Wednesday, September 7, 2011
Fitch Ratings assigns an 'AA' rating to California Department of Water Resources (DWR; Electric Power Fund) series 2011N power supply revenue bonds.
Depending upon market conditions, DWR may issue up to $1.1 billion in 2011N refunding bonds, via negotiation, the week of Aug. 15. In addition, Fitch affirms the 'AA' rating on the DWR Electric Fund's $7.8 billion in outstanding parity power supply revenue bonds. The Rating Outlook is Stable.
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 11.4 million electric customers served by the state's largest investor owned utilities: Pacific Gas & Electric Co. (PG&E; Issuer Default Rating [IDR] of 'A-'), Southern California Edison Co. (SCE; IDR of 'A-'), and San Diego Gas & Electric Co. (SDG&E; IDR of 'A'). The bonds are separately secured from any other obligations of DWR and are not obligations of the state.
KEY RATING DRIVERS:
Irrevocability of Bond Charge: California legislation AB1X (enacted 2001) established the irrevocability and enforceability of DWR's bond charges. Pursuant to this legislation, the bond charges are required to be adjusted as needed to ensure full recovery of DWR's debt service costs.
Timely Approval of DWR's Revenue Requirement: DWR has had a solid nine-year track record of timely processing of DWR's annual revenue requirement by the CPUC.
DWR Revenues Derived from Large Customer Base: DWR's revenues are supported by a very large (11.4 million), diverse customer base, spread throughout the state of California.
Winding Down of Purchased Power Contracts: A key credit strength of late, are the rapidly declining power supply expenses, particularly beginning in 2012, as purchased power contracts expire. The power supply portion of DWR's charges have historically been the more volatile component (due to the associated natural gas commodity exposure and kwh sales risk).
Solid Cash Reserves: DWR continues to maintain ample operating and debt service reserves. In particular, as of Jan. 1, 2012, DWR projects to have $899 million in its power charge accounts which is estimated to be sufficient to pay all remaining power costs through the expiration of the last purchased power contract in 2015.
Sharly Declining Variable Rate Exposure: Depending upon market conditions, DWR could refinance, with proceeds from the 2011N fixed rate bonds, all remaining variable rate securities ($947 million outstanding currently). As a result, the refunding will reduce or eliminate associated interest rate exposure and bank liquidity replacement risk.
Ongoing Risks to Cash Flows: While power supply costs continue to be collected, certain risks to transaction cash flows remain, including: actual kwh sales below annual projections, volatility in natural gas prices, and the potential for delays in IOUs' servicing of DWR revenues or the CPUC approving DWR's revenue requirement.
DWR's Electric Power Fund was created by state legislation in 2001 when soaring energy prices outpaced the capped retail electric rates charged by the state's IOUs. PG&E and SCE were unable to pay their full power expenses, and the ability of all three of the state's largest IOUs to reliably deliver power was severely comprised. Governor Davis at the time declared a state emergency in California and directed DWR to take over the responsibility to procure power for the state's IOUs. Toward this endeavor, DWR issued over $11.3 billion in power supply revenue bonds, including roughly 60 percent fixed rate and 40 percent of variable rate securities.
DWR entered into more than 50 power supply contracts to meet the IOUs residual net retail load. Since 2001, DWR has favorably utilized very conservative financial stress scenarios and regularly updated kwh sales and natural gas price forecasts in order to maintain adequate power cost recovery from customers. Since 2008, the power supply contracts, which are subject to greater cost volatility, have begun to expire, reducing DWR's power supply exposure as each contract is terminated. Contractual power purchases are scheduled to fall from 3,293 GWHs in 2012, to 90 GWHs in 2015, and ultimately to zero by May 1, 2015.
Once all the power supply contracts expire, solely DWR's bond charges remain to be collected through 2022, at an average cost of less than 1 cent per kwh. Additionally, risk of DWR having to siphon funds from the bond charge accounts to meet under-funded power costs (as provided in the Indenture) is eliminated as well. To date, DWR has more than sufficiently covered power supply costs through collected power charges.
With respect to DWR's bond charge revenues, DWR experienced some fluctuation in variable rate interest expense during the financial market fallout in 2007-2008. Positively, DWR weathered the market turmoil given its significant operating and debt service reserves. Historically, DWR has also benefited from conservative variable interest cost projections. Prospectively, with the planned 2011N refunding, DWR's variable rate debt exposure may well be eliminated. Variable rate debt as a percentage of total debt is currently modest, at 12.1 percent, and will only decline with this planned financing.
Additional information is available at 'fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Bond Counsel, Financial Consultant, CreditScope, and State of California website.
"Fitch Rates California Dept Water Resources 2011N Power Supply Rev Bds 'AA'; Stable Outlook." Professional Services Close-Up 12 Aug. 2011. Gale Power Search. Web. 7 Sep. 2011.
Gale Document Number: GALE|A264530296