Fitch Ratings said Nov.24 that it has assigned an initial ‘A’ rating to Utah Associated Municipal Power Systems (UAMPS) bonds to help finance the Veyo Heat Recovery Project, which will use waste heat from gas turbines to generate elecricity.
The bonds are scheduled to price via negotiation on Dec. 9, 2014. Proceeds will be used to finance acquisition and construction costs of the Veyo Heat Recovery Project (VHRP). The Rating Outlook is Stable. The bonds are secured by net revenues of UAMPS’ VHRP, principally derived from take-or-pay power sales contracts (PSCs) with each of seven project participants.
UAMPS is a project-based joint action agency serving 45 mostly small, unrated members through 16 projects. The VHRP will use waste heat to fuel a 7.8-MW recovered energy generation system upon expected commercial operation in September 2016. The estimated cost of power is stable and economic at a blended $44/MWh.
The VHRP furthers UAMPS’ commitment to diversifying its power supply portfolio with renewable resources, Fitch noted. The agency’s resource plan increasingly supplants carbon-based generating assets with renewables and possibly nuclear generation over the longer term. Moreover, the VHRP helps the Utah participants meet the state’s 20% renewable goal by 2025 in a cost-effective manner.
The VHRP will be located adjacent to the existing Veyo Compressor Station, which is owned and operated by the Kern River Gas Transmission Co. (KRGTC). The station includes three natural gas-fired turbine compressors to facilitate the movement of natural gas along an interstate pipeline. UAMPS’ recovered energy generation system will capture waste heat from the turbines to generate electricity.
A host agreement with KRGTC dated Feb. 21, 2014, allows UAMPS to interconnect with and purchase waste heat from the Veyo Compressor Station. KRGTC agrees to sell all existing waste heat to UAMPS during the agreement term. However, KRGTC is not obligated to provide any amount of such waste heat. Moreover, KGRTC has no obligation to retain the existing turbine equipment and can remove such equipment at its option, Fitch pointed out. Regardless, the pipeline is a valuable asset and the participants remain obligated to UAMPS pursuant to the PSCs.
Bondholders have direct exposure to the three largest project participants to varying extents. The cities of Lehi (25%) and Logan (22.7%), as well as Truckee Donner Public Utility District (23%), have entitlement shares that exceed the capacity of a 25% step-up. However, certain participants that have elected to make upfront capital contributions change the practical consequences of a payment default and the step-up, Fitch said. Such contributions lower a participant’s debt service share, which would otherwise mirror its project entitlement share.