SENIOR LIEN BONDS RATED Aa3; SUBORDINATE LIEN BONDS A1
NEW YORK, Jun 24, 2011 -- Moody's Investors Service has affirmed the Aa3 senior lien rating and A1
subordinate lien rating on the Intermountain Power Agency's, Utah (IPA)
outstanding revenue bonds. We have changed the outlook to negative from stable
to reflect several factors that are exerting downward pressure on the ratings.
The A1 rating on IPA's $810,865,000 subordinate lien bonds is the reference
rating since the subordinate lien debt is the great majority of the agency's
debt structure. Moody's affirmed the Aa3 rating on the outstanding
$293,950,000 senior lien bonds.
The rating takes into consideration the strong take-or-pay power sales contracts
with various municipal electric utilities including the Los Angeles Department
of Water and Power (54% entitlement share; LADWP power revenue bonds are rated
Aa3 ), as well as, the focused strategic plans of both IPA and its participant
utilities and the record of sound financial results. The rating also
reflects the consistently strong operating performance record of IPA's
Intermountain Power Project (IPP) a two-unit 1800 MW coal-fired
generation facility; the importance of the economic value of the project's
energy and capacity to the power purchasers and the resource diversity that
the IPP coal-fired generation unit provides to the southern California municipal
The rating distinction between the senior and subordinate lien bonds
reflects the lien position; the lack of maximum annual debt service reserve fund
requirement for the subordinate lien bonds and the very strong debt service
coverage ratio for the senior lien bonds averaging 2.3 times between 2007-2010
and 2.8 times in 2010.
The negative outlook recognizes several factors which we believe are
exerting downward pressures on the ratings. The weighted average credit quality
of IPA participants has weakened and is closer to A1, as a result of the
downgrade in 2011 to A1 from Aa3, of Anaheim, California electric revenue bonds.
Anaheim's entitlement represents 13.2% of the IPA project. Participant credit
quality represents an important weight in the ratings assigned.
Moody's also expects increasing challenges for IPA from rising costs
as California's greenhouse gas regulations (GHG) are implemented, more stringent
federal environmental regulations on mercury and coal production waste storage
are enforced, and new higher priced coal contracts are utilized to replace
locally mined coal. These increased operating costs will likely reduce IPA's
cost competitiveness. Under the enacted California greenhouse gas (GHG)
emissions performance standards(EPS) , the southern California municipal
electric utilities who are IPA participants cannot make any "long term
financial commitment" with IPA beyond their 2027 IPA contract expiration
date because the IPP will not be able to meet the state's emissions performance
standard. Any new capital costs required by legislative or regulatory compliance
will have to be amortized within the existing contract period. As
the subordinate lien bonds are dominant in the debt structure, the lack of a
maximum debt service reserve also represents a credit pressure.
What Could Change the Rating UP:
The rating could face upward rating pressures if there is an increase in the
overall credit quality of the participating municipal electric utilities, if
there is a strengthening in available project liquidity and if there is less
uncertainty about and reasonable cost management of compliance with greenhouse
gas regulation and or federal environmental regulation on mercury and waste
What Could Change the Rating DOWN:
The rating could face downward pressure if there is a trend of poor
IPP generation performance or if the overall weighted credit quality of the IPA
participants weakens. Also, the rating could be downgraded should regulatory
compliance add significant new costs that IPA will have to recover which then
affects the economic value and competitiveness of the project.
IPA has take-or-pay power-sales contracts with "step-up" provisions
that permit IPA to discontinue the delivery of project capacity and energy to
any defaulting participant, to offer to the non-defaulting participants the
right to assume their respective pro rata shares of the defaulting participant's
entitlement share of project capacity and energy and to sell any portion of the
defaulting participant's entitlement share not so assumed on the best terms
available in the marketplace. In the event that any such default results in a
deficiency in the amount on deposit in any fund established under IPA's bond
resolution, IPA is required to amend its budget to increase billings to all
participants (including the defaulting participant) in order to obtain funds to
make up the deficiency.
