Small Investors Flock to State Power Bonds

The state’s sale of fixed-rate power bonds is drawing heavy interest from small investors.

The $6.75-billion bond offering, which will repay loans the state took on to buy power during the energy crisis of 2000 and 2001, attracted $975 million in orders from individual investors by Friday afternoon, according to J.P. Morgan Chase & Co., the deal’s lead underwriter.

Brokers will continue to take small-investor orders on Monday, before inviting institutional investors to bid for the bonds Tuesday.

Yield estimates provided by J.P. Morgan show the state expects to pay returns that are higher than what is available on many other investment-grade tax-free bonds.

The annualized yield on the uninsured 10-year issue was estimated at 4.44%. That interest will be exempt from federal and state income tax for California investors, so the true return can be substantially higher, depending on an investor’s tax bracket.

The power bonds will be sold in maturities ranging from 2 1/2 years to 20 years. They will be repaid by surcharges on the electricity bills of the state’s major utilities.

The state is offering some of the bonds with private insurance that guarantees repayment. Yields on those bonds will be lower than what the uninsured bonds pay. The yield on the 10-year insured issue was estimated at 3.84% on Friday.