Fitch Rts Public Authority for Colorado Energy Natural Gas Purchase Revs 'A+'; Outlook...

Fitch Rts Public Authority for Colorado Energy Natural Gas Purchase Revs 'A+'; Outlook Negative

NEW YORK--(Business Wire)--
Fitch Ratings assigns an 'A+' rating to Public Authority for
Colorado Energy's (PACE) $630 million of gas purchase revenue bonds.
The final rating will be assigned prior to closing and will be based
upon final documentation in a form satisfactory to Fitch and
consistent with the structure described below. The bonds are expected
to price June 11, 2008. The Rating Outlook is Negative.

PACE is a Colorado nonprofit corporation organized for the purpose
of acquiring, financing and supplying gas for the City of Colorado
Springs. Bond proceeds from this issuance will be used by PACE to
prepay a specified supply of natural gas for 30 years to be delivered
by Merrill Lynch Commodities, Inc. (MLCI). Merrill Lynch and Co.
(Merrill, rated 'A+', with a Negative Outlook by Fitch) will guaranty
the financial obligations of MLCI.

Given the structured nature of the transaction, the expected 'A+'
rating reflects the lowest rating of the following transaction
counterparties (or their performance guarantees):

--The guarantor (Merrill, rated 'A+' on a Negative Outlook by
Fitch) of MLCI's obligations as the gas supplier and remarketer;

--The commodity swap provider's obligation to make timely payments
of contract price in exchange for index price (Royal Bank of Canada,
RBC, rated 'AA', Outlook stable);

--The participating utility's obligation to pay for any gas
received (Colorado Spring Utilities (CSU), rated 'AA' Outlook Stable);

--The guaranteed investment provider (GIC) provider to be selected
at pricing (required to be rated at least 'AA-' by all three rating
agencies at closing).

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 the
supplier (since financial payments will be due by the supplier, in the
event of non-delivery of gas for any reason, including during Force
Majeure events). The credit quality of the customer purchasing the gas
from PACE (Colorado Springs Utilities) and their agreement to purchase
gas delivered is an important component of the rating on this
transaction.

Bondholder security is provided in the transaction structure
outlined in:

--The trust indenture between Wells Fargo Bank and PACE that
outlines certain commitments to bondholders, including extraordinary
redemption of the bonds in the event of an early termination of the
gas purchase agreement for any reason and the payment of swap netting
payments prior to debt service.

--The Agreement for Purchase and Sale of Natural Gas (GPA) between
MLCI and PACE requires MLCI to supply a specified amount of natural
gas for 30 years to PACE in return for a prepayment made from bond
proceeds. The GPA includes a guaranty by Merrill Lynch and Co. and
provisions for termination payments and mandatory advances to be made
by the gas supplier under certain early termination scenarios. The
termination payment under the GPA does not include any amounts owed by
the customer, the commodity provider, or GIC provider.

--The gas supply agreement (GSA) between PACE and Colorado Spring
Utilities requires the customers to pay for any gas delivered by MLCI
to PACE at a price equal to market index price less a fixed discount.

--Under the commodity swap between PACE and RBC, PACE will pay an
index price (less a discount) and RBC will pay a fixed price. This
swap is designed to hedge the risk of natural gas price differences
between the fixed costs established through the bond financing (and
paid by PACE to the trustee for debt service), and the index price
paid by the customer.

--The uncollateralized GIC provider (to be bid at the time of
pricing) will receive debt service and operating reserve account
deposits from the trustee, and in return provide PACE with guaranteed
investment earnings. The earnings from this contract are not included
in the contract price discount to customers; however, bondholders do
take the limited risk (limited in that providers shall post collateral
if they are rated below 'AA-' and must be replaced if it falls below
investment grade) of payment default on the debt service principal and
interest amounts invested with the provider.

-The trust indenture between Wells Fargo Bank and PACE outlines
certain commitments to bondholders, including extraordinary redemption
of the bonds in the event of an early termination of the gas purchase
agreement and the concurrent payment of debt service and commodity
swap payments in the flow of funds.

While prepay transactions are similar in many ways, there are
several variations. Below are some unique characteristics of this PACE
prepay structure.

There is only one project participant and their credit is an
important factor in the rating of the transaction. Typically, the risk
associated with a project participant's failure to pay for gas is
mitigated by a surety bond, cash reserve or mandatory receivables
purchase agreement. In the case of this transaction, upon the failure
of CSU to pay for gas delivered, MLCI has the option to either
purchase the utility's receivables or terminate the transaction. If
MLCI executes its option to purchase the receivables, the transaction
would continue; however, if MLCI decides to terminate the transaction,
the amount due by CSU would be subtracted out of the termination
amount to bondholders. Therefore, CSU ('AA') and their payment for the
gas delivered is an integral part of this transactions credit rating.

While there are no cash reserves in this transaction, a Funding
and Assignment Agreement (F&A agreement) between PACE and MLCI
(guaranteed by ML) requires full payment by MLCI (in most
circumstances) in a mandatory redemption of the bonds. The F&A
agreement also provides mandatory advances to cover certain commodity
swap payment deficiencies, and at the option of the gas supplier the
ability to advance funds to cover a general debt service deficiency on
the part of the authority.

In prepaid energy transactions, there are sometimes collateral
provisions for each of the counterparties at specific rating triggers.
Below are listed certain collateral and GPA termination triggers for
the PACE transaction.

If the swap counterparty (RBC) is downgraded below 'A+' they must
post collateral equal to the cumulative amounts expected to be owed by
RBC to PACE on the next three settlement dates (this is a stronger,
more defined collateral posting provision than in previous gas prepay
structures). Upon a downgrade below 'A', PACE has the option to
replace the swap regardless of collateral posted as long as the new
swap results in a rating that is greater than or equal to the
transactions' rating at the time. If the swap counterparty's rating
falls below Investment Grade ('BBB-'), replacement is required. If
PACE fails to replace within 30 days, the GPA will terminate and the
bonds will be extraordinarily redeemed.

If the GIC provider is downgraded below 'AA-', it must post
collateral that the authority determines to be appropriate for the
interest of bondholders. If the GIC provider's rating falls below
'A-', Pace has the option to replace the GIC with another entity rated
at least 'AA-' (Qualified Provider) and with rating confirmation (of
at least the same or equivalent rating) by each of the rating agencies
then rating the bonds. If the GIC provider's rating falls, below
'BBB-', PACE will replace the GIC provider with another Qualified
Provider. Although it is imperative that the GIC provider make its
scheduled payments to the debt service fund, the interest earnings
from the GIC are not reflected in the fixed discount to CSU and are
not necessary to pay debt service. Therefore, in the event the GIC
provider is terminated and is not immediately replaced, the
transaction will continue to function normally and sufficient deposits
to debt service will continue to be made.

The supplier's guarantor (Merrill) must post collateral if it is
downgraded below 'BBB+', but only an amount equal to the unearned
amount, which would be due to PACE in the event of an early
termination. The collateral posted by the supplier is solely for
PACE's benefit and not available to bondholders.

Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings, New York
Lina Santoro, 212-908-0522
Karl Pfeil, III, 212-908-0516
or
Media Relations:
Brian Bertsch, 212-908-0549

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