CA Closes $4.3 Billion `Bridge' Loan to Buy Power
California last week completed a $4.3 billion bridge loan to allow the state Department of Water Resources (DWR) to buy power over the next two months before a major $13 billion, 15-year bond sale is completed, freeing the state's general fund surplus from being tapped for the $20-30 million of daily bulk spot power market purchases. The overall interest rate at closing was 4.14%.
JP Morgan led the interim loan lenders with $2.5 billion; Lehman Brothers had $1 billion; Commerzbank $500 million; and Bayerische Landesbank $300 million, according to California State Treasurer Philip Angelides.
In addition to cutting the erosion of general fund surplus monies, the bridge loan, Angelides said, will "stabilize the state's fiscal position and credit ratings," which have suffered in recent months. It also will do the following: provide working capital to DWR's power purchasing; pave the way for the larger, long-term bond sale; negate generators' claims of the need for "credit premiums" in the spot prices they charge; and remove the possibility of suppliers on some of the long-term contracts signed by the state of walking away from the deals because of a clause stipulating that "external financing" (presumed bond sale) be in place July 1.
"This short-term financing will stabilize the state's fiscal condition by stopping the daily drain of taxpayer dollars to pay for power," Angelides said. "It is an important first step toward completion of the long-term energy bond sale, and a vote of confidence from Wall Street."
Several emergency session state laws authorize the bond sale and the DWR's electricity purchasing program, along with mandating that the CPUC provide sufficient rate coverage for the state to recover all of its power purchasing costs eventually from private sector utility customers. Therein lies the current focus on the CPUC, which in addition to suspending retail customer choice, must take four other actions by mid-July to keep the long-term bond sale on its current after-Labor Day schedule:
- Provide a rate schedule for covering DWR's costs (in a sense, it is a finance agreement between the CPUC and DWR);
- Complete service agreements with the private-sector utilities to bill and collect revenues for DWR;
- Extend the March 27/May 15 three-cent/kw rate increase to San Diego Gas and Electric Co.; and
- Complete a rate structure ("spread" of rates) for DWR that allows it to meet its revenue requirements.
As of mid-June, DWR had authorization to spend up to $8.1 billion of general fund monies for spot market wholesale power, but about $7 billion had been committed and by the end of June the actual expenditures for power are expected to total $6.2 billion. DWR estimates that net power purchase costs for July through October will be about $3.89 billion, paid for by the bridge financing completed Tuesday.
Basically, the bridge loan is expected to provide the difference between the costs of spot market ("net short") power supplies and the revenues from utility retail rates available to cover those costs. As more long-term contracts, new power supplies and conservation kick in, state officials expect these amounts to decrease on a daily, weekly and monthly basis going forward.
In July and August, the state will be making presentations on Wall Street, pursuant to gaining credit ratings for the long-term bond sale, Angelides said. Currently, the long-term bonds are tentatively expected to break down as: $6 billion of tax-exempt, fixed rate bonds; $4 billion of tax-exempt, variable rate bonds; and the balance in taxable fixed- and variable-rate bonds.
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