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Global Credit Research - 19 Nov 2010
Approximately $270 million of securities affected
New York, November 19, 2010 -- Moody's Investors Service affirmed all the ratings of Chugach Electric
Association, Inc., including the A3 rating for its
two existing series of senior unsecured notes and the P-2 short-term
rating for its commercial paper program; the cooperative's
stable rating outlook is also affirmed.
"The affirmations reflect the impending change in seniority for
the senior unsecured notes to senior secured, which will place the
notes pari-passu with any planned first mortgage bonds (FMB) to
be issued by Chugach Electric under its new FMB indenture expected to
be finalized during the first quarter of 2011" said Kevin Rose,
lead analyst. "Given Moody's view that there has been
no material change in the fundamental credit quality of Chugach Electric,
the impending change in seniority does not warrant a higher rating at
this time" Rose added.
Moody's Rating Methodology for U.S. Electric Generation
& Transmission Cooperatives looks to the senior most class of debt
as the "benchmark" rating level. Over the past few
years, Chugach Electric's ratings reflect financial credit metrics
that have usually exceeded the minimum required levels in its debt indenture.
In addition, the rating takes into account Chugach Electric's
dominant position in Alaska's Rail-belt region and its isolation
from the lower 48 states, which provides competitive insulation
and tempers concerns that might otherwise exist about its small size.
Chugach Electric's rates are regulated by the Regulatory Commission
of Alaska (RCA), which makes the company face the potential for
more regulatory risk than most of its G&T cooperative peers.
Nevertheless, the risk is considerably tempered by a recent series
of credit supportive orders issued by the RCA. These decisions
relate to the pre-approval of a significant amount of the costs
associated with a new generation plant and the timely recovery of other
prudently incurred costs and expenses.
In January 2011, Chugach Electric also plans to address its large
pending debt maturity in March 2011 and other financing needs with $275
million of new FMB's to be issued under a new FMB indenture.
Specifically, on November 18, 2010 Chugach Electric received
commitments from private investors to sell $275 million of amortizing
FMBs comprised of $90 million of 4.2% FMBs Series
A due March 15, 2031 and $185 million of 4.75%
FMBs Series B due March 31, 2041. We also expect Chugach
Electric to follow a similar approach in early 2012 to address another
large debt maturity in February 2012. Since the refinancing activities
coincide with plans for issuing incremental debt to help fund anticipated
heavier capital expenditures, we expect to see temporary pressure
on Chugach Electric's key financial credit metrics.
Importantly, Chugach Electric has been maintaining sufficient liquidity,
including a recently amended and extended $300 million three-year
unsecured bank facility, which expires November 17, 2013.
We expect the company will continue to maintain a robust amount of liquidity
availability over the intermediate-term horizon. The new
facility backstops Chugach Electric's Prime-2 (P-2)
commercial paper program and provides some flexibility in addressing short-term
financing needs related to higher expected near-term capital expenditures.
Moody's affirmation of the stable outlook for Chugach Electric looks
through the anticipated weakening of its credit metrics as the generation
construction period unfolds over the next two years and takes into account
the recent series of credit supportive regulatory orders from the RCA.
The stable outlook also assumes that Chugach Electric stays on schedule
and budget during its construction cycle. It also reflects our
view that the RCA will be supportive of Chugach Electric in future orders
by providing timely and full recovery of construction costs, thus
enabling the cooperative to restore the flexibility that will be used
up during the construction cycle and re-solidify its positioning
in the A3 rating category.
We do not foresee upside potential for the ratings as the construction
cycle unfolds; however, longer term changes in business plans
that target a permanent commitment to substantially stronger debt protection
metrics and equity levels would be credit positive. For example,
if equity to total capital were to exceed 35% for an extended period
of time, then the possibility for an upgrade would increase.
The ratings could be downgraded if one or more of the following occurs:
material delay and or cost overruns during the construction cycle;
lack of RCA support for rate increases as needed or other rate-making
changes that may be necessary to address operating cost pressures;
an inability to compensate for the potentially significant loss of customer
load due to changes in contractual relationships or other unforeseen reasons;
if Chugach Electric's key credit metrics were to weaken significantly
(i.e., FFO/debt and FFO/interest less than 6%
and 2.0x, respectively, for an extended period of time).
The principal methodology used in rating Chugach Electric was U.S.
Electric Generation & Transmission Cooperatives rating methodology
published in December 2009. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found on Moody's website.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
Chugach Electric Association, Inc. is an electric cooperative
with headquarters in Anchorage, Alaska.
Kevin G. Rose
Vice President - Senior Analyst
Infrastucture Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms Chugach Electric's A3 long-term and P-2 short-term ratings; outlook stable
250 Greenwich Street
New York, NY 10007
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