Fitch Upgrades Utah Associated Municipal Power Systems' Horse Butte Revs to 'A'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has upgraded to 'A' from 'A-' its underlying rating on the following Utah Associated Municipal Power Systems (UAMPS) revenue bonds:

--$63,585,000 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 the 23 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 44 mostly small, unrated members through 16 separate projects. The HBWP is a 57.6MW wind farm that began commercial operations in August 2012.

UPGRADE DRIVEN BY PARTICIPANTS: The upgrade to 'A' reflects the improved financial profile of the eight largest project participants whose combined entitlement percentage plus the 25% step-up provision is sufficient to cover the limited default of the remaining project participants. Financial metrics have steadily improved with fiscal 2015 results generally comparing favorably to Fitch's 'A' rated medians for debt service coverage, liquidity, and equity-to-capitalization ratio.

TAKE OR PAY CONTRACTS: Long-term, take-or-pay PSCs with 23 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). TDPUD's credit quality supports the project's rating.

PROJECT ENTITLEMENT CHANGE: Lower Valley Energy became the second largest participant in the project by entitlement share (14.04%) following Eagle Mountain City's transfer and withdrawal from the project. The transfer is viewed as credit neutral as Lower Valley Energy's credit quality is viewed as commensurate with that of Eagle Mountain City.

OPERATIONAL PROJECT: The HBWP contributes to Utah's renewable energy goal, and project's performance continues to improve. However, at $77.19/MWh (fiscal 2016), the cost of power remains above early estimates ($73.39/MWh) and UAMPS' other generation projects.

RATING SENSITIVITIES

PROJECT PARTICIPANTS: The rating on the Utah Associated Municipal Power System's Horse Butte Wind project will continue to reflect the underlying credit quality of the Truckee Donner Public Utility District and the other project participants. Credit drivers for the participants include financial performance, liquidity levels, and rate flexibility.

CREDIT PROFILE

UAMPS was established in 1980 as an energy services interlocal entity to finance, acquire, and operate various projects for the generation and transmission of electricity to its 44 members. The members choose to participate in any of UAMPS' 16 separate projects.

Fitch's principle rating considerations for UAMPS' Horse Butte Wind project remain the PSCs and the financial and operating performances of the 23 participants, with particular emphasis on the eight largest participants in terms of project entitlement share. Additional rating considerations include the project operations and UAMPS' financial position, including its sources of liquidity.

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

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 project's rating.

UAMPS has a take-or-pay PSC with each of its 23 members who are project participants. 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.

CHANGE IN PROJECT ENTITLEMENTS

In March 2015, Eagle Mountain City transferred and assigned its 8.8% entitlement in HBWP to an existing project participant, Lower Valley Energy. Following the transfer, Lower Valley Energy's project entitlement increased to 14.04%, making it the second largest participant in the project. The transfer was prompted by Eagle Mountain City's sale of its electric and gas systems. Eagle Mountain is no longer a HBWP participant following the transfer of its entitlement share.

The entitlement transfer is viewed as credit neutral as Fitch views Lower Valley Energy's credit quality as being commensurate with that of Eagle Mountain City's electric system prior to its sale.

IMPROVED FINANCIAL METRICS

The eight largest project participants represent 84.2% of the total entitlement shares and, under the step-up provisions, could fully support the debt if the remaining participants defaulted on their obligations.

The project's upgrade is largely driven by the steadily improving financial metrics of the project's eight largest participants. Aggregate liquidity on a revenue-adjusted basis improved to 168 days cash on hand in fiscal 2014 and is expected to remain at a similar level in fiscal 2015. Fitch-calculated coverage of full obligations increased in fiscal 2014 to 1.37x, which is generally in line with the 'A' rated peer median of 1.13x. In addition, overall debt levels remain relatively low with only two of the eight reporting equity-to-capitalization ratios of 60% or less.

SATISFACTORY PROJECT OPERATIONS

Despite not yet matching original expectations, the project's operations have been satisfactory. Project availability remains high while the capacity factor continues to improve, reaching 35.2% for the period extending from Aug. 1, 2015 through the end of April 2016.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008915

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008915

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst:
Matthew Reilly, CFA, +1-415-732-7572
Director
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Committee Chairperson:
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Matthew Reilly, CFA, +1-415-732-7572
Director
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Committee Chairperson:
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com