Fitch Rtes Intermountain Pwr Agency, UT, $130MM Pwr Supp Bnds & Affs Outstanding $1.6B at ‘AA-’

Fitch rates Intermountain Power Agency’s (IPA) proposed $130 million, 2007 series A subordinated power supply revenue refunding ‘AA-’. In addition, Fitch affirms IPA’s outstanding $1.2 billion senior lien power supply revenue bonds and $416 million subordinate power supply revenue bonds. The ratings reflect the underlying rating as the bonds are predominantly insured by ‘AAA’ rated bond insurers. The Rating Outlook is Stable.

The 2007 bonds will refund a portion of the series 1997 A and B senior lien bonds. The ‘AA-’ reflects the 2007 bonds underlying rating as the bonds are expected to be insured by AMBAC, whose financial insurer strength is rated ‘AAA’ by Fitch. The 2007 bonds are scheduled to price April 3, 2007, with Goldman, Sachs & Co. and Morgan Stanley co-managing the underwriting of the bonds.

IPA’s strong credit ratings are supported by highly rated long-term power purchasers, a competitive wholesale cost of power, consistently above-average plant performance and solid financial position. The vast majority of IPA power sales and revenues are attributable to six California municipal power purchasers: LADWP (Los Angeles Department of Water and Power) and the city electric departments of Anaheim, Pasadena, Glendale, Riverside and Burbank. LADWP, Pasadena Water and Power, Riverside Public Utilities, and the City of Anaheim are entitled to 79.8% of IPA’s generating capability, and each is rated ‘AA-’ by Fitch. IPA’s rating also benefits from take-or-pay power sales agreements with its power purchasers, whereby the project’s costs including debt service payments are payable whether the project is operating or not. The power sales contracts extend to 2027, three years beyond the latest maturity of IPA’s debt.

Plant performance of IPA’s coal-fired, baseload generating facility (1,800 megawatts [MW]) has consistently exceeded industry norms for similar sized coal units. Production costs have declined via operating efficiencies, minor upgrades to the generating units increasing plant output, and accelerated debt paydown. IPA’s cost of power production has fallen to a regionally competitive 4 cents per kilowatt hour (kwh) currently, from 6.5 cents per kwh in 1998. Additionally, IPA’s excess billings to customers in prior years helped build up cash reserves and provide added financial flexibility. Unrestricted cash reserves total approximately $153 million at fiscal year-end 2006, which is the equivalent of 180 days operating cash – very solid for the rating category. On a projected basis, with considerably hedged fuel supply for the next seven years, cash funded capital expenditures, and level-to-declining debt service, IPA’s financial performance should remain solid.

Credit risks appear manageable and include single-project operating risk, rising coal supply costs, and potential for change to federal/state plant emission standards. The risk of material operating problems at the Intermountain Power Project (IPP) generating station is mitigated by the coal project’s long track record of strong operating performance, the solid take-or-pay purchased power obligations, and the likely ability of the ‘AA-/A+’ rated California purchasers to manage the cost of replacement power. With respect to IPA’s delivered cost of power, it is very competitive particularly given that IPA’s power is largely sold into California, where the energy market is driven by considerably higher natural gas prices. The increase in coal supply costs reflects production problems at certain Utah mines and rail transportation issues. Even with these factors contributing to higher coal costs, the aggregate change in IPA wholesale cost of power is modest.

With respect to the potential for federal/state legislation regarding plant emissions, California recently enacted greenhouse gas emissions (GHG) legislation. In 2006, there were two bills enacted in California that dealt with GHG issues: AB32 and SB1368. The key points of these legislations included: a mandate to reduce greenhouse gas emissions in the state to 1990 levels by 2020; a limit on the ability to build new coal-fired generation in-state; and a restriction on entering into long-term coal-based power purchases (greater than 5 years). Neither legislation invalidates the California purchasers’ existing contracts to buy IPA’s coal-based power. However, Fitch recognizes global warming is receiving greater legislative attention both regionally and nationally. Fitch will continue to monitor developments with respect to GHG emission regulations and the potential, albeit longer term horizon, impact to IPA’s operations and cost of power.

Finally, there are various springing amendments to the senior lien resolution which are finally nearing an effective date, likely in 2007. The springing amendments, in Fitch’s opinion, do not pose a material credit concern. Some of the key amendments include: a reduction in the number or required funds to be maintained, the ability to use a surety bond/letter of credit/bond insurance to fund a debt service reserve, broadened investment options for IPA funds, and ability to dispose of project property as long as it does not impair IPA’s ability to meet its rate covenant (as supported by legal counsel).

IPA was organized by 23 Utah municipalities to finance, construct, and operate the state-of-the-art, two-unit, 1,800 MW coal-fired Intermountain Power Project. IPP, operational in 1987, provides power to 36 Utah and California participant/purchasers via long-term contracts through 2027.

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