Fitch Ratings has affirmed the rating on Chugach Electric Association, Inc.'s (Chugach) implied senior secured obligations at 'A-'. The rating takes into account Chugach's $525 million of first mortgage bonds, but is assigned to implied obligations since all of the outstanding debt is privately placed.
The Rating Outlook is Positive.
The obligations are secured under the mortgage indenture, which became effective on Jan. 20, 2011. The indenture imposes a lien on substantially all of Chugach's assets to secure its existing long-term debt.
KEY RATING DRIVERS
FUNDAMENTALS IMPROVING: The Positive Outlook incorporates the cooperative's sound financial metrics; improved capital structure; new, more efficient generation; strong regulatory support and anticipated clarity related to customer power supply obligations.
DOMINANT ELECTRICITY PROVIDER: Chugach is the major electricity provider in Alaska, serving a diversified customer base in and around the heavily populated Anchorage area. Electric service is also provided to the Fairbanks area on an economy (non-firm) energy sales basis.
PLANNED REDUCTION IN WHOLESALE SALES: Two of Chugach's wholesale cooperative customers have announced plans to end their contracts with Chugach in 2014. Chugach has planned for this event and expects to be able to handle any sales reduction, without having a material negative effect on financial results.
SUPPORTIVE REGULATORY TREATMENT: Chugach is subject to rate regulation by the Regulatory Commission of Alaska (RCA). Recent rate decisions have been quite constructive and supportive of Chugach's business model.
HIGHLY RELIANT ON SINGLE FUEL: The utility relies extensively on natural gas from local sources for its primary source of fuel. With the end of favorable legacy gas contracts in 2011, new fuel supplies at reasonable prices will be important in Chugach's ability to maintain sound financial metrics.
WHAT COULD TRIGGER A RATING ACTION
MEETING UPDATED BUSINESS PLAN: Greater clarity with regard to possible extension of wholesale power contracts after 2014, successful performance of a new, more efficient generating plant and further certainty to future natural gas supplies, could result in a rating upgrade.
Chugach is the largest electric utility in Alaska providing electric service to approximately 81,339 service locations in the Anchorage and northern Kenai Peninsula areas. The company also provides service, under separate wholesale power contracts, to three wholesale customers serving about 92,400 ultimate meters. The three wholesale customers include: Matanuska Electric Association, Inc. (MEA), Homer Electric Association, Inc. (HEA) and the city of Seward (Seward). Chugach also provides economy energy service (non-firm energy sales) to Golden Valley Electric Allocation, Inc. located in Fairbanks, Alaska.
Both HEA and MEA have notified Chugach that they do not intend to renew, extend or modify their existing wholesale power contracts when they expire on January 1, 2014, and December 31, 2014, respectively. Chugach has been planning for the termination of these power supply relationships for several years. As a result, Chugach expects to retire in place its less efficient assets upon the expiration of these contracts after having recovered its costs, and will replace them with a more efficient facility sized to serve the utility's projected retail load.
SUPPORTIVE RATE REGULATION
Chugach's relationship with the RCA has improved in recent years. More supportive rate decisions and the implementation of the Simplified Rate Filing (SRF) process by the RCA demonstrate a better working environment between the two parties. In addition, Chugach recovers fuel and purchased power costs on a direct, dollar-for-dollar pass-through basis in accordance with a quarterly fuel and purchased power rate adjustment process. Chugach's current RCA authorized Times Interest Earned Ratio (TIER) is 1.30 x long-term interest expense. Fitch views this favorably and considers RCA support to be a positive factor.
Chugach's retail rates are competitive relative to other Railbelt utilities in Alaska. Chugach's three-year average retail rate from 2007 to 2009 was 12.9 cents/kilowatt hour. This was far below the average for other Alaska electric cooperatives of 16.8 cents/kilowatt hour and Alaska municipals of 13.2 cents/kilowatt hour. With costs of additional generation and new fuel supply contracts, Chugach forecasts that retail rates will average about 15 cents/kilowatt hour in 2015 and beyond. Wholesale rates are expected to be around 9 to 10 cents/kilowatt hour.
GENERATING ASSETS UPDATED
Chugach's generation portfolio includes 462.6 megawatts (MW) of installed capacity, comprised of a combination of natural gas and hydroelectric power, which represents approximately 50% of the state's capacity. Chugach has been participating in the development of a 183 MW combined cycle natural gas-fired generation plant. The Southcentral Power Project (SPP) is configured as a 3x1, with GE LM6000 gas turbine packages. In addition to better fuel efficiency, the SPP will provide Chugach a transition plan that more effectively incorporates future alternative generation without losing thermal efficiency and avoids substantial investment in existing older technology generating units. SPP is jointly owned with Anchorage Municipal Light & Power (ML&P), with Chugach owning 70% of the new plant's output and ML&P owning the remaining 30%. Chugach will also be entitled to its share of duct-firing capacity, which will provide an additional 12 MW. The majority of construction of the project was completed in late 2012 and the plant is expected to achieve commercial operation in the first quarter of 2013. Chugach is currently finalizing engineering studies to determine the plant's ability to handle dual-fuel capability.
ADDITIONAL FUEL SUPPLY BEING DEVELOPED
Approximately 89% of Chugach's energy is generated from natural gas. Chugach's favorably-priced legacy gas contracts ended April 2011. New fuel contracts were negotiated in recent years and Chugach currently has fuel contracts in place to fill 100% of its needs through December 2014, 70% through December 2015 and 40% in 2016. Natural gas used by Chugach and all other Railbelt utilities is produced within the Cook Inlet Basin. Chugach believes there is sufficient gas available in the area through at least 2018; and expects future supplies, supplemented by new drillers and gas storage, to be adequate to meet extended regional needs.
FINANCIAL PERFORMANCE GOOD
While Chugach is legally required to maintain margins for interest coverage of 1.10x (in each fiscal year) pursuant to the bond indenture, both management's financial target for budgeting and the RCA publicly prescribe interest coverage of 1.30x. Additionally, management plans to increase its equity ratio, reaching 40% by 2021 and will resume capital credit disbursements beginning in 2016.
The five-year capital projects plan for the period 2013-2017 is well below recent levels, estimated at a reasonable $167 million, importantly reflecting the completion of SPP. Chugach expects to fund the majority of future costs with internal funds, grants, municipal reimbursements and customer contributions. Financing needs are modest at $38 million, which will be met by commercial paper and small bank loans.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action is informed by information by CreditScope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
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