A recent downgrade of Wachovia Bank NA won’t affect the rating and outlook on a Northern California city’s prepaid natural gas supply deal that is similar to other long-term supply arrangements that public-sector electric utilities in the state have signed in the past two years. Roseville Natural Gas Financing Authority keeps its “A” rating and stable outlook on $209.4 million in 2007A bonds, according to Standard & Poor’s Ratings Services (S&P).

In May S&P pushed up Roseville and some other California munis’ outlooks from negative to stable based on improved ratings and outlooks for Merrill Lynch & Co. Inc., whose ratings are tied to the utilities’ prepaid gas deals (see Daily GPI, May 14).

Last Thursday S&P said the downgrade of Wachovia and its parent, Wells Fargo & Co., follows “an industry review and our recent criteria on stress testing and U.S. banks. The industry review reflects a reassessment of rating levels and rating relativities in the industry and Wells Fargo’s exposure to the deteriorating consumer and commercial credit cycle.”

S&P emphasized that in its role as the debt service forward delivery counterparty, Wachovia is relied on by bondholders to deliver securities, as outlined in the investment agreement, to meet debt service payments. “The securities are deposited into a trust account that is pledged to the benefit of bondholders,” the rating agency said.

Roseville’s municipal financing arm sold the bonds to support the transaction — pre-payment for 46 Bcf of gas during a 20-year period. The deal is tied to the various counterparties in the transaction.

The 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.

“The rating on the [financing authority] prepay transaction is currently tied to the rating on Merrill Lynch (A/Stable/A-1), which guarantees Merrill Lynch Commodities Inc.’s obligations,” said S&P, adding that it could revise the ratings and outlook on the gas deal if it revises Merrill’s ratings, or the ratings of another counterparty in the deal, become a problem.

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