LOS ANGELES — The Sacramento Municipal Utility District Financing Authority plans to price $195 million in project revenue refunding bonds on April 22, taking advantage of goodwill toward California issues as the state's economy and fiscal health improve.
The bonds will be special, limited obligations of the Sacramento Municipal Utility District Financing Authority, acting as a conduit issuer for the Sacramento Municipal Utility District.
"Given the continued demand for California bonds and the fact that this is a widely traded name, we expect significant interest in these bonds, subject to how they are priced," said Michael Johnson, co-CIO/managing partner and head of research for Gurtin Fixed Income Management, LLC. "We have not yet seen anything on structure or yield, so our decision to participate will depend on those factors."
Michael Ginestro, director of municipal research for Beverly Hills-based Bel Air Investment Advisors LLC., said the firm probably isn't going to look at the SMUD sale, because "it's very high quality" and "The bonds are trading rich --similar to most California credits." Bel Air has California electric bonds in its existing portfolios, however.
"Most California utilities that we own have some kind of mechanism that enables them to pass through changes in fuel and purchased power costs to ratepayers," Ginestro said.
The cost of fuel is the largest operating expense for most utilities that don't rely on nuclear or renewable resources, he said.
"Our outlook for commodity costs suggests falling gas and stable coal prices," Ginestro said. "If prices stay low, it would be a marked departure from historically volatile prices, and we believe that it will promote credit stability in the sector."
Citi is senior manager on the SMUD bonds with Public Finance Management as financial advisor and Orrick, Herrington & Sutcliffe LLP as bond counsel. Underwriters counsel is Nixon Peabody LLP.
The bonds received AA-minus, AA-minus, and Aa3 from Standard & Poor's, Fitch Ratings and Moody's Investors Service, respectively. All gave a stable outlook.
Moody's upgraded SMUD's electric revenue bonds to Aa3 from A1 and subordinated lien bonds to A1 from A2 in an April 9 report. The upgrade affected approximately $2.2 billion of debt.
The Moody's upgrade to Aa3 from A1 applied to $1.87 million in electric revenue bonds. It also upgraded the district's $347.85 million of subordinate lien revenue bonds to A1 from A2.
The upgrade reflects SMUD's consistently strong management of its financial operations including timely rate-setting as an unregulated utility with no revenue transfer requirement to city or regional governments, according to Moody's report. It also takes into account "an effective risk management program; improved financial metrics; the strong competitive position against regional peers; the improvement in the diverse local area economy; and capably managing the transition of the electric industry in California, including the sourcing of 26% of renewable energy for retail load while maintaining competitive prices."
As the utility that serves the state's capital, SMUD remains vulnerable to state involvement in utility policy, Moody's said. The rating "recognizes that the utility has been able to implement changes at a pace and in a manner that has not impaired its credit position."
This element is an important consideration as California contemplates ramping up the renewable power standard to 50% by 2030 and introducing new distributive generation opportunities that could affect demand, according to the Moody's report.
"Additionally, we understand that SMUD may need to incur incremental indebtedness for a potential major pumped storage facility that would be used to help manage intermittent power flows owing to the state's increased reliance on renewable energy," Moody's analysts wrote.
SMUD's leverage ratios have fallen over past decade, and new capital spending is expected to be funded significantly from internal sources, Moody's analysts said.
"We anticipate that should the pump storage facility proceed, the cost of construction may be shared with area utilities."
S&P based its rating on an assessment of SMUD's AA-minus senior lien rating, unconditional, "take-or-pay" obligation to make debt service payments on the bonds, pursuant to a power purchase agreement between the authority and SMUD, according to the report.
The bonds proceeds will be used to refund the authority's $233 million of Series 2006 bonds, including current refunding of $20 million and advance refunding of $213 million, according to S&P. The bonds were issued for the Consumnes Project under a power purchase agreement, dated as of June 2, 2015, according to bond documents. The bonds will be issued with maturities ranging from 2016 to 2030.
"The ratings reflect our view of such factors as SMUD's strong fixed-charge coverage, very strong and improved unrestricted cash reserves, and demonstrated willingness and ability to adjust rates to recover costs and maintain strong margins," said S&P credit analyst Paul Dyson.
The stable outlook reflects "our opinion of SMUD's willingness to raise rates as it deems necessary to align revenue with expenditures, support moderately high capital needs, and meet its internal financial targets, such as 1.55 times fixed-charge coverage and no less than 90 to 100 days' cash," Dyson said.
Fitch said its rating for the series 2015 bonds reflects the credit quality of timely payments from SMUD, rated AA-minus by Fitch, the sole off-taker for the Consumnes Power Project.
The bonds will be issued only in fully registered form, without coupons, in denominations of $5,000 and any integral multiple. The Series 2015 bonds will be special, limited obligations of the authority, not the state of California. The authority has no taxing power.
SMUD and the Irrigation District formed the Authority through the execution of the Joint Powers Agreement Sacramento Municipal Utility District Financing Authority. The authority has the power under the Act to enter into contracts and to issue revenue bonds in support of the project.
The power purchase agreement between SMUD-FA and SMD is currently structured as a take-and-pay contract. It requires certain performance and availability metrics be satisfied to assure full payment.
"It should be noted that we view the Sacramento Municipal Utility Financing Authority's Cosumnes Project bonds as having a different security than Sacramento MUD's usual electric revenue bonds," Johnson said. "Though in this case, given the unconditional take-or-pay contract, we see the credit quality as being similar." Gurtin holds several electric utility bonds.
"We view the electric essential service sector as generally being sound, but pitfalls do exist," he said.
The electric essential service sector requires an extensive review of the documents to get a very clear idea of the structure of the project, the nature of the contracts and the obligations of the participants, he said.
"For example, some utilities have take-or-pay contracts, while others have take-and-pay contracts," he said.
Take-or-pay contracts are usually stronger in that a participant is obligated to pay whether or not it receives electricity , according to Johnson.
"With a take-and-pay contract, the participant is only obligated to pay for the electricity they actually receive," he said. "The type of imbedded contract can have a dramatic impact on a utility's credit quality. "
Since the drought, water credits have received a lot of press. Johnson said Gurtin has "not seen a difference in how electric bonds have traded."
Recently, the bond market has been orderly, and despite some tax date influence, municipal trading has been broadly consistent, he said.
"We would expect a little more activity next week as we clear the tax day effect, but not to significant levels," he said.
