NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA+' rating to the approximately $568 million power supply revenue bonds, series 2016P to be issued by the California Department of Water Resources Electric Fund (DWR).
The bonds are scheduled to price Sept. 13, 2016 via negotiation. Proceeds will be used to advance refund all or a portion of the outstanding 2005F and 2008H power supply revenue bonds for economic savings.
In addition, Fitch affirms $4.609 billion of outstanding DWR power supply revenue bonds at 'AA+'.
The Rating Outlook is Stable.
SECURITY
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 11.8 million electric customers served by the state's largest investor-owned utilities (IOUs): Pacific Gas & Electric Co. (PG&E; Fitch Issuer Default Rating [IDR] 'BBB+'; Outlook Positive), Southern California Edison Co. (SCE; IDR 'A-'), and San Diego Gas & Electric Co. (SDG&E; IDR '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 Electric Fund bond and power charges. Pursuant to this legislation, the charges are adjusted as needed to ensure full recovery of DWR's power supply and bond debt service costs. The bonds' final maturity is in 2022.
EXPIRATION OF POWER SUPPLY CONTRACTS: The current rating takes into account the expiration of all the power supply contracts (priority and non-priority) as of April 15, 2015. The power supply portion of DWR's charges has historically been the more volatile component, subject to natural gas commodity exposure and kwh volume risk. Expiration of the priority contracts further eliminates the risk of tapping into bond-charge revenues in the event of a power-charge revenue shortfall.
TIMELY REGULATORY APPROVAL: The CPUC has an established, solid 13-year track record of administering and processing DWR's annual revenue requirement on a timely basis.
STATEWIDE CUSTOMER BASE: DWR's revenues are supported by a very large and diverse electric customer base, spread throughout the state and collected by the three largest IOUs as servicing agents of the DWR.
STRONG RESERVES: DWR's strong credit rating is supported by ample operating and debt service reserves, totaling more than $1.8 billion as of Dec. 31, 2015. Required debt service reserves are equivalent to 16 months of debt service costs. All variable-rate debt has been refunded with fixed-rate debt eliminating the interest rate risk and liquidity requirements.
RATING SENSITIVITIES
RISKS TO DEBT REPAYMENT: Risks to California Department of Water Resources (DWR) bondholders include the potential for delays in the servicing of DWR revenues or the timely adoption of bond charges by the California Public Utility Commission (CPUC). Although unexpected, any delay in the collection of revenue that results in the depletion of reserves would be viewed negatively.
CREDIT PROFILE
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 three largest 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 compromised. Governor Davis at the time declared a state of emergency in California and directed DWR to take over the responsibility to procure the net short power needs for the state's IOUs.
DWR entered into more than 50 power supply contracts to meet the IOUs' residual net short position in 2001 and 2002. In addition, DWR issued over $11.3 billion in power supply revenue bonds to repay various advances from the state's general fund to support power procurement. DWR's authority to enter into power supply contracts ended on Dec. 31, 2002.
DWR's final power supply contract terminated in April 2015 leaving only bond charges (and administrative costs) to be collected through May 2022. Bond charges are relatively modest, at an average cost of 1/2 cent per kwh across the state and are expected to produce approximately $900 million in annual revenue available for debt service going forward.
DWR's financial metrics are mixed but stable, with strong liquidity resulting from their required maintenance of substantial reserves. At Dec. 31, 2015, DWR reported more than $1.8 billion in bond charge and debt service reserves. With its power supply contracts now terminated the risk of DWR having to use funds from the bond charge accounts to meet under-funded power costs is eliminated.
Debt service coverage approximates just 1x, as provided by the Indenture. In the most recent three fiscal years (2013-2015), Fitch calculated coverage is less than 1.0x, reflecting the winding down of DWR's power supply program and the remittance to customers of excess power charge reserves and prior energy contract settlements. While coverage is below the 'AA+' rating category median (1.40x), DWR's credit quality is more than bolstered by the state legislation and CPUC regulatory order - which provide irrevocability and adequacy in its power bond charge recovery.
DWR's total debt, including the current portion of long term debt amounted to $5.6 billion at June 30, 2015, down from $7.8 billion at FYE2011. Annual debt service is expected to remain relatively stable at approximately $900 million, with the full maturity of all debt scheduled for May 1, 2022.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/site/re/864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010977
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010977
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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