Fitch Rates Sacramento Muni Util District, CA Electric Revs 'A+'
Fitch Ratings assigns an 'A+' rating to Sacramento Municipal Utility District (SMUD), CA's bonds as follows:
--Approximately $150,000,000 electric revenue bonds, series 2013A due 2035;
--Approximately $125,000,000 electric revenue refunding bonds, series 2013 B due 2033;
--Approximately $62,000,000 electric revenue refunding bonds, series 2013 C due 2020.
The bonds are expected to price during the week of April 15, 2013. Proceeds will be used to fund planned capital expenditures and refund a portion of SMUD's outstanding bonds to achieve interest rate savings.
In addition, Fitch affirms the 'A+' rating on the following outstanding SMUD bonds (including amounts to be refunded):
--$1.9 billion electric revenue bonds;
--$347.9 million subordinated electric revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by the net revenues of the electric system of SMUD.
KEY RATING DRIVERS
STRONG METRICS: The rating reflects improvement in debt service coverage in fiscals 2011 and 2012, that together with robust liquidity and SMUD's other stable credit characteristics are consistent with an 'A+' rating.
BOARD REGULATED: SMUD is regulated by an independent Board, which has sole rate setting authority and is not subject to city council or state utility commission oversight.
COMPETITIVE RATES: SMUD's average rates are considerably below their neighboring provider's, Pacific Gas & Electric (PG&E), providing rate flexibility.
STABLE CUSTOMERS: The almost entirely residential and commercial customer base of SMUD has been relatively stable despite weakness in the state economy. While sales have been flat, delinquencies remain manageable.
RENEWABLE AND GHG MANDATES: SMUD is in compliance with state renewable mandates, primarily through long-term power purchase agreements and increasing use of landfill gas. Although SMUD will have to comply with increasingly strict greenhouse gas (GHG) mandates in California, it has sufficient allowances allocated through 2020 to mitigate any effect on customer rates.
NATURAL GAS EXPOSURE: Power resources are mostly natural gas-fired (around 50% of energy mix) and subject to fuel price volatility. SMUD's natural gas supply, comprised of owned natural gas reserves and prepay agreements, is actively hedged.
TIMELY RATE ADJUSTMENT: Continued willingness of the Board to adjust rates sufficiently to maintain SMUD's financial ratios is important to maintain the current rating.
CHANGING POWER SUPPLY: Ability to effectively manage a changing power supply base, as existing long-term power purchase agreements expire and SMUD increases its renewable resource portfolio.
Stable Service Territory
SMUD is an integrated electric utility providing electric service to more than 600,000 primarily residential, commercial and governmental users in Sacramento, CA and a small portion of adjoining Placer County. SMUD is the sixth largest public power retail system in the U.S., in terms of the number of customers served.
Diverse Resource Mix
SMUD has developed a diverse resource portfolio consisting of district-owned resources and purchased power arrangements. Four of the five local natural gas fired plants in SMUD's service territory were financed through the issuance of project revenue bonds by separate joint power authorities. SMUD entered into long-term take-and-pay agreements with the authorities for the power generated from each of the underlying plants. The contracts initially had performance requirements, although two of the smaller unit contracts have been converted to take-or-pay with no performance requirements. Together with the local gas fired stations, SMUD's existing capacity is approximately 60% owned, consisting of eight different plants.
Improved Financial Position
Improved operational performance and an aggregate 13.25% rate increase over fiscals 2009-2011 enabled SMUD to strengthen key financial metrics, including debt service coverage and liquidity. Fitch's calculation of consolidated debt service coverage improved to 1.85x in 2012 from 1.40x times in fiscal 2010. As of December 31, 2012, SMUD had $510.0 million of unrestricted cash on hand including $86.2 million in its two rate stabilization funds. This translates into 192 days cash on hand, a historical high and well above the district's stated goal. Prospectively, given conservative sales projections, manageable capital expenditures, and moderate annual rate increases, SMUD should be able to maintain its financial targets including a minimum of $200 million in unrestricted cash reserves (not including rate stabilization funds) and 1.5x debt service coverage.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'US Public Power Peer Study' (June 18, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study -- June 2012
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Elizabeth Fogerty, +1-212-908-0526 (New York)
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