Fitch Takes Various Actions on 4 Sacramento Municipal Utility-Supported Projects

2008-06-11 23:44:35 -

- Following a review of the four natural gas-fired, local generating projects, utilized by the Sacramento Municipal Utility District (SMUD; rated 'A' with a Stable Outlook by Fitch), Fitch Ratings has taken the following rating actions on the projects' separately financed and secured revenue bonds:

Central Valley Financing Authority

--$55.2 million, series 1998 cogeneration project revenue refunding bonds (Carson Cogeneration Project) upgraded from 'BBB' to 'BBB+' and removed from Rating Watch Positive.

Sacramento Cogeneration Authority

--$76.6 million, series 1998 cogeneration project revenue refunding bonds (Procter & Gamble Project) upgraded from 'BBB' to 'BBB+' and removed from Rating Watch Positive.

Sacramento Power Authority

--$116.5 million, series 2005 cogeneration project revenue refunding bonds (Campbell Project) affirmed at 'BBB+'.

Sacramento Municipal Utility District Financing Authority

--$293.1 million, series 2006 project revenue bonds (Cosumnes Power Plant Project) affirmed at 'BBB'

The Rating Outlook is Stable for Central Valley Financing Authority, Sacramento Power Authority and Sacramento Cogeneration Authority, while Fitch has revised the Sacramento Municipal Utility District Financing Authority's Rating Outlook to Positive from Stable.

The rating actions for all of the projects reflect the solid credit strength of their 100% project offtaker - SMUD, and each of the projects' continued strong operating performance and value of the assets to SMUD's overall power resource mix. Each of the projects is separately financed via an individual financing authority and the project bonds are each secured by revenues derived predominantly from power sales to SMUD pursuant to long-term (30-year) take-and-pay power purchase agreements. While the financing of these projects is off balance sheet (limited recourse) to SMUD, the continued active SMUD participation, commitment and need for the projects' output closely aligns SMUD to these projects nonetheless.

A credit concern is SMUD's ability to reduce capacity payments to the projects upon plant operating performance falling below minimum required levels (i.e., typically net dependable capacity and plant availability triggers). Additionally, SMUD can terminate the purchase power agreement (PPA) for each of the projects should operating performance severely and persistently underperform. These concerns are partially mitigated by the solid 10+ year operating performance for the three cogeneration projects and all of the projects' continuing exceedance of initially projected key plant operating metrics.

With respect to the Cosumnes Power Plant Project, which is the largest of the four local generating projects (500 MW), its operating history is fairly young, as the facility only became operational in early 2006. Thus far, the project is operating as expected with the exception that is has not passed all operating level testing necessary to achieve 'acceptance' as per the PPA. The project has not attained acceptance primarily due to SMUD requested facility changes that needed to be completed prior to testing for acceptance. From a credit perspective, the Cosumnes project bonds' debt service is fully covered by SMUD payments (at guaranteed 1.10x rate covenant) until project acceptance is attained. From an operating perspective, however, Fitch would like to see the project reach all its initially projected plant operating targets. To upgrade the ratings for Cosumnes project revenue bonds to the 'BBB+' level (assuming SMUD's credit rating does not change), Fitch expects to see continued solid operating performance for the project (over next 12-to-18 months) and attainment of 'acceptance' level of operations.

The four local, natural gas-fired power projects account for approximately 1,001 MW, in aggregate, of SMUD's generating capacity. This represents approximately 30% of SMUD's total resource capacity, and a substantial 50% of energy requirements. The projects provide SMUD with needed voltage support, load following and the reliability inherent in having the power resources located close to native load. Although the projects are owned individually by separate joint power authorities, SMUD has exclusive control of their dispatch and manages their operations as part of its total power supply strategy. The natural gas supply risk is also borne by SMUD.

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, California.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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Alan Spen, 212-908-0594
Joanne Ferrigan, 212-908-0399
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