Fitch Affirms Utah Associated Municipal Power Systems Horse Butte Revs at 'A-'

NEW YORK--()--Fitch Ratings has affirmed the 'A-' long-term rating and unenhanced 'A-' long-term rating on the following Utah Associated Municipal Power Systems (UAMPS) revenue bonds, respectively:

--$65,740,000 Horse Butte wind project revenue bonds, series 2012A.

--$23,970,000 Horse Butte wind project variable-rate demand revenue bonds, 2012B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of UAMPS' Horse Butte Wind Project (HBWP), principally derived from take-or-pay power sales contracts (PSCs) with each of 24 project participants.

The series 2012B bonds are supported by an irrevocable, direct-pay letter of credit issued by Bank of Montreal, acting through its Chicago Branch (rated 'AA-'/'F1+' with a Stable Outlook by Fitch), which is the basis for the long- and short-term ratings assigned to that series of bonds.

KEY RATING DRIVERS

PROJECT-BASED WHOLESALE AGENCY: UAMPS is a project-based joint action agency serving 45 mostly small, unrated members through 15 separate projects. The HBWP is a 57.6MW wind farm that began commercial operations in August 2012.

TAKE-OR-PAY CONTRACTS: Long-term, take-or-pay PSCs with 24 project participants underpin the HBWP rating. A 25% step-up provision provides additional bondholder protection against limited instance of participant default, with the exception of the largest, Truckee Donner Public Utility District (TDPUD; 26.3% entitlement share). While bondholders have direct exposure to the participant, Fitch believes TDPUD exhibits good credit quality in support of the project rating.

IMPROVING PARTICIPANT FINANCIALS: Taken together, the largest participants' improving financial metrics enhance overall project credit quality. Nevertheless, the varied size and strength of the individual participants drives the 'A-' project rating. Aggregate coverage of full obligations and liquidity ratios all improved during the past two years versus the prior three years. In addition, the participants retain full rate-setting authority, which provides flexibility to ensure full and timely rate recovery.

HEALTHY SERVICE TERRITORIES: Mostly residential customer sales within dedicated service territories benefit each participant's revenue stability. Income levels are slightly above average and very low unemployment rates evidence the continued economic development of the growing region.

PROJECT ONLINE: The HBWP contributes to Utah's renewable energy goal, and project performance is improving. However, at $79.10/MWh (fiscal 2014) the cost of power is above early estimates ($73.39/MWh) and UAMPS' other generation projects. There are no plans to build out additional phases.

RATING SENSITIVITIES

POSSIBLE REASSIGNMENT OF SHARES: The proposed sales of Eagle Mountain's (a HBWP participant) electric and gas utilities to separate entities at the end of this year could skew the participant credit quality, and consequently the project rating, to the negative. However, the ultimate reassignment of entitlement shares is uncertain at this time. The other HBWP participants are given the first option to acquire Eagle Mountain's entitlement shares, pursuant to the PSCs.

CREDIT PROFILE

Fitch's principal rating considerations for UAMPS' HBWP are the take-or-pay PSCs and the financial and operating performances of the project participants. Additional rating considerations include the project operations and financial position, including its sources of liquidity.

UAMPS' 57.6MW HBWP consists of 32 wind turbines located 15 miles east of Idaho Falls in Bonneville County, Idaho.

PLANNED EAGLE MOUNTAIN SALE

The planned sale of Eagle Mountain's electric utility to South Utah Valley Electric Service District at the end of this year presents some uncertainty with respect to the HBWP underlying participant credit quality. However, the impact on the project rating cannot be determined until the ultimate reallocation of Eagle Mountain's entitlement shares has been established.

Pursuant to the PSCs, the other HBWP participants have the first option to acquire Eagle Mountain's entitlement shares, which presents a number of possible outcomes. Favorably, various provisions of the PSCs and purchase power agreement between UAMPS and the project seller, Horse Butte Wind I LLC, set minimum rating requirements for any new project entrants.

Fitch rates Eagle Mountain's gas and electric revenue bonds 'A' with a Stable Outlook. However, the combined entity draws financial strength from the gas system, even after a 5% electric rate increase in fiscal 2013. The electric system has traditionally produced negative operating margins on its own.

