California’s topsy-turvy fiscal and political climate this summer, with a $38 billion annual budget deficit still waiting to be patched over, does not immediately impact the standing of the state’s former wholesale net-short power buyer, the Department of Water Resources (DWR), but it could longer term, Standard & Poor’s Ratings Services (S&P) said Monday in a terse credit report.

In a report on “frequently asked questions” concerning DWR’s standing, S&P said it is “possible” that California’s prolonged budget crisis eventually could hurt DWR’s credit quality, exposing it to “the political environment that is an outgrowth of California’s budget crisis.” Last May 15, S&P reiterated that it placed DWR’s “BBB+” rated bonds on “CreditWatch with negative implications.”

The negative outlook was prompted by California Gov. Gray Davis’s announcement that he was having DWR release about $1 billion in its operating reserves (for the bonds) to help reduce retail electricity rates charged by the state’s three major private-sector utilities. S&P noted that this underscored “the political influences that could affect DWR bondholders.”

The national rating service indicated that it would continue to monitor the possible impact of a $1 billion reserve release on bondholder protections as well as the future “financial volatility” faced by DWR from its ongoing obligations created by the long-term power contracts.

Regarding the specific downgrade that the state’s other bond ratings have experienced because of the growing political/fiscal crisis, S&P said that would not directly impact the DWR power bonds. Lowered from “A” to “BBB,” the state’s other bond ratings are a reflection of the “substantial budget deficit, an ongoing budget impasse, and concerns that the potential for a gubernatorial recall can frustrate the resolution of the budget crisis.”

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.