SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed Utility Contract Funding, LLC's (UCF, the project) approximately $829.3 million senior secured bonds ($125.2 million outstanding) due in 2016 at 'A-'. The rating is linked to the project's lowest rated counterparty at 'A-'. The Rating Outlook remains Stable.
The rating of the bonds reflects the credit quality of Public Service Electric & Gas Company (PSE&G) and Morgan Stanley. Due to the structural balance of the power purchase agreements (PPAs), the credit risk is effectively limited to PSE&G's payment obligation under the amended and restated PPA, and Morgan Stanley's guarantee of Morgan Stanley Capital Group's (MSCG) payment obligation of liquidated damages under the mirror PPA. Accordingly, the rating of the bonds is equivalent to the lower counterparty credit rating of PSE&G ('A-'/Outlook Stable) or Morgan Stanley ('A'/Outlook Stable).
KEY RATING DRIVERS
Operation Risk: Stronger
Lack of Operational Risk: There is no performance risk associated with this transaction due to the obligation by MSCG to schedule, sell and deliver annual quantities of energy or pay liquidated damages as set forth by the mirror PPA. The liquidated damages payable to UCF are sufficient to pay liquidated damages to PSE&G and cover debt service.
Supply Risk: Stronger
Fully Hedged Supply Risk: Commodity price and power supply risks are fully hedged by the structural balance between the PPAs. All obligations and risks are borne by MSCG and are financially backstopped by the Morgan Stanley guarantee.
Revenue Risk: Stronger
Revenue and Cash Flow Stability: UCF has stable and predictable cash flows due to the fixed capacity and energy rates under both the amended and restated PPA and the mirror PPA. The amended and restated PPA also ensures sufficient revenues to cover MSCG capacity and energy payments as well as annual debt service.
Debt Structure: Midrange
Reserves Mitigate Tail Risk: The debt is structured to amortize over the life of the agreements with a five month tail. A liquidity reserve currently sized at $27 million is sufficient to cover this tail. Additionally, the liquidity reserve helps to smooth cash flows for the semi-annual payments.
Debt Service: The project cash flows have been sized to meet 1.0x debt service coverage which is adequate for the investment grade rating given the contractual nature of the project.
RATING SENSITIVITIES
Positive/Negative - Counterparty Rating Change: The rating will change if the rating for PSE&G or Morgan Stanley is downgraded below 'A-' or if PSE&G's rating is upgraded.
CREDIT SUMMARY
UCF is an indirect, wholly owned subsidiary of JPMorgan Chase & Co. ('A+'/Outlook Stable). UCF was formed in August 2001 solely to obtain and fulfill the rights and obligations under an amended and restated PPA. The proceeds from the issuance were primarily used to reimburse the original owners' costs of obtaining and restructuring the PPA and to fund accounts required under the bond indenture.
UCF is a special-purpose entity created to sell electric energy and capacity to PSE&G under a long-term 15-year PPA. UCF purchases the energy and capacity from MSCG, a wholly owned subsidiary of Morgan Stanley, under a mirror PPA with substantially similar terms. The PPA price of sales to PSE&G is higher than the PPA cost of purchases from MSCG, providing positive cash flow to pay debt service. Both PPAs are structured to allow for payment of liquidated damages in lieu of delivering energy or capacity. Morgan Stanley has guaranteed MSCG's payment obligations under the mirror PPA.
UCF has no employees. All management and accounting functions are provided by an affiliate, Arroyo Power GP Holdings LLC, an indirect wholly owned subsidiary of JP Morgan, under an administrative services agreement. All electricity scheduling functions are performed by MSCG under the mirror PPA. UCF has no physical assets. The material assets of UCF consist of the PPA with PSE&G, the mirror PPA with MSCG, UCF's interest in cash accounts administered by the Trustee, and various guarantees and support agreements.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967
Rating Criteria for Thermal Power Projects (pub. 23 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998691
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998691
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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