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S&P: U.S. Bank Assessment Stresses Muni Gas Deals

Given the U.S. government's stress test assessment that Bank of America (BofA) needs a multi-billion-dollar capital infusion, Standard & Poor's Ratings Services (S&P) on Wednesday adopted a "negative" credit watch for some of the high-profile public-sector utility long-term natural gas purchases. The gas prepayment deals have been under credit rating downward pressures for the past year (see Daily GPI, Sept. 17, 2008).

The deals' links to Merrill Lynch & Co. Inc., a key player in the public sector gas deals and now part of BofA, were cited for the latest negative response by S&P. That affected Roseville Natural Gas Financing Authority's $209 million in series 2007A bonds, the Main Street Natural Gas Inc. 2006 and 2007 bonds, and the Long Beach (CA) Bond Finance Authority's $887 million in bonds for the city natural gas utility, S&P said.

Each rating action involving the placement of a CreditWatch "with negative implications" designation on the debt financings was specifically called out as the result of Monday's negative credit outlook for BofA and its subsidiaries, including Merrill, S&P said. The rating agency placed "A" senior secured ratings on each of the deals.

The Roseville authority, a joint powers financing unit, funded the prepayment on a 20-year, 46 Bcf gas deal with Merrill Lynch Commodities Inc. as a means of helping supply the city of Roseville's electric utility generation. The gas authority has a supply contract with Roseville for all of the gas supplied by Merrill under the prepaid contract, with supplies priced at first-of-month index for Pacific Gas and Electric Co.'s citygate delivery point, minus a specified discount.

Long Beach's finance authority is the city's vehicle for financing a 30-year pre-pay supply deal that is supposed to satisfy 80-90% of city-run utility's 12-13 Bcf annual gas demand with terms that were designed to keep its retail rates below the surrounding Sempra Energy utilities for the next three decades. The deal was put together with Merrill Lynch Commodities Inc. and was unique in that it is not priced just to the California-Arizona border prices for natural gas.

Main Street has more than $1 billion in outstanding 2006 ($527.6 million) and 2007 ($496.7 million) revenue bonds as the financing arm of the Municipal Gas Authority of Georgia, which established the nonprofit, special-purpose entity.

"[The latest] rating action does not affect the rating or outlook on Main Street's $528 million series 2006A revenue bonds," S&P said. "These ratings currently link to the rating on JPMorgan Chase & Co. that guarantees the obligations of JP Morgan Venture Energy Corp."

S&P said the ratings and outlook on the gas deals could be raised or lowered in the future, depending on what is done with the rating of Merrill Lynch and its subsidiaries in these muni gas deals.

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