former California Governor Gray Davis

LOS ANGELES — Fitch Ratings upgraded the California Department of Water Resources' power supply revenue bonds one notch to AA-plus ahead of plans to advance refund $765 million in power supply revenue bonds on March 31.

The outlook is stable.

Fitch cited the end in 2015 of a power supply program that was launched in 2001 when former Governor Gray Davis declared a state of emergency during the state's energy crisis.

DWR's Electric Power Fund was created by state legislation in 2001, because Pacific Gas & Electric, Southern California Edison Co. and San Diego Gas & Electric were unable to pay their full power expenses, and the ability of all three of the state's large investor-owned utilities to reliably deliver power was severely compromised, according to the March 23 Fitch report.

The proceeds of the Series 2015O bonds to be sold via negotiation will be used to advance refund, all or a portion, of the outstanding 2008H and 2010L power supply revenue bonds for economic savings, according to Fitch.

In addition, Fitch has upgraded $5.943 billion of the department's outstanding power supply revenue bonds to AA-plus from AA.

The power supply revenue bonds are secured by DWR's Electric Power Fund bond charge revenues, imposed by the California Public Utilities Commission on approximately 11.5 million electric customers served by the state's largest investor-owned utilities. The bonds are separately secured from any other obligations of DWR and are not obligations of the state.

DWR issued over $11.3 billion in power supply revenue bonds in 2001 and 2002 with final maturity in 2022 after Davis declared a state emergency.  DWR entered into more than 50 power supply contracts after Davis directed it to take over the responsibility of procuring the net short power needs for the state's IOUs. DWR's authority to enter into power supply contracts ended in late 2002.

"Since 2008, the power supply contracts, which are subject to greater cost volatility than bond charges, have begun to expire, reducing DWR's power supply exposure as each contract expires," Fitch wrote. "Contractual power purchases have fallen from 3,920 gigawatt hours in 2012, to 483 GWHs in 2013, and will ultimately fall to zero no later than Sept. 30, 2015."

Once all the power supply contracts expire, only DWR's bond charges remain to be collected through 2022, at an average cost of 1/2-cent per kilowatt hour, Fitch said. Additionally, the risk of DWR having to use funds from the bond charge accounts to meet under-funded power costs, as provided in the indenture, is eliminated.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.