Jan 3 - 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
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
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.