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Rating Update:

MOODY'S DOWNGRADES UTAH MUNICIPAL POWER AGENCY'S RATING TO A2 FROM A1; OUTLOOK NEGATIVE

09 Aug 2011

RATING ACTION AFFECTS $24.6 MILLION REVENUE BONDS OUTSTANDING

Electric Utilities
UT

Opinion

NEW YORK, Aug 9, 2011 -- Moody's Investors Service has downgraded to A2 from A1 the rating on the Utah Municipal Power Agency's (UMPA) outstanding $24.6 million power revenue bonds. The rating outlook is negative given the weakened financial metrics over the past four years. The rating also takes into consideration the average weighted A1 credit strength of UMPA participants; low leverage and fully funded maximum annual debt service reserve.

RATINGS RATIONALE

While the agency has maintained the debt service coverage ratio at 1.00 times calculated according to the bond indenture which permits use of Rate Stabilization funds as revenue, the inability to consistently meet debt service coverage from current revenues has been a weakness and is reflected in the rating change. The median debt service coverage ratio between 2007-2010 was 0.70 times while agency's reserves also fell to lowest point in 7 years.

UMPA was formed by agreement in 1980 under the Utah Interlocal Co-Operation Act. UMPA has six members for the purpose of joint ownership of generation and transmission of electrical energy for the benefit of its members. The major project owned and partly financed by UMPA is the Bonanza coal-fired generating station. UMPA is governed by a six member Board of Directors.

OUTLOOK:

The negative rating outlook reflects the poor debt service coverage record and uncertain forecast given the reliance on volatile wholesale energy market margins to meet annual debt service coverage.

What Could Change the Rating UP:

The rating could be upgraded if the agency's debt service coverage ratio exceeds on a sustained basis more than 1.20 times and the agency rebuilds its reserves to a level of 120 adjusted days liquidity on hand. Moody's calculates debt service coverage by subtracting current expenditures from current revenues. Interest income is added to that margin and debt service is divided into the resulting net revenues.

What Could Change the Rating DOWN:

The rating could be downgraded should participant credit quality weaken or debt service coverage further deteriorates on a current basis. Credit pressure would be immediate should Provo's electric revenue bond rating be downgraded given that Provo represents 74.8% of the agency's total debt obligation.

RECENT DEVELOPMENTS:

1.Reduction in loads in 2010 and reduced short-term wholesale energy market prices produced lower wholesale energy sales margins. Off-system sales of surplus capacity and energy were off by 31%. UMPA had to use its Rate Stabilization Fund to attain debt service coverage. Sluggish growth was also experienced in 2011.

2. The UMPA Board of Directors increased the budgeted members billed rate 10.2% for FY 2011, and an additional increase was implemented July 1, 2011, which is expected to reduce the use of Rate Stabilization Funds to pay debt service.

3. UMPA's load growth forecast for the next seven years is 2.0% to 2.5%. Potential new base load capacity will be required during that time period and the board has stated it desires to increase the ratio of owned generation resources instead of purchased power obligations. The agency is completing its Integrated Resource Plan which will establish a direction.

4. Provo's debt service coverage in 2010 expressed as fixed obligation charge coverage on its electric revenue bonds and its days liquidity on hand fell to the lowest level in a decade. Liquidity days on hand was only 13 days at the end of 2010.

BOND SECURITY PROVISIONS:

.UMPA's operating revenues are supported by take-and-pay, full requirement contractual obligations of its six participants. Pursuant to these power sales agreements, each of the members has agreed to purchase all of its net electric power and energy requirements from UMPA at rates sufficient to enable the agency to pay all of its operating and debt service costs. UMPA can use Rate Stabilization funds to meet the rate covenant requirement.

The power sales agreements have an initial term that extends to December 31, 2025. The power sales agreements provide that the agency shall sell and deliver and each member shall purchase and receive all electric power and energy required by the member to meet the loads of its electric system. The power sales agreements do not specify any particular power supply resource or resources as the source of the agency's power under the agreements. The agency accumulates all of its power resources and charges a single blended rate to its members reflecting the costs of all agency resources.

The bonds are secured by the net revenues of the UMPA. Typical of many joint power agencies, UMPA's rate covenant and additional bonds test are both equal to 1.0 times aggregate annual debt service. The reserve requirement is standard, equal to the lesser of (i) the maximum annual debt service; (ii) 125% of the average annual debt service; or (iii) 10% of the original sale proceeds.

