Fitch Rates SMUD's $510MM Series U Elec Refg Revs 'A'; Outlook to Stable
2008-05-17 00:59:52 -
- Fitch assigns an underlying 'A' rating to Sacramento Municipal Utility District's (SMUD or the district) approximately $510 million, 2008 series U electric revenue refunding bonds (senior lien). Fitch also affirms SMUD's $1.5 billion parity electric revenue bonds and $431.4 million subordinated electric revenue bonds at 'A'. The Rating Outlook is revised from Positive to Stable. The Rating Outlook revision reflects anticipated tightening of financial protection metrics over the next four years due to higher projected capital expenditures, increased future debt financing requirements, and likely slower electricity sales growth. The fixed rate 2008 bonds are scheduled to price May 29, 2008, via negotiation.
SMUD's solid 'A' credit rating is supported by competitive electric rates, a reasonable power supply strategy, sound financial and risk management practices, and a favorable customer base. SMUD is also ahead of the curve, relative to many utilities in the state, with respect to meeting established renewable energy resource, carbon footprint, and energy efficiency targets. The district's renewable energy resources, for example, accounted for 16% of SMUD's total 2007 resources, as compared to a state renewable average of just 5% (for 2006).
Over the past decade, SMUD has taken steps to replace high-priced purchased power contracts with more reasonably priced contracts and owned generation facilities closer to native load. In addition, SMUD has focused on adding renewable sources, such as wind and solar, diversifying and 'greening' its power resource mix.
SMUD's current power supply (energy) consists of roughly 20% from owned hydroelectric/renewable resources, 54% from SMUD sponsored, off-balance sheet financed power projects, and the rest (26%) via long and short term purchase power contracts or arrangements. From a fuel perspective, SMUD's power supply mix is primarily natural gas driven, at 61% for 2007. The commodity fuel risk is offset by SMUD's utilization of a combination of physical and financial hedges to reduce the fuel and energy cost exposure.
Credit concerns are centered around challenges ahead for SMUD over the next five years, including: cost effectively replacing expiring long term power purchases between 2008-2012 (representing 19% of total power supply), funding a larger capital program than previously planned in prior year, and maintaining solid financial performance measures throughout given likely slower sales growth in the near term. The slower sales growth is a function of the economic downturn triggered by the residential mortgage and credit crisis. Positively, with respect to the ongoing federal relincensing process for SMUD's Upper American River Project, the district has reached mutually agreeable terms and conditions with all interested parties, and has filed the application with the Federal Energy Regulatory Commission for its review and approval.
Capital expenditures will total approximately $1.5 billion through 2012, a 55% increase above prior year projections, due to unforeseen or altered capital plans related to environmental or reliability goals. Given these generally increasing cost pressures for SMUD going forward, the board needs to continue to sufficiently raise rates to maintain adequate financial margins.
Coverage of full obligations, which includes debt service for off-balance sheet obligations related to the local-gas-fired plants and the Transmission Agency of Northern California, will remain in the 1.3 times (x)-1.5x range, which is comparable to other Fitch 'A' rated retail utility systems. Unrestricted cash reserves are projected to fall below historic levels, but will remain adequate for the rating category. Equity-to-total-capitalization, at 15% for fiscal year end 2007, will remain relatively flat until at least 2011.
Fitch will be monitoring the district and the Board's willingness to take appropriate rate actions during this period of increased cost pressures. In addition, SMUD's long standing and knowledgeable general manager is retiring this year. At the present time, this is a credit neutral factor, although the ultimate selection and direction of the new GM is clearly a key credit component.
SMUD is a municipal retail utility providing electric service to approximately 589,600 primarily residential, commercial and governmental users, in the state capital of Sacramento.
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