Fitch Assigns 'AA-' Bank Note Rating to Intermountain Power Agency, UT CP; Outlook Stable
Fitch Ratings has assigned an 'AA-' bank note rating to the $100 million
commercial paper (CP) notes, series B1 & B2, issued by Intermountain
Power Agency (IPA), Utah. The bank note rating reflects the credit
quality of IPA's obligation if the notes become bank notes, held by the
provider of the liquidity agreement, Bank of America.
The CP notes are expected to be sold on Jan. 27, 2016. Note proceeds
will be used to refund outstanding debt.
In addition, Fitch has affirmed its outstanding 'AA-' ratings on the
following Intermountain Power Agency bonds:
--$453.6 million subordinated power supply revenue refunding bonds,
series 2007A, 2013A, 2014A and 2014B.
The Rating Outlook is Stable.
The subordinated bonds and CP notes are secured by revenues from the
long-term Power Sales Contracts (PSCs) between IPA and its power
purchasers. All senior lien debt was repaid in 2013, and no additional
issuance is anticipated on the senior lien.
KEY RATING DRIVERS
SINGLE-ASSET COAL PROJECT: IPA owns the Intermountain Power Project (the
project), a two-unit coal-fired plant that has historically exhibited
solid operational performance. All project capacity is sold pursuant to
take-or-pay power sales contracts (PSCs) with implied step-up provisions
that unconditionally obligate the purchasers to pay all costs of
operation, maintenance and debt service, whether or not the project is
STRONG CREDIT QUALITY OF PURCHASERS: The rating reflects the credit
quality of IPA's six California purchasers, who are contracted by the
PSCs to purchase 75% of project generation but purchase nearly 100% of
power output through excess power sales contracts with the Utah
purchasers. IPP participants include 36 entities throughout Utah and
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 coal-based power supply.
REPOWERING AND CONTRACT AMENDMENTS NEUTRAL: Environmental considerations
have prompted a planned repowering of IPP as a natural gas-fired project
in the coming decade. Recently approved amendments to the PSCs, in order
to permit the repowering, do not shorten the term or negatively impact
repayment obligations supporting outstanding debt obligations. Final
approval of the amended PSCs is expected in 2016, which will allow for
subsequent but separate power sales contracts to be executed in order to
finance the repowered IPP.
PERFORMANCE OF CALIFORNIA PURCHASERS: Deterioration or enhancement in
the credit quality of the California purchasers could lead to a change
in Intermountain Power Agency's rating, particularly the largest
purchasers -- the Los Angeles Department of Water and Power (LADWP;
'AA-'/ Outlook Stable) and Anaheim Public Utilities Department
IPP includes a two-unit, 1,800MW coal-fired generating plant and an
extensive transmission system. The project is operated by LADWP and has
generally operated at a high degree of availability that exceeds
industry averages and a high capacity factor, indicating its competitive
cost position in the region. An unplanned 151 day outage in fiscal 2012
significantly weekend results for the 12-month period, but performance
metrics have since returned to historic levels.
Power from the project is contracted to be sold to 36 entities
throughout Utah and California, pursuant to unconditional take-or-pay
PSCs. The PSCs expire on June 15, 2027, well after bond maturity (July
1, 2023), and cannot be adversely amended or terminated as long as the
bonds are still outstanding.
IPP REPOWERING PLANNED BY 2025
The purchasers and IPA have agreed in concept to repower IPP as a
natural gas-fired generation project in order to address environmental
considerations relating to coal-fired power plants. IPA and the 36
project participants are in the final stages of amending the PSCs and
excess power sales agreements to allow for project conversion to natural
gas in the future. The amendments to the power sales contracts do not
shorten the term or alter the repayment security of the PSCs for
existing bondholders, expect for the assumption by LADWP of Utah Power &
Light's 4% share of the project. The amendments are not viewed as
adverse to existing bondholders.
Final approvals of the amended PSCs, including approval from each
purchaser's general counsel, are expected to occur in early 2016.
Twenty-two of the 36 have been received to date. Counsel approval is the
final step to the amended PSCs becoming effective, which will then
permit IPA to offer renewal PSCs to each participant in order to secure
participation levels for the new repowered project. The renewal PSCs do
not supersede or replace the amended PSCs. If a participant decided to
sign up for a share of the repowered project, that participant will have
both an amended PSC and renewal PSC, that obligate them for different
amounts in each project (IPP and 'IPP Renewed').
IPP anticipates that IPP Renewed will consist of a new, combined-cycle
natural gas plant located on the IPP site of between 600 and 1,200 MW.
Commitments from interested project participants are expected to be
known by the end of 2016 with construction to begin in 2020 and
completion in 2025.
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 Utah Power & Light, 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, Utah Power & Light has contracted to sell its 4% entitlement
to LADWP. Utah Power & Light's PSC will be terminated once the amended
PSCs become effective, 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 budgeting
process results in an unlimited implied step-up obligation for the
performing purchasers. However, given LADWP's sizable entitlement share
of 67% (including 4% from Utah Power & Light), it is unlikely if the
remaining purchasers would be able to absorb its payments in the event
of an LADWP default.
STABLE PROJECT FINANCIAL PERFORMANCE
IPA's financial performance continues to exhibit stable characteristics,
as illustrated by Fitch-calculated debt service coverage in excess of
1.4x in the past three years and healthy liquidity of 200 days at fiscal
year-end 2015. Management expects future financial performance to be
largely in line with historical trends. Debt service costs continue to
decline with the amortization of remaining debt by July 1, 2023.
In addition to outstanding subordinated bonds and CP notes, IPA has
$781.64 million in outstanding prepayment notes payable to LADWP and
Pasadena Water and Power. This mechanism allowed the two purchasers to
provide funds to IPA for the early retirement of debt and receive credit
for those prepayments by holding prepayment notes payable from IPA. The
prepayment notes have a junior lien to subordinated bonds and CP notes.
The prepayment notes have the same final maturity as outstanding bonds
of July 1, 2023.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
Dodd-Frank Rating Information Disclosure Form
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