NEW YORK - Fitch Ratings said it assigned a AA-minus rating to California Department of Water Resources (DWR) $2.1 billion series 2010L tax-exempt power supply revenue bonds, and upgraded to AA-minus from A-plus $9 billion power supply revenue bonds (parity lien).
The bonds, with a final maturity on May 1, 2020, are expected to price May 3, via negotiation. The bonds will refund certain series 2002 fixed-rate power supply revenue bonds (approximately $400 million) and varied series of variable-rate power supply revenue bonds (depending upon market conditions). A portion of the bond proceeds will be used to terminate interest rate swaps.
The rating outlook is revised to stable from positive.
The power supply revenue bonds are secured by DWR's electric power fund bond charge revenues, imposed by the California Public Utilities Commission (CPUC) on approximately 11.3 million electric customers served by the state's largest investor owned utilities: Pacific Gas & Electric Co. (PG&E; Fitch Issuer Default Rating [IDR] rating of A-minus), Southern California Edison Co. (SCE; IDR of A-minus), and San Diego Gas & Electric Co. (SDG&E; IDR of A-plus). The bonds are separately secured from any other obligations of DWR and are not obligations of the State of California.
The rating upgrade reflects the significantly diminished exposure on the power supply portion of DWR's revenues collected from the majority of electric customers in the state and the solid seven-year history of the CPUC processing DWR's revenue requirement on a timely and adequate recovery basis.
As DWR is nearing the end of its power supply contracts' duration (2015), its power supply charges are rapidly falling, from $5.3 billion in fiscal year 2004, down to approximately $2.9 billion in 2010, $320 million in 2012, and $22 million in 2015.
The power supply portion of DWR's revenues has historically been the more volatile piece, as it engendered the management of a large natural gas commodity exposure and volume (kwh sales) risk.
The bond charge portion of DWR's revenues - which covers debt service payments on the power supply revenue bonds - has been more stable and is supported by a legislatively created nonbypassable and irrevocable surcharge for the life of the bonds (2022).
Additional credit strengths include the diversity of the customer base spread throughout the state of California, and DWR's continued maintenance of significant operating and debt service reserves (bond charge reserves equivalent to 16 months debt service).
While DWR's proportionately large variable-rate debt exposure is a credit concern, several factors mitigate this risk: (a) all auction-rate securities have been refunded and/or redeemed; (b) with this refunding, gross variable-rate debt as percentage of total debt will considerably decline to approximately 38% from 52.9%, and (c) legal provision to maintain bond charges sufficient to cover DWR debt service on power supply revenue bonds.
A credit concern for the near term is the significant, approximately $3.6 billion (declining to $2.2 billion after this refunding) in bank-provided letters of credit/liquidity facilities which will expire on Dec. 1, 2010. Fitch will be monitoring DWR's ability to renew and/or replace the remaining bank provided support or conversely refinance the variable-rate debt with fixed-rate securities in the fall of this year.
Favorably, the bond charge portion of DWR's revenues is supported by an irrevocable and nonbypassable surcharge, which must, by state law, be maintained at a level adequate to cover DWR power supply revenue bonds' debt service.
