State’s Delayed Power-Bond Sale to Proceed Today

Despite a lawsuit filed last week, the state of California plans to go forward today with the first phase of the largest municipal bond sale in history.

The first phase of the planned $11.9-billion bond issue -- the sale of $4.25 billion in adjustable-rate bonds -- was slated for this week and was expected by bond traders to happen Tuesday. But it was delayed a day to allow investors to review the latest lawsuit filed in connection with the bond sale, according to the state treasurer’s office.

The bond sale is needed to repay loans from banks and the state’s general fund that helped the state buy power during California’s energy crisis in early 2001. It has been delayed for more than a year because of political and legal wrangling.

Pacific Gas & Electric Co. filed a suit last week that questions a plan to use utility revenue to back the bonds and claims a state agency violated due process requirements when it set the amount of revenue to be collected.

Although the possibility of such a suit already was disclosed in bond documents, notice that the complaint was filed will be added to the prospectus for the sale to ensure that full disclosure is made to potential investors, state officials said.

Many of the large Wall Street investors expected to buy the variable-rate portion of the bond issue said they would purchase the bonds even with another delay.

“The potential legal issues were already disclosed. With a deal this complex, it doesn’t surprise us there are some legal challenges; we just thought they would come after the bonds are sold,� said Steven Permut, senior portfolio manager at American Century Investments in Mountain View, Calif. “We still think the variable rate and the long-term bonds are appropriate for purchase.�

Moody’s Investors Service, Standard & Poor’s Corp. and Fitch Ratings have said the PG&E; lawsuit won’t change their investment-grade ratings for the bonds.

If the sale of the $4.25 billion in adjustable-rate bonds is completed this week, it will be followed by a sale of $6.75 billion in fixed-rate bonds the next week and then $950 million in taxable bonds in November.

This first phase of adjustable bonds is expected to be sold mainly to large institutional investors, such as pension funds and insurance companies. The fixed-rate portion is expected to draw strong interest from California’s individual investors because the bonds would be exempt from state and federal taxes for state residents.