs expire on June 15, 2027, well after bond maturity in 2023, and cannot be adversely amended or terminated as long as the bonds are outstanding. The purchasers and IPA are in the process of amending the PSCs and excess power sales agreements to allow for project conversion to natural gas in the future. While no final decisions have been made in regard to the conversion, amending the contracts is a necessary step to facilitate this change. The amendments are not viewed as adverse to existing bondholders.

STRONG PURCHASERS & CONTRACTS

Favorably, the majority of the project's output is sold to six financially strong California-based purchasers. The California purchasers are entitled to 75% of the project's generating capacity and the remaining 25% is entitled to PacifiCorp (operating as Rocky Mountain Power), 23 Utah municipal purchasers and six rural electric cooperatives. In practice, the California participants purchase approximately 100% of actual project output through excess power sales agreements that are in place between four California purchasers (LADWP, Pasadena Water and Power, the City of Burbank and Glendale Water and Power) and the Utah purchasers. In addition, PacifiCorp has contracted to sell its 4% entitlement to LADWP. PacifiCorp's PSC is in the process of being terminated, at which point its entitlement share will be permanently transferred to LADWP.

Credit strength is derived from the unconditional take-or-pay nature of the PSCs. In the event of default by a purchaser, IPA's flexible budgeting process results in an unlimited implied step-up obligation for the performing purchasers. However, given LADWP's sizable entitlement share, it is unclear if the remaining purchasers would be able to absorb its payments in the event of an LADWP default.

ENVIRONMENTAL UNCERTAINTY

Environmental laws and regulations at the state and federal level remain a concern because of their potential cost impact on the purchasers and the project. Currently enacted California environmental mandates do not invalidate the PSCs, but limit renewals and extensions. The California purchasers received carbon allowances that are expected to enable project purchases to remain economic through PSC maturity.

IPA is working with all of the purchasers to develop a project repowering strategy that includes building a new gas-fired unit to comply with California greenhouse gas emission mandates, and would allow the California purchasers to remain project participants after the termination of the existing PSCs. Utah legislation was approved in 2012 that would allow for construction of natural gas generation at the site and the Utah purchasers have amended the IPA organization agreement to allow for natural gas conversion. Discussions regarding cost, size and capacity allocations of the repowered project are ongoing. No final decisions have been made and are not expected for some years.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria' (March 18, 2014);

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

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013);

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

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

U.S. Public Power Peer Study -- June 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710397

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst:

Stacey Mawson, +1-212-908-0738

Associate Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst:

Kathy Masterson, +1-512-215-3730

Senior Director

or

Committee Chairperson:

Dennis Pidherny, +1-212-908-0738

Managing Director

or

Media Relations:

Elizabeth Fogerty, New York,+1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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