NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has placed the 'A+' rating of the Clarksville Natural Gas Acquisition Corporation (NGAC) series 2006 bonds on Rating Watch Negative.

The rating action reflects Fitch's assessment of the credit quality of the various counterparties and enhancement providers and Fitch's Oct. 13, 2011 decision to maintain the long-term Issuer Default Rating (IDR) of Merrill Lynch & Co., Inc. (ML) and subsidiaries on Rating Watch Negative, where they were initially placed on Oct. 22, 2010.

SECURITY

The bonds are special obligations of the issuer, payable solely from revenues and other funds pledged under each indenture. Revenues are derived from the fulfillment of obligations from each of the transaction's varied counterparties. Bondholders also rely on funds pledged under the indenture, which are typically invested by a third party.

CREDIT SUMMARY

Given the structured nature of prepaid natural gas transactions and the different components of pledged revenues, ratings generally reflect Fitch's assessment of the relevant counterparties and structural enhancements. The principal counterparties in the Clarksville Natural Gas Acquisition Corporation series 2006 transaction include ML (rated 'A+', Rating Watch Negative by Fitch), Wells Fargo Bank, N.A. (rated 'AA-' with a Stable Outlook) and Bayerische Landesbank (rated 'A+' with a Stable Outlook). Gas is purchased by the city of Clarksville (TN) (water, sewer and gas revenues rated 'AA-'with a Stable Outlook) and the Humphreys County Utility District (TN). The obligations of both purchasers are supported by surety bonds from Syncora Guarantee Inc. (formerly XL Capital Assurance).

KEY RATING DRIVERS

Supplier Rating Watch Negative: Gas is supplied by Merrill Lynch Commodities, Inc. (MLCI), whose obligations are guaranteed by ML (currently on Rating Watch Negative).

Single Dominant Gas Purchaser: The dominant gas purchaser (approximately 91% of contracted volumes) is the city of Clarksville (TN), which exhibits a strong credit profile.

No Rating Enhancement: Fitch does not believe that the Syncora surety bond, that provides payment in the event of the purchaser's failure to pay for delivered gas, provides additional rating enhancement to the structure.

Strong Investment Providers: Wells Fargo and Bayerische Landesbank invest the proceeds of the operating reserve fund and debt service fund, respectively. Both investment providers exhibit strong credit profiles.

WHAT COULD TRIGGER A RATING ACTION

Resolution of ML Rating Watch: Fitch expects to resolve the Rating Watch Negative on the bonds concurrent with a resolution of the ML Rating Watch.

Change in Counterparty Ratings: The long-term rating on the bonds will also continue to be determined by Fitch's assessment of the transaction structure, the role of the remaining counterparties in the structure, and their credit quality.

CREDIT PROFILE

The proceeds of the NGAC bonds were used to prepay the gas supplier (MLCI) for specified quantities of natural gas, deliverable to the issuer over 15 years. Bondholders rely on the supplier to deliver the gas or make a cash payment to the issuer in lieu of delivery over the life of the bonds. The issuer, in turn, delivers the gas to the purchasing utility. The purchasing utilities are required to make a payment to the issuer for the gas delivered, is sufficient to meet debt service requirements.

Should the supplier fail to deliver gas or pay an equivalent amount of money, the supplier or its guarantor (ML) is required to make a termination payment to the trustee that, together with other available funds, is sized to be sufficient to redeem outstanding bonds.

Of the two purchasers, Clarksville (TN), which takes the vast majority of the gas delivered, is the stronger credit. In the event of a default by HCUD (failure by HCUD to pay for gas delivered and failure by Syncora Guarantee, the surety bond provider to make its required payment), bondholders are exposed to approximately three months of payment obligations. Bondholders benefit from the structure's operational reserve fund ($2.5 million) that could be used in the event of a HCUD payment default. Fitch believes that the size of the reserve is sufficient to mitigate the HCUD default risk.

For additional details regarding the transaction, please see the full report available on the Fitch Ratings web site 'www.fitchratings.com', 'Natural Gas Acquisition Corporation of the City of Clarksville, Tenn.' dated June 21, 2006.

In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action which is different than the original rating committee outcome.

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:

--'Criteria for Rating Prepaid Energy Transactions,' dated Aug. 15, 2011;

--'Prepay Gas Transactions: Focus on Counterparty Risk,' dated Feb. 23, 2009;

--'Natural Gas Acquisition Corporation of the City of Clarksville, Tenn.' dated June 21, 2006.

Applicable Criteria and Related Research:

Criteria for Rating Prepaid Energy Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648406

Prepay Gas Transactions: Focus on Counterparty Risk

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=427254

Natural Gas Acquisition Corporation of the City of Clarksville, Tenn.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=280164

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