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S&P Becomes More Optimistic on Muni Gas Deals

In less than a week, credit rating outlooks for several pre-paid long-term natural gas purchases by public-sector utilities and the billions of dollars of bonds supporting them turned more positive Tuesday as Standard & Poor's Ratings Services translated an uptick in the outlook for a Merrill Lynch & Co. unit as cause to remove negative outlooks on the muni deals. Earlier in May S&P was giving all of the same deals a "negative" outlook.

Impacted so far are Roseville (CA) Natural Gas Financing Authority, Long Beach (CA) Bond Financing Authority, Public Authority for Colorado Energy (PACE), and Main Street Natural Gas Inc. In each case, Merrill Lynch Commodities Inc. (MLCI) is providing the pre-paid gas supplies and Merrill Lynch serves as the guarantor.

The Roseville financing arm's $209.4 million series 2007 A bonds are affirmed at an "A" rating, and the negative CreditWatch was turned into a "stable" outlook designation. "The rating on the transaction -- pre-payment for 46 Bcf of gas during a 20-year period -- is tied to the various counterparties in the transaction," S&P said.

Roseville's city-run electric utility will use the natural gas supplies and the financing authority has the supply agreement with the city for all of the supplies under the pre-paid deal.

Similarly, the Long Beach financing arm has nearly $900 million of bonds supporting a 30-year pre-pay supply deal that is supposed to satisfy 80-90% of the city-run utility's 12-13 Bcf annual gas demand with terms that were designed to keep its retail rates below those of the surrounding Sempra Energy utilities for the next three decades. The deal was put together with MLCI and was unique in that the price is not based only on the California-Arizona border prices for natural gas.

Like the others, Long Beach kept its "A" rating and was switched from "negative" on CreditWatch to having a stable outlook.

In Colorado, PACE has some $653.2 million in series 2008 gas project revenue bonds, and they are now removed from the CreditWatch negative designation. MLCI guarantees PACE's obligation, which helps pay for the prepaid 152.5 Bcf, 30-year supply deal. PACE in turn is supposed to sell the supplies to the public-sector Colorado Springs Utilities.

In Georgia, 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. It too has the tie to Merrill and was removed from the negative outlook

Earlier in May S&P had just turned the outlooks to negative to all of these deals because of the downturn of Merrill, which has quickly seen the tide reverse with its parent Bank of America Corp. (BofA) standing behind Merrill's guarantees (see Daily GPI, May 8). S&P stressed that the outlook on Merrill is now closely linked to the outlook on BoA.

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