SAN FRANCISCO — The California Department of Water Resources will sell $1.9 billion of power revenue bonds next week to refund debt sold after the state’s energy crisis.
The revenue bonds, backed by charges from the California Department of Public Utilities to customers, will sell to retail Oct. 5 and Oct. 6 with institutional pricing Oct. 7, according to Joe DeAnda, a spokesman for the state treasurer’s office.
Nick McLaughlin, a portfolio manager at First Western Capital Management in Los Angeles, said the department is smart to issue the bonds now before the state budget passes and floods the market with debt.
“We are not overly amazed by the value in the spread in the new issue — at least I know I can park money there,” McLaughlin said.
“We are heavy agencies right now that minimize our [California] exposure in our accounts, just because we know what is in the pipeline once the budget is signed,” he added.
According to the state Department of Finance, California’s capital plans call for issuing more than $6 billion of general obligation bonds this fall.
Top state lawmakers say they have the framework for a budget agreement, but no budget as of yet. The budget delay has narrowed the window for the state to sell the paper.
The maturity dates for the power revenue bonds run from 2011 to 2020, according to the preliminary official statement.
The DWR bonds will be used to refund part of the $11.2 billion bond sale in 2002 after the energy crisis that led to the bankruptcy of Pacific Gas & Electric Co. and the near bankruptcy of Southern California Edison in early 2001.
The 2002 sale was used to fund and refinance a program to buy electricity after Gov. Gray Davis determined those utilities could not supply enough power to stop rolling blackouts.
In 2001, Davis proclaimed a state of emergency and told the DWR to buy electric power for retail customers.
It entered into costly short- and long-term contracts to buy the needed electricity.
Ahead of the deal, Fitch Ratings upgraded the credit to AA from AA-minus, and Moody’s Investors Service revised its outlook to positive from stable on its Aa3 rating. Standard & Poor’s rates the debt AA-minus.
In a report Monday, Moody’s cited DWR’s planned reduction of operating and interest-rate risk.
“Our expectation is that strong bond security will provide sound bondholder protections through final maturity,” the report said.
Moody’s said DWR’s operating risk will be significantly reduced after 2011 as the power contracts expire.
However, the Moody’s report also noted that California’s electricity prices are very high compared to U.S. averages, which could increase political pressure for reform.
In addition, the public utility has some power-purchase contracts with companies with weak credit.
Bank of America Merrill Lynch, Stone & Youngberg, and Wells Fargo Securities are joint book-runners on the deal.
DWR’s financial adviser is Montague DeRose and Associates and its bond counsel is Hawkins Delafield & Wood LLP.
