Fitch Ratings has affirmed the 'A' rating on Chugach Electric
Association, Alaska's (Chugach) implied senior secured obligations. The
rating takes into account $448.1 million of secured first mortgage bonds
at Sept. 30, 2015 but is assigned to implied obligations, since all of
the outstanding secured debt is privately held.
The Rating Outlook is Stable.
The obligations are secured under the mortgage indenture, which creates
a lien on substantially all of Chugach's assets.
KEY RATING DRIVERS
MAJOR REGIONAL ELECTRICITY PROVIDER: Chugach is Alaska's largest retail
electricity provider, serving a diversified retail customer base in and
around the more heavily populated cities of Anchorage and the northern
Kenai Peninsula areas.
SUPPORTIVE REGULATORY TREATMENT: While subject to rate regulation by the
Regulatory Commission of Alaska (RCA), Chugach has clearly benefited
from supportive rate actions by the commission, along with a more
streamlined ratemaking approach. Average retail rates are competitive.
HEAVILY RELIANT ON A SINGLE FUEL: Chugach relies extensively on a single
fuel, natural gas, to power its units. While this creates greater risk,
Fitch views favourably a growing number of local gas providers,
commercial operation of the highly efficient Southcentral Power Project
(SPP) and state support for the development of alternative fueled
SUCCESSFULLY MANAGED LOSS OF MAJOR CUSTOMERS: Chugach's two largest
customers, Matanuska Electric Association (MEA) and Homer Electric
Association (HEA), previously allowed their contracts with Chugach to
expire in 2013 and 2014. Chugach had been planning for this event and
has managed the reduction in sales, without negatively impacting
LESS SUPPORTIVE RATE REGULATION: Less favourable rate regulation by the
Regulatory Commission of Alaska (RCA) could have an adverse effect on
the rating of Chugach Electric Association.
Chugach is the largest retail electric utility in Alaska currently
providing electric service to 83,294 service locations in the Anchorage
and northern Kenai Peninsula areas. Through an interconnected regional
electrical system, Chugach's power flows throughout Alaska's Railbelt, a
400-mile long area stretching from the coastline of the southern Kenai
Peninsula to the interior of the state. While future oil and natural gas
development affords less economic certainty, the local economy continues
to perform well, helped by its diversity, with unemployment at a low
level. Retail customers account for about 74% of total revenues, and
future sales growth is expected to remain relatively flat.
Chugach's generation portfolio totals about 550 megawatts (MW),
comprised of a combination of base-load and peaking natural-gas units
and hydroelectric power. The utility also purchases additional hydro and
wind power. Base load contributes 76% of this total. Approximately 85%
(rated capacity) of the company's generating capacity is fueled by
natural gas. Chugach has made a relatively seamless transfer to its
reliance on the highly efficient SPP from the Beluga station. Beluga is
now available for peaking and emergency backup. For planning purposes,
Chugach uses a 30% reserve margin.
Chugach has an ownership interest in the SPP, an approximate 200 MW
combined cycle natural gas-fired generation plant that went commercial
on Feb. 1, 2013. The plant is configured as a 3x1, with GE LM6000 gas
turbine packages and affords 25% better fuel efficiency than system
average. SPP is jointly owned with ML&P, with Chugach owning 70% of the
new plant's output and ML&P owning the remaining 30%. By using 25% to
30% less gas per kilowatt-hour (KWH) than existing resources, the
project will extend Chugach's Cook Inlet gas supply and lower the fuel
surcharge for customers.
Chugach's primary sources of natural gas were historically divided among
ConocoPhillips Alaska, Inc. and Marathon Alaska Production, LLC. The
ConocoPhillips contract terminates Dec. 31, 2016, and the Marathon
contract terminated Dec. 31, 2014. On July 12, 2013, Chugach submitted a
new gas purchase agreement with Hilcorp Alaska, LLC to the RCA that
provides fuel for economy energy sales from Jan. 1, 2015 through March
31, 2018. On Sept. 10, 2013, the RCA issued an order approving the
agreement and the recovery of costs through the fuel and purchased power
cost adjustment process. Hilcorp gas supply agreements have been
extended to 2023.
Chugach is also seeing a growing number of smaller, more aggressive
natural gas developers, which should result in a more stable, long-term
source of natural gas. A recently completed gas storage facility, Cook
Inlet Natural Gas Alaska, will also benefit utilities in the region, by
avoiding swings in natural gas prices and providing added certainty.
Other natural gas supply strategies are being considered by Chugach.
Chugach is subject to wholesale and retail rate regulation by the
Regulatory Commission of Alaska. Chugach's relationship with RCA has
shown improvement 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.
While rate regulation adds a level of complexity and can reduce
financial flexibility, the current relationship is viewed as supportive
by Fitch. Chugach's retail rates are competitive relative to other
Railbelt utilities in Alaska.
While Chugach is legally required to maintain margins for interest
coverage of 1.10x (in each fiscal year) pursuant to the bond indenture,
management's financial target for budgeting purposes is 1.30x margins
coverage of interest and RCA publicly prescribes interest coverage of
1.30x. Chugach has been exceeding its financial targets for the past
The 10-year financial forecast assumes a gradual moderation of net
margins, which will require Chugach to work with the RCA to achieve its
financial targets. While interest coverage remains a meaningful
benchmark, Chugach believes that debt service coverage (DSC) will be
more appropriate in the future and a better benchmark to use, subject to
RCA approval. DSC is expected to exceed 1.50x by 2021.
Based on Fitch calculations, DSC was 1.58x in 2014 and cash on hand
equalled 29 days. The long-term equity goal remains 40%. Beginning in
2013 Chugach began paying capital credits.
Based on known projects, annual capital expenditures are expected to
remain relatively small, with financing modest. Chugach is in the
process of renewing its commercial paper program for a period of five
years and is currently evaluating $100-$150 million of capacity for
working capital and capital expenditures. The average balance in 2014
was about $19 million. The utility expects to maintain its $50 million
line of credit with CFC.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
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