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Fitch Rates M-S-R Energy Authority, CA's $1B Prepaid Gas Revs 2009A, B & C 'A+'; Outlook Stable

NEW YORK - (BUSINESS WIRE) - Fitch Ratings assigns an 'A+' rating to M-S-R Energy Authority, CA's (the Authority) $1 billion of prepaid gas revenue bonds, series 2009A, 2009B, and 2009C. The Rating Outlook is Stable. Each series of bonds is a special obligation of the Authority and the payment of principal, interest and redemption price is secured by payments of the transactions counterparties as governed by the indenture.

Bond proceeds will be used by the Authority (each series relates to a different participating municipal utility) to purchase a 30-year supply of natural gas for use by participants. Bonds are expected to price the week of Aug. 24, 2009.

The rating reflects the credit risk to bondholders of the transaction's various counterparties, each of which is required to perform its obligations under the governing documents in order for bondholders to receive debt service payments. The counterparties include:

--Citigroup Inc (Citigroup), rated 'A+' with a Stable Outlook by Fitch, which guarantees the performance and payment obligations of the gas supplier, Citigroup Energy Inc (CEI);

--J.P. Morgan Chase (JPM), rated 'AA-' with a Stable Outlook by Fitch, the commodity swap provider;

--For series 2009A, Modesto Irrigation District (CA), rated 'A+' with a Stable Outlook by Fitch, participant;

--For series 2009B, Silicon Valley Power (CA), rated 'A' with a Stable Outlook by Fitch, participant;

--For series 2009C, Redding (CA), rated 'A+' with a Stable Outlook by Fitch, participant.

The transaction is structured to limit and mitigate bondholder exposure to the counterparties besides Citigroup, the supplier guarantor. Going forward, the rating of the transaction will primarily reflect the rating of supplier guarantor unless the transaction's 'structural mitigants' fail. Should the mitigants fail, the rating on the bonds will reflect the structure's weakest link. These mitigants include the following:

--In the event of a termination of the Gas Purchase Agreement (GPA), the subsequent redemption payment by Citigroup is sized to redeem all outstanding bonds. Therefore, bondholder exposure is limited to a potential shortfall in a required debt service payment that could occur in the interim between the termination of the GPA and the required redemption payment by Citigroup. The maximum potential shortfall is limited by the document terms to a maximum of two months debt service payments.

--Regarding the purchasing utilities, the remarketing obligations of the supplier limit bondholder exposure to the purchasers to two months. Furthermore, purchaser risk is mitigated by a surety bond provided by Assured Guaranty Corp (rated 'AA' and on Rating Watch Negative by Fitch), which is sized to cover the maximum two months delivery at a maximum gas price of $25/MMBtu.

--Regarding the commodity swap provider, if the provider is rated below 'A+' it is required to post collateral sized to match the trustee's exposure. Furthermore, should the provider be rated below 'A', the trustee shall use its best efforts to replace the provider.

A full report on the Authority's 2009A, B and C will follow shortly.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
W. Drake Richey, +1-212-908-0325 (New York)
Kathryn Masterson, +1-415-732-5622 (San Francisco)
or
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com