September 26, 2007
Fitch Rates Southern California Public Power Authority $511.5MM Gas Project Revs ‘AA-‘
Fitch Ratings has assigned an 'AA-' rating to $511.5 million in gas project revenue bonds for the Southern California Public Power Authority (SCPPA) as follows:
--Series 2007A (fixed-rate);
--Series 2007B (LIBOR Index Rate)
--Series 2007C (SIFMA Index Rate).
The rating and Fitch's analysis assume the final documents will be in a form satisfactory to Fitch and consistent with the structure described below. The bonds are expected to price on Oct. 3, with Goldman Sachs as the sole manager. The Rating Outlook is Stable.
Bond proceeds will be used by SCPPA to acquire a 30-year supply of natural gas to be supplied by J Aron & Company (J Aron) pursuant to five nearly identical prepaid natural gas sales agreements - one for each of the five SCPPA project participants. SCPPA will sell the gas supply to its five project participants (California municipal electric utilities) at a price equal to first of the month market index minus a fixed discount pursuant to nearly identical gas supply agreements with each project participant. Price risk between the prepaid (fixed) price of natural gas paid by SCPPA to J. Aron at the bond closing and the index price that will be received by SCPPA from the project participants over the next 30 years will be hedged by a commodity swap between SCPPA and AIG-FP Broadgate, as described below. In addition, SCPPA will enter into an interest rate swap with J. Aron to hedge the interest rate risk on the index rate bonds.
The 'AA-' rating is assigned due to the following:
--Guarantor of J Aron's obligations to make financial payments as the gas supplier - Goldman Sachs Group, Inc. (GSG; IDR rated 'AA-' with a Stable Outlook by Fitch);
--Guarantor of AIG-FP Broadgate to make financial netting payments as the commodity swap counterparty - AIG, Inc. (AIG; IDR rated 'AA' with a Stable Outlook);
--Debt service reserve account surety bond provider (MBIA; IDR rated 'AA' with a Stable Outlook);
--Yet to be determined the guaranteed investment agreement provider, with whom the debt service fund and working capital account will be invested (required by trust indenture to be rated at least 'AA-' or fully collateralized).
The bonds are structured with provisions that provide for timely payment of debt service regardless of changes in natural gas prices, interest rates, gas transportation costs, or even physical delivery of gas by the supplier (since financial payments would be due by the supplier, including force majeure). The performance of the five project participants are not a material credit factor in the rating given support provided by the debt service reserve fund that sufficiently covers a default by the participants until the natural gas can be remarketed by J. Aron for the benefit of bondholders.
Bondholder security is provided in the transaction structure outlined in:
--The five prepaid natural gas purchase agreements between J Aron and SCPPA (for the gas volume to be delivered to each project participant) that requires J Aron to supply 30 years of a fixed amount of gas supply in return for a prepayment at closing made from bond proceeds and require a termination payment sufficient, along with reserves on hand, to redeem the bonds in the event of an early termination of the prepaid natural gas agreement;
--The gas supply agreements between SCPPA and each project participant that requires each project participant to pay for any gas delivered by J Aron to SCPPA at a price equal to first of the month market index minus a fixed discount;
--The commodity swaps between SCPPA and AIG-FP Broadgate that are designed to hedge the risk of natural gas price variations between the fixed price paid by SCPPA as a prepayment and the first of the month market index price paid over the next 30 years by project participants;
--The uncollateralized guaranteed investment contract expected to be bid at the time of pricing that will invest debt service funds and working capital account deposits with the provider in return for a guaranteed investment return;
--The trust indenture between U.S. Bank National Association (Trustee) and SCPPA that outlines certain commitments to bondholders, including extraordinary redemption of the bonds in the event of any early termination of the prepaid natural gas sales agreements, for any reason, and the establishment of a debt service reserve fund that is sufficient to protect bondholders from a project participant default;
--Five surety bond policies provided by MBIA, one for each project participant's debt service reserve fund requirement.
--Working capital account to make payments to commodity swap provider in the event of project participant default, and
-- A Receivables Purchase Agreement between J. Aron and the Trustee that will replenish any shortfall in the working capital account if needed to pay bondholders in the event of an early termination.
This transaction contains limited unique features as compared to other gas prepay transactions recently rated by Fitch. Although noted for disclosure purposes, none of these distinctions are considered to be material rating factors.
--Greater flexibility regarding commodity swap provider replacement: SCPPA has the flexibility to replace the commodity swap provider at any time as long as rating confirmation is received from each of the rating agencies then currently rating the bonds, whereas in other transactions, the commodity swap provider could only be replaced in specific events;
--Stricter collateral posting in GSG credit event: GSG can avoid a automatic termination event of the prepaid natural gas supply agreement in the event it is downgraded below 'BBB-' if GSG elects to post collateral in an amount equal to 110% (vs. 100%) of the termination payment;
--Greater legal separation between project participants: the use of five prepaid natural gas supply agreements, five commodity swaps, five working capital accounts, and five debt service reserve funds (individually sized to match the volume of each project participant) is designed to prevent any shared support among project participants of the working capital account or debt service reserve fund and should facilitate the partial early redemption of bonds, if necessary;
--Ability to use lower-rated investment agreements: guaranteed investment agreement must be provided by an 'AA-' rated entity unless fully collateralized and then the entity may be rated as low as 'A-'. Fitch views collateralized agreements as being a sufficient structural provision to support the current rating on the bonds.
Fitch expects to publish a full report prior to bond pricing that will provide additional details on the transaction structure.