Fitch Ratings said Jan. 14 that it has assigned an ‘AA-‘ bank note rating to the $100 million commercial paper (CP) notes, series B1 & B2, issued by the Intermountain Power Agency (IPA), which operates an 1,800-MW coal-fired power plant in Utah.
The bank note rating reflects the credit quality of IPA’s obligation if the notes become bank notes, held by the provider of the liquidity agreement, Bank of America. The CP notes are expected to be sold on Jan. 27. Note proceeds will be used to refund outstanding debt. In addition, Fitch affirmed its outstanding ‘AA-‘ ratings on other Intermountain Power Agency bonds. The Rating Outlook is Stable.
IPA owns the Intermountain Power Project, a two-unit coal-fired plant that has historically exhibited solid operational performance. All project capacity is sold pursuant to take-or-pay power sales contracts (PSCs) with implied step-up provisions that unconditionally obligate the purchasers to pay all costs of operation, maintenance and debt service, whether or not the project is operating.
The rating reflects the credit quality of IPA’s six California purchasers, who are contracted by the PSCs to purchase 75% of project generation but purchase nearly 100% of power output through excess power sales contracts with the Utah purchasers. IPP participants include 36 entities throughout Utah and California.
IPA’s existing pollution-control equipment meets the requirements under the U.S. EPA’s Mercury and Air Toxic Standards (MATS). Additionally, IPA’s California purchasers have been allocated sufficient carbon allowances through 2020 to allow for a phased-in transition away from coal-based power supply, Fitch noted.
Climate change considerations have prompted a planned repowering of IPP as a natural gas-fired project next decade. Recently approved amendments to the PSCs, in order to permit the repowering, do not shorten the term or negatively impact repayment obligations supporting outstanding debt obligations. Final approval of the amended PSCs is expected in 2016, which will allow for subsequent but separate power sales contracts to be executed in order to finance the repowered IPP, Fitch noted.
Deterioration or enhancement in the credit quality of the California purchasers could lead to a change in Intermountain Power Agency’s rating, particularly the largest purchasers, which Fitch said are the Los Angeles Department of Water and Power (LADWP) and Anaheim Public Utilities Department.
IPP includes a two-unit, 1,800-MW coal plant and an extensive transmission system. The project is operated by LADWP and has generally operated at a high degree of availability that exceeds industry averages and a high capacity factor, indicating its competitive cost position in the region. An unplanned 151-day outage in fiscal 2012 significantly weakened results for the 12-month period, but performance metrics have since returned to historic levels.
The PSCs expire on June 15, 2027, well after bond maturity (July 1, 2023), and cannot be adversely amended or terminated as long as the bonds are still outstanding.
Final approvals of the amended PSCs, including approval from each purchaser’s general counsel, are expected to occur in early 2016. Twenty-two of the 36 have been received to date, Fitch reported. Counsel approval is the final step to the amended PSCs becoming effective, which will then permit IPA to offer renewal PSCs to each participant in order to secure participation levels for the repowered project. The renewal PSCs do not supersede or replace the amended PSCs. If a participant decided to sign up for a share of the repowered project, that participant will have both an amended PSC and renewal PSC, that obligate them for different amounts in each project (IPP and ‘IPP Renewed’).
IPP anticipates that IPP Renewed will be a new, combined-cycle natural gas plant located on the IPP site of between 600 MW and 1,200 MW. Commitments from interested project participants are expected to be known by the end of 2016 with construction to begin in 2020 and completion in 2025.
The California purchasers are entitled to 75% of the project’s generating capacity and the remaining 25% is entitled to Utah Power & Light, 23 Utah municipal purchasers and six rural electric cooperatives. In practice, the California participants purchase approximately 100% of actual project output through excess power sales agreements that are in place between four California purchasers (LADWP, Pasadena Water and Power, the City of Burbank and Glendale Water and Power and the Utah purchasers. In addition, Utah Power & Light has contracted to sell its 4% entitlement to LADWP. Utah Power & Light’s PSC will be terminated once the amended PSCs become effective, at which point its entitlement share will be permanently transferred to LADWP.