SAN FRANCISCO -Standard & Poor's yesterday upgraded the California Department of Water Resources water revenue bonds to AAA from AA.

The action affects about $2.1 billion in outstanding debt for the Central Valley Project water system, including next week's planned sale of $630 million in water revenue bonds.

According to the rating agency, the gilt-edged upgrade reflects the increasing essentiality of Central Valley Project water to the state; its May 2007 upgrade to AAA from AA-plus of revenue bonds from the Metropolitan Water District, which is responsible for 61% of Central Valley Project water billings; and the maintenance of steady and large Central Valley Project water financial reserves.

The Central Valley Project includes 20 dams and reservoirs, and 500 miles of major canals.

"We expect that the department's water system's strong liquidity position will be maintained, that its principal water contractors will remain of high credit quality, and that its water will remain vital to the state's economy," Standard & Poor's credit analyst David Hitchcock said in a statement.

The new issue will take out about $188 million of auction-rate securities, as well as outstanding commercial paper and bond anticipation notes, and refund some outstanding fixed-rate bonds.

The bonds are scheduled to price Wednesday after a retail order period Tuesday.

Goldman, Sachs & Co. is senior manager.

The state has not experienced any particularly hair-raising resets for its water revenue ARS, said Tom Dresslar, spokesman for the State Treasurer's Office.

"It's been kind of a mixed bag," he said. "A couple of [ARS] tranches have gone up significantly on reset. A couple have gone down. It's just a desire to continue withdrawing from that market for the time being at least."

The auction-rate debt that is being refunded came in four series - the worst case for the state was a series that reset to 5.16% from 3.35%, according to Dresslar. On the other hand, another series reset down to 3.5% from 5.44%.

According to Thomson Financial data, the auction-rate bonds are insured by XL Capital Assurance, once triple-A but now rated A-minus, A3, and BB by Standard & Poor's, Moody's Investors Service, and Fitch Ratings, respectively.

Moody's affirmed its Aa2 underlying rating on the water revenue bonds Monday. Fitch will not rate the bonds, Dresslar said.

 

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