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Northern California Gas Authority Feels Credit Pressure

The Northern California Gas Authority (NCGA), a financing conduit for public power sector generators, has felt the domino effect of the Wall Street credit meltdown, being placed on "watch for a downgrade" of its "A1" credit rating Oct. 16 by Moody's Investors Service, following the credit agency's downgrade of Morgan Stanley earlier in October. Some $758 million of series A and B 2007 bonds held by the gas authority are tied to Morgan Stanley and other Wall Street firms caught in the credit collapse.

At the center of the ratings are bonds used to pre-pay long-term gas supplies used by the "A"-credit-rated Sacramento Municipal Utility District (SMUD) to fuel some of its electric generation plants.

Here's how the dominos fall as far as Moody's is concerned:

The "A1" rating on the gas authority bonds is based on: (1) Morgan Stanley, which is currently rated "A1" under review for possible downgrade, as the gas purchase contract guarantor; (2) Royal Bank of Canada, currently rated "Aaa," as guarantor of Royal Bank of Canada Europe Ltd. as commodity swap counterparty; and (3) SMUD, currently rated "A1," as the sole participant in the transaction, getting the gas for its power generation operations.

MBIA, in turn, is the insurer, providing a customer insurance policy covering SMUD's failure to pay.

In late September as Moody's and Standard & Poor's Ratings Services (S&P) downgraded four pre-paid public sector gas projects, global credit woes continued to seep into the public-sector utility space where the electrics have made bold natural gas hedging plays in recent years. Major ratings agencies, such as Moody's, last July downgraded several utilities in California and elsewhere around the nation. At that time, the hedges were bad enough that one municipal said it was closing its hedging program.

In June, S&P said that NCGA's $757 million in bonds were unaffected by the MBIA downgrades. MBIA, which earlier in the year had its credit rating downgraded and placed on the S&P CreditWatch designated negative, is involved with insuring bond dividend payments for the NCGA deal.

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