TEXT-Fitch affirms Utility Contract Funding at 'BBB+'
April 12 - Fitch Ratings has affirmed Utility Contract Funding, LLC's (UCF) $829.3 million senior secured bonds due 2016 at 'BBB+' as a result of the structural balance of the contractual agreements and the credit quality of the counterparties Public Service Electric & Gas (PSE&G) (rated 'BBB+', with a Stable Outlook by Fitch) and Morgan Stanley ('A', Stable Outlook). Key Rating Drivers Counterparty Linkage: The rating of the bonds is constrained by the lower of two credit ratings of counterparties PSE&G and Morgan Stanley. The project's risk exposure is effectively limited to PSE&G's payment under the power purchase agreement (PPA), and Morgan Stanley's guarantee of Morgan Stanley Capital Group's (MSCG) payment of liquidated damages under the mirror PPA. Cash Flow Stability: UCF has stable and predictable cash flows due to the fixed capacity and energy rates under both the amended and restated PPA and the mirror PPA. The PPA also ensures sufficient revenues to cover MSCG capacity and energy payments as well as annual debt service at 1.01 times (x) coverage annually. Lack of Operational Risk: There is no performance risk associated with this transaction due to the obligation by MSCG to schedule, sell and deliver annual quantities of energy or pay liquidated damages as set forth by the mirror PPA. The liquidated damages payable to UCF are sufficient to pay liquidated damages to PSE&G and cover debt service. What Could Trigger a Rating Action --Counterparty Rating Change: The rating of the project would change to reflect a change to the counterparty ratings. Security The bonds are secured by a first security interest in all rights, title and interest in all assets, including the right to sell energy to PSE&G, the right to purchase energy from MSCG, the Morgan Stanley Dean Witter guarantee and all cash accounts. Credit Update UCF is a special-purpose entity created to sell electric energy and capacity to PSE&G under a long-term 15-year PPA. UCF purchases the energy and capacity from MSCG, a wholly owned subsidiary of Morgan Stanley, under a mirror agreement with substantially similar terms. The difference between the price at which energy is purchased from MSCG and sold to PSE&G is favorable to UCF, providing cash flow to pay debt service. Both PPAs are structured to allow for payment of liquidated damages in lieu of delivering energy or capacity. Morgan Stanley has guaranteed MSCG's payment obligations under the mirror PPA. UCF has no employees. All management and accounting functions are provided by an affiliate, Arroyo Power GP Holdings LLC, an indirect wholly owned subsidiary of JP Morgan, under an administrative services agreement. All electricity scheduling functions are performed by MSCG under the mirror PPA. UCF has no physical assets. The material assets of UCF consist of the PPA with PSE&G, the mirror PPA with MSCG, UCF's interest in cash accounts administered by the Trustee, and various guarantees and support agreements. UCF is an indirect, wholly-owned subsidiary of JPMorgan Chase & Co. ('AA-', Stable Outlook). UCF was formed in August 2001 solely to obtain and fulfill the rights and obligations under an amended and restated PPA. The proceeds from the issuance were primarily used to reimburse the original owners' costs of obtaining and restructuring the PPA and to fund accounts required under the bond indenture. 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: --'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011). Applicable Criteria and Related Research: Rating Criteria for Infrastructure and Project Finance