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A3 CREDIT RATING TO CAL DWR POWER SUPPLY REVENUE BONDS (What it takes to buy a good bond rating!)
Moody's Investors Service ^ | September 27, 2002 | Dan Aschenbach, Raymond Murphy, Renee Boicourt

Posted on 09/27/2002 9:48:00 AM PDT by Robert357

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Even thought this excerpt is long, it is worth reading the entire Moody's report.

I am amazed that this got a three A rating, but some of the interesting things are the variable bond interest rate, the huge DWR exposure to interest rate changes in the future (and hence the pressure on DWR and the CPUC to anything that Alan Greenspan does). It will be interesting to watch democrats suck up to Greenspan to keep interest rates low!

The amount of fixed reserves and the promise made by the state are real interesting!

I expect other rating agencies to announce ratings as well. Should be interesting to see how Davis trys to spin this!

1 posted on 09/27/2002 9:48:01 AM PDT by Robert357
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To: Robert357; snopercod; Ernest_at_the_Beach
I thought you would appreciate this Moodys analysis.

I am surprised that it is tripple A, but Moody's is clearly relying upon promises made to them by the Cal Attroney General, by the Cal CPUC attorney, and by the Treasurer and Controller. If there is a problem, Moodys and investors will be able to sue the State and its officials for fraud.

2 posted on 09/27/2002 9:50:42 AM PDT by Robert357
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To: Robert357; *calgov2002; *calpowercrisis; randita; SierraWasp; Carry_Okie; okie01; socal_parrot; ...
Good work. Thanks for posting this !

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3 posted on 09/27/2002 9:52:03 AM PDT by Ernest_at_the_Beach
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To: Robert357
I skimmed this, and much of it went over my head. What I caught was that these bonds are backed by the state and ratepayers. Does that mean that the state can use taxpayer dollars to protect the bonds? Does that mean that they can increase rates whenever they feel they need to? So, basically, taxpayers are paying for Gray Davis' failures?
4 posted on 09/27/2002 10:01:16 AM PDT by Gophack
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To: Robert357
If there is a problem, Moodys and investors will be able to sue the State and its officials for fraud.

Good luck catching up with Davis!

Looks like we have a rate increase (imposed taxes ) coming for the next X years!

5 posted on 09/27/2002 10:02:56 AM PDT by Ernest_at_the_Beach
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To: Robert357
Remember that Moody's also rated the 15% Washington Public Power Supply bonds for nuclear reactor construction at A3 as well.

WPPS has been known as "Woops" ever since.

IMHO, Moody's is a crooked player in this mess.
6 posted on 09/27/2002 10:03:19 AM PDT by Carry_Okie
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To: Robert357
I don't understand the rating, either. This is all based on promises made by the Davis Administration, the same Administration that is doing everything it can to get out of binding contracts that it signed last year.

When the next power crunch hits California (which it will, given their policy of discouraging new plants but increasing their population), it will come down to a choice of raising electricity rates to pay off the bondholders, or to default on them.

Since California isn't personally on the hook to repay the bondholders, the temptation will be great, especially if it's an election year.

I wouldn't risk a penny buying these bonds.

7 posted on 09/27/2002 10:07:02 AM PDT by Dog Gone
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To: Dog Gone; snopercod
...Since California isn't personally on the hook...

Actually, what I read said that the Attorney General and the Chief attorney for the CPUC have submitted legal opinions that the CPUC and/or DWR must pay funds into a special bond fund that goes for repaying the lenders and that the State Treasurer must act on behalf of the lenders in his/her making payments from that fund.

What I read said that California is deeply on the hook and that legal opinions have been rendered by various representatives of the state as saying that the State will pay when called upon. That means if the state doesn't pay those branches of government and hence the state provided false and misleading legal information, upon which the rating agencies and lenders relied upon.

8 posted on 09/27/2002 11:24:45 AM PDT by Robert357
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To: Dog Gone
"I wouldn't risk a penny buying these bonds."

Ahhhh, but there's the rub. You might get your money put at risk for you.

A favorite trick of the muni's is to have state funds (generally those controlled by Democrats) invest their temporary surpluses in bonds that look good on paper but that everyone really knows are junk.

Hence, the state of Tennessee has Billions in California bonds. Democrats in one state can easily cover for Democrats in other states by channeling state investments (every state has temporary surplus funds)...

9 posted on 09/27/2002 11:31:41 AM PDT by Southack
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To: Robert357; snopercod
I thought I would add the Fitch Rating, which is more what I had expected A-. Fitch has a reputation of not kissing up to issurers and calling it like they see it. Obviously such a difference between three A and A- is going to cause members of the investment community to talk and will influence the interest rate, but should not stop the bonds from being marketed. Fitch really stressed that no state Credit is on the line, which is much different than Moody's implied. I will now check S&P.

Fitch Ratings-New York-September 27, 2002: Fitch Ratings assigns an underlying 'A-' rating to the California Department of Water Resources (DWR) power supply revenue bonds. The underlying rating represents an assessment of the non-enhanced, long-term, credit quality of the bonds. The Rating Outlook is Stable. A total of $11.9 billion of bonds are expected to be issued, of which $5.9 billion are expected to be fixed-rate, with the remainder variable-rate, including daily, flexible, commercial paper, weekly and auction modes. There will be several forms of credit enhancement, leading to the assignment of several ratings on specific sub-series of bonds reflecting the enhancement provided.

