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02 Apr 2019
Approximately $2.5 billion of debt securities affected
New York, April 02, 2019 -- Moody's Investors Service revised the rating outlook to negative from stable and affirmed the Aa3 rating on Sacramento Municipal Utility District, CA 's (SMUD) outstanding revenue bonds. The Cogeneration Project Revenue Refunding Bonds (Proctor and Gamble) Series 2009 bond is issued by Sacramento Cogeneration Authority, CA and the Cogeneration Project Revenue Refunding Bonds (Carson Ice-Gen Project) Series 2009 bond is issued by Central Valley Financing Authority, CA.
Today's rating action reflects Moody's view that the utility operating environment in California has become more challenging as legislators and other policy makers look for viable alternatives involving the application of inverse condemnation while simultaneously balancing the potential impact on municipal utilities and ratepayers. The potential risk of wildfires related to inverse condemnation could materially impact the utility long-term as the frequency and intensity of fires increases.
The negative rating outlook acknowledges the fact that SMUD's service territory lies in the Sacramento Valley and falls outside of the high risk areas identified by the California Public Utilities Commission (CPUC) Fire Threat Map. SMUD's exposure comes through its ownership of the Upper American River Hydro Project (UARP) transmission assets located northeast of Sacramento in fire-prone areas identified as Tier 2 and Tier 3 risk level by the CPUC Fire Threat Map. The UARP project runs through the Eldorado National Forest on federally owned land, where vegetation management can be more difficult due to US Forest Service requirements and other regulations.
The rating action recognizes SMUD's risk mitigation strategy to limit its wildfire-related liability exposure along with the strength of its fundamental credit profile. In that regard, we note that SMUD has proposed a rate increase during 2019 that is intended fund future wildfire mitigation projects. We view this initiative as a credit supportive action The utility is not involved in any past or pending litigation on wildfires or wildfire-related inverse condemnation.
SMUD's credit profile is supported by its sound financial metrics, demonstrated willingness to increase rates, management commitment to a strong financial profile, and ample liquidity.
The negative outlook reflects the risks associated with the uncertain magnitude of potential contingent liabilities related to inverse condemnation and the nearby wildfires affecting electric utilities in California, as well as the execution risk around the implementation of legislative and regulatory initiatives at the state level that will significantly mitigate these risks.
FACTORS THAT COULD LEAD TO AN UPGRADE
- An upgrade of SMUD's ratings is unlikely in light of the negative outlook. The outlook could be stabilized if regulatory, legislative, or judicial actions are enacted that we believe effectively mitigates the financial impact of a potential wildfire on the utilities.
- Maintenance of conservative financial metrics with fixed obligation charge coverage ratio around 2.0x, coupled with deleveraging or reduced unfunded net pension liability.
- Successful transition to majority renewable power generation portfolio while maintaining cost competitive rate structure relative to Pacific Gas & Electric Company and municipal peers.
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Incurrent of large unforeseen liability from wildfire damages
- Failure of state government to pass legislation or enact regulatory measures to largely mitigate the impact of inverse condemnation risk exposure from wildfires on utilities may place further additional downward pressure on SMUD.
- Material increase in direct leverage or unfunded adjusted net pension liability that weakens financial metrics on a sustained basis
Revenue bond pledge is the net revenues of SMUD's electric system; rate covenant is 1.20x; and the additional bonds test is satisfactory with a test that includes 1.25x coverage by net revenues for 12 of 24 month prior period, adjusted for new rates. The debt service reserve requirement is weak funded at current annual interest on all bonds; the reserve is established at time of new debt issuance.
SMUD serves the City of Sacramento, California's state capital, as well as a large surrounding area. The district is an unregulated electric utility with an elected autonomous board that sets rates and policies.
Sacramento Cogeneration Authority, CA (SCA) operates the Procter & Gamble Project, a 136 MW (net) natural gas-fired cogeneration facility and a 50 MW (net) natural gas-fired simple cycle peaking plant. SMUD provides the revenue stream to pay the SCA bonds' debt service.
Central Valley Financing Authority, CA (CVFA) operates the Carson Project, a 65 MW (net) natural gas-fired cogeneration facility and a 42 MW (net) natural gas-fired simple cycle peaking plant. SMUD provides the revenue stream to pay the CVFA bonds' debt service.
The principal methodology used in these ratings was US Public Power Electric Utilities With Generation Ownership Exposure published in November 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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