Bangkok--30 Sep--Standard & Poor's
Standard & Poor's Ratings Services has assigned its 'AA-' long-term rating to the California Department of Water Resources' (CDWR or the department) power supply revenue bonds, series M. Standard & Poor's also affirmed its other ratings, including its 'AA-' underlying ratings, on CDWR's existing bonds. The outlook is stable. The department has $8.4 billion outstanding.
"The ratings reflect our assessment of CDWR's power program, and the ongoing trend of declining power program responsibilities that we believe has greatly reduced the program's exposure to power market volatility," said Standard & Poor's credit analyst Peter Murphy. "The ratings also reflect our assessment of the department's adequate operating reserve levels that we believe will likely mitigate remaining program risks," Mr. Murphy added.
The 'AA-' rating also reflects our opinion of the breadth of the customer base that supports the revenue stream and CDWR's ability to raise rates to recover potentially higher operating costs.
We understand bond proceeds will refinance both fixed and variable rate debt outstanding.
In our opinion, natural gas costs are the greatest source of cash-flow volatility. We also believe that the hedging program for gas costs, which expanded in 2005, significantly eliminates potential for cash-flow volatility. The majority of the utility's gas exposure for 2010 has been hedged through California's three investor-owned utilities. Given the hedges for 2010, we believe current reserves are adequate compared to the remaining fuel price exposure.
The stable outlook reflects our expectation that CDWR will maintain adequate reserves to reflect the market risks of the shrinking power supply program, and our assumption that the natural gas hedging program will remain in place and limit exposure to manageable levels. Barring extreme volatility in natural gas prices, we believe the operating and operating reserve accounts should continue to shield bondholders during the next two years, after which we believe that most of the wholesale market risks will dissipate. We believe that time and the resulting expiration or cancellation of power supply contracts will eventually eliminate wholesale risks and provide the potential for a higher rating.
RELATED CRITERIA AND RESEARCH
USPF Criteria: Electric Utility Ratings, June 15, 2007
Complete ratings information is available to RatingsDirect subscribers on the Global Credit Portal at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
Media Contact:
Ana Sandoval, New York (1) 212-438-5095,
[email protected]
Analyst Contacts:
Peter V Murphy, New York (1) 212-438-2065
David Bodek, New York (1) 212-438-7969