Fitch Affirms Central Plains Energy Project No. 1 (NE) Gas Proj Revs Ser
2007A&B at 'A'
NEW YORK -- March 19, 2013
Fitch Ratings has affirmed the ratings on the following bonds issued by the
Central Plains Energy Project (CPEP), NE:
--$123.68 million gas project revenue bonds (Project No. 1), series 2007A at
--$55.915 million gas project revenue bonds (Project No. 1), series 2007B at
The Rating Outlook on all bonds is Stable.
The series 2007 A and 2007 B 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, 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', Stable Outlook by Fitch), Transamerica Life
Insurance Company (rated 'AA-', Negative Outlook) Royal Bank of Scotland plc
(RBS; rated 'A', Stable Outlook), the Metropolitan Utilities District of Omaha
(OMUD; rated 'AA+', Stable Outlook), and MBIA, Inc. (Not rated).
KEY RATING DRIVERS
SOLID GUARANTEED GAS SUPPLIER: Gas is supplied to CPEP by J. Aron & Company,
who also serves as the variable-rate series 2007B interest rate swap provider.
All of J. Aron's obligations are guaranteed by GSG.
EXPANDED SUPPORT FROM GSG: Proposed amendments to the transaction will amend
the existing receivables purchase agreement (RPA) with J. Aron (and GSG
guaranty) 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 will be further mitigated pursuant to
proposed amendments and a custodial arrangement that will insulate 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.
PROPOSED AMENDMENTS HAVE NO RATING EFFECT: Proposed amendments to the CPEP
Project No. 1 transaction are viewed as supportive of credit quality, but will
have no effect on the current rating.
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, which is obligated to purchase delivered gas as an operating
expense of its 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.
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).
Fixed payments 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.
PROPOSED AMENDMENTS HAVE NO EFFECT ON RATING
CPEP has proposed to amend the existing Project No. 1 agreements to provide
for three principal objectives that will reshape the risks to bondholders, but
which Fitch believes have no effect on the current rating. The principal
changes include expanding the current RPA and related GSG guaranty to cover
all MBIA non-payment risk related to the existing MBIA GICs; thereby
effectively replacing MBIA payment risk with GSG payment risk.
A custodial arrangement will also be implemented on the 'back-end' commodity
swap agreement between RBS and J. Aron that would require all swap payments to
be made initially into custodial accounts. The custodial agreement will
provide 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.
Finally, the gas purchase agreement will be amended to eliminate the seller
default provision if GSG fails to maintain investment grade ratings from
Moody's and S&P. Although the proposed change exposes bondholders to greater
risk related to declining credit quality at GSG, it has no effect on the
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Criteria for Rating Prepaid Energy Transactions', dated Aug. 7, 2012;
--'Prepay Gas Transactions: Focus on Counterparty Risk,' dated Feb. 23, 2009.
Applicable Criteria and Related Research
Prepay Gas Transactions: Focus on Counterparty Risk
Criteria for Rating Prepaid Energy Transactions
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Hugh Welton, +1-212-908-0742
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Dennis Pidherny, +1-212-908-0738
Kathy Masterson, +1-415-7328-5622
Elizabeth Fogerty, New York, +1 212-908-0526
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