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

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'A' rating on the following Utah Associated Municipal Power Systems (UAMPS) revenue bonds:

--$20,905,000 Veyo Heat Recovery Project (VHRP) revenue bonds, series 2014 (Green Bonds).

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 47 mostly small members through 16 separately financed and secured projects. The VHRP uses waste heat to fuel a 7.8-MW recovered energy generation system that began commercial operation in May 2016. The project provides participants with an economic, non-carbon-emitting source of power.

TAKE-OR-PAY CONTRACTS: Long-term, take-or-pay PSCs with seven project participants extending for the life of the bonds underpin the rating. The PSCs remain in effect regardless of project operations, as well as any other project suspensions or related agreement terminations. Moreover, the participants are obligated pursuant to the PSCs, to increase their respective payment obligations by 25% in the event of a participant default.

PARTICIPANT CREDIT QUALITY: Fitch's view of the participants' credit quality remains the primary driver of the project rating. Project participants are relatively small but stable retail electric utilities with generally improving financial metrics supportive of Fitch's 'A' rating medians. Participants retain relatively competitive rates and full rate-setting authority, providing flexibility to ensure full and timely cost recovery.

DIRECT EXPOSURE TO PARTICIPANTS: Direct bondholder exposure to the three largest participants, each with a more than 20% project entitlement share, limits the project rating. A sizable up-front capital contribution made by Lehi, Utah mitigates exposure to one of the three largest participants, as any redistributed project share of Lehi 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.

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

RATING SENSITIVITIES

PROJECT PARTICIPANTS: The rating on the Utah Associated Municipal Power System's Veyo project will continue to reflect the underlying credit quality of the project participants, particularly the largest three.

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 47 members. The members choose to participate in any of UAMPS' 16 separately financed and secured projects.

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 7.8 MW VHRP achieved commercial operation in May 2016, ahead of schedule and under budget. The VHRP has operated well to date, with an average availability factor and capacity factor of 98.4% and 84.3%, respectively, from June to October.

VHRP is 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.

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.

CONTRACTS UNDERPIN RATING

Take-or-pay PSCs with its seven participants underpin the project rating. The PSCs obligate the participants whether or not the project is operating. 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.

Fitch views bondholder exposure to Lehi as being somewhat reduced compared to the other large participants given Lehi's $7.9 million capital contribution that effectively prepaid its portion of construction costs. Lehi's monthly bills include only its proportional amount of O&M expenses and related royalty fees, not project debt service. As such, Lehi's cost of project power is estimated to be very low and competitive, which would attract the other participants to voluntarily increase their participatory shares.

PROJECT PARTICIPANTS

Seven of UAMPS's members are participants in the VHRP. Six of the participants operate in Utah, with one from California. The participants serve approximately 63,500 customers in aggregate. Participants have the exclusive right to provide all utility services within its boundaries. Retail rates are generally competitive and each participant has full authority to set its own rates. These characteristics, common to municipal electric utility systems, provide latitude to ensure the timely recapture of project costs.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/site/re/864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014832

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014832

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com