Fitch to Rate Central Plains Energy Proj (NE) 2007A&B Gas Revs 'AA-'; Stable Outlook.

NEW YORK -- Fitch expects to assign a rating of 'AA-' to the Central Plains Energy Project (CPEP) $484 million gas project revenue bonds, series 2007A and 2007B (Project No. 1). The Rating Outlook is expected to be Stable. The expected rating and Fitch's analysis assume final documents will be in a form satisfactory to Fitch for the assignment of a formal rating nearer to the offering date of the bonds. The bond issue is a prepay gas structured transaction that allows the project participants to secure a predetermined gas supply for 20 years and lock-in gas costs at a discount to the regional market index price. The CPEP financing is scheduled to price the week of Feb. 12, 2007. Goldman Sachs is the senior underwriter on the bonds.

Depending on market conditions, the bond issue may be issued entirely as fixed rate bonds (series 2007A) or index rate bonds (series 2007B) or as a combination of the two.

Any 2007B index rate bonds will have an interest rate that will be established every quarter at 67% of the three-month LIBOR rate. The index bonds will carry a long-term rating since there is no put or demand features for the investors. If bonds are issued as index rate bonds, CPEP will enter into a floating-to-fixed interest rate swap, which will fix CPEP's aggregate financial obligation.

CPEP is a public body and not-for-profit corporation. CPEP was created to acquire natural gas for its members and any non-member project participants. Project No. 1 will provide a portion of the gas supply needs of the two municipal natural gas systems participating in this project: Omaha Metropolitan Utilities District natural gas utility (MUD) and the Municipal Gas Utility of the City of Cedar Falls, Iowa (CFU). MUD has agreed to purchase approximately 94% of the gas to be delivered to CPEP with the remaining 6% going to CFU.

Structured Transaction

Debt service payments are secured by certain reserves funded at bond closing as well as the following revenue streams:

--Revenues received from gas sales to MUD gas and CFU;

--Payments from the investment provider;

--Net swap payments from the commodity swap counterparty;

--Net swap payments from the interest rate swap counterparty;

--Payments from the gas supplier.

As a result of the different components of pledged revenues, the expected rating for the bonds is influenced by the lower rating of the following:

--The guaranty on the performance of the gas supplier (J Aron) and the interest rate swap counterparty (Goldman Sachs Capital Markets) provided by Goldman Sachs Group, Inc. (GSG; rated 'AA-' with a Stable Outlook by Fitch);

--The investment agreement provider(s), whose services will be bid around the time of pricing and is required by the Indenture to be rated in one of the two highest rating categories by the three rating agencies;

--The commodity swap counterparty - The Royal Bank of Scotland plc (RBS), rated 'AA+/F1+' with a Stable Outlook by Fitch;

--One of the project participants - Omaha Metropolitan Utilities District natural gas utility (MUD), rated 'AA' with a Stable Outlook by Fitch.

The credit quality of the project's other participant, the Municipal Gas Utility of the City of Cedar Falls, Iowa (CFU), is not a factor in the rating of the bonds (see below).

Unique Features

This transaction contains some unique features as compared to other gas prepay transaction recently rated by Fitch. These features include:

--Bondholders take performance risk of one of the municipal gas system participants (MUD);

--Bondholders take performance risk of the commodity swap counterparty (RBS) and the investment agreement provider(s) (yet to be named);

--The possible use of variable-rate bonds (with no put or demand feature) that are swapped to a CPEP fixed-rate obligation through an interest rate swap. Upon termination of the interest rate swap, neither party will owe the other a market based termination payment. The only payments that will be due will be accrued swap net payments;

--Most triggers to a termination of the sales agreement between J Aron and CPEP are optional, including J Aron's failure to supply gas or make necessary cash payments or changes in tax laws. Automatic or mandatory termination triggers for the sales agreement are related to CPEP's and J Aron's failure to replace the commodity swap counterparty upon its payment default, if the commodity swap counterparty's ratings falls below the rating threshold or upon the termination of the interest rate swap.

Fitch also notes that CPEP is subject to a complaint filed in a District Court in Nebraska. The plaintiffs are seeking monetary damages to compensate for loss of revenues as a result of CPEP's proposed transaction.

Credit Impact of Project Participants

CPEP has separate supply agreements with the two project participants that require the participants to pay the contracted price (index price minus a predetermined discount) for the scheduled gas delivered to CPEP by J Aron. The supply agreement is take-and-pay (i.e., the participants only are obligated to pay if they receive the gas) and requires the participants to pay for the gas as an operating expense of the gas utility systems.

The credit quality of CFU is not a factor in the rating of the bonds since CFU's performance obligation is backed by:

--Required reserves that accommodate CFU payment shortfalls until their gas is remarketed by CPEP or the gas supplier;

--A remarketing agreement in which, following a default by CFU, J Aron is obligated to sell gas and pay CPEP a price that will ensure sufficient revenues (along with net commodity and interest rate swap payments and investment earnings) for CPEP to provide timely payment of principal and interest on the bonds (regardless of the price that J Aron actually sells the gas);

--A receivable purchase agreement in which J Aron is obligated to purchase from CPEP at final maturity or any early termination date, the amounts owed to CPEP by CFU from its initial payment default to pay amounts due on the bonds and net swap payments.

Alternatively, the credit quality of MUD is a factor in the rating. The transaction's reserves and J Aron remarketing of MUD's allocation of gas (to begin in the month following the default) will provide sufficient funds to meet required debt service fund deposits at the time of default and for the following months. However, if MUD does not pay CPEP its defaulted payment and adequately replenish the reserves, there is no guaranteed revenue source to make up for the default. Consequently, there could be insufficient funds at final maturity or any early termination date.

Fitch will publish a Full Report the week of Feb. 5, 2007 that will provide additional details on the transaction, including the areas of redemption features, credit impact of the commodity seller, commodity swap counterparty and investment 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.