Fitch Ratings has upgraded the long-term debt rating for the Florida Gas
Utility's Gas Supply Acquisition Project No. 2 revenue bonds (series
2006) to 'AA' from 'AA-'. The Rating Outlook is Stable. In addition, the
short-term rating for the 2006 bonds is affirmed at 'F1+'.
Florida Gas Utility's (FGU) upgrade follows UBS AG's posting of
collateral equal to 102% of bond and swap related exposure and reflects
Fitch's assessment of the value of the collateral and its permitted uses
under the transactions documents as it pertains to the project's rating
(see below for more details). The collateral posted is sufficient to
redeem bondholders or enter into a replacement Gas Purchase Agreement
(GPA). FGU may exercise one of these two options in the event that UBS
AG (currently rated 'AA-' by Fitch) is downgraded below 'A-'. UBS AG is
the natural gas supplier to the Florida Gas Utility in connection with
the prepaid gas transaction that was financed with proceeds of the
following variable-rate bonds:
--$277.7 million 2006 series A-1 (remarketing agent: Goldman Sachs &
Co.);
--$138.84 million 2006 series A-2 (remarketing agent: Banc of America
Securities LLC);
--$134.84 million 2006 series A-3 (remarketing agent: Bear Stearns &
Co., Inc.);
--$134.84 million 2006 series A-4 (remarketing agent: Bear Stearns &
Co., Inc.).
On April 1, 2008, Fitch downgraded Florida Gas Utility's Gas Supply
Acquisition Project No. 2 revenue bonds (series 2006) to 'AA-' from
'AA', with a Negative Outlook. The downgrade was subsequent to the
downgrade of the UBS AG's long-term Issuer Default Rating (IDR) to 'AA-'
from 'AA' (see the press released dated April 1, 2008).
Per the terms of the GPA, a downgrade of UBS AG by two or more rating
agencies to below 'AA' by Fitch and S&P and Aa3 by Moody's constitutes a
Downgrade Event. It was noted in the same press release that following a
downgrade event, FGU may require UBS to post collateral equal to 102% of
the sum of bond related and swap related exposures.
On April 4, 2008, FGU requested that UBS AG post the required
collateral, which equaled approximately $933 million. UBS AG posted
sufficient collateral on April 7, 2008. The funds are held by Wells
Fargo (Trustee) and marked-to-market weekly. In addition, on Wednesday
of each week, Wells Fargo and Calyon (Swap Counterparty) compute the
project's Termination Exposure to verify the sufficiency of the
collateral. The collateral is invested in qualified 'AAA' or 'Aaa' money
market funds and is presently equal to approximately $980 million.
The posted collateral serves as security for all payment and performance
obligations of UBS AG and all other monetary claims that FGU may have
against UBS AG. In a scenario where UBS AG's rating falls below 'A-' or
'A3' by any one of the rating agencies, FGU may terminate the GPA and
demand payment of the Early Termination Claim from UBS. Upon such
occurrence, FGU has the right to transfer the bond related portion of
the collateral posted by UBS AG to Wells Fargo, the trustee, to the
Substitute Gas Project Account (SGPA). Although these actions are at
FGU's discretion, the interests of bondholders and FGU are aligned. If
FGU continues to receive gas, bondholders will continue to get paid, but
if FGU is not receiving gas it will terminate the transaction and
bondholders will be fully redeemed.
Additionally, to enter into a substitute GPA with a new supplier, the
terms of the new GPA must be substantially similar to those of the UBS
GPA. In addition, the substitute GPA is subject to confirmation by each
rating agency that the project's rating will not be withdrawn or
downgraded because of the new GPA.
If FGU is unable to execute a replacement GPA within 90 days, then the
trustee shall transfer all funds remaining in the SGPA to the Special
Redemption Account (SRA). The funds in the SRA shall be used by the
trustee for redemption of all bonds and payment of accrued interest
It is important to note that the 'AA' rating on the bonds also takes
into account an event in which UBS AG's rating rises above 'AA-'. Under
this scenario, the collateral would be released and the project's
long-term credit risk to bondholders would depend solely on UBS's
obligation to make a final termination payment.
The series 2006 bond proceeds were used to fund a natural gas prepay
transaction between FGU and UBS AG. FGU is a Florida joint action agency
that acquires, manages, and finances gas supplies for sale to its 23
members. The natural gas prepay transaction financed by the series 2006
bonds represents a 20-year gas supply on behalf of 16 members. The
transaction allows the 16 FGU members to secure monthly natural gas
volumes, on a take-and-pay basis, at a fixed discount to the regional
gas market index price. The price of natural gas will vary over time,
but the discount will remain constant.
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.
