After two months of being on a designated watch for possible downgrade, Northern California Gas Authority (NCGA), a gas purchaser for public-sector utilities, had its gas revenue bonds (Series 2007 A and B) rating dropped to “A2” from “A1” by Moody’s Investors Service.
At the center of the ratings are bonds used to pre-pay long-term gas supplies used by the “A”-credit-rated Sacramento Municipal Utility District (SMUD) to fuel some of its electric generation plants.
As a financing conduit for public power generators, NCGA has felt the domino effect of the Wall Street credit meltdown, being placed on “watch for a downgrade” of its “A1” credit rating Oct. 16 by Moody’s, following the credit agency’s downgrade of Morgan Stanley. Some $758 million of bonds held by the gas authority are tied to Morgan Stanley and other Wall Street firms caught in the credit collapse (see Daily GPI, Oct. 21).
The rating agency said its downgrade was based on Morgan Stanley’s “A2” rating as the gas purchase contract guarantor; Royal Bank of Canada (“Aaa” rating) as guarantor of the commodity swap counterparty, Royal Bank of Canada Europe Ltd.; and SMUD (“A1”) as the sole participant in the transaction.
MBIA Insurance Corp., which has been affected by the global credit crunch and was downgraded earlier this year by Moody’s, provides a customer insurance policy covering SMUD’s failure to pay.
Since late September when Moody’s and Standard & Poor’s Ratings Services downgraded four pre-paid public sector gas projects, global credit woes have worsened, seeping further into the public-sector utility space where some of the electrics have made bold natural gas hedging plays in recent years. Moody’s last July downgraded several of the utilities in California and elsewhere around the nation. Since then, some public sector utilities have discontinued hedging programs.
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