Atlanta - The Municipal Electric Authority of Georgia's $907 million investment portfolio, about 12% of which is in derivatives, suffered a $40.3 million market loss this year, authority officials said Friday.

But Ron Vasquez, vice president of financial services, said that he does not expect the authority to suffer actual losses from the current price depreciation of securities held in the portfolio.

Unrealized losses attributable to derivatives were virtuary identical, on a proportional basis, to those experienced in the remainder of the portfolio, Vasquez said.

He attributed the markdown in the value of the agency's holdings to a rise in interest rates over the past year, and said the authority's investments will be held to maturity, precluding actual losses.

Both Vasquez and the agency's chief investment officer Patrich Simkins sought to draw a sharp distinction between the authority's situation and that of Orange County, Calif. On Tuesday, the county filed for bankruptcy under Chapter 9, citing a potential loss of $1.5 billion on an $8 billion portfolio.

"We are not really worried because our liquidity needs are such that we can hold these investments to maturity, so in the final analysis there won't be any losses:' said Vasquez.

Simkins stressed that unlike Orange County, the power authority did not leverage its portfolio by borrowing, against reverse repurchase agreements to fund additional investments.

"There is never a good reason to leverage yourself with reverse repos, and we didn't," he said.

According to Simkins, the $107 million of derivatives held in the portfolio, comprising 11.8% of the total, accounted for $6.1 million, or 15.1%, of the unrealized loss.

"The losses were fairly evenly distributed by security type," said Simkins, who also serves as the authority's treasurer.

Simkins said that about 60% of the derivatives portion of the portfolio is in structured notes from the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. Thirty per cent of the derivatives are "inverse floaters"' and 10% are interest-only and principal-only collateralized mortgage obligations.

Inverse floaters are variable-rate instruments that are reset in opposition to the movement of the overall market.

Simkins said that the authority purchased the derivatives "for hedging purposes only," and has not added any of these instruments to its portfolio since early this year. He said most of these instruments would mature in less than three years.

The 88% balance of the authority's portfolio is divided among U.S. Treasury securities, 30%; collateralized mortgage obligations, 25%; cash-equivalents, 25%; and U.S. agency securities, 8%, he said.

Simkins said the portfolio is distributed among 87 different funds, including about $240 million in debt service reserve funds, $150 million in a rate stabilization fund, $80 million in a fund to take generating facilities out of service, with the remainder allocated to general operating funds.

Debt service reserve funds do not include any derivatives, Simkins said.

Earlier this year, Vasquez said, the authority took steps to improve the oversight of its investments, following general concerns about the weakness of the bond market in March. At that time, he said, the authority set up a three-person investment oversight committee, which reports back to the authority's board each quarter.

In addition, the authority recently hired an outside investment adviser, Callan Associates of Atlanta, to monitor the fund, Vasquez said.

Callan is conducting a review of investment guidelines and will report back its findings in about four months, Vasquez said.

Rating agency officials said Friday that the authority's paper losses do not at present pose credit concerns.

"What's important to us is that there is no pressure on them to liquidate their holdings," said David Alter, an assistant vice president at Moody's Investors Service. Alter said that he was also encouraged that the authority has set up a formal mechanism to monitor the portfolio.

Phillip Edwards, a director at Standard & Poor's, said "the bottom line is that we are not concerned about the authority's unrealized losses on their investment because liquidity in their portfolio is more than adequate.

"Additionally they have matched the maturities on their investments and, as a result none of the unrealized losses will turn into realized losses," Edwards said.

In May, both Moody's and Standard & Poor's downgraded about $4billion of outstanding authority debt. Each rating agency cited financial stress caused by the authority's excess generating capacity.

Moody's cut the authority's senior lien to debt to A from A1; while Standard & Poor's downgraded these borrowings to A plus from AA minus.

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