Fitch Ratings affirms the 'A-' rating on Chugach Electric Association, Inc.'s outstanding Series 2002A bonds (unsecured) and assigns an 'A-' implied senior secured rating. The senior rating takes into account Chugach's $525 million first mortgage bonds that were privately placed in 2011. The Rating Outlook is revised to Positive from Stable.
The bonds are payable from electricity sales to wholesale and retail customers.
KEY RATING DRIVERS
FUNDAMENTALLY STRONGER: The Positive Outlook takes into account the utility's improved capital structure and reduced market risk, with the January 2011 refinancing of two large bullet bonds, due in 20ll and 2012; additional regulatory support from the state public service commission and plans for new and more efficient power generation.
MORE SUPPORTIVE REGULATORY TREATMENT: While subject to rate regulation by the Regulatory Commission of Alaska (RCA), Chugach has benefited recently from more supportive rate decisions and a more streamlined approach to ratemaking.
DOMINANT ELECTRICITY PROVIDER: Chugach is the major electricity provider in Alaska, serving a well diversified customer base in and around the more heavily populated cities of Anchorage and Fairbanks.
HIGHLY RELIANT ON A SINGLE FUEL: The utility relies extensively on natural gas for its primary source of energy. Sufficiency of fuel, price and storage will be important considerations in Chugach's ability to continue to perform successfully.
ABILITY TO MANAGE REDUCED SALES TO WHOLESALE CUSTOMERS: Chugach is a major electric supplier to several wholesale cooperative customers; some of which plan on ending their contracts in 2014. However, Chugach has planned for this and expects to be able to financially absorb any sales reduction.
WHAT COULD TRIGGER A RATING ACTION
Successful Execution of Business Plan: Greater clarity with regard to a possible extension of the wholesale power agreement with Matanuska Electric Association after 2014, timely completion of a new, more efficient generating plant and further certainty to future natural gas supply arrangements, could trigger a review for a rating upgrade.
Chugach is the largest electric utility in Alaska, providing electric service to 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. For 2010, Chugach's wholesale power contracts, including fuel and purchased power components, produced $93.3 million in revenues, equaling 37% of Chugach's total sales revenues and 47% of the cooperative's total energy sales to customers, but only 10% of Chugach's total margin. Through direct service to retail customers and indirectly through wholesale and economy energy sales, Chugach provides some or all of the electricity used by approximately two-thirds of Alaska's electric customers.
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 Jan. 1, 2014, and Dec. 31, 2014, respectively. Chugach has been planning for the termination of these power supply relationships for several years. As a result, Chugach expects to either retire in place or dispose of 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. Chugach believes that assets associated with serving HEA and MEA will be fully depreciated by 2014.
MORE EFFICIENT GENERATION
Chugach's generation portfolio includes 530.1 megawatts (MW) of installed capacity, comprised of a combination of natural gas and hydroelectric power, which represents 50% of the state's capacity. Chugach has 17 generating units at five owned power plants: Beluga Power Plant, Bernice Lake Power Plant, International Station Power Plant, Cooper Lake Hydroelectric Project and Eklutna Hydroelectric Project, in which Chugach owns 30%. Approximately 85% (by rated capacity) of the company's generating capacity is fueled by natural gas. The rest of Chugach's generating resources are hydroelectric and steam facilities. The all-time system peak demand was 489.5 MW. Chugach, along with the other electric utilities in Alaska, do not have any connection to the electric grid of the continental United States or Canada. Chugach is currently updating its fuel supply and natural gas storage arrangements.
Chugach is in the process of developing a 183 MW combined cycle natural-gas-fired generation plant. In addition to better fuel efficiency, the new project (Southcentral Power Project) 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. On October 5, 2010, the RCA concluded that Chugach may include in future rates $197 million in expenses attributable to three principal contracts to build the Southcentral Project, when the project becomes commercially operable. Fitch views RCA support for the project favorably.
While Chugach is legally required to maintain margins for interest coverage of 1.10 times x annually pursuant to the bond indenture, management's financial target for budgeting purposes is 1.25x margins coverage of interest and RCA publicly prescribes interest coverage of 1.30x. Additionally, management plans for a 25% minimum equity capitalization ratio, before which any capital credits can be disbursed to customers. Based on historical financial metrics, Chugach has exceeded its financial targets for the past several years. Chugach's 2011 forecast through October was for revenues of $287.1 million, margins of $6.1 million, an MFI ratio of 1.33x and a TIER of 1.56x.
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:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'U.S. Public Power Rating Criteria' (March 28, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
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