California DWR Ups Deal to Nearly $12B Following PUC Nod

By Deborah Finestone

SAN FRANCISCO - The California Department of Water Resources now plans to sell $11.95 billion of power purchase revenue bonds after receiving unanimous approval from the state's Public Utilities Commission.

The DWR previously expected to issue $11.1 billion, but sought the larger amount in order to increase some of its reserves and get a better credit rating for the deal, which would be the largest in the history of the municipal bond market.

The commission approved the amendments to the financing documents on Monday afternoon by a 5-to-0 vote with no debate. The PUC must still determine the exact bond charge that utility customers will pay in order to cover debt service.

The state treasurer's office requested the hearing this week so it can take the information to bond insurance companies and liquidity providers, according to PUC president Loretta Lynch. A firm sale date has not yet been set.

The new par amount will allow the DWR to maintain up to $1 billion in its operating reserve as long as it must buy power on the open market, PUC attorney Joel Perlstein said at the hearing.

A higher rating could help decrease insurance fees for the bonds by tens of millions of dollars, according to Joseph Fichera, chief executive of Saber Partners, an advisory firm that counseled Gov. Gray Davis during the state's energy crisis last year. A higher rating will also ensure the bonds can be sold to a much wider market of investors.

"DWR is paying up in an attempt to ensure market access for the entire amount," Fichera said. "They're taking a huge amount of cash in the system that belongs to ratepayers and keeping it in the power fund because they couldn't get the PUC to agree to a credit structure that would address investor concerns."

Credit agencies may publicly release ratings in the next two weeks and analysts said the higher reserves bode well for the outcome.

The level of reserves is important because there could be a time lag between when the DWR requests more revenue from ratepayers, and when cash actually comes in upon PUC approval of an increase, said David Hitchcock, a director at Standard & Poor's. He also believes the agency will continue to be responsible for buying power beyond Dec. 31 even though the investor-owned utilities are supposed to resume buying for themselves after that date.

Major concerns surrounding security for the debt involve volatility in the energy market and any potential delays in increasing power rates if that becomes necessary, according to Dan Aschenbach, vice president at Moody's Investors Service.

"Having a level of reserves that mitigates against those delays and volatility improves the credit quality of the bonds," he said. "But we're not requiring DWR to do this."

The department may now keep up to $3.2 billion in various reserves for its energy purchase program.

Fitch Ratings chairman Claire Cohen also said that the more reserves the DWR has, the more it will be insulated against volatile energy price swings.

Investors said that increased reserves are a positive, but want to see the final structure, ratings, and credit support.

"Until we see the actual official statement and ratings, it's hard to decide whether it meets our criteria for investment," said Terry Goode, senior municipal credit analyst at Wells Capital Management. "The reserves provide a buffer while the PUC may have to raise rates, but we have to see if the level of reserves gives us, as an investor, enough comfort that if there is any delay in raising rates, they will still be able to pay."

David Blair, senior analyst for Nuveen Advisory Corp., also said the additional reserves should help if prices dramatically increase and the PUC must increase rates.

Energy prices shot up for a short while last month, so "it's in the back of people's minds that we can again get into a difficult situation with the volatile market," Blair said. "The state is also trying to reduce its costs and increase the investor audience to which it's marketing to have a successful offering, so that makes sense."

 

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