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California Refinancing $2 Billion in Power Bonds After Upgrade

California, whose power bonds received a credit-rating boost, plans to borrow $1.9 billion to refinance debt sold to purchase electricity for cash-strapped utilities during the state’s power crisis a decade ago.

The California Department of Water Resources was upgraded one step to AA by Fitch Ratings today, third-highest, and a level above the AA- from Standard & Poor’s. The department’s debt has a higher ranking than the state’s general obligations because they’re backed by revenue from consumer electricity bills. The new issue is scheduled for Oct. 7, according to California Treasurer Bill Lockyer’s website.

“The purpose of this transaction is to continue to reduce DWR’s variable-rate debt exposure,” Fitch analysts Lina Santoro and Kathryn Masterson wrote. “With this refunding, DWR’s remaining variable-rate debt as a percentage to total debt will decline from 24 percent to just 11.3 percent.”

A portion of the sale proceeds will also terminate interest-rate swaps agreements, according to the Fitch report.

Yields on top-rated tax-exempt general obligations due in 10 years are 2.61 percent today, according to data from Municipal Market Advisors, an independent research firm in Concord, Massachusetts. The yields, which move inversely to prices, reached 2.58 percent on Aug. 25, the lowest since MMA began compiling the data in January 2001.

The department issued about $3 billion in tax-exempt revenue bonds in a May 6 refinancing sale, with 10-year securities priced to yield 3.61 percent, or 14 basis points below an index of comparable-maturity AA rated power-backed debt, according to Bloomberg Fair Market Value data.

Those same bonds traded Sept. 21 at an average yield of 2.91 percent, 20 basis points below the index.

The water resources department sold bonds to finance the purchase of electricity on behalf of investor-owned utilities when wholesale prices soared because of shortages.

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