The bonds will be secured by DWR's bond charge revenues, imposed by the California Public Utilities Commission (CPUC) on all customers served by the three investor owned utilities (IOUs) in California, Pacific Gas & Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E) and Southern California Edison Company (SCE). The underlying 'A-' rating reflects Fitch's assessment of the statutory and regulatory framework that establishes the bond charges, the adequacy of the reserves and transaction cash flows to withstand significant stress, the ability of the IOUs to service the power and bond charges, and the relative economic stability of the service territory. The bonds are separately secured from any other obligations of DWR. The bonds will not be obligations of the state of California and no state credit is involved.

The bond charge is a part of DWR's revenue requirement, which also includes a separate power charge for operations and maintenance expenses. Such charges are authorized under a rate agreement between the CPUC and the DWR that was entered into pursuant to the authorizing legislation. Under the legislation, DWR has sole authority to determine and present to the CPUC for recovery its revenue requirements, although they must be just and reasonable. The revenue requirements include the amounts necessary for operations and maintenance (primarily purchased power) and debt service. While the CPUC does not have the authority to determine that the DWR's revenue requirements are not 'just and reasonable', it will continue to be responsible for setting rates among classes of customers. The CPUC has covenanted in the rate agreement to calculate, revise and impose bond charges that are sufficient to provide for the payment of all bond-related costs at all times. The rate agreement has the force and effect of a financing order, meaning that it is irrevocable and enforceable in accordance with its terms. DWR will rely on the IOUs, pursuant to agreement and/or order, to collect the charges but legislation has delineated clearly that DWR owns the revenues derived from the sale of its power. The IOUs have significant experience with the functions required to service the charges.

While DWR has the ability to set the revenue requirement to cover its costs, the rating also considers risks to transaction cash flows associated with the volatility of power prices in California, variances from expected demand for electricity, and potential delays both in DWR arriving at the revenue requirement and the CPUC adopting customer rates. Additionally, about half of the bonds will be in variable-rate modes; after hedging, the ratio drops to a lower 25% but the various arrangements will require oversight. Of some, but lesser, concern is the ability of priority contract counterparties to access the bond charge collection account.

While the bond and power charges are separate and distinct, a first lien on revenues was granted under certain power purchase contracts, designated priority long term power contract costs. Consequently, the priority holders can access the bond charge collection account if power charge revenues are insufficient. However, once amounts in the collection account have been deposited into the bond charge payment account, which is to occur on a monthly basis, the funds will no longer be available to priority contract holders. Fitch's cash flow analysis considers the impact of the unlikely need for the bond charge collection account to be tapped for priority long-term contract costs.

Bondholders benefit from significant reserves to be maintained to support both debt service and the power purchase program. A debt service reserve account equal to maximum annual debt service is initially expected to be just under $1 billion. On the operating side, additional protection is provided by an operating reserve account and a required minimum balance in the operating account of $1 billion for so long as DWR continues to procure the additional power needed beyond the amount supplied by the long term contracts (residual net short position). Looking ahead, risk will diminish when DWR is no longer responsible for fulfilling the residual net short position, but only for collecting the bond charge for debt service. Positive security factors also include the wealth and diversity of the service area and the essentiality of electric power. California has a population of about 34 million, 60% larger than Texas, the second largest state.

California entered the electric power business in January 2001 when soaring energy prices outpaced the capped rates charged by the IOU's, rendering PG&E and SCE uncreditworthy and compromising the ability of all three investor owned utilities to deliver power. DWR is responsible for purchase of the 'net short', or the power necessary to be purchased to supplement that provided by the IOU's themselves. Through June 2001 DWR borrowed $6.1 billion from the state's general fund for power purchases. DWR at that time obtained interim financing of $4.3 billion, ending general fund involvement. Bond proceeds will be used first to repay the remaining $3.5 billion of the interim loan, second to repay the general fund with interest and to fund reserves.

10 posted on 09/27/2002 11:37:07 AM PDT by Robert357
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To: Robert357
Technically, I suppose that's true. But what that would require is the bondholders to sue California for failing to make those payments into the fund out of electricity rates. If and when a final judgment was entered against California, the taxpayers would be on the hook for the payments.

I don't know how many years that would be down the road, and what the costs of the litigation would be, but assuming the bondholders prevailed, they might break even.

Might.

11 posted on 09/27/2002 11:41:32 AM PDT by Dog Gone
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To: Dog Gone; snopercod; Ernest_at_the_Beach
S&P RATES CAL POWER BONDS BBB+ I see that S&P has some balls!

This is going to shake up the investment community. Three A (about as good as it gets) to BBB+ which is low investment grade. This is the kind of controversy that has been delaying the bond issue and the kind of stuff that will make for interesting reading.

The conference call just after high noon (12:30) on Oct 2nd should be one heck of a cat-fight!

