Fitch Rates Utah Associated Municipal Power Systems Veyo Revs 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an initial 'A' rating to the following Utah Associated Municipal Power Systems (UAMPS) bonds:

--$20.8 million Veyo Heat Recovery Project revenue bonds, series 2014 (green bonds).

The bonds are scheduled to price via negotiation on Dec. 9, 2014. Proceeds will be used to finance acquisition and construction costs of UAMPS' new Veyo Heat Recovery Project (VHRP).

The Rating Outlook is Stable.

SECURITY

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.

KEY RATING DRIVERS

PROJECT-BASED WHOLESALE AGENCY: 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 7.8MW 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.

TAKE-OR-PAY CONTRACTS: Long-term, take-or-pay PSCs with seven project participants extending the tenor of the bonds underpin the rating. The PSCs are currently in effect, which limits construction risk, and will remain so regardless of project completion and operations, as well as any other project suspensions or related agreement terminations. Moreover, a 25% step-up provision provides bondholder protection against limited instance of participant default.

DIRECT EXPOSURE TO PARTICIPANTS: Direct bondholder exposure to the three largest participants -- each with a more than 20% project entitlement share -- caps the project rating. A sizable upfront capital contribution mitigates exposure to the city of Lehi, as any redistributed project share would include only its related operation and maintenance expenses. Lehi remains obligated for any redistributed costs of the other participants, subject to the 25% step-up.

IMPROVING PARTICIPANT FINANCIALS: The participants' improving financial metrics support overall project credit quality. Nevertheless, the varied size and strength of individual participants drives the 'A' rating. Coverage of full obligations and liquidity ratios 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 recovery.

GROWING SERVICE TERRITORIES: Mostly residential customer sales within dedicated service territories benefit the participants' revenue stability. Generally average income levels and very low unemployment rates evidence the continued economic development of the growing areas.

RATING SENSITIVITIES

CONTINUED PARTICIPANT STRENGTHENING: Consistent improvements across each of the participants' financial performances would further support credit quality at current levels. The participants' aggregate financial positions are measurably stronger, as noted.

PROJECT PERFORMANCE ISSUES: Longer-term asset operation problems causing a materially higher cost of power relative to UAMPS' other power supply projects could lead to downward rating pressure.

CREDIT PROFILE

The VHRP furthers UAMPS' commitment to diversifying its power supply portfolio with renewable resources. 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.

Fitch's primary rating considerations for UAMPS' VHRP are the PSCs and the financial and operating performances of the seven participants. UAMPS' member systems, which span eight states in the western region, each own and operate a retail electric system, some for more than 100 years.

VEYO HEAT RECOVERY PROJECT

The VHRP will be located adjacent to the existing Veyo Compressor Station, which is owned and operated by the Kern River Gas Transmission Company (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.

The VHRP's expected cost of power provides an economic incentive to participate in the project. At a blended rate of $44/MWh -- assuming an 85% capacity factor -- the project is competitive with UAMPS' overall power supply portfolio.

HOST AGREEMENT ALLOWS INTERCONNECTION

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. Regardless, the pipeline is a valuable asset and the participants remain obligated to UAMPS pursuant to the PSCs.

PARTICIPANTS SHOWING IMPROVEMENT

Seven UAMPS members serving 63,500 customers are participants in the VHRP. Each participant has the exclusive right to provide all utility services within its boundaries. Each participant also has full authority to set its own rates and rate-setting procedures. These characteristics provide latitude to ensure the timely recapture of costs.

The participants are generally small but operate in expanding economic regions that ultimately benefit project fundamentals. Unemployment rates are very low - in some cases lower than 3% - and principally residential customers constituting nearly half of total sales provide for moderately stronger revenue predictability; income levels are slightly above average.

Taken together, the largest participants' improved financial metrics over the past two years ultimately improves bondholder security by bolstering UAMPS' underlying revenue base. Very little debt creates high ratios of equity to capitalization, averaging nearly 90%. Moreover, Fitch-calculated coverage of full obligations (1.32x) is in line with or slightly better than Fitch's 'A' rating category medians for retail systems. Cash on hand, too, is slightly stronger than the median at 158 days. Both metrics have improved measurably from an average of 1.04x and 104 days, respectively, in fiscal years 2009-2011.

CONTRACTS UNDERPIN RATING

Take-or-pay PSCs with its seven participants underpin the project rating. The PSCs are currently in force, as they secure a portion of the construction loan that will be redeemed with proceeds of the series 2014 bonds. Moreover, the PSCs obligate the participants whether or not the project is constructed, operable, curtailed, or terminated, which limits construction risk. This is particularly noteworthy, given the risks, however modest, inherent in KRGTC's third-party influence on the Veyo Compressor Station operations.

DIRECT EXPOSURE TO PARTICIPANTS

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. Such contributions lower a participant's debt service share, which would otherwise mirror its project entitlement share.

In Fitch's view, the city of Lehi's relatively large project participation presents limited bondholder risks compared with a typical project-based joint action agency structure. Lehi will effectively prepay its share of construction costs ($7.9 million) with a capital contribution, which it relinquishes once deposited with the trustee. Monthly bills for its full share of project power and energy will include only its proportional amounts of operations and maintenance expenses and related royalty fees, not debt service. Consequently, Lehi's effective cost of project power is estimated at a very low $18/MWh by Fitch's calculation, which would attract the other participants to voluntarily increase their participatory shares.

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:

--'Fitch Affirms Utah Associated Municipal Power Systems Horse Butte Revs at 'A-'' (Aug. 4, 2014);

--'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).

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=933255

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Contacts

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

Contacts

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