Fitch Rts Sacramento Muni Util District, CA Elec Revs Rfdg 2012 Ser Y & Sub Elec Revs 2012 L&M 'A+'

Fitch Rts Sacramento Muni Util District, CA Elec Revs Rfdg 2012 Ser Y & Sub Elec Revs 2012 L&M 'A+' | Bild: © diane39

--$150 million to $200 million 2012 series Y electric revenue refunding bonds;

--$75 million subordinated electric revenue bonds, series 2012L;

--$75 million subordinated electric revenue bonds, series 2012M;

--Bank bonds corresponding to series 2012 L & M bonds.

The Rating Outlook is Stable.

In addition, Fitch affirms the following bond ratings of SMUD and related Joint Power Agencies (JPAs):

--$2.02 billion SMUD electric revenue bonds at 'A+';

--$197 million SMUD subordinated electric revenue bonds at 'A+';

--$53 million Sacramento Cogeneration Authority project revenue refunding bonds at 'A+';

--$41 million Central Valley Financing Authority project revenue refunding bonds at 'A+'.

--$92 million Sacramento Power Authority (SPA) cogen project revenue refunding bonds at 'A-';

--$261 million Sacramento Municipal Utility District Financing Authority Cosumnes Project revenue bonds at 'A-'.

The Rating Outlook is Stable.

SECURITY

The bonds (SMUD's direct debt) are secured by net revenues and net subordinated revenues for senior and subordinate bonds, respectively. The project bonds (JPA debt) are secured by the revenue from the power purchase agreement between SMUD and the JPAs.

KEY RATING DRIVERS

STRONG METRICS: The rating reflects improvement in debt service coverage, that together with robust liquidity and the districts other stable credit characteristics are consistent with an 'A+' rating.

BOARD REGULATED: The district is regulated by an independent Board, which has the sole rate setting authority and is not subject to city council or state utility commission oversight.

COMPETITIVE RATES: The district's average rates are considerably below their neighboring provider's, Pacific Gas & Electric (PG&E), and are also among the lowest in the state of California.

WILLINGNESS TO ADJUST RATES: The district has implemented three rate increases totaling 13.25% between September 2009 and January 2011, which should further improve financial metrics. The rate increases come after two years of below average operating performance due to high fuel prices, during which the district drew on its rate stabilization fund.

STABLE CUSTOMERS: The almost entirely residential and commercial customer base of California's state capital has been relatively stable despite weakness in the state economy. While sales have been flat, delinquencies remain relatively limited.

RENEWABLE AND GHG MANDATES: Through mainly long term power purchase agreements, the district has already met its established renewable energy target of 23% by 2010, a level that exceeds the state standard of 20%. Additionally, the district will have to comply with the green house gas (GHG) mandate under AB32. However, SMUD has allowances allocated in the initial years to partially mitigate rate impact.

NATURAL GAS EXPOSURE: Power resources are mostly natural gas-fired (-50% of energy mix) and subject to fuel price volatility. SMUD's fuel resource, comprised of in the ground reserves and prepay agreements, is aggressively hedged.

CREDIT PROFILE

Stable Service Territory

SMUD is an integrated electric utility providing electric service to about 597,000 primarily residential, commercial and governmental users in Sacramento, California's state capital, 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.

Diverse Resource Mix

Following the closure of the Rancho Seco Nuclear plant two decades ago, the district moved aggressively to reduce its reliance on any single generating asset by developing a resource portfolio consisting of district-owned resources and power supply arrangements. The five local natural gas fired plants in its service territory were financed through the issuance of project revenue bonds by separate joint power authorities (i.e., off balance sheet obligations for SMUD). The district initially entered into long-term take-and-pay agreements with the authorities, although two of the smaller unit contracts have since been converted to a take-or-pay agreement, which is reflected in their higher ratings. The take-or-pay agreement converts SMUD's purchase power payments to the JPAs into an unconditional and irrevocable obligation. Together with the local gas fired plants, SMUD's current energy portfolio is 65% owned, consisting of eight different plants. The remaining 35% of SMUD's power supply mix is purchased power.

Improving Financial Performance

Financial metrics tightened in 2008 and 2009 coinciding with an increase in natural gas prices and low hydro output. The district used cash from the rate stabilization fund to defer rate increases. Subsequently, the district implemented rate increases totaling 13.25% between September 2009 and January 2011. The rate adjustment together with an improvement in operating performance resulted in a strengthening of financial metrics. The district's cash position is at its strongest point since 2006. Debt service coverage including debt service payments on off balance sheet debt is in excess of 1.5 times(x), a healthy coverage level. Prospectively, given conservative sales projections, manageable capital expenditures, and moderate annual rate increases, the district should be able to maintain its financial targets including a minimum of $200 million in unrestricted cash reserves (not including rate stabilization fund) and 1.5x coverage of all debt service obligations.

Bank Bonds

Fitch bases the bank bond ratings on its analysis of the underlying credit strength of the issues, taking into consideration the potential negative effects of a purchase of the bonds by the bank, which may include a ramp-up in interest rate and an accelerated repayment of principal. Since these factors are considered in Fitch's analysis of the underlying rating of all parity debt, including any variable-rate demand obligations (VRDOs), bank bonds whose security is on parity with their corresponding VRDOs carry the same underlying long-term rating as those VRDOs.

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 20, 2011;

--'U.S. Public Power Rating Criteria', Jan. 11, 2012;

--'Sacramento Municipal Utility District', Sept. 7, 2011;

--'U.S. Public Power Peer Study', June 20, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815

U.S. Public Power Peer Study -- June 2011

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=636311

Sacramento Municipal Utility District

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=650134

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