The take-or-pay contracts, which expire June 15, 2027, provide for the several
and not joint pledge of participants to make required payments for allocated
power. This is not subject to reduction or offset if the project is inoperable
or its output is interrupted or curtailed. The California municipal utility
take-or-pay contracts have not been validated or tested in the courts, but
the utilities have authority rooted in the State Constitution to
purchase capacity and energy.
There is a sum-sufficient rate covenant and no additional bonds test.
There is no maximum anuual principal and interest debt service reserve required
for the subordinate lien bonds but there is a maximum annual debt service
requirement for the senior lien bonds.
INTEREST RATE DERIVATIVES:
IPA terminated all its swaps in fiscal year 2010.
*LADWP (rated Aa3), the project operating agent, depends on IPP for more than
30% of its power requirements and is the source of more than 50% of IPA's
revenues through term of contract in 2027.
*Take-or-pay power-sales contracts have been validated in Utah courts;
California purchasers have strong Home Rule Charter provisions with
authorization to enter into power-purchase contracts as provided by California's
*IPA can amend its budget to pass unexpected costs through to participants and
the municipal participants also have unregulated rate-setting and can pass
through monthly higher power purchase costs
*LADWP's accelerated debt prepayment plan has been successfully
implemented, significantly lowering the effective cost of IPA power for LADWP to
a competitive price
*IPP provides an essential power resource that has gained competitive strength
given the still uncertain California energy market. The coal-fired generation
provides significant resource diversity for the participating utilities
*IPP has maintained a consistently strong production record and is a key
baseload resource for several Southern California city-owned electric utilities.
Performance measures, including a median heat rate of 9,536 btu/kw and 90.9% net
capacity factor in the 2007-2010 period and below average production costs
continued to reflect strong operating performance for the IPP generating
* IPP has single asset risk and a lack of fuel diversity; however, the IPP
project consists of a two-unit coal plant, is part of the power purchasers'
resource diversity and also has some diversity in its coal-supply source
*Expected increase in coal supply costs due to closing of several Utah mines
*Potential significant regulatory costs from pending federal Clean Air and Clean
* Lack of a maximum annual debt service reserve for the subordinate lien bonds
*An extended, unscheduled outage could put pressure on contracts
*Potential for legal challenge (none has been filed ) to the step-up provision
on the basis that the California city-owned utilities cannot enter into any new
financial obligations for additional coal-based resources under new California
greenhouse gas emission performance standards. A mitigating factor is that the
state cannot over rule existing contracts permitted under Home Rule city
KEY RATING DRIVERS
IPA IS AN IMPORTANT POWER RESOURCE FOR SOUTHERN CALIFORNIA MUNICIPAL
ELECTRIC UTILITIES CONTRIBUTING TO RESOURCE DIVERSITY
IPP provides an essential power resource that remains very competitive. LADWP
2011 budget shows the wholesale rate at $44/mwh for Los Angeles Department of
Water and Power(LADWP) , the major project off taker. This is below the price of
most of LADWP power resources. The well-maintained IPP generating units have had
a strong performance record including a median heat rate of 9,536 btu/kw and
90.9% net capacity factor for the past 5 years, which is below that of
Moody's believes that IPA management and the Los Angeles Department of Water and
Power, serving as IPP plant operator, continue to do a good job of preventive
maintenance on IPP and the continued sound operating performance is evidence of
that record. While the IPP project has reached a mid-point in the useful life of
the plant asset, the stated management objective is to continue strong
maintenance practices that will keep performance records sound.
NEW CALIFORNIA GREENHOUSE GAS EMISSIONS AND FEDERAL ENVIRONMENTAL
REGULATION COULD POSE RATE PRESSURE ON CALIFORNIA MUNICIPAL RETAIL CUSTOMERS
AND POTENTIALLY STRESS CONTRACTS
The sound financial and competitive position of the project participants that
are municipal electric utility distribution systems is important to the IPA
rating. Retail rates for most of the southern California municipal IPA
participants remain below the rates of the three major investor-owned utilities
in California. For example, LADWP retail rates in 2010 were more than 20% lower
than that of Southern California Edison. Customers in municipal service areas do
not have choice of power supplier.
