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California Munis Sell $901M in Bonds to Support Gas Purchase

Three medium-sized public sector power utilities in California last Thursday sold $901 million in bonds through a financing arm, M-S-R Energy Authority, to support a 30-year natural gas purchase that will be shared by the trio. This is akin to other long-term group gas purchases by similar public-sector utility groups in Northern and Southern California in recent years.

In the meantime, at least one major municipal (muni) financing arm, the Southern California Public Power Authority (SCPPA), has moved away from the pre-paid gas. Instead, SCPPA is adding natural gas reserves and carrying out almost a perpetual bidding program for new renewable projects.

"We're just starting to survey our [12] member utilities to see if its time for another round of buying more gas reserves," said Bill Carnahan, SCPPA executive director, noting that a half-dozen members have teamed up to obtain reserves in Wyoming and Texas during the past four years. Gas pre-pay purchases are not as attractive these days, he said.

Nevertheless, Modesto Irrigation District (MID), the City of Santa Clara's Silicon Valley Power and Redding (CA) Electric Utility have pooled their resources in the M-S-R Energy bond sale. It was assigned an "A+" credit rating by Fitch Ratings earlier in August, based on what the rating agency said was a reflection of the strong credit ratings of the counterparties involved in the deal -- Citigroup Inc. ("A+") and JP Morgan Chase ("AA-").

The bonds collectively support prepaid supplies amounting to 22,000 MMBtu/d, with Silicon Valley taking more than half (12,000 MMBtu/d) and the other two public power entities each taking 5,000 MMBtu/d, according to an official at MID. Supplies begin flowing to the three utilities Oct. 1.

Prepaid natural gas purchase deals are becoming more common, and financial analysts have noted that the prepaid gas bonds are back after a yearlong drought in the midst of the banks' credit problems and Lehman Brothers Holdings Inc.'s default on $709 million of Georgia-based Main Street Natural Gas debt. SCPPA has outstanding $500 million in bonds for prepaid gas deals for a half-dozen of its members and another $450 million gas reserves in Wyoming and Texas for some of the same public sector utilities, including the Los Angeles Department of Water and Power.

Other ratings agencies have been slapping warnings of potential downgrades on some of the outstanding bonds for large gas prepay deals -- particularly in California -- because of indirect negative developments with some of the major financial players, such as the Bank of America (BofA). Last spring Standard & Poor's Ratings Services (S&P) said each rating action involving the placement of a CreditWatch "with negative implications" designated on the debt financing was specifically called out as the result of a negative credit outlook for BofA and its subsidiaries, including Merrill Lynch & Co. Inc.

For the M-S-R bonds, however, Fitch assigned "stable" outlooks for all of the parties, saying the transaction was structured "to limit and mitigate bondholder exposure to the counterparties besides Citigroup, the guarantor of the gas supplies. Going forward, the rating of the transaction will "primarily reflect the rating of the supplier-guarantor," Fitch said.

Continuing global financial woes are not a factor as far as SCPPA and its members are concerned, Carnahan said. "We've done a lot of restructuring of some of our debt to lower our exposure, although we were never at a great deal of risk, and we never were penalized, but some of our deals involved [the troubled global insurance company] AIG and it was pretty shaky there for awhile. We had to restructure some deals to take them out of the deals. Again, we took the risk away."

Carnahan said SCPPA was preparing to do probably $600-700 million in bonds for renewable projects in the next six months, and he said the financing arm "doesn't expect to have any problem raising that money."

"We've put our request for proposals [RFP] on our website as sort of a perpetual RFP," Carnahan said. "Developers can bring a project to us any time, and we'll take a look at it." (The website contains a renewables RFP asking for submittals by Oct. 30.)

During the past two years, SCPPA has had to restructure at least two of its wind power projects when investment tax credit (ITC) investors dried up with the souring of the global economy. "When Wall Street fell apart, there weren't any tax investors left," Carnahan said. "We had to restructure those deals, and what happens is we now have the option of acquiring the projects; otherwise, they might not be able to build it."

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