Fitch Affirms Central Plains Energy Project No. 1 (NE) Gas Proj Revs Ser 2007A&B at ‘A’ [Professional Services Close – Up]

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 'A';

--$55.915 million gas project revenue bonds (Project No. 1), series 2007B at 'A'.

The Rating Outlook on all bonds is Stable.

SECURITY

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.

CREDIT SUMMARY

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 percent 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.

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 each counterparty in the structure, and their credit quality.

CREDIT PROFILE

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 percent of the gas delivered, and Cedar Falls purchases the remaining 5 percent.

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 current rating.

Additional information is available at '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

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=427254

Criteria for Rating Prepaid Energy Transactions

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=684588

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