NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on the following bonds issued by the Central Plains Energy Project (CPEP):
--$82.89 million gas project revenue bonds (Project No. 1), series 2007A at 'A';
--$55.92 million gas project revenue bonds (Project No. 1), series 2007B at 'A'.
The Ratings Outlook is Stable.
The bonds are special obligations of the issuer, payable solely from revenues and other funds pledged under the trust agreement. Revenues are derived from the fulfillment of the obligations from each of the transactions varied counterparties. Bondholders also rely on funds pledged under the indenture, which are typically invested by a third party.
Given the structured nature of prepaid natural gas transactions and the different components of pledged revenues, the ratings reflect Fitch's assessment of the relevant counterparties and structural enhancements. The principal counterparties in the CPEP Project No. 1 transaction include Goldman Sachs Group, Inc. (GSG; rated 'A'/Outlook Stable), Transamerica Life Insurance Company (rated 'AA-'/ Outlook Negative) Royal Bank of Scotland plc (RBS; rated 'A'/Outlook Stable), the Metropolitan Utilities District of Omaha (OMUD; rated 'AA+'/Outlook Stable), and MBIA, Inc. (not rated).
KEY RATING DRIVERS
SOLID GAS SUPPLIER: Gas is supplied to CPEP by J. Aron & Company, who also serves as the transaction interest rate swap provider. All of J. Aron's obligations are guaranteed by GSG.
EXPANDED SUPPORT FROM GSG: The receivables purchase agreement with J. Aron, and GSG guaranty, were amended in March 2013 to provide mandatory credit support for MBIA's collateralized obligations under its guaranteed investment contracts (GICs).
COMMODITY SWAP PROVIDER CUSTODIAL ARRANGEMENT: RBS is the commodity swap provider. Credit exposure to RBS is mitigated by a custodial arrangement which insulates bondholders from any failure by RBS to pay under its swap agreement with CPEP.
STRONG DOMINANT GAS PURCHASER: More than 95% of the delivered gas is purchased by OMUD, which exhibits a strong credit profile. The remaining purchase obligations of the City of Cedar Falls, IA are supported by the reserve accounts and RPA.
COLLATERALIZED INVESTMENT AGREEMENT OBLIGATIONS: The obligations of the debt service account GIC provider (Transamerica), as well as those of MBIA related to the reserve accounts, have been collateralized.
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.
The proceeds of the CPEP bonds were used to prepay for a specified supply of natural gas to be delivered by J. Aron. Pursuant to separate gas supply contracts (GSC), CPEP sells the natural gas to OMUD and the City of Cedar Falls, IA, who are obligated to purchase delivered gas as an operating expenses of their respective utility systems. OMUD purchases approximately 95% of the gas delivered, and Cedar Falls purchases the remaining 5%.
COMMODITY SWAP AGREEMENT TO HEDGE PRICE RISK
To hedge the risk of changes in gas prices, CPEP has entered into a commodity swap agreement, exchanging a monthly index price for a fixed price. J. Aron has also entered into a matching swap agreement, exchanging a fixed price for a monthly index price.
A custodial arrangement implemented on the 'back-end' commodity swap agreement between RBS and J. Aron requires all swap payments to be made initially into custodial accounts. The custodial agreement provides that payments made by J. Aron on the 'back-end' swap may be remitted directly to CPEP in the event that RBS fails to make the corresponding required payment to CPEP on the 'front-end' commodity swap; thereby further replacing RBS payment risk with GSG payment risk.
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 J. Aron (since financial payments will be due from J. Aron in certain cases of non-delivery of gas).
Payments for delivered gas due from the Gas Purchasers, together with those required under the commodity swap agreements, investment agreements and the RPA, are sufficient to meet debt service requirements.
Payments due from J. Aron (backed by GSG) 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 J. Aron and guaranteed by GSG.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Criteria for Rating Prepaid Energy Transactions', dated July 10, 2014;
--'U.S. Municipal Structured Finance Criteria', dated Feb. 24, 2014;
--'Prepay Gas Transactions: Focus Shifts to Restructuring' dated April 2, 2014.
Applicable Criteria and Related Research:
Criteria for Rating Prepaid Energy Transactions
U.S. Municipal Structured Finance Criteria
Pre-pay Gas Transactions: Focus Shifts to Restructuring