OREANDA-NEWS. Fitch Ratings has assigned a 'A' rating on Chugach Electric Association, Alaska's (Chugach) implied senior unsecured obligations.

In addition, Fitch affirms the 'A' rating on Chugach's implied senior secured obligations.

The Rating Outlook is Stable.

SECURITY

The implied senior unsecured obligations are payable from the cooperative's net revenues.

The implied senior secured obligations are secured by a lien on substantially all of Chugach's assets.

KEY RATING DRIVERS

RETAIL ELECTRICITY PROVIDER: Chugach is Alaska's largest electricity provider, serving a retail customer base in and around the more heavily populated cities of Anchorage and the northern Kenai Peninsula areas. Wholesale sales, which previously made up a substantial portion of total energy sales, are expected to be relatively modest following the expiration of wholesale contracts.

RATE REGULATION: Chugach is subject to rate regulation by the Regulatory Commission of Alaska (RCA), but has benefited in recent years from supportive rate actions by the commission and a more streamlined ratemaking approach. Average retail rates are competitive.

NATURAL GAS DEPENDENT: Chugach relies extensively on a single fuel, natural gas, to power its units. While this creates greater risk, 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, is viewed favorably.

SATISFACTORY FINANCIAL PERFORMANCE: Chugach preserved its satisfactory financial metrics for the rating despite the planned loss of its two largest customers-- the Matanuska and Homer Electric Associations -- when their wholesale power contracts expired in 2014 and 2015. In 2015, Fitch-calculated debt service coverage was at 1.46 times (x) and days cash on hand increased modestly to 38 days.

RATING SENSITIVITIES

LESS SUPPORTIVE RATE RECOVERY: Less favorable rate recovery allowed by the Regulatory Commission of Alaska (RCA) could have an adverse effect on the financial margins and rating of Chugach Electric Association.

CREDIT PROFILE

Chugach is the largest electric utility in Alaska currently providing electric service to 83,383 service locations (68,543 members) in the Anchorage and northern Kenai Peninsula areas. Chugach is on an interconnected regional electrical system, a 400-mile long area stretching from the coastline of the southern Kenai Peninsula to the interior of the state.

AMPLE GENERATION

Chugach's generation portfolio totals about 531.2 MW of installed capacity, consisting of 16 generating units that include a combination of base-load and peaking natural-gas units and hydroelectric power. The utility also purchases power from hydro, natural gas-fired, and wind resources.

Chugach has an ownership interest in the SPP, a 200.2 MW combined cycle natural gas-fired generation plant that went into commercial operation on February 1, 2013. Chugach has a 70% ownership interest is SPP with the remaining 30% owned by Anchorage Municipal Light & Power (ML&P; electric revenue bonds rated 'A+' by Fitch Ratings). SPP has performed well in its initial years of operation and Chugach stands to benefit from the plant's high efficiency that will lower the fuel surcharge for customers and extend the cooperative's gas supplies.

NATURAL GAS DEPENDENT

Chugach is heavily reliant on natural gas at approximately 87% (rated capacity) of the company's generating capacity. While medium term supplies appear to be sufficient, the cooperative's heavy reliance on a single fuel source remains a risk to the system's operational and financial profile.

Chugach's gas supply needs are expected to be met through 2023 under existing contracts with ConocoPhilips and Hilcorp. Additional gas supplies are expected to be secured through Chugach's and ML&P's proposed purchase of ConocoPhilip's share of the Beluga River Gas Field. Ownership of the entire Beluga River Field after the acquisition would include ML&P at 57% and Chugach at 10%. The purchase would cost approximately $45.6 million for Chugach, which is expected to be debt-financed and repaid through the utility's fuel and purchased power cost adjuster, if approved by the RCA.

The RCA is expected to make a final decision on the proposed purchase in the near term. If approved, the Beluga River Field is expected to provide approximately 15% of the utility's gas requirements from 2018 through 2033 at an annual savings of $2-$3 million.

RATE REGULATION

Chugach is subject to wholesale and retail rate regulation by the RCA. 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. Rate regulation adds a level of credit complexity and can reduce a utility's financial flexibility. However, the current relationship is viewed as supportive by Fitch. Chugach's retail rates are competitive relative to other Railbelt utilities in Alaska.

SOLID FINANCIALS

Chugach is legally required to maintain margins for interest coverage of 1.10x (in each fiscal year) pursuant to the bond indenture. However, actual financial performance has historically exceeded this minimum and the cooperative budgets for 1.25x margins coverage of interest. The RCA publicly prescribes interest coverage of 1.30x. In 2015, the cooperative earned operating revenues of $216 million, net margins of $6.5 million, and Fitch-calculated debt service coverage of 1.46x.

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 TIER remains a meaningful benchmark, Chugach believes that 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 known projects, annual capital expenditures are expected to remain relatively small. The current financial forecast assumes approximately $17 million of capital expenditures per year, not including the proposed gas field purchase. Chugach expects to fund the majority of its future capital costs with internal funds, grants, municipal reimbursements and customer contributions.