A scenario that keeps some form of Eagle Mountain's electric utility in the project, along with the formal separation of the city's gas and electric enterprises, would likely raise rating concerns. While Eagle Mountain would benefit from the smaller SUVESD's stronger margins, fiscal 2013 proformas would still produce less than 1x debt service coverage from operations. The resultant weakened credit quality of the HBWP participants could result in a project downgrade absent additional rate increases or other financing measures to strengthen the combined Eagle Mountain/SUVESD's financial operations.

STEP-UP PROVIDES PROTECTION

A 25% step-up provision in the PSCs provides some bondholder protection against a default by one or more smaller members. While bondholders have direct exposure to TDPUD (26.3% entitlement share), Fitch believes the participant's credit quality sufficiently supports the HBWP rating.

UAMPS has a take-or-pay PSC with each of its 24 members who are participants in the HBWP. The PSCs terminate at the later of the final maturity of the bonds or the useful life of the project. Project participants are billed jointly for all UAMPS projects in which they participate.

IMPROVED PARTICIPANT METRICS

Improvement in the nine largest participants' (84.2% of total entitlement shares) financial metrics over the past two years ultimately enhances bondholder security by bolstering UAMPS' underlying revenue base.

The participants' Fitch-calculated coverage of full obligations increased to a healthy average of 1.36x in fiscal years 2012 and 2013 from an average of 1.23x the prior three years. Cash on hand likewise increased to an average of 157 days from 137 days during the same periods. Leverage outpaced equity growth, but the aggregate ratio of equity to capitalization remained a strong 59.8% in fiscal 2013.

Tempering the largest participants' overall positive momentum weaker financial positions at certain systems; these participants ultimately drive the project rating. Fitch says in its public power rating criteria, 'The rating for a take-or-pay supplier will generally reflect the credit quality of the weakest purchaser after factoring the applicable step-up provision.'

GROWING SERVICE TERRITORIES

The generally small project participants are nevertheless growing and operate in an expanding economic environment that ultimately benefits project fundamentals. The largest participants' sales increased by 3.1% in fiscal 2013. Mainly residential customers provide for better revenue predictability. Unemployment rates are low, and income levels are slightly above average.

PROJECT OPERABLE

The elimination of construction completion risk subsequent to Fitch's initial rating review - barring wind damage to several turbines - supports the HBWP rating.

Project performance has improved in recent months but remains mixed. The fiscal 2014 capacity factor is near early forecasts at 30.1%, or 33.9% with load reduction credits for the turbine damage. The fiscal 2014 adjusted cost of power improved to $79.10/MWh from $83.78/MWh but exceeds initial expectations of $73.39/MWh and UAMPS' other generation projects. Nevertheless, the project offers the political benefit of contributing toward Utah's statewide renewable energy goal.

PROJECT FINANCES AND LIQUIDITY

HBWP is structured similarly to UAMPS' other projects. Debt service coverage is structured near 1.1x annually, and equity remains principally with the project participants. Fiscal 2013 results included a one-time developer fee ($17.7 million).

Various sources of liquidity provide additional support. Project restricted assets include a liquidity reserve (currently $1 million) and working capital fund ($1.1 million). In addition, UAMPS maintains two system-wide line of credit facilities totaling $25 million to manage cash flows.

Additional information is available at 'www.fitchratings.com'.

This rating action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria.

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'Fitch Affirms Utah Associated Municipal Power Systems Payson Revs at 'A'; Outlook Stable' (Feb. 14, 2014);

--'Fitch Rates Utah Associated Muni Power Systems Horse Butte Wind Proj $23.97MM 2012B VRDBs 'AA-/F1+'' (Sept. 5, 2012).

--'Utah Associated Municipal Power Systems (Horse Butte Wind Project Revenue Bonds)' (Aug. 9, 2012).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Utah Associated Municipal Power Systems (Horse Butte Wind Project Revenue Bonds)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686180

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=844554

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Contacts

Fitch Ratings
Primary Analyst
Ryan A. Greene
Director
+1 212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Matthew Reilly
Director
+1 415-732-7572
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Ryan A. Greene
Director
+1 212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Matthew Reilly
Director
+1 415-732-7572
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com