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Utah's IPA To Refund VR Bonds

DALLAS - Utah's Intermountain Power Agency this week will issue up to $330 million of subordinate-lien revenue bonds and use much of the proceeds to refund 24-year-old variable-rate debt that has lost its liquidity provider.

The current refunding will take out $241 million of variable-rate bonds issued in 1985, said Allyn Orme, capital programs manager for the IPA.

The original liquidity facility with Morgan Stanley "has reached its expiration date, and they don't want to renew it," Orme said. "And there isn't anyone out there who does."

The deal will also refund 1998 and 1999 bonds for interest rate savings to be determined, according to Orme. The 1985 variable-rate bonds reset every six months and are currently paying a yield of 3%.

The new fixed-rate bonds will be subordinate to the IPA's $755 million of senior debt.

Morgan Stanley and Goldman, Sachs & Co. are senior managers, with Merrill Lynch & Co., Fidelity Capital Markets, and Wells Fargo Brokerage Services as co-managers. George K. Baum & Co. serves as financial adviser, with Orrick, Herrington & Sutcliffe LLP as bond counsel.

The authority will hold a retail order period for the first time in recent history today, with institutional orders coming Wednesday. Retail orders of up to $3 million could come from bank trust departments or investment advisers as well as individuals.

Although Utah residents buying the bonds enjoy double tax-exemption, the state is not known for a lot of high-wealth investors and the deal is being marketed across the country.

"I think this will be well received nationally," said John Crandall, executive vice president at financial adviser George K. Baum in Utah. "Obviously, we're a little disappointed that rates have been creeping away from us daily. If it were a couple of months ago, they would be about 50 basis points lower."

The deal could shrink if interest savings prove insufficient on the 1998 and 1999 bonds, Crandall said. "It could be as small as $240 million and as large as $330 million," he said.

The liquidity crisis that has had such a big impact on the municipal bond sector effectively forces issuers like the IPA to ration their credit, according to Crandall.

The power agency would have preferred to keep the 1985 bonds in the market because they enjoy exemption from certain provisions of the 1986 tax law. But to provide a new liquidity facility for the 1985 bonds could have limited the authority's commercial paper capacity. In the end, the commercial paper program was a higher priority, Crandall said.

The new bonds earned an important boost from Standard & Poor's, which upgraded the IPA's subordinate-lien debt to A-plus from A. Moody's Investors Service maintained its A1 rating while Fitch Ratings affirmed its AA-minus on the credit.

Moody's provides a Aa3 rating on the senior-lien debt based on stronger reserve fund provisions while Standard & Poor's and Fitch rate the senior debt the same as the subordinate.

While the senior-lien indenture dating back to 1978 is still technically available, the more current subordinate indenture provides the working lien, according to Standard & Poor's.

"In our view, the distinction between the two liens is diminished, and allows for the ratings on both liens to be the same," said analyst Peter Murphy.

With its ratings on the fringe of the high-demand double-A category, the IPA is considering the cost of insuring the debt through Assured Guaranty Corp.

"We are qualifying this issue, though we do not know if we will use the insurance," Crandall said.

The IPA's last bond deal was a $426 million refunding in April 2008 that took out $60 million of auction-rate securities and $350 million of variable-rate bonds issued in 1998 and backed by Financial Guaranty Insurance Co., whose ratings have fallen to CCC on the Standard & Poor's scale.

At this point, the IPA has no plans to issue anymore debt, Orme said.

Formed officially in 1977 as a separate legal entity and a political subdivision of the state of Utah, the Intermountain Power Agency was created to develop a coal-burning power plant that would provide wholesale power for utilities in Utah and California. Of the 36 power purchasers, six are California municipal electric systems, 29 are Utah municipal electric systems and cooperatives, and one is an investor-owned company.

The six California utilities buy most of the power from the Intermountain Power Project, led by the Los Angeles Department of Water and Power with 60%, followed by Anaheim with 13%, Riverside with 7.6%, Pasadena with 5.7%, Burbank with 4%, and Glendale with 2%.

"The ratings reflect the overall credit quality of the six participating California municipal electric systems, IPA's continued sound financial performance, an efficiently run system, and adequate legal provisions on the senior and subordinate debt," Standard & Poor's Murphy noted.

While IPA's debt is expected to be paid off in 2023 and its power contracts extend four years beyond that, regulatory variables could have an impact on the coal-fired plant.

"There can be no assurance that the project will remain subject to the regulations currently in effect or in compliance with future regulations, or will be able to retain the current conditions in all required operating permits," the utility warns investors in its preliminary official statement. "Evolving environmental standards could result in additional capital or operating expenditures, reduced operating levels, or the complete shutdown of individual electric generating units."

In its examination of the public power sector in January, Standard & Poor's cited the sharp economic downturn and the regulatory environment as the two biggest wild cards in their outlook.

"We have a stable outlook on most individual utilities' debt issues, but we could lower ratings on utilities that cannot overcome or respond effectively to the looming threats," analysts noted.

"Reduced energy sales make covering fixed costs harder, underscoring the benefits of a diverse customer base," they added. "Bad economic times also raise the risk of ratepayer delinquencies. Utilities are already experiencing modest increases in delinquent payments, and falling income levels or job loss could accelerate this trend.

"Furthermore, in the face of ratepayer concerns, utilities are facing increased political pressure to absorb rising costs, rather than passing them through to customers in a timely fashion, further threatening net operating income. We believe that a financial position, featuring strong debt service coverage and liquidity, can temporarily insulate utilities from each of these financial challenges."

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