Correction - Fitch Rates Northern California Gas Authority's $758MM 2007A/B Gas Project Revs 'AA-'.

NEW YORK -- This is a correction for a press release that was issued on May 8, 2007. It corrects the Rating Outlook for Morgan Stanley, which consequently affects the Rating Outlook for Northern California Gas Authority.

Fitch Ratings has assigned an 'AA-' rating to the Northern California Gas Authority No. 1's (NCGA) $758.3 million gas project revenue bonds, consisting of the following:

--$132.3 million fixed-rate bonds, series 2007A;

--$626 million index rate bonds, series 2007B.

The Rating Outlook is Negative.

The 2007 bond proceeds will prepay a 20-year supply of natural gas for the gas project participants, and locks in the cost of gas at a predetermined discount to the regional market index price. Given the structured nature of the transaction, the expected 'AA-' rating reflects the lowest rating of: the guarantor of the gas supplier and interest rate swap provider (Morgan Stanley, rated 'AA-' with a Negative Outlook by Fitch); the commodity swap counterparty (Royal Bank of Canada, rated 'AA' with a Stable Outlook); and the debt service reserve fund and commodity swap account surety bond provider (MBIA, rated 'AAA' with a Stable Outlook). The bonds are expected to price May 16, with Morgan Stanley as sole underwriter.

Subject to market conditions, the 2007 bonds may be issued entirely as fixed-rate bonds (series 2007A) or as a combination of fixed- and floating (index) rate bonds (series 2007A/B). For the 2007B bonds, the interest rate will be established quarterly at an expected 67% of the three month LIBOR rate. The index bonds would carry a long term rating as the securities do not contain put or demand features for investors. If the index rate bonds are issued, NCGA will enter into a floating-to-fixed interest rate swap, which will fix NCGA's aggregate financial obligation. The interest rate swap counterparty will be Morgan Stanley Capital Services (MSCS), and their performance is unconditionally guaranteed by their parent, Morgan Stanley (MS). The rating and Fitch's analysis assumes the final documents will be in a form satisfactory to Fitch.

NCGA is a joint power authority formed by the Sacramento Municipal Utility District (SMUD; rated 'A' with a Positive Outlook) and the Sacramento Municipal Utility District Financing Authority. NCGA was created to acquire natural gas for its project participants, with SMUD as the only participant for this project,. This project will provide approximately 15% of SMUD's daily gas needs beginning in June 2007.

The 2007 bonds are secured by the gas supply contract between NCGA and SMUD, funds and accounts established under the Indenture, and the revenues of NCGA. NCGA's revenues primarily consist of payments from SMUD for delivery of gas under the take-and-pay gas supply contract, net swap payments from the commodity swap provider (RBC) and interest rate swap provider (MSCS), and any gas remarketing payments due from the gas supplier (Morgan Stanley Capital Group; MSCG) under the prepaid agreement.

Going forward, the rating for the 2007 bonds will move with Fitch's assessment of the guarantor (MS), the commodity swap provider (RBC), and the surety bond provider (MBIA). The rating and performance of the sole gas project participant, SMUD, is covered by MBIA under the debt service reserve fund surety. Given the sizing of the debt service reserve and commodity swap account surety bonds, and the gas remarketing provisions in the Prepaid Gas Sale and Purchase Agreement, any SMUD payment shortfalls will be covered until either: 1) NCGA or the trustee exercises its right to terminate its gas deliveries to SMUD and requests that the gas supplier (MSCG) remarkets all gas; or 2) the gas project is terminated, triggering a termination payment from the gas supplier's guarantor (MS) and an extraordinary redemption of the bonds. In either case, there should be sufficient revenues (together with other available funds, including access to the debt service reserve fund surety bond for case #1) for NCGA to provide timely payment of principal and interest on the 2007 bonds.

Obligations of the Gas Supplier (MSCG) and Guarantor (MS):

NCGA will enter into a gas purchase and sale agreement with MSCG, which, in exchange for a prepayment amount to be received at bond closing, will unconditionally obligate the supplier to provide NCGA a specified 20-year supply of natural gas. A financial guaranty is provided by MS, the parent company of the gas supplier (MSCG), securing the supplier's performance under the gas purchase and sale agreement.

Consequently, the rating on the 2007 bonds is directly impacted by the long-term issuer default rating and Outlook that Fitch assigns to the supplier's parent company, Morgan Stanley. The rating on the bonds reflects the obligation of MSCG as supplier to deliver gas (or provide financial compensation if gas is not delivered or taken), and also to meet its obligation to make the required termination payment in the event the prepaid gas agreement is terminated.

Obligation Under the Commodity Swap Agreement:

At bond closing, in order to hedge against reductions in gas sale revenues resulting from a decline in monthly index gas prices, NCGA has entered into a floating-to-fixed commodity price swap agreement with RBC (rated 'AA'). In addition, the total volume of natural gas hedged by the commodity swap agreement (for NCGA) will equal the volume of gas delivered by the supplier.

The commodity swaps are essential to the structure and the rating on the bonds. The net swap payments made under the agreement accommodate any difference between the index-based natural gas revenues NCGA will receive from SMUD, versus the fixed debt service NCGA will pay on the bonds. Bondholders take the remote risk of a default by the commodity swap providers. In the event of a commodity swap provider default, NCGA may not receive sufficient revenues from SMUD in a low gas price environment to pay debt service and no termination payment from the supplier is required. Therefore, Fitch's rating of the 2007 bonds also reflects the credit quality of the commodity swap provider.

The commodity swap agreements are required to be assigned to another swap provider in the event of a downgrade below 'A' (assuming the existing commodity swap counterparty can not provide adequate additional assurances of performance). The swap must be assigned to another qualified swap counterparty (rated 'AA-' or better) within 45 days, or it could trigger a termination of the purchase agreement and require a termination payment to be made by the supplier.

Obligations under the Interest Rate Swap Agreement:

At bond closing, should NCGA issue index rate bonds, the gas purchaser will enter into a floating-to-fixed interest rate swap with MSCS, which will fix NCGA's aggregate financial obligation.

The interest rate swap netting payment is necessary to adequately meet the debt service on the 2007 bonds. As a result, the rating of the interest rate swap provider (MSCG) impacts the rating of the bonds. In this case, MSCG's ability to perform is guaranteed by its parent company, Morgan Stanley (long-term Issuer Default Rating 'AA-').

Unique Features:

This transaction contains some unique features as compared to other gas prepay transaction recently rated by Fitch, including the following:

--The rating of the commodity swap counterparty (RBC) can fall from 'AA' down to single 'A' rating, without any posting of collateral or other remedy - a performance risk borne by bondholders;

--Morgan Stanley's rating must fall below investment grade, unless alternative credit support is provided, before NCGA may terminate the prepaid agreement;

--The use of floating-rate notes, with no put or demand feature, have only been used in two prior gas prepaid transactions, with the floating interest rate swapped to a fixed rate through an interest rate swap. Upon termination of the swap, neither party will owe the other a market based termination payment.

Fitch will publish a full report prior to bond pricing that will provide additional details on the transaction.

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.