Questions about the credit ratings of a debt service provider in two natural gas pre-pay deals involving California’s primary public-sector utility financing arms will not affect the credit or outlook on either state-chartered agency, according to Standard & Poor’s Ratings Services (S&P). Combined, the gas contracts involve $1.26 billion in project revenue bonds.

The source of concerns is MBIA Insurance Corp., the provider of debt service reserve surety bonds to both the Southern California Public Power Authority’s (SCPPA) $504.5 million in pre-paid gas deals, and Northern California Gas Authority’s (NCGA) $757.1 million in revenue bonds to back the pre-pay contract. SCPPA has J. Aron & Co. as its supplier and The Goldman Sachs Group Inc. guaranteeing J. Aron’s obligation, and NCGA has Morgan Stanley Capital Group Inc. as its supplier and guarantor of the supply obligations.

MBIA provides payments, if necessary, for both public utility financing units to cover debt service in the case of a municipal participant in one of the deals defaulting.

S&P put a “CreditWatch Negative” on the triple-A-rated MBIA insurance firm, with the caveat that it did not expect that move to impact either SCPPA’s or NCGA’s gas deals.

Last November as the sub-prime mortgage crisis spread around Wall Street, S&P did change NCGA’s outlook to “negative,” and some financial and gas supply representatives began talking cautiously about the possible impact on pre-pay gas deals industrywide (see Daily GPI, Nov. 9, 2007).

In the midst of the subprime mortgage problems last fall, speakers at the LDC Forum Rockies & West conference in Los Angeles expressed concerns about S&P changing the outlook from stable to negative on the NCGA deal to get long-term pre-paid supplies for the municipal utility in Sacramento, CA. They stressed that NCGA’s supplier, Morgan Stanley, had just reported that its revenues fell by $3.7 billion in the two-month period ended Oct. 31 because of a decline in value of its subprime mortgage-related exposure, S&P said.

At stake for SCPPA and its members is a contract with Goldman Sachs to handle a massive pre-payment for gas supplies stretching over the next 20-30 years. The investment bank finalized the financing and operational details for a number of Southern California munis that would pre-pay more than $500 million for future gas supplies. They are buying “index-minus-priced” supplies over a 20- to 30-year period (see Daily GPI, Nov. 27, 2006).

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