Fitch Rates Main Street Natural Gas' (Georgia) 2007A1-A4 Project Revs 'AA-'.

NEW YORK -- Fitch Ratings has assigned an 'AA-' rating to the Main Street Natural Gas, Inc.'s (Main Street) gas project revenue bonds, series 2007A-1, 2007A-2, 2007A-3 and 2007A-4. The rating and Fitch's analysis assumes the final documents will be in a form satisfactory to Fitch and consistent with the structure described below. The bonds are expected to price this week, with Merrill Lynch as the senior manager. The Rating Outlook is Stable.

Main Street is a Georgia non-profit corporation, authorized to act on the behalf of the Gas Authority under IRS Regulations and sell gas to participating utilities. Bond proceeds will be used by Main Street to prepay for a specified supply of natural gas for 20 years to be delivered by Merrill Lynch Commodities Inc. (MLCI). Merrill Lynch and Co., Inc. (Merrill Lynch rated AA-, Stable) will guarantee the performance of MLCI.

Given the structured nature of the transaction, the 'AA-' rating reflects the lowest rating of: the guarantor of MLCI obligations as the gas supplier and remarketer (Merrill Lynch); the commodity swap provider Calyon (rated 'AA,' Stable), the surety bond provider covering a participant default until the gas can be remarketed (XL rated 'AAA' with a Stable Outlook by Fitch), and the GIC provider (rated at least 'AA-'). The performance of Main Street is not a material factor in the rating given the support provided by the customer insurance policy that sufficiently covers a default by the Gas Authority until the gas is available to be remarketed by MLCI, at a price guaranteed to be no less than contract price, for the benefit of bondholders. While the guaranteed investment contract (GIC) has not been selected, the rating takes into account the expected rating of the GIC provider (expected to be at least 'AA-'). In addition, several factors limit the impact of this counterparty's rating on this structure. Those factors include a rating trigger of 'A+' where the GIC provider would have to be post collateral or be replaced with another qualified provider at a rating level of at least 'AA-'.

These bonds are limited obligations of Main Street and are payable only out of the Trust Estate. The bonds do not constitute a debt, liability or loan of the credit of the State or any political subdivision thereof, including Main Street or its members. The Trust Estate includes proceeds from the bond sale, all right, title and interest in the gas purchase agreement, the commodity swap, and the interest rate swap, and all funds held by the trustee. Revenues include: all revenues, income and receipts derived by Main Street under the gas supply agreements (from the sales of gas to the customers) and the gas purchase agreement, and commodity and interest rate swap receipts.

Bondholder security is provided in the transaction structure outlined in:

--The gas purchase agreement between MLCI and Main Street that requires MLCI to supply 20 years of a fixed amount of gas supply in return for a prepayment made from bond proceeds,

--The gas supply contract between Main Street and the customers that requires the customers to pay for any gas delivered by MLCI to Main Street at a price equal to market index minus a fixed discount,

--The commodity swap between Main Street and Calyon that is designed to hedge the risk of natural gas price differences between the fixed rate paid by Main Street as a prepayment in the gas purchase agreement and the market index price paid over the next 20 years by the customers,

--The trust indenture between The Bank of New York Trust Company and Main Street 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, the establishment of a customer insurance policy from XL that is sized sufficiently to protect bondholders from customer payment defaults, and the priority of debt service payments enjoy in lien status over that of the swap counterparty.

--While there is an uncollateralized guaranteed investment contract, expected to be bid at the time of pricing, that will invest debt service fund deposits with the provider in return for a guaranteed investment return, the earnings from this contract are not included in the contract price discount.

Differences to Note:

Fitch has rated several prepay transactions in the past year. While the transactions are similar in many ways, there are several variations. Below are listed some unique characteristics of the Main Street prepay structure.

--Weaker threshold regarding swap provider.

--The commodity swap provider can fall to 'A-/A3' before being required to provide 'adequate assurance' to Main Street that it can continue to perform. Fitch does not view this as a firm collateral posting requirement.

--Main Street has 120 days to replace the swap provider with the replacement provider rated 'A/A2' or higher.

--In the event of a swap provider default Main Street has 60 days to find a replacement provider rated 'A/A2' or higher. If a replacement is not found in either case within the provided cure period there is an automatic termination of the GPA.

Credit Impact of the Gas Supplier (MLCI) and Guarantor (Merrill Lynch):

At bond pricing, Main Street and MLCI will enter into a gas purchase agreement, which, in exchange for a prepayment amount to be received at bond closing, will unconditionally obligate MLCI to provide Main Street with a 20-year supply of natural gas and to make termination payments in the event of an early termination of the gas purchase agreement. The termination payment is formula based and is sized to be sufficient, along with funds scheduled to be on hand, to pay principal and accrued interest to make bondholders whole at the time of redemption, assuming performance of the other rated obligations. A financial guaranty is provided by Merrill Lynch, the parent company of MLCI, securing the supplier's performance under the gas purchase agreement.

Consequently, the ratings on the 2007 A-1, A-2, A-3 and A-4 bonds are directly impacted by the long-term issuer default rating and Outlook that Fitch assigns to Merrill Lynch, given its guaranty of MLCI's obligations in this transaction. The rating on the bonds reflects the obligation of MLCI as supplier to deliver gas (or provide financial compensation if gas is not delivered or taken, even in the event of Force Majeure), and also to meet its obligation to make the required termination payment in the event the prepaid gas agreement is terminated.

Credit Impact of the Commodity Swap Provider (Calyon):

At bond closing, in order to hedge against natural gas price fluctuations, Main Street will enter into a floating-to-fixed commodity price swap agreement with Calyon (rated 'AA/F1+'). At the same time, MLCI will enter into a fixed-to-floating commodity price swap agreement with Calyon. The total volume of natural gas hedged by the commodity swap agreements will equal the volume of gas to be delivered by the supplier at the primary delivery points. The commodity swap is essential to the structure and the rating on the bonds. The net swap payments made to Main Street are designed to accommodate any difference between the index-based natural gas revenues Main Street will receive from the customers, versus the fixed debt service Main Street will pay on the bonds.

Bondholders take the credit risk of and the risk or acceleration of the prepayment structure in the event of a default by the commodity swap counterparty. Bondholders take the remote risk of non payment due to a swap default and an inability to replace the swap (if needed) within 60 days. In these events, upon a swap default where a replacement swap provider is not secured within 60 days, there will be a mandatory termination of the swap and the supply agreement and an acceleration of the bonds. In this event, there is the potential for a shortfall in a scheduled debt service payment, and ultimately the final termination payment on the redemption date. Since a default by the commodity swap provider could lead to insufficient funds for debt service payments or the termination payment and given that the termination payment will be based on an amount, sufficient with other available funds to redeem the bonds, the rating reflects the credit quality of the commodity swap provider.

Main Street may terminate the commodity swap agreement in the event of a downgrade below 'A' unless the commodity swap counterparty provides adequate additional assurances of performance or a replacement provider rated 'A' or higher is secured within 120 days. Additionally, in this event Main Street may not terminate the existing commodity swap unless it simultaneously replaces it with a qualified provider.

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.