Fitch Affirms Anchorage ML&P, AK Bonds at 'A+'; Outlook Stable
SAN FRANCISCO -- October 18, 2013
Fitch Ratings has affirmed the 'A+' rating for the following Anchorage
Municipal Light & Power (ML&P), AK bonds:
--$209.4 million electric system revenue bonds, series 1996, 2005A, 2009A, and
The Rating Outlook is Stable.
The bonds are secured by a pledge of net revenues of the electric system.
KEY RATING DRIVERS
VERTICALLY INTEGRATED SYSTEM: ML&P is an enterprise fund of the municipality
of Anchorage providing generation, transmission, and distribution of
electricity to approximately 30,743 customers within a portion of the city.
SIGNIFICANT CAPITAL INVESTMENT: ML&P is partway through an extensive capital
plan to replace older and less efficient generation assets. The rating
reflects the recent commercial operation of the Southcentral Power Plant
(SPP), 30% of which is owned by ML&P, and the planned construction of a 120
MW, combined-cycle, gas-fired plant (expected second quarter 2016).
SATISFACTORY FINANCIAL METRICS: Fiscal 2012 financial metrics remain
satisfactory for the rating with Fitch calculated debt service coverage at
1.72 times (x) and unrestricted cash at 106 days. Debt to equity is expected
to climb as high as 67% in fiscal 2018 (52% in 2012) as additional debt is
issued to finance a portion of the capital plan.
LOW COST OF SERVICE: ML&P owns an interest in the Beluga River Gas Field
(Beluga). The cost of the field's gas reserves is currently below market price
and is one of several factors contributing to the system's competitive
REGULATED RATE SETTING: ML&P's rates are regulated by the Regulatory
Commission of Alaska (RCA) along with most other Alaskan utility systems,
which is uncommon for retail public power entities. ML&P's relationship with
the RCA appears constructive and ML&P has historically received favorable
rulings on rate requests. Financial projections include significant rate
increases to maintain financial metrics within historical parameters.
ISOLATED ELECTRIC SYSTEM: The electrical infrastructure in Alaska is more
limited than the lower 48 states, which exposes utilities to potential service
disruptions associated with extreme weather or failed units. The rating takes
into account the state grid's isolation from Canada and the 48 contiguous
states, which is partially mitigated by ML&P's above-average reserve margin
and relatively dense service territory.
RATE INCREASES AND FINANCIAL METRICS: ML&P's financial metrics are projected
to decline modestly over the near term as additional debt is issued and cash
is spent to partially finance its significant capital plan. An unwillingness
to seek, or an inability to gain approval for, rate increases necessary to
maintain financial performance consistent with historical and forecasted
figures could pressure the rating.
ML&P serves approximately 30,743 customers within a dense 19.9 square-mile
service territory. While the customer base is predominately residential (80%
of customers), the utility's sales and revenues are dominated by its 6,300
commercial customers, which represented 60% of MWh sales and total revenues in
fiscal 2012. In addition, sales to military bases under partial requirements
contracts account for 15.5% of MWh sales and 10.1% of total revenues.
SIGNIFICANT CAPITAL PLAN
ML&P is partway through an extensive capital improvement plan that will
ultimately replace a significant portion of its older and less efficient
gas-fired generation capacity. The recent completion of the SPP, which began
commercial operations in February 2013, will provide the utility with
approximately 55 MW of baseload capacity at a significant fuel and cost
savings compared to existing units.
ML&P is also in the process of building a 120 MW combined-cycle plant at
ML&P's existing plant 2 with an expected completion in the second quarter of
2016. Following its completion, ML&P will have access to some of the most
efficient thermal resources in the state.
The utility is planning on effectively doubling its outstanding debt to
partially finance capital projects. While the projected modest weakening in
financial metrics over the medium term is viewed as reasonable given ML&P's
stage in its capital cycle, projections include significant rate increases
that must receive approval by the RCA. The utility's relationship with RCA has
been productive in the past, but the size of the projected rate increases
(16.5% in 2014, 7.2% in 2015) raises some rating concerns.
SATISFACTORY FINANCIAL PERFORMANCE
Recent financial performance remains stable and generally in line with
historical trends. Fitch calculated debt service coverage in fiscal 2012 was
1.72x, or 1.33x after adjusting for transfers (dividend and Municipal Utility
Service Assessment payments) to the city. Cash levels continue to decline in
accordance with the utility's capital plan, dropping to a still sound 106 days
cash on hand ($19.9 million) in fiscal 2012 from a recent high of 212 days in
Fitch notes that ML&P retains additional financial flexibility through its
accumulated cash restricted for future natural gas purchases or improvements
to its ownership interest in Beluga. At the end of fiscal 2012, ML&P held a
cumulative $79.5 million for those purposes.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by information identified in Fitch's U.S.
Public Power Rating Criteria and Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
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Matthew Reilly, +1-415-732-7572
Fitch Ratings, Inc.
650 California St.
San Francisco, CA 94108
Lina Santoro, +1-212-908-0522
Dennis Pidherny, +1-212-908-0738
Elizabeth Fogerty, New York, +1-212-908-0526
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