State Closes on $4.3-Billion Interim Loan to Buy Power

From Bloomberg News

California closed Tuesday on a $4.3-billion interim loan to help cover its power and natural gas purchases in coming months and stop draining its general fund, state Treasurer Phil Angelides said.

Gov. Gray Davis issued an executive order last week that allows the Department of Water Resources to arrange the loan. The money will give the water department breathing room until it can sell as much as $13.4 billion of bonds in September for power costs after it stepped in to buy electricity on behalf of the state's two largest investor-owned utilities.

The water department is the state agency charged with buying power.

The loan is "an important first step toward completion of the long-term energy bond sale, and a vote of confidence from Wall Street," Angelides said. The overall interest rate on the loan was 4.14%, he added.

J.P. Morgan Chase & Co. provided $2.5 billion of the loan. Lehman Bros. lent $1 billion, followed by Commerzbank at $500 million and Bayerische Landesbank Girozentrale, $300 million.

Angelides said last week that State Street Bank & Trust also provided a $250-million loan commitment, subject to closing.

PG&E; Corp.'s Pacific Gas & Electric and Edison International's Southern California Edison spent more than $14 billion buying power at higher prices than they could charge customers under the state's deregulation laws.

The water department has tapped the state's general fund for about $8 billion of loans to buy power. The interim loan will be repaid by the bond sale, which will be secured by a slice of utility customers' rates.

Credit rating companies Standard & Poor's and Moody's Investors Service downgraded the state's bonds this spring, expressing concern about California's ultimate liability for power costs. Fitch Inc. also warned it might cut the state's rating.

Closing the loan "is a very positive step," said Claire Cohen, vice chairwoman of Fitch. "It takes the pressure off the general fund."

The interim loan provides more flexibility for the water department in case the bond sale, which would be the largest municipal bond issue ever, is delayed, Angelides said. The state plans to begin selling the bonds in September, with tentative estimates calling for $4 billion of adjustable-rate debt first, followed at least 15 days later by fixed-rate bonds.

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