Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )
 December 4, 2015 - 4:59 PM EST
Print Email Article Font Down Font Up
Fitch Affirms Chugach Electric Association, AK's Bonds at 'A'; Outlook Stable

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.

SECURITY

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 projects.

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 financial results

RATING SENSITIVITIES

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.

CREDIT PROFILE

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.

AMPLE GENERATION

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.

FUEL SUPPLY

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.

SUPPORTIVE REGULATION

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.

SOLID FINANCIALS

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 several years.

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'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996026

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996026

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Alan Spen, +1-212-908-0594
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Matthew Reilly, CFA, +1-415-732-7572
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (December 4, 2015 - 4:59 PM EST)

News by QuoteMedia
www.quotemedia.com