SAN FRANCISCO--(BUSINESS WIRE)--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 2009B.
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 electric rates.
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 fiscal 2009.
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