NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on the following bonds issued by the Public Authority for Colorado Energy (PACE) as follows:
--$633.1 million natural gas purchase revenue bonds, series 2008 at 'A'.
The Rating Outlook is Stable.
SECURITY
The bonds are special obligations of PACE, payable solely from revenues and other funds pledged under the indenture. Revenues are derived from the fulfillment of the 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.
CREDIT SUMMARY
Given the structured nature of prepaid natural gas transactions and the different components of pledged revenue, ratings generally reflect Fitch's assessment of the relevant counterparties and structural enhancements. The principal counterparties in the PACE series 2008 transaction include:
--Gas supplier: Merrill Lynch Commodities Inc. (MLCI), guaranteed by Bank of America Corporation (BAC; rated 'A' with a Stable Outlook by Fitch);
--Commodity swap provider: Royal Bank of Canada (RBC; rated 'AA'; Outlook Stable);
--Gas purchaser: Colorado Springs Utilities (CSU; 'AA'; Outlook Stable);
--Investment agreement providers: Credit Agricole Corporate and Investment Bank (Credit Agricole; rated 'A'; Outlook Stable); and Transamerica Life Insurance Co. (rated 'AA-'; Outlook Negative).
KEY RATING DRIVERS
SOLID GUARANTEED GAS SUPPLIER: Natural gas is supplied by MLCI, whose obligations are guaranteed by BAC. In the event MLCI fails to deliver gas for any reason (including force majeure), it is required to pay specified amounts to PACE, or at PACE's request provide a postponed delivery schedule the gas not delivered.
SINGLE STRONG GAS PURCHASER: The sole gas purchaser is CSU, which exhibits a strong credit profile. Unlike many other prepaid gas transactions, the gas purchaser's payment performance is not enhanced via a surety bond, due to CSU's strong standalone credit quality.
STRONG COMMODITY SWAP PROVIDER: RBC is the commodity swap provider and exhibits a strong credit profile.
ADEQUATE INVESTMENT AGREEMENT PROVIDERS: Credit Agricole (formerly Calyon) and Transamerica Life Insurance Co. are the investment agreement providers. Credit Agricole's obligations have been collateralized.
RATING SENSITIVITIES
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 the remaining counterparties in the structure, and their credit quality.
CREDIT PROFILE
PACE is a nonprofit corporation organized for the purpose of assisting the City of Colorado Springs by acquiring, financing and supplying natural gas to the City's utility systems (Colorado Springs Utilities; CSU). In June 2008, PACE issued the series 2008 bonds to prepay for a specified supply of natural gas to be delivered by MLCI (the gas supplier) to PACE for 30 years.
PACE sells the natural gas to the project's sole participant - CSU - who is obligated to purchase delivered gas as an operating expense of its utilities system. The prepaid natural gas accounts for roughly 20% of CSU's annual gas requirements. Fitch recently reviewed CSU's debt rating and affirmed its 'AA'/Stable Outlook for outstanding obligations (for additional details see Fitch's press release dated Sept. 10, 2013).
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 transportation costs, or even the physical delivery of gas by MLCI. Financial payments (or establishment of a postponed gas delivery schedule) are due from the gas supplier in the event of non-delivery of gas for any reason, including during force majeure event. Payments due from PACE, together with those required under the debt service fund agreement and net commodity swap payments, are sufficient to meet debt service requirements.
In the event that the transaction is terminated for any reason, payments due from MLCI, together with other available funds, are expected to be sufficient to pay off the bonds plus accrued interest. The funds required to pay the termination payment will be provided by MLCI (guaranteed by BAC).
Given BAC's current ratings, it has had to collateralize certain obligations to PACE in accordance with the terms of the prepaid gas agreement. The collateral approximates the present value of the purchaser's discount to the index price of natural gas.
COMMODITY SWAP AGREEMENT TO HEDGE PRICE RISK
To hedge the risk of changes in the price of natural gas, PACE has entered into a commodity swap agreement with RBC. The agreement involves exchanging a monthly index price for a fixed price. RBC has separately entered into a mirror swap agreement with MLCI, exchanging a fixed price for a floating natural gas price. In the event that the commodity swap provider is downgraded below 'A+', the provider must collateralize its obligations. In the event the swap provider's rating falls below 'BBB-', replacement of the swap provider is required, or the transaction terminates after 30 days.
With the exception of one gas delivery default (December 2008), which MLCI settled via a cash payment to PACE, the prepaid gas transaction has been operating as expected. Otherwise, all natural gas deliveries have been received as scheduled and all counterparties have made payments as required.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Criteria for Rating Prepaid Energy Transactions' (July 26, 2013);
--'Fitch Affirms Colorado Springs (CO) Series 2013B Rev Bonds 'AA'; Outlook Stable', dated Sept. 10, 2013.
Applicable Criteria and Related Research:
Criteria for Rating Prepaid Energy Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714538
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812409
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