Three medium-sized public sector power utilities in California on 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.

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 analyst 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. The Southern California Public Power Authority 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. (see Daily GPI, May 8).

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.

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