NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating for the following M-S-R Energy Authority (the authority) gas project revenue bonds:
--$201.0 million prepaid gas revenue bonds series 2009A;
--$500.2 million prepaid gas revenue bonds series 2009B;
--$200.4 million prepaid gas revenue bonds series 2009C.
The Rating Outlook is Stable.
The bonds are special obligations of the issuer, payable solely from revenues and other funds pledged under each indenture. Revenues are derived from the fulfillment of obligations from each of the transaction's 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, ratings generally reflect Fitch's assessment of the relevant counterparties and structural enhancements. The principal counterparties include Citigroup Inc. (Citigroup; 'A'/ Outlook Stable) and J.P. Morgan Chase Bank, N.A. (JPM; 'AA-'/Outlook). Gas purchase obligations reside with the Modesto Irrigation District (MID; 'A+'/Outlook Stable), the City of Santa Clara (electric revenue bonds 'A+'/ Outlook Stable) and the City of Redding (CA) (electric system bonds 'A+'/ Outlook Stable) - and are supported by surety bonds from Assured Guaranty Corp (Not Rated by Fitch).
KEY RATING DRIVERS
GUARANTEED GAS SUPPLIER: The rating on the bonds is currently driven by the credit quality of Citigroup, the lowest rated of the relevant counterparties. Gas is supplied by Citigroup Energy Inc. (CEI), whose obligations are guaranteed by Citigroup. Forward delivery agreements used in the series A and B transactions are also guaranteed by Citigroup.
SOLID COMMODITY SWAP PROVIDER: The commodity swap provider is JPM, which exhibits a solid credit profile.
GAS PURCHASERS: The gas purchasers are MID, the City of Santa Clara and the City of Redding, all of which exhibit strong 'A+' credit quality. The purchases of gas are subject to take-and-pay agreements that require the purchases to be made as operating expenses of the utility.
SEPARATE REVENUE PLEDGES: Each series of bonds is secured by a separate revenue pledge and separate gas supply agreements with MID (Series A), Santa Clara (series B) and Redding (series C).
NO RATING ENHANCEMENT: Fitch does not believe that the Assured Guaranty Corp. surety bonds supporting the obligations of the gas purchasers provide additional rating enhancement to the structure, given the strong credit quality of the three respective gas purchasers.
CHANGE IN COUNTERPARTY RATINGS: The Long-term rating on the M-S-R Energy Authority Project bonds will continue to be determined by Fitch's assessment of the transaction structure, the role of the counterparties in the structure, and their credit quality. The current rating for each series is determined by the weakest of the following rated counterparties: Citigroup, J.P. Morgan Chase Bank, N.A. and the relevant gas purchaser - Modesto Irrigation District (Series 2009A), the City of Santa Clara (Series 2009B) and the City of Redding (Series 2009C).
Bond proceeds were used to prepay the gas supplier (CEI) for a specified quantity of natural gas, deliverable to the issuer over the 30-year life of the bonds. The issuer, in turn, delivers the gas to the three respective purchasing electric utilities. The gas purchasers are only obligated to make a payment if gas is physically delivered. Fitch's 'A' rating reflects bondholder reliance on the gas supplier to deliver the gas or make a cash payment to the issuer over the life of the bonds.
SEPARATE GAS PURCHASE AGREEMENTS AND PLEDGED REVENUE
The purchasing utilities are required to make payments to the issuer for the gas delivered, which together with other payments including those required under the commodity and interest rate swap agreements, should be sufficient to meet debt service requirements. Gas payments are made by the utilities pursuant to separate gas purchase agreements and therefore only secure the repayment of their respective bonds. The series A bonds were issued to prepay for gas to be delivered to MID; the series B bonds for gas to be delivered to Santa Clara; and the series C bonds for gas to be delivered to Redding.
Should the supplier fail to deliver gas or pay an equivalent amount of money, the gas supplier or its guarantor (Citigroup Inc.) is required to make a termination payment to the trustee that, together with other available funds, is sized to be sufficient to redeem outstanding bonds.
Additional information is available at 'www.fitchratings.com'.
Criteria for Rating Prepaid Energy Transactions (pub. 10 Jul 2014)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
Dodd-Frank Rating Information Disclosure Form