Municipal electric utilities are owned by their respective local governments and
are not subject to rate regulation by the state regulatory board. However,
municipal electric utilities have fallen under state regulation regarding their
power supply as a result of California's renewable energy standard and climate
change legislation. Regulatory uncertainty has now returned to California as to
the impact of the regulation of GHG. IPA's ultimate need to comply with GHG
regulatory requirements and pending federal environmental regulations could pose
retail rate pressures and stress the power supply contracts.
The California Air Resources Board (CARB) is expected to adopt rules for a
statewide cap and trade program for implementation starting in 2012. The
proposed rules have been subject to litigation preventing their
implementation thus far and implementation in 2012 may be delayed. The
current timetable for GHG regulatory compliance comes from California's AB
32 legislation, the Global Warming Solutions Act of 2006 which established a
statewide cap on GHG at 1990 levels by 2020 and 80% below 1990 levels by 2050.
All California IPA participants will have to purchase allowances under a cap and
trade program each year for the GHG emissions attributable to their coal-fired
generation. The impact of the new regulations will depend on various factors
including the timetable of the cap and trade program; the price placed on carbon
tonnage by CARB and the level of allowances municipal utilities will be
Moody's believes that under the California greenhouse gas (GHG)
emissions performance standards(EPS) , if LADWP makes any "long term
financial commitment" in connection with its out of state coal-fired
generation facilities, such facilities would have to be in compliance with the
new state EPS. Compliance with the EPS would be impossible for the Intermountain
Power Project. The EPS is 1,100 lbs of CO2 per megawatt generated and only
highly efficient natural gas fired generating units can meet the new standard.
In addition to the uncertainty about GHG compliance requirements, the IPP
project will likely have to meet certain new federal environmental regulations
on mercury and waste storage among other pending Clean Air and Clean Water Act
FINANCIAL POSITION AND PERFORMANCE: STRONG TAKE-OR-PAY CONTRACTS AND SOUND
IPA's sound financial position remains tied to the willingness and ability of
its contracted participants to pay for the energy and power they purchase. The
weighted average of credit quality of IPA participants weakened in 2011 due to
the downgrade of Anaheim's electric revenue bonds to A1 from Aa3 and the
increased power recall of IPA power (representing 1% of total) by the Utah
The participants pay the IPA charges as O&M expenses which include their
share of the IPA debt service. The strong take-or-pay power sales contracts
include terms and conditions that support the maintenance of IPA's required
revenues and reserves. IPP generation remains key to the resource requirements
of the participant municipal electric utilities. Recent legal opinions have
affirmed that the California municipal participants' take-or-pay power sales
contracts are enforceable.
IPA's 168 days cash on hand in 2010 exceeded the JPA median. However, when
liquidity is adjusted to reflect the absence of a maximum annual debt service
reserve for the subordinate lien bonds, the adjusted days cash on hand dips
below average to 65 days. Moody's believes that stronger liquidity is needed
given the potential pressures on the take-or-pay contracts.
CAPITAL PLAN: ONGOING MAINTENANCE IS PRIMARY
The IPA capital plan is geared towards scheduled maintenance projects on Units 1
and 2. IPA follows a two-year cycle with a scheduled maintenance outage for Unit
1 in the spring of the first year and scheduled maintenance on Unit 2 in the
next year. The next major outage for maintenance is scheduled for March 2012.
The major expenditure items are primarily for maintenance of the IPP generating
units ($38 million in 2011) IPP is in compliance with clean air standards, but
evolving environmental regulation could pose significant future
The principal methodology used in this rating was U.S. Municipal Joint Power
Agencies published in September 2006.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, public
information, confidential and proprietary Moody's Investors Service information,
and confidential and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of maintaining a credit rating.
Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
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Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Chee Mee Hu
Public Finance Group
Moody's Investors Service
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MOODY'S CHANGES INTERMOUNTAIN POWER AGENCY'S OUTLOOK TO NEGATIVE;
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