OREANDA-NEWS. June 17, 2015. Fitch Ratings has affirmed the rating on the following bonds issued by the Northern California Gas Authority No. 1 (NCGA):

--\\$342.5 million gas project revenue bonds series 2007B at 'A'.

The Rating Outlook is Stable.

SECURITY

The Series 2007B bonds are special obligations of the issuer, payable solely from revenues and other funds pledged under the indenture. Revenues are derived from the fulfillment of the obligations from each of the transactions varied counterparties.

CREDIT SUMMARY

Given the structured nature of prepaid natural gas transactions and the different components of pledged revenues, ratings reflect Fitch's assessment of the relevant counterparties and structural enhancements. The principal counterparties in the NCGA Series 2007B transaction include Morgan Stanley (MS; rated 'A'/Stable Outlook), Royal Bank of Canada RBC; rated 'AA'/Stable Outlook), and the purchasing utility, Sacramento Municipal Utility District (SMUD;
'AA-'/Stable Outlook).

KEY RATING DRIVERS

SOLID GUARANTEED GAS SUPPLIER: Natural gas is supplied to NCGA by Morgan Stanley Capital Group, Inc. (MSCG) whose obligations are guaranteed by MS. Under any event of termination, including a payment default by NCGA or the persistent failure of MSCG to deliver gas, MSCG is required to make a termination payment sized in an amount to equal or exceed to cost of redeeming all outstanding bonds.

STRONG COMMODITY SWAP PROVIDER: The commodity swap provider is RBC, which exhibits strong credit quality. The executed ISDA between NCGA and RBC requires RBC to post adequate assurances in the event RBC is downgraded below A/A2.

CREDITWORTHY GAS PURCHASER: SMUD provides exclusive electric service to a predominately residential customer base in and around the city of Sacramento, CA. Importantly, gas supplied to SMUD via the NCGA structure is strategically important to the utility system as it represents about 10% of annual fuel supply requirements and is delivered at a meaningful discount to monthly index pricing.

RATING SENSITIVITIES

CHANGE IN COUNTERPARTY RATINGS: The long-term rating on the bonds will continue to be determined by Fitch's assessment of the transaction structure, the role of each counterparty in the structure, and their credit quality.

CREDIT PROFILE

NCGA is a not-for-profit, joint powers authority formed by SMUD and the Sacramento Municipal Utility District Financing Authority. NCGA issued its Series 2007B bonds to prepay for a specified supply of natural gas to be delivered by MSCG to NCGA over a 20-year period. NCGA sells the gas to the project's sole participant, SMUD, which is obligated to purchase delivered gas on a take-and-pay basis as an operating expense of its utility system.

A National Public Finance Guarantee Corp. (NPFG) surety bond has been issued to support a potential payment shortfall by SMUD pursuant to the gas purchase agreement. However, Fitch does not believe that the surety bond provides additional rating enhancement to the structure.

COMMODITY SWAP AGREEMENT TO HEDGE PRICE RISK

To hedge the risk of changes in gas prices, NCGA has entered into a commodity swap agreement with RBC, exchanging a monthly index price for a fixed price. RBC has separately entered into a back-to-back swap agreement with MSCG, exchanging a fixed price for a floating natural gas price.

DEBT SERVICE FUND AGREEMENT

Amounts in the debt service fund (\\$15 million at 12/31/2014) are invested in a synthetic guaranteed investment contract in the form of a forward supply agreement. Securities are delivered to NCGA by Morgan Stanley Capital Services, Inc. (guaranteed by MS). MS is required to collateralize its guarantee obligations if its rating falls below A-/A3.

STRUCTURE DESIGNED FOR TIMELY PAYMENT

The bonds are structured with provisions that provide for timely payment of debt service, regardless of changes in natural gas prices or the physical delivery of gas by MSCG (since financial payments will be due from MSCG in certain cases of non-delivery of gas). Payments due from SMUD, together with those required under the commodity swap agreement and debt service fund agreement, are sufficient to meet debt service requirements.

Payments due from MSCG (backed by MS) upon early termination, together with other available funds, are also expected to equal an amount sufficient to pay off the bonds plus accrued interest. The funds required to pay the termination payment will be provided by MSCG and guaranteed by MS.