LOS ANGELES -- The Sacramento Municipal Utility District, whose ratings tumbled in the late 1980s, continued its comeback effort this week by obtaining some upgrades prior to a $157 million bond sale planned today.
Moody's Investors Service raised its ratings on the district's senior lien revenue debt to A from Baa and upgraded the junior lien debt to Baal from Baa.
Fitch Investors Service Inc. yesterday raised its assessment to BBB-plus from BBB, saying that the credit trend is stable.
Officials at the two agencies cited increased stability in district operations as one reason for the upgrades.
Standard & Poor's Corp., however, confirmed its existing BBB assessment while changing the outlook from stable to positive.
SMUD initially planned to sell all of today's Series Y issue on an insured basis with backing from Municipal Bond Investors Assurance Corp., but district officials late yesterday were pondering whether, after the upgrades, to sell a few of the shorter-term serial bonds without insurance.
The deal is structured with serials maturing from 1992 to 2006 and term bonds due in 2011 and 2021.
Including today's issue, the district has about $1.29 billion of senior debt and $491.5 million of junior lien bonds outstanding.
Upgrades on the district's ratings were expected eventually. Analysis had noted early last year that chances for improvement in SMUD's credit quality probably outweighed downside risks.
"We're obviously pleased," said Steve Nielsen, SMUD's assistant treasurer. The upgrades "confirmed what we've felt for a long time" about the district's financial turnaround.
He added that SMUD had hoped for an "uptick in the rating" from Standard & Poor's. District officials considered appealing the agency's decision, Mr. Nielsen said, but decided against delaying today's sale because interest rates will be based on the insurance backing rather than the underlying ratings.
The utility had been rated double-A until the mid-1980s, when it fell afoul of an extended outage at its Rancho Seco nuclear power plant.
Major capital expenditures and heavy borrowing for an overhaul of Rancho Seco weakened SMUD's finances, and management suffered extensive turnover because of friction among board members over the plant and other matters.
The controversy prompted local voters in June 1989 to approve a measure that closed Rancho Seco permanently.
Moody's said investors benefit "as the elected board and staff continue to pursue a more defined agenda." Fitch said the higher rating "reflects a better operating relationship between the district's board of directors and senior management, helped in part by the shutdown [of Rancho Seco], and stronger support" by local voters.
But the agencies disagreed on whether SMUD merits an A-level rating at this stage.
Moody's said "the legacy's still there" from the turnmoil surrounding Rancho Seco, but the agency also believes that SMUD in large part has resolved its major problems, said David Ambler, a Moody's vice president and assistant director.
A key to Moody's brighter assessment is the customer base in SMUD's service area, Mr. Ambler said. That base has steadily grown and diversified and gives SMUD added flexibility, Mr. Ambler noted.
Alan Spen, a senior vice president of Fitch, said his firm had not considered an A rating because "I think it's just too early." Mr. Spen said SMUD's ratings tumbled quickly because the situation "got so explosive," adding that he needs to see more than 12 to 18 months of improved operations and stability before assigning a higher rating.
Standard & Poor's said in a draft release that "a rating upgrade will be considered once SMUD has demonstrated the ability to successfully implement the staff's financial and operating plans with board-approved action."
The rating agency acknowledged progress made by SMUD, but it said "exposure still exists" on achieving decommissioning approval for Rancho Seco, as well as for board approval of new power purchase contracts and settlement of a dispute over allocation of costs between residential and industrial customers.
Fitch said in a release that credit concerns "include some lingering uncertainty about the cohesiveness of the board, the need to approve and begin development of the revised resource program, and the risks associated with a continuation of the five-year drought."
The drought has resulted in reduced hydroelectric generation by the district. SMUD said in the preliminary official statement that it has offset financial harm from the drought by buying surplus power from the Pacific Northwest.
SMUD negotiated short-term power contracts with private utilities to help replace the generating capacity of Rancho Seco. It also is analyzing potential power resources to carry the utility into the next century.
S. David Freeman, SMUD's general manager, this month released a draft of his recommendations for power supply additions by 1995 and beyond, including four new gas-fired cogeneration plants, power purchases from Canadian hydroelectric projects, and renewable resources such as solar, wind, and geothermal power, SMUD also is emphasizing energy conservation.
Proceeds from today's bond sale reimburse SMUD for recent capital expenditures.
The Series Y issue will deplete SMUD's existing revenue bonding authority, Mr. Nielsen said. Last March, the district's board adopted a resolution authorizing the issuance of additional bonds totaling $800 million. But certain local citizens who oppose some of the district's strategy launched a successful petition drive calling for a vote on the debt authorization.
SMUD officials believe they could prevail in an election, but they are studying various options that might avoid a vote, including adoption of a resolution with less bonding authority, Mr. Nielsen said.
In any event, Mr. Nielsen stressed that the district can meet its capital needs with other borrowing vehicles as well, including certificates of participation, commercial paper, and debt issued by a joint powers authority.
He also said today's bond issue will satisfy SMUD's long-term borrowing needs for an estimated two years. The district plans no long-term sales next year, followed by $387 million of sales from 1993 to 1995.
SMUD also is working to decommission Rancho Seco, which it estimates will cost $281 million.
The Nuclear Regulatory Commission has proposed guidelines to the district that in effect would require SMUD to either fund its decommissioning obligation over a five-year period or provide other financial assurances in order to fund over a longer period of time, such as the 17 years proposed by the district.
An A-level rating is the financial criterion that would permit the district to fund the obligation over a longer period of time, Mr. Nielsen said.
An underwriting group led by Goldman, Sanchs & Co. is pricing today's bond issue. SMUD recently made slight changes to its team of co-managers after going through a request for proposal process, adding Morgan Stanley & Co. and dropping Lehman Brothers and PainWebber Inc. Three other co-managers remain the same: Grigsby Brandford Powell Inc., Merill Lynch & Co., and Smith Barney, Harris Upham & Co.
