OREANDA-NEWS. Fitch Ratings affirms the following Anchorage, Alaska ratings:

--\\$117.8 million water revenue bonds series 2004, 2007 and 2009 at 'AA'.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a first lien on net water revenues before the utility's Municipal Utility Service Assessment (a payment in lieu of taxes, or PILOT).

KEY RATING DRIVERS

SOLID SERVICE AREA: The utility is the monopoly provider of essential water services to 95% of the Municipality of Anchorage, the economic center of the state of Alaska.

ABUNDANT CLEAN WATER: The utility benefits from an ample supply of clean water, giving it capacity for future growth and insulating it from the supply pressures affecting utilities in other parts of the U.S.

SOUND FINANCES: Financial performance is healthy and very predictable due to the water system's fixed-rate structure. Senior debt service coverage (DSC) averaged a very strong 3x over the past three years, and liquidity was very strong with 437 days cash at the end of 2014.

SIGNIFICANT SUBORDINATE TRANSFER: The utility makes an annual PILOT to the Municipality of Anchorage that is subordinate to bond debt service. All-in coverage after transfers averaged a healthy 1.6x over the past three years.

HIGH DEBT: Debt levels are almost double the median for 'AA' category utilities and continue to rise, given the utility's plan to invest heavily in its aging infrastructure and practice of funding most capital spending through borrowing.

REGULATED RATES: The utility's rate flexibility is reduced by a cumbersome rate-setting process that requires approval from the Regulatory Commission of Alaska (RCA).

RATING SENSITIVITIES

DEBT, ALL-IN COVERAGE DETERIORATION: The rating could come under downward pressure if financial metrics, particularly all-in debt service coverage after transfers, deteriorate or the utility's debt burden increases beyond the levels currently forecast. Upward movement is unlikely due to high debt levels and the regulated rate environment.

CREDIT PROFILE
The utility is the monopoly provider of essential water services to about 95% of Anchorage with 55,900 customers.

STRONG SERVICE AREA AND SUPPLY POSITION
Anchorage (general obligation bonds rated 'AA+' with a Stable Outlook) is the economic center of Alaska with about 40% of the state's population. The municipality is the center of business, trade, transportation, healthcare, education, government and tourism for the Gulf of Alaska region and accounts for about 55% of the state's economic output. The economy remains concentrated in the oil and gas sector, somewhat offsetting strong recent performance due to the lack of breadth in the economic base. Median household income is solid at 146% of the national level and 109% of the state median. The unemployment rate is quite low by national standards, having averaged just 5.1% over the past 12 months.

The customer base is about two-thirds residential and growing gradually. Customer concentration is not a significant concern with the top 10 ratepayers providing just 4.9% of revenues.

One of the utility's key strengths is a large supply of clean water drawn from watersheds in the protected wilderness areas. The strong supply position insulates the utility from the water shortages that periodically reduce financial performance in other regions and allows for a fixed fee structure that provides extraordinary revenue stability.

SOLID FINANCIAL PERFORMANCE
Financial performance and liquidity have been consistently sound over the years. Fitch-calculated DSC on the rated water revenue bonds, the utility's most senior debt, was strong at 2.2x in fiscal 2014. The utility makes a substantial annual payment to the Anchorage general fund that is subordinate to debt service. All-in coverage - which includes revenue bonds, subordinate state loans and the PILOT payments - was healthy at 1.7x in fiscal 2014. Free cash-to-depreciation was 122%, providing a healthy amount of excess cash to invest in system assets.

The utility's detailed and reasonably conservative financial forecast shows all-in coverage after transfers falling significantly over the next five years as the utility increases payments of dividends and taxes to the municipality's general government. The increase in payments may only be made if regulators believe the utility would remain financially viable. Fitch calculated coverage after transfers would fall to about 1.2x in 2020 under the plan, and free cash flow available to invest in system assets would fall to a very weak 30% of depreciation. Such a deterioration in underlying financial performance would likely put downward pressure on the rating and significant upward pressure on debt ratios.

Liquidity is solid, particularly in light of the very stable and predictable revenue environment. Unrestricted cash and investments equaled \\$28 million, or 437 days cash, at the end of 2014, close to the 442-day median for 'AA' category utilities. The utility's quick ratio was solid at 2.4x. The utility recently increased its minimum unrestricted cash target to 120 days from 45. While the target is somewhat low relative to high cash levels in the sector, it is much improved from the earlier target and provides an adequate minimum liquidity level given the lack of revenue volatility.

HIGH DEBT LEVELS
Debt per customer was elevated at \\$3,789 per customer at the end of 2014, almost double the median for 'AA' rated utilities. The elevated debt burden reflects significant investments to catch up on renewal of aging system infrastructure, the high cost of doing business in Alaska and the decision to transfer excess cash flows out of the utility instead of investing them back into the system.

The average age of the utility's plant is more than double the average for similarly rated utilities at 27 years, suggesting continued significant capital needs. Debt is projected to rise to a very high \\$5,382 per customer at the end of the 2015-2019 capital improvement plan, which totals \\$162.2 million and is 90% debt financed.

The utility's heavy reliance on debt and its large deferred maintenance needs are its most significant credit weaknesses, holding the rating at a lower level than would be suggested by the utility's strong financial performance, extremely stable revenue structure, strong service area and extraordinary water supply position.

REGULATED RATE SETTING
The utility's cumbersome rate-setting process also weighs on the rating somewhat, but less than it did in previous years when the municipality and the RCA were engaged in active rate disputes. Rate cases have been decided in a timely manner in recent years, and the RCA has approved rates as proposed or fairly close to proposed levels. While the rate-setting environment appears to have improved, the municipality is judged to have less rate flexibility than the typical municipal water enterprise even though water bills are affordable by national standards at 0.8% of median household income.