INTEREST RATE DERIVATIVES:

None

CREDIT FUNDAMENTALS

STRENGTHS

*Provo, Utah representing 74.8% of the agency is rated Aa1 (GO bonds) and A1 (electric revenue bonds)

*Below average debt ratio

*Unregulated ability of the agency and its members to establish new rates

*Agency has a diverse resource mix and contracts are take-and-pay all-requirements

*Fully funded maximum annual debt service reserve

CHALLENGES

*Despite 10.2 rate increase there is lack of track record of covering debt service requirements from current revenues

*Financial results rely on wholesale market energy sales margin which is uncertain and unpredictable

*Agency reserve levels are at their lowest point since 2004

* Some exposure to coal-fired generation and the uncertain impact of greenhouse gas regulation

RATING DRIVERS:

1- Participant Credit Quality in A1 Range is Fundamental Credit Factor

The six participants of UMPA are municipal electric utilities that provide an essential service on a monopoly basis in their respective service territories in Utah. The municipal electric utilities have unregulated rate setting ability and have long-term all-requirement power supply contracts with UMTA expiring in 2025. UMPA participants pay for the power supply as an O&M expense.

The City of Provo, population of 119,755, (GO rated Aa1, electric revenue bonds rated A1) represents 74.8% of the UMPA obligation, is located 50 miles south of Salt Lake City, and is the Utah County seat (GO rated Aa1) and home to Brigham Young University (BYU) (30,000 students), the utility's largest customer. The city has a degree of economic diversity with manufacturing, education, and government activities. Resident per capita incomes however are below average.

The electric system serves about 28,000 residential customers, over 4,000 commercial accounts and one large customer (BYU), which represents about 13% of revenues. Provo electric utility derives all its energy and capacity under a power supply contract with UMPA.

Provo has experienced weakened financial results in 2010 due to weakened demand. Fixed obligation charge coverage was 1.25 times in 2010. Days liquidity on hand fell to the lowest level in decade at 13 days.

The City of Spanish Fork (electric revenue bonds rated A2) represents 16.9% of UMPA obligations, is located about 5 miles south of Provo. For the past two decades the city's population has rapidly expanded with population now exceeding 30,000. The primarily residential community adjacent to Utah Lake has completed water (water system revenue bonds rated A3) and sewer infrastructure upgrades which has permitted further population growth. The electric system is an electricity distributor and an all-requirements take-and-pay customer of UMPA.

2- Lack of Debt Service Coverage From Current Year Revenues Remains a Credit Weakness

Over the past several years, while UMPA complied with its bond indenture using Rate Stabilization Funds to achieve a 1.00 times debt service coverage ratio, UMPA had an actual median debt service coverage ratio excluding the use of the reserve of 0.70 times during 2007-2010. Moody's believes that at minimum, debt service coverage ratios should be met by recurring revenues after taking into account recurring expenses. In 2010, UMPA had to use $5.9 million of the Rate Stabilization to achieve the bond indenture coverage leaving its reserves at their lowest level during past decade.

While the financial approach relieved rate shock during the region's economic downturn, it also points to the narrow margins the agency maintains which is not reflective of an A1 rated joint power agency. A positive development was the recent rate increases on participants in 2011, but regional power markets remain weak affecting the agency's important off-system sales margins which could result in continued tight financial results.

In 2010, operating revenues from power sales decreased by $9.47 million over 2009, principally sales of capacity and energy not needed for sales to members fell significantly. Energy sold to non-members dropped by 31%.

3.UMPA Has A Competitive Diverse Resource Mix Which Mitigates Risk of Any One Fuel

A credit positive is the agency's diverse resource mix which provides a reliable and competitively priced supply for its members. Most of the resource portfolio is purchased through contracts with different terms. The major power resource is the Colorado River Storage Project (CRSP) operated by the Western Area Power Administration at 87MW in the winter and 74 MW in summer. UMPA has some exposure to fossil fuels which presents a challenge regarding impact of greenhouse gas regulation.

4. No Capital Improvement Plan But Potential Future Baseload Generation Ownership Financed

UMPA has a low amount of outstanding debt which is fully amortized by 2019. Given the volatility associated with the wholesale market and the identification of several options in the UMPA Integrated Resource Plan, UMPA may decide to finance in the future baseload facility. No decisions have been made.

Key Indicators:

Debt Service Coverage Trend, FY 2007-2010: 0.70 x median

Debt Service Coverage, Bond Ordinance, 2007-2010: 1.00 x median

Adjusted Days Liquidity on Hand, 2010: 98 days

Provo as % Total UMPA obligations, 2010: 74.8%

Provo General Obligation Rating: Aa1

Key Contacts: Layne Burningham, Chief Financial Manager (801) 798-7489

The principal methodology used in this rating was U.S. Municipal Joint Power Agencies published in September 2007. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Dan Aschenbach
Analyst
Public Finance Group
Moody's Investors Service

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

Matthew A. Jones
Senior Credit Officer
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 DOWNGRADES UTAH MUNICIPAL POWER AGENCY'S RATING TO A2 FROM A1; OUTLOOK NEGATIVE
No Related Data.
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