SAN FRANCISCO — Standard & Poor's Wednesday upgraded $9.03 billion of California Department of Water Resources power supply revenue bonds to AA-minus from A-plus on reduced exposure to electricity market volatility.

The bonds were issued in 2002 to repay loans the general fund incurred when the state took over long-term electricity supply contracts for investor-owned utilities during the power blackouts of 2000 and 2001, when a surge in wholesale electricity prices bankrupted the state's major private utilities. The bonds are secured by surcharges on the electric bills of California's three major investor-owned utilities.

"The higher rating reflects our assessment of CDWR's power program and the ongoing trend of declining power program responsibilities that we believe has greatly reduced the program's exposure to power market volatility," Standard & Poor's analyst Peter Murphy said in a report. "The rating also reflects the department's maintenance of what we view as adequate operating reserve levels that we believe will likely mitigate remaining program risks."

The Department of Water Resources expects to have reserves of $999 million at the end of fiscal 2010, according to Standard & Poor's. That's about 35% of its power costs.

"These balances, in our view, adequately cover what we see as the main risk facing the CDWR's power program, namely the rise of gas prices," Murphy wrote. He said the department hedges about 70% of its natural gas costs, limiting its risks of price volatility.

The power program is set to begin winding down over the next few years. According to its most recent financial statements, most of the volume of power under contract expires at the end of 2011, and the last of the contracts expires in 2015.

Standard & Poor's said the DWR plans to begin to draw down its reserves "significantly" as the program winds down and its obligations to buy power and exposure to natural gas prices fluctuations decrease.

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