SAN FRANCISCO — The California Department of Water Resources will sell $1 billion of power revenue bonds this week as part of a plan to refund debt sold in 2002 due to the state's energy crisis.
The revenue bonds, backed by fees billed to power customers and collected by the California Public Utilities Commission, will be sold to retail investors Tuesday and institutional investors on Wednesday, according to the California Treasurer's Office.
The DWR will be selling into a favorable market that has been squeezed by a lack of supply and has boosted a flight to quality.
"I think there is enough money and a lack of bond supply to warrant any of these larger deals," said Kenneth Naehu, managing director for fixed income at Bel Air Investment Advisors in Los Angeles. "From my perspective, I don't like the market."
The municipal market ended Friday with benchmark yields holding low levels. The 10-year municipal yield held steady at 2.26%, its lowest yield since Sept. 3. The two-year municipal yield remained unchanged at 0.30%, its lowest yield in more than two years. The 30-year municipal yield was unchanged at 3.88%, its lowest level since Nov. 2.
Brian Wynne, head of the muni bond syndicate at Morgan Stanley, said last week he expects yields to tighten to 10 to 15 basis points above Municipal Market Data's triple-A scale compared with DWR's November sale that had spreads between 45 to 51 basis points above the scale.
Morgan Stanley is the lead underwriter on the deal and De La Rosa & Co. is senior manager. The maturities of the bonds will run from 2012 through 2021, according to the preliminary official statement.
The DWR bonds will be used to refund a portion of the bonds still outstanding from $11.2 billion of debt sold in 2002 in the wake of the energy crisis to pay for power purchases. The crisis led to the bankruptcy of Pacific Gas & Electric Co. and the near bankruptcy of Southern California Edison in early 2001.
The department sold $1.9 billion of power revenue bonds in November as part of the same effort to lower costs on the bonds issued to help remedy the energy crisis.
In 2001, then-Gov. Gray Davis proclaimed a state of emergency and told the DWR to buy electric power for retail customers. At the height of the crisis, the department bought large amounts of power on the spot market. It entered into costly short- and long-term contracts to buy the needed electricity.
Since DWR purchases power for its own use, Davis selected the department to undertake the program because of its experience.
Standard & Poor's rates the bonds AA-minus, Moody's Investors Service rates them Aa3, and Fitch Ratings rates them AA. Ahead of the deal in November, Fitch upgraded the credit from AA-minus and Moody's revised its outlook to positive from stable. Moody's noted DWR's plans to reduce operating and interest rate risk.
However, Moody's said California's electricity prices are very high compared with U.S. averages, which could increase political pressure for reform. It said the utility also has some power-purchase contracts with companies with weak credit.
DWR's financial advisor is Montague DeRose and Associates and its bond counsel is Hawkins Delafield & Wood LLP.
