After a four-year absence, Utah’s Intermountain Power Agency is scheduled to return to the municipal market on Wednesday with nearly $552 million of power supply revenue bonds that will help finance its transition from a coal-fired plant to more environmentally friendly electricity generation using natural gas and hydrogen.
The project, estimated to cost $1.7 billion, will replace IPA’s two-unit, coal-fired steam-electric generating plant with a new facility housing two natural gas-based power blocks by July 1, 2025.
The transition was spurred by the needs of the agency’s California-based power purchasers to meet state and local renewable and clean energy targets and requirements, according to Cameron Cowan, IPA’s general manager.
The Los Angeles Department of Water and Power, the nation’s largest municipal utility, is the IPA’s biggest power purchaser in both existing contracts that run through June 15, 2027, and new contracts that will be in effect until mid-June 2077. It is also IPA’s operating agent and project manager, as well as a key credit element for the bonds, which are rated Aa3 by Moody’s Investors Service and AA-minus by Fitch Ratings.
“We’re anticipating a great (bond) sale, truthfully,” Cowan said, adding that both IPA and the LADWP, which is rated Aa2 and AA-minus, are well-known debt issuers in the muni market.
CreditSights said the bonds should be considered largely an LADWP credit given that it is the biggest power user among the 30 entities that have entered into 50-year take-or-pay power sales contracts for the entire 840 megawatt capacity of the new project.
“Given that IPA hasn’t sold bonds since 2018 and more bonds are expected, this is a good opportunity for many national investors to build a position in a new name and to add California exposure without paying up for California bonds,” CreditSights said in a report.
CreditSights added that the bonds allow investors “to participate in a new, greener project in a familiar structure from a long-standing issuer.”
Fitch said its rating for the bonds reflects the LADWP’s credit quality “and the terms of the existing power sales contracts and renewal power sales contracts that require unconditional payment of all costs, including debt service, whether or not the project is constructed, operating or operable.”
The deal consists of $508.5 million of tax-exempt bonds and $43.4 million of taxable bonds with both series carrying maturities from 2026 through 2045. The taxable portion is due to Utah electric cooperatives that account for a small slice of power purchasers not qualifying for tax-exempt financing, Cowan said.
Bond interest is exempt from Utah state taxes.
BofA Securities is the bookrunner, with Goldman Sachs as co-senior manager. Co-managers are J.P. Morgan and RBC Capital Markets. Orrick, Herrington & Sutcliffe is bond counsel and Gilmore & Bell is underwriters counsel.
Subsequent bond issuances of about $504 million in 2023 and $300 million in 2024 are anticipated, IPA officials said.
Premium bonds will likely be included in the upcoming bond sale, according to John Crandall, a managing director at Stifel, Nicolaus & Company, IPA’s municipal advisor. He noted that the deal has a heftier debt service reserve fund than in prior debt issues, a factor that helped IPA boost its A1 Moody’s rating to Aa3.
“Previously, IPA had used six months of maximum annual debt service. This time around IPA adjusted that to go to 12 months of maximum annual debt service,” he said.
Moody’s said in a rating report that the debt service reserve fund mitigates “the weaker financial covenants of the financing structure with a sum-sufficient rate covenant and no financial additional bonds test” and its strength is further supplemented by IPA’s “long history of sound financial management and maintenance of sound balance sheet liquidity that we expect to continue at levels equal to about half of what was maintained in the past owing to lower liquidity exposure” at the new project compared to the existing plant.
It added that the IPA’s power purchasers have a multi-decade history of on-time payments for their contractual obligations under their existing power sales contracts, including debt service.
“The strength of this contractual requirement is fundamental to IPA's credit quality as all revenues are derived from the project participants' contractual payments,” Moody’s said. “There is an unlimited step-up provision in both the power sales and renewal power sales contracts requiring all members to make up for any defaulting member's shortfall. Further, the requirement that 80% of the project participants agree in order to make key operating decisions ensures no key credit related decisions can be made without LADWP's approval.”
Besides LADWP, five California cities, 23 Utah municipalities, and six electric cooperatives make up IPA’s 35 current power purchasers. Thirty of those entities have 50-year renewal contracts, with LADWP receiving 71.4% of the new plant’s capacity.
While switching to natural gas from coal, which produces significantly more carbon emissions,
Hydrogen is used to generate electricity without carbon emissions. The trick is to separate the hydrogen from the molecules it is usually attached to,
Cowan said the new plant will immediately have the capability for a 30% hydrogen fuel mix, with a goal to ramp hydrogen use up to 100% by 2045. Hydrogen storage will be provided by a geologic salt dome at the plant’s 4,614-acre site near Delta, Utah.
“This project is really unique and really important for our purchasers’ future resource needs.” Cowan said.
Costs associated with the project’s hydrogen use, production, and storage are being paid by the LADWP and the California cities of Burbank and Glendale, according to the deal’s preliminary official statement.
Modernization of IPA’s southern transmission system, which transmits energy from the plant to California, will primarily be financed by the Southern California Public Power Authority.
Risks for bondholders include drought, according to the POS. Utah Governor Spencer Cox last week declared a state of emergency due to “dire” drought conditions affecting the entire state.
Cowan said the IPA is in a “very strong position from a water standpoint,” given its water rights have exceeded needs, while transitioning to gas units will decrease its water use.
IPA, a state of Utah political subdivision organized in 1977, last held a public debt sale in 2018 for $105.23 million of subordinated power supply revenue refunding bonds, which the agency defeased last year before their final maturity dates.
In 2019, it entered into a $100 million drawdown loan with RBC Capital Markets to cover initial project costs. That debt will be refunded in the upcoming bond sale, which marks the IPA’s first new money issue since 1984, according to Cowan.
