TEXT-Fitch affirms Utility Contract Funding at 'BBB+'

Thu Apr 12, 2012 5:14pm EDT

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
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