I hope some reporters in the business press pick this up and ask what the heck is going on. How can three rating agencies come up with totally different opinions on a set of bonds!

NEW YORK (Standard & Poor's) Sept. 27, 2002 -- Standard & Poor's Ratings Services has assigned a triple-'B'-plus rating and a stable outlook to the California Department of Water Resources' (DWR) $11.9 billion of bonds. The rating principally reflects the bondholder protection provided by the financing's legal framework, which mitigates many of the political risks and power market uncertainties associated with DWR's power program.

Bond proceeds will repay $6.2 billion, plus interest, borrowed from the state's general fund, extinguish the remaining portion of a $4.3 billion loan made by a consortium of private banks to DWR to finance 2001 electricity purchases as part of the state's response to the power crisis, and contribute to required operating and debt service reserve accounts. Approximately 25% of the $11.9 billion of bonds to be issued will consist of unhedged variable-rate debt, with various forms of credit enhancement.

The bonds are secured by a charge on retail electric customers regulated by the California Public Utilities Commission (CPUC), subject to the prior lien of payments to electric power providers. Bonds are also secured by various reserve funds which should provide sufficient liquidity during the time needed for a rate adjustment to be implemented to cover increases in projected DWR power costs and fluctuations in variable bond interest costs. Although California advanced large sums of money in 2001 to support DWR's power program, the bonds are not a state obligation. "DWR is expected to take all actions contemplated by the indenture to garner revenues that will enable it to make timely payment of debt service," said credit analyst David Hitchcock. "Lack of such action could call into question the willingness of the state to make payment on its own direct general obligations." The political incentives to avoid power disruptions and impairment of the state's economy should induce DWR and the CPUC to act in a manner that is supportive of credit quality, at the risk of the state's ability to market its own general obligations. These strengths are buttressed by the financing's legal framework.

Nevertheless, considerable risks do remain and the ratings could be lowered if retail electric rates are not adjusted as needed or if DWR substantially reduces reserves in future years when the minimum required level drops, by incorrectly projecting that it foresees lesser potential for market volatility.

Standard & Poor's full report on the DWR bond issue is available on Standard & Poor's RatingsDirect, and will be posted on the Web at www.standardandpoors.com.

Members of the media may contact Christopher Mortell at 212-438-2756 or christopher_mortell@sandp.com for more information. TELECONFERENCE

Standard & Poor's will hold a teleconference on Wednesday, Oct. 2 at 12:30 p.m. (ET) to discuss the DWR bond rating. The discussion will focus on DWR's creation of a legal framework for the financing that mitigates many of the political risks and power market uncertainties of its power program. The speakers will include David Hitchcock and David Bodek, from the state and local governments and public utilities teams, respectively. After prepared remarks, they will be available to answer your questions. The dial-in number is 712-257-2021; the confirmation number is 8462118; and the passcode is "SANDP". Please call at least 15 minutes before the scheduled start of the call to complete the pre-call registration process. Participants will be asked to provide their name, company affiliation, and fax numbers or e-mail address. The entire call will last approximately one hour.

12 posted on 09/27/2002 11:53:36 AM PDT by Robert357
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To: Gophack
Try looking at the other rating agencies analysis as well. You can read those in some of the later posts. They are shorter and may be less over the top.
13 posted on 09/27/2002 12:02:15 PM PDT by Robert357
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To: Robert357
It's as if the state plans to issue junk bonds, except that they don't carry a high interest rate to justify the risk.

No thanks.

14 posted on 09/27/2002 12:07:13 PM PDT by Dog Gone
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To: Robert357
Actually the bonds would be a good investment and I "think" they are tax free...but for those of us who live in CA we can thank Dimwit Davis for the debt that we will be paying for when he is dead and gone...
15 posted on 09/27/2002 12:14:16 PM PDT by kellynla
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To: kellynla
"Actually the bonds would be a good investment and I "think" they are tax free..."

California bonds have already had complete defaults (witness the Orange County bonds from the early 1990's).

Is that what you think makes for a good investment?

16 posted on 09/27/2002 12:23:08 PM PDT by Southack
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To: Robert357; rohry; Wyatt's Torch; arete; LS; meyer; DarkWaters; STONEWALLS; TigerLikesRooster; ...
Kali using long term dept to pay operating expense.
17 posted on 09/27/2002 12:30:02 PM PDT by razorback-bert
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To: Robert357; Dog Gone
The big question in my mind is:

"What recourse do the bondholders have if California simply decides to change the terms of the contract after the fact?"

OK, they sue. Meanwhile, the sapsbondholders get no interest payments for the ten or fifteen years that it takes for the courts to decide in their favor. Even then, how can the Courts make California pay?

Buying these bonds is like making a deal with the devil.

18 posted on 09/27/2002 12:48:30 PM PDT by snopercod
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To: Robert357
Wow! S&P just crapped in Davis's punchbowl!

We need to be sure that these worthless pieces of paper carry the name:

GRAY BONDS

19 posted on 09/27/2002 12:54:24 PM PDT by snopercod
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To: Southack
Looking at the A3 rating...
20 posted on 09/27/2002 12:55:17 PM PDT by kellynla
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