Fitch Rates Sacramento Municipal Utility District, CA Electric Rev Rfdg Bonds 'AA-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned a 'AA-' rating to the following bonds issued by the Sacramento Municipal Utility District, CA's (SMUD).
--$150 million electric revenue refunding bonds, 2016 series D.
Bond proceeds are expected to refund all or a portion of the outstanding electric revenue bonds, 2008 series U, 2011 series X, 2013 series A, and 2013 series B. The bonds will be sold via negotiated sale on June 2.
In addition, Fitch affirms its 'AA-' rating on the following SMUD obligations:
--$1.97 billion electric revenue bonds;
--$347.9 million subordinated electric revenue bonds;
--Bank bonds corresponding to series K commercial paper notes;
--Bank bonds corresponding to series 2012 L & M bonds.
The Rating Outlook is Stable.
The bonds are secured by the net revenues of the electric system of SMUD.
KEY RATING DRIVERS
VERTICALLY INTEGRATED ELECTRIC UTILITY: SMUD is an integrated, retail electric system serving a modestly growing, non-concentrated customer base in an economically sound service area. The district is independent of the cities it serves and its board has sole rate-setting authority.
HEALTHY FINANCIAL METRICS: SMUD's financial metrics are commensurate with the rating with Fitch-calculated debt service coverage (DSC), on a consolidated basis, at 1.66 times (x) and 201 days cash on hand at the end of 2015. Improved water conditions should support stronger financial performance in 2016.
COMPETITVE RATES: SMUD's rates are relatively low and competitive with other California electric systems despite the board's demonstrated willingness to raise rates to support financial performance. Modest rate increases of 2.5% annually are approved for 2016 and 2017.
FLEXIBLE, RENEWABLE POWER SUPPLY: The district's power supply includes a flexible and environmentally friendly resource mix that is well-positioned to meet environmental mandates and manage drought conditions.
NATURAL GAS EXPOSURE: Fuel price volatility has the potential to significantly affect the district's financial performance and SMUD actively hedges and manages its fuel supply through owned reserves, financial hedges, and prepaid agreements. Collateral posting requirements can be significant although rating concerns are offset by the district's sound liquidity levels.
MANAGEABLE CAPITAL NEEDS: Capital needs through 2020 are manageable and expected to be approximately 40% debt financed. The additional leverage will maintain the district's debt metrics are somewhat elevated levels relative to similarly rated entities.
SUSTAINED FINANCIAL METRICS: Sacramento Municipal Utility District's ability to maintain coverage and liquidity metrics at levels similar to 2015 and 2014 by virtue of continued rate increases and effective power cost management could result in positive rating action over the medium term.
SMUD is an integrated electric utility providing generation, transmission, and distribution electric services to Sacramento, the state capital, and a small portion of adjoining Placer County. The district's 617,300 retail customers are largely residential, commercial, and governmental users with limited industrial exposure. SMUD is the sixth largest public power retail system in the U.S. in terms of total customers served.
HEALTHY FINANCIAL METRICS
SMUD's financial metrics are healthy, though they softened somewhat during 2015 and 2014 as the state's on-going drought significantly reduced the amount of low cost hydro power, leading to higher purchased power and production costs. The cumulative impact of annual rate increases of 2.5% in 2014 through 2015 helped offset the increased costs to some degree.
Fitch's calculation of debt service coverage is done on a consolidated basis, including JPA debt, and remained solid at 1.66x in 2015. Coverage levels tend to rise and fall in relation to water conditions given SMUD's significant hydroelectric generation resources. Coverage ratios have averaged 2.05x from 2011-2015.
The district's liquidity position remained ample with $585.7 million in cash and investments, including rate stabilization funds, at the end of 2015. While Fitch expects cash levels will fluctuate to some degree as the district cash funds capital improvements, the rating assumes SMUD will continue to meet or exceed its policy of maintaining at least 100 days cash on hand. The district had 201 days cash on hand at the end of 2015.
IOWA HILL PROJECT TERMINATED
SMUD's board voted February 2016 against pursuing the Iowa Hill project, which Fitch views favorably given the high estimated cost ($1.3 billion), the system's relatively lower actual need over the medium term, and the increased feasibility of other options that may prove more economically attractive and operationally flexible. The project, a 400 MW pumped storage project, was authorized under the FERC license and SMUD had completed geotechnical and preliminary design studies. However, board concerns about the project's risks, including the significant projected costs, led to the no vote, terminating the project.
MANAGEABLE CAPITAL NEEDS
SMUD is projecting approximately $1.7 billion in capex through 2020. Approximately $1 billion, or 60%, is expected to be financed through internally generated funds, with the balance being financed by debt. Capital needs are viewed as manageable, and debt levels should remain relatively stable over the projected timeframe.
SMUD's board has sole authority over rate changes and rates are not regulated by any city, state, or federal agency. The board has demonstrated a willingness to raise rates to support the district's financial performance. This includes the recent approval of two separate 2.5% rate increases taking effect Jan. 1, 2016 and Jan. 1, 2017. This followed two separate rate increases of 2.5% implemented in 2015 and 2014 and a 13.25% aggregate increase phased in from September 2009 through January 2011.
SMUD's rates remain competitive even with the recent increases. Internally, the district benchmarks its rates against PG&E, which surrounds SMUD's service territory. SMUD's rates remain well below those of PG&E (40% lower for residential customers) and are among the lowest rates in the state.