California begins selling largest municipal bond in U.S. history

By Don Thompson
Friday October 04, 2002

SACRAMENTO — California officials began selling nearly $12 billion in municipal bonds Thursday, by far the largest such issue in U.S. history. 

The bonds will repay the state treasury for last year’s energy crisis, though conditions have changed dramatically since electricity and natural gas prices have dropped and energy companies such as Enron Corp. have imploded. 

The fallout continues, however, for California’s depleted state budget, for state and federal regulators, and in the courts. 

“The California energy market has been stabilized and is much different and ... has been for some time,” state Treasurer Phil Angelides said during a conference call with potential investors nationwide, including those attending a J.P. Morgan Chase conference in New York City. J.P. Morgan Chase is handling the bond sale. 

He said the market was stabilized in part because of the state’s electricity purchases on behalf of three cash-strapped utilities, long-term energy contracts the state negotiated at the peak of the market and has since been renegotiating, contracts for new power plants and reduced consumer demand due to conservation efforts. 

The state’s cost for a megawatt of electricity has dropped to 10 percent of its cost at the height of the crisis, from about $298 in January 2001 to about $30 this year. 

But the break in the crisis came at a significant price for about 10 million California utility customers. Those customers of the three investor-owned utilities will be paying off the bonds with a portion of their bills, although their rates will not necessarily increase beyond rate hikes imposed last year. 

Bond advisers expressed concern the state could face the same energy supply crunch and resulting price spikes again, making it harder for the state to repay the bonds. That uncertainty helped lower the bond ratings, which in turn are expected to bring the state less favorable interest rates. 

But the state’s energy consultant, Navigant Consulting Inc., laid out four separate scenarios over 10 years, each including a natural gas price spike and other variations including a drought that would trim hydroelectricity, increased consumer demand and delays in building new power plants. 

In none of the scenarios would the state have to dip into the $1.8 billion reserve required by the bond guidelines, Navigant concluded. Though each scenario included a natural gas price spike, the consultant predicted sufficient natural gas supplies and a gradual increase in prices for the fuel that powers many existing and planned power plants. 

The bonds to be issued later this month and next were initially proposed for last year, but have been repeatedly delayed. The $98.9 billion budget signed by Gov. Gray Davis last month depends on money made by selling the bonds. 

The $11.95 billion in bonds will be issued for up to 20 years to repay $3.5 billion in bank loans and $6.5 billion in tax money that the state spent to buy electricity last year. The remainder covers the reserve and bond sale costs. 

The sale eclipses the largest previous bond sale, $3.4 billion by the Long Island Power Authority in 1998. 

State and bank officials plan to promote the sale with investor meetings in Boston, Chicago, Los Angeles, Minneapolis, New York, Philadelphia and San Francisco between Oct. 11 and Oct. 25, as well as with national ads in The Bond Buyer. 


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