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Rating Action:

Moody's Assigns A1 Rating to Intermountain Power Agency Revenue Bonds; Outlook Changed to Stable from Negative

11 Feb 2013

IPA is Selling $307 Million Refunding Revenue Bonds

New York, February 11, 2013 --

Moody's Rating

Issue: Subordinated Power Supply Revenue Refunding Bonds, 2013 Series A; Rating: A1; Sale Amount: $307,000,000; Expected Sale Date: 02-15-2013; Rating Description: Revenue: Government Enterprise

Opinion

Moody's has assigned the rating of A1 to the Intermountain Power Agency's $307,000,000 Subordinated Power Supply Revenue Refunding Bonds, 2013 Series A expected to sell in mid February 2013. Moody's has also affirmed the A1 rating on IPA's outstanding subordinated revenue bonds. After the upcoming refunding there will be no senior lien debt outstanding. The A1 rating is now the reference rating for IPA revenue bonds which is one notch lower than the previous senior lien rating. The outlook was changed from negative to stable given the reference rating of A1 going forward.

RATINGS RATIONALE

The long term rating of A1 is based on a sound and reliable record since inception at delivering energy and providing capacity at a competitive price to its participants. As important, for more than 25 years the Intermountain Power Project (IPP), a two unit 1,800 MW coal-fired generation facility, has been reliable. Currently measured against peer facilities, IPP has operated with an above average performance record. Preventive maintenance programs funded annually and internally have been a constant. A forced 151 day outage in 2012 resulted in a poor performance record but repairs have been made and output at above average capacity factors has resumed. Whether the forced outage is an example of what will begin to take place due to the aging of the units is balanced again the strong maintenance record of IPP by IPA.

The rating also considers that the majority of the strong take-or-pay power sales contracts with various municipal electric utilities (average weighted credit quality of A1) including the Los Angeles Department of Water and Power (LADWP, rated Aa3), as well as the aggressive and focused strategic plans of both IPA and its participant utilities have continued to produce strong financial results. In 2012, the six southern California municipal utilities took 99% of the IPP generation.

Given the transition of the electric industry, particularly in California, to a lower carbon fuel mix, increased regulatory pressure on coal-fired generation could pose new challenges for IPA. Moody's believes as California's new cap and trade and renewable energy standards take hold more pressure will be placed on the California purchaser IPA contracts. Under the California greenhouse gas (GHG) emissions performance standards (EPS) , if LADWP for example 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. Uncertainty continues to exist on what future capital improvements might be required to comply with expected future federal environmental regulations. However, LADWP and the remaining 35 purchasers, through enforceability opinions delivered with each financing, are committed to pay debt service on outstanding IPA debt through final maturity in 2023, well ahead of the expiration of the Power Sales Contracts in 2027.

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 60% of IPA's revenues through the term of contract 2027.

- Strong 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 in the $40/mwh range in 2013

- 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.

CHALLENGES

- A major 151 day outage at Unit 1 could be a sign of aging of plant as is the slight trend of a higher heat rate (still very efficient versus peer units)

- IPP has single project 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

- Lack of a fully funded maximum annual debt service reserve for the subordinate lien bonds- An extended, unscheduled outage could put pressure on contracts (however all participants paid on time despite the 151 day outage)

- Potential for legal challenge (none has been filed to date) to the step-up provision on the basis that the California city-owned utilities can't enter into any new financial obligations for additional coal-based resources under new California greenhouse gas emission standards. A mitigating factor is that the state cannot over rule existing contracts permitted under Home Rule city charters.

Outlook

Moody's has assigned a stable outlook to the reference rating for IPA which is now A1. Moody's expects the strong take-or-pay contract and sound project management to provide stability through the 2023 term of bonds. While the lack of a fully funded maximum annual debt service reserve is a credit weakness, the IPA has had a consistent level of sound financial liquidity. The stable outlook reflects assumptions regarding the maintenance of sound financial metrics and liquidity. Continued uncertainty regarding greenhouse gas regulation and renewable energy standards particularly as it relates to the southern California municipal participants represents an ongoing credit pressure.

What Could Change the Rating UP:

An improvement in the overall credit quality of the participating municipalities; a strengthening of the available project liquidity and more certainty to greenhouse gas regulation could provide upward pressure on the rating.

What Could Change the Rating DOWN:

The rating could face downward pressure if there is a longer trend of poor IPP project performance or IPA's participants are downgraded. Moody's will also evaluate the credit impact should there be any legal challenges to the step-up provisions of the California IPA participant's take-or-pay contracts or if new federal greenhouse gas emission standards cap energy that could be derived from the IPP project and transmitted to California.

The principal methodology used in this rating was US Municipal Joint Action Agencies published in October 2012. 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 certain 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 certain 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 certain 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.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dan Aschenbach
Senior Vice President
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Chee Mee Hu
MD - Project Finance
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Assigns A1 Rating to Intermountain Power Agency Revenue Bonds; Outlook Changed to Stable from Negative
No Related Data.
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