LOS ANGELES -- The Central Coast Water Authority in California plans to make its first appearance in bond market with a $177.1 million financing this week that is designed partly to alleviate the water supply concerns of Santa Barbara.

Some of the proceeds will help finance costs of constructing a water treatment plant, which is designed to treat water from the State Water Project for use by various water purveyors and users in Santa Barbara and San Luis Obispo Counties.

Some of the proceeds also will fund part of cost of an aqueduct to connect drought-stricken entities in Santa Barbara County with state water suppliers. In addition, bonds proceeds will defease $23.5 million of development notes issued by the water authority.

Santa Barbara voters and other citizens in the region fought for years over whether to approve a link to state water supplies. Last year, however, voters in Santa Barbara and other local entities approved the aqueduct after a five-year drought forced reconsideration of alternative water sources.

The water shortage in Santa Barbara, a coastal resort about 90 miles north of Los Angeles, drew national attention when the city constructed an ocean desalting plant to help address severe water shortages.

This week's revenue bond sale involves a somewhat complicated structure because water revenues from numerous entities, participating under different agreements depending on their geographic location, will secure the bonds.

The water authority was formed by a joint exercise of powers agreement to facilitate financing the water treatment and distribution facilities.

AMBAC Indemnity Corp. is providing a municipal bond insurance policy that insures this week's sale, thereby providing a triple-A rating for that transaction.

Some of the features of the financing "were unusual, but when you boil them down," the security for the bonds provides substantial comfort, noted Timothy Travers, a vice president of AMBAC.

The financing includes the so-called Santa Barbara Project Participants, including a geographic distinction by whether those participants are in the northern or southern part of that group.

Another group participating in the transaction, known as the San Luis Obispo Water Purchasers, is tied to the financing through an agreement between the joint powers authority and the San Luis Obispo County Flood Control and Water Conservation District.

"It was like looking at three separate financings" because each geographic group entails separate step-up provisions in the events of a default by any of its members Travers said.

The take-or-pay contracts require each participant to agree to a maximum 25% step-up provision -- to cover fixed project costs and fixed and variable operating and maintenance costs -- in the event of a default by another participant.

But those step-up provisions apply only to defaults within each group, so Travers noted that he had to examine "the weakest link in each group" as part of his credit analysis. He added that the analysis was a time-consuming process because he essentially examined "25 different transactions" involving each of the project's participants.

"A dramatic need for the water out there" is part of the reason AMBAC is comfortable with the financing, Travers said. But he also stressed a willingness by local citizens to accept higher rates in exchange for additional water and better reliability of that supply.

Smith Barney, Harris Upham & Co. is underwriting the transaction, which is tentatively planned for pricing tomorrow. Rauscher Pierce Refsnes Inc. is financial adviser.

The maturity schedule calls for serials maturing from 1996 to 2007, with term bonds due in 2012 and 2022.

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