OREANDA-NEWS.  Fitch Ratings has assigned an 'AA-' bank note rating to the $100 million commercial paper (CP) notes, series B1 & B2, issued by Intermountain Power Agency (IPA), Utah. The bank note rating reflects the credit quality of IPA's obligation if the notes become bank notes, held by the provider of the liquidity agreement, Bank of America.

The CP notes are expected to be sold on Jan. 27, 2016. Note proceeds will be used to refund outstanding debt.

In addition, Fitch has affirmed its outstanding 'AA-' ratings on the following Intermountain Power Agency bonds:

--$453.6 million subordinated power supply revenue refunding bonds, series 2007A, 2013A, 2014A and 2014B.

The Rating Outlook is Stable.

SECURITY

The subordinated bonds and CP notes are secured by revenues from the long-term Power Sales Contracts (PSCs) between IPA and its power purchasers. All senior lien debt was repaid in 2013, and no additional issuance is anticipated on the senior lien.

KEY RATING DRIVERS

SINGLE-ASSET COAL PROJECT: IPA owns the Intermountain Power Project (the project), a two-unit coal-fired plant that has historically exhibited solid operational performance. All project capacity is sold pursuant to take-or-pay power sales contracts (PSCs) with implied step-up provisions that unconditionally obligate the purchasers to pay all costs of operation, maintenance and debt service, whether or not the project is operating.

STRONG CREDIT QUALITY OF PURCHASERS: The rating reflects the credit quality of IPA's six California purchasers, who are contracted by the PSCs to purchase 75% of project generation but purchase nearly 100% of power output through excess power sales contracts with the Utah purchasers. IPP participants include 36 entities throughout Utah and California.

LIMITED IMPACT OF ENVIRONMENTAL RULES: IPA's existing pollution-control equipment meets the requirements under EPA's Mercury and Air Toxic Standards (MATS) rule. Additionally, IPA's California purchasers have been allocated sufficient carbon allowances through 2020 to allow for a phased-in transition away from coal-based power supply.

REPOWERING AND CONTRACT AMENDMENTS NEUTRAL: Environmental considerations have prompted a planned repowering of IPP as a natural gas-fired project in the coming decade. Recently approved amendments to the PSCs, in order to permit the repowering, do not shorten the term or negatively impact repayment obligations supporting outstanding debt obligations. Final approval of the amended PSCs is expected in 2016, which will allow for subsequent but separate power sales contracts to be executed in order to finance the repowered IPP.

RATING SENSITIVITIES

PERFORMANCE OF CALIFORNIA PURCHASERS: Deterioration or enhancement in the credit quality of the California purchasers could lead to a change in Intermountain Power Agency's rating, particularly the largest purchasers -- the Los Angeles Department of Water and Power (LADWP; 'AA-'/ Outlook Stable) and Anaheim Public Utilities Department ('AA-'/Outlook Stable).

CREDIT PROFILE

IPP includes a two-unit, 1,800MW coal-fired generating plant and an extensive transmission system. The project is operated by LADWP and has generally operated at a high degree of availability that exceeds industry averages and a high capacity factor, indicating its competitive cost position in the region. An unplanned 151 day outage in fiscal 2012 signficinatly weekend results for the 12-month period, but performance metrics have since returned to historic levels.

Power from the project is contracted to be sold to 36 entities throughout Utah and California, pursuant to unconditional take-or-pay PSCs. The PSCs expire on June 15, 2027, well after bond maturity (July 1, 2023), and cannot be adversely amended or terminated as long as the bonds are still outstanding.

IPP REPOWERING PLANNED BY 2025

The purchasers and IPA have agreed in concept to repower IPP as a natural gas-fired generation project in order to address environmental considerations relating to coal-fired power plants. IPA and the 36 project participants are in the final stages of amending the PSCs and excess power sales agreements to allow for project conversion to natural gas in the future. The amendments to the power sales contracts do not shorten the term or alter the repayment security of the PSCs for existing bondholders, expect for the assumption by LADWP of Utah Power & Light's 4% share of the project. The amendments are not viewed as adverse to existing bondholders.

Final approvals of the amended PSCs, including approval from each purchaser's general counsel, are expected to occur in early 2016. Twenty-two of the 36 have been received to date. Counsel approval is the final step to the amended PSCs becoming effective, which will then permit IPA to offer renewal PSCs to each participant in order to secure participation levels for the new repowered project. The renewal PSCs do not supersede or replace the amended PSCs. If a participant decided to sign up for a share of the repowered project, that participant will have both an amended PSC and renewal PSC, that obligate them for different amounts in each project (IPP and 'IPP Renewed').

IPP anticipates that IPP Renewed will consist of a new, combined-cycle natural gas plant located on the IPP site of between 600 and 1,200 MW. Commitments from interested project participants are expected to be known by the end of 2016 with construction to begin in 2020 and completion in 2025.

STRONG PURCHASERS & CONTRACTS

Favorably, the majority of the project's output is sold to six financially strong California-based purchasers. The California purchasers are entitled to 75% of the project's generating capacity and the remaining 25% is entitled to Utah Power & Light, 23 Utah municipal purchasers and six rural electric cooperatives. In practice, the California participants purchase approximately 100% of actual project output through excess power sales agreements that are in place between four California purchasers (LADWP, Pasadena Water and Power, the City of Burbank and Glendale Water and Power and the Utah purchasers. In addition, Utah Power & Light has contracted to sell its 4% entitlement to LADWP. Utah Power & Light's PSC will be terminated once the amended PSCs become effective, at which point its entitlement share will be permanently transferred to LADWP.

Credit strength is derived from the unconditional take-or-pay nature of the PSCs. In the event of default by a purchaser, IPA's budgeting process results in an unlimited implied step-up obligation for the performing purchasers. However, given LADWP's sizable entitlement share of 67% (including 4% from Utah Power & Light), it is unlikely if the remaining purchasers would be able to absorb its payments in the event of an LADWP default.

STABLE PROJECT FINANCIAL PERFORMANCE

IPA's financial performance continues to exhibit stable characteristics, as illustrated by Fitch-calculated debt service coverage in excess of 1.4x in the past three years and healthy liquidity of 200 days at fiscal year-end 2015. Management expects future financial performance to be largely in line with historical trends. Debt service costs continue to decline with the amortization of remaining debt by July 1, 2023.

In addition to outstanding subordinated bonds and CP notes, IPA has $781.64 million in outstanding prepayment notes payable to LADWP and Pasadena Water and Power. This mechanism allowed the two purchasers to provide funds to IPA for the early retirement of debt and receive credit for those prepayments by holding prepayment notes payable from IPA. The prepayment notes have a junior lien to subordinated bonds and CP notes. The prepayment notes have the same final maturity as outstanding bonds of July 1, 2023.