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Rating Update:

MOODY'S CHANGES INTERMOUNTAIN POWER AGENCY'S OUTLOOK TO NEGATIVE;

24 Jun 2011

SENIOR LIEN BONDS RATED Aa3; SUBORDINATE LIEN BONDS A1

Electric Utilities
UT

Opinion

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.

RATINGS RATIONALE

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 electric utilities.

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.

OUTLOOK

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 storage.

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.

LEGAL SECURITY:

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.

FUNDAMENTAL FACTORS:

STRENGTHS

*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 state constitution

*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 station.

CHALLENGES

* 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 Water regulations

* 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 charters.

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 comparable plants.

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 provided.

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 regulations.

FINANCIAL POSITION AND PERFORMANCE: STRONG TAKE-OR-PAY CONTRACTS AND SOUND LIQUIDITY

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 participants.

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 capital requirements.

REGULATORY DISCLOSURES

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.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Dan Aschenbach
Analyst
Public Finance Group
Moody's Investors Service

John Medina
Backup Analyst
Public Finance Group
Moody's Investors Service

Chee Mee Hu
Director
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S CHANGES INTERMOUNTAIN POWER AGENCY'S OUTLOOK TO NEGATIVE;
No Related Data.
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