Fitch Affirms Tennessee Energy Acquisition Corp Proj Revs Series 2006A & B Bonds; Outlook Stable
Fitch Ratings has affirmed the ratings on the following bonds issued by
the Tennessee Energy Acquisition Corp. (TEAC):
--$1.162 billion gas project revenue bonds series 2006A at 'A';
--$111.7 million gas project revenue bonds series 2006B at 'BBB'.
The Rating Outlook on the bonds is Stable.
SECURITY
The series 2006A and 2006B bonds are special obligations of the issuer,
payable solely from revenues and other funds pledged under the trust
agreement. Revenues are derived from the fulfillment of the obligations
from each of the transactions varied counterparties. Bondholders also
rely on funds pledged under the indenture, which are typically invested
by a third party. The series 2006B bonds have a subordinate security
interest to TEAC's $1.16 billion outstanding series 2006A bonds.
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 counterparty in the TEAC transaction for the
series 2006A bondholders is Goldman Sachs Group, Inc. (GSG; rated
'A'/Stable Outlook by Fitch).
The principal counterparties for the Series 2006B bondholders include
GSG, Royal Bank of Canada (RBC; rated 'AA'/Stable Outlook), Transamerica
Life Insurance Company (AEGON; rated 'AA-'/Stable Outlook), Wells Fargo
(rated 'AA-'/Stable Outlook), MBIA Insurance Co. (MBIA; not rated) and
the 26 utilities and joint action agencies contracted to purchase gas
(the Gas Purchasers).
KEY RATING DRIVERS
MULTIPLE ROLES FOR GAS SUPPLIER: Natural gas is supplied to TEAC by J.
Aron & Company (J. Aron), which also now provides investment agreements
related to certain of the transaction debt service reserve agreements as
well as the debt service account. All of J. Aron's obligations are
guaranteed by GSG.
EXPANDED SUPPORT FROM GSG: The series 2006A bondholders further benefit
from a receivables purchase agreement (RPA) with J. Aron (supported by a
GSG guaranty) designed to provide additional credit support for the
collateralized obligations of MBIA under its debt service reserve
investment agreements, and ultimately the obligations of the Gas
Purchasers.
BROADER EXPOSURE FOR SERIES 2006B HOLDERS: The series 2006B holders are
exposed to a broader range of counterparty obligations that are both
collateralized (MBIA, AEGON) and uncollateralized (Wells Fargo and the
26 Gas Purchasers), and not subject to the RPA.
CREDITWORTHY GAS PURCHASERS: Series 2006A holders are insulated from any
exposure to the Gas Purchasers through certain collateralized reserve
accounts and the RPA. However, the full payment of the Gas Purchaser
obligations and debt service reserve funds are broadly required to meet
the Series 2006B debt service requirements and bullet maturity. Fitch
has assessed the risk related to these payments to be supportive of a
'BBB' rating.
STRONG COMMODITY SWAP PROVIDER: The commodity swap provider is RBC,
which exhibits strong credit quality. Credit exposure to RBC for the
2006A holders is mitigated by debt service reserve accounts that may be
drawn to meet debt service payments upon a default by the commodity swap
provider.
RATING SENSITIVITIES
CHANGE IN COUNTERPARTY RATINGS: The long-term rating on Tennessee Energy
Acquisition Corporation's gas project revenue bonds will continue to be
determined by Fitch's assessment of the transaction structure, the role
of the counterparties in the structure and their credit quality, and
credit enhancement. The current rating on the series 2006A bonds is
determined by the rating on Goldman, Sachs Group, Inc. (GSG). The
current rating on the series 2006B bonds is determined by the weakest
credit quality of the following uncollateralized counterparties: GSG,
Wells Fargo and the 26 utilities and joint action agencies contracted to
purchase gas.
CREDIT PROFILE
TEAC is non-profit public corporation, and an instrumentality of the
State of Tennessee and certain municipalities, that was created in 1996
for the purpose of obtaining supplies of natural gas for the benefit of
its members. On July 20, 2006, TEAC issued its Series 2006A and 2006B
bonds to prepay for a specified supply of natural gas to be delivered by
J. Aron over a period of 20 years. Pursuant to separate project Gas
Supply Contracts (GSC), TEAC will sell the natural gas to 26 Gas
Purchasers. Payment for the gas is an operating expense of each system
and the obligations are separate.
COMMODITY SWAP AGREEMENT TO HEDGE PRICE RISK
To hedge the risk of changes in gas prices, TEAC has entered into
separate commodity swap agreements with RBC, exchanging a monthly index
price for a fixed price. J. Aron has also entered into a matching swap
agreement, exchanging a fixed price for a monthly index price.
THE GAS PURCHASERS
The Gas Purchasers include a broad array of public gas systems and
wholesale gas suppliers that have agreed to purchase shares of the
delivered gas ranging from 19.8% to less than 1% based on maximum
monthly purchase requirements. The obligations of the Gas Purchasers
under the GSCs are separate. Although the GSCs include a step-up
requirement that obligates the Gas Purchasers to purchase additional
quantities of gas in the event of a Gas Purchaser default and subsequent
GSC termination, the provision does cover defaulted debt service
payments.
The series 2006A bondholders are relatively insulated from any risk
related to non-payment by the Gas Purchasers. Reserves currently in
place are sufficient to cover any shortfall in payment. In addition, a
Receivables Purchase Agreement (RPA) was executed in January 2012 under
which J. Aron is obligated to purchase any defaulted receivables
resulting from non-payment by a gas purchaser. Fitch notes that the RPA
extends only to debt service on the series 2006A bonds.
Alternatively, the series 2006B bondholders are more reliant on Gas
Purchaser payments and the reserves, particularly at final maturity,
when liquidation of the reserve accounts is expected to the Series 2006B
bullet maturity. Prior to final maturity, transactional cash flows
earmarked for release to the Gas Purchasers, along with funds in the
junior debt service reserve account ($4.6 million), are also available
to meet scheduled debt service in the event of a Gas Purchaser default.
Overall, the risk related to the Gas Purchaser payments is supportive of
a 'BBB' rating.
STRUCTURE DESIGNED FOR TIMELY PAYMENT
The bonds are structured with provisions that provide for timely payment
of debt service, regardless of changes in natural gas prices or the
physical delivery of gas by J. Aron (since financial payments will be
due from J. Aron in certain cases of non-delivery of gas).
Payments due from the Gas Purchasers, together with those required under
the commodity swap agreements, investment agreements and the RPA, should
be sufficient to meet debt service requirements.
Payments due from J. Aron (backed by GSG) upon early termination,
together with other available funds, are also expected to equal an
amount sufficient to pay off the bonds plus accrued interest. The funds
required to pay the termination payment will be provided by J. Aron and
guaranteed by GSG.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria, U.S. Public Power Rating Criteria,
and Criteria for Rating Prepaid Energy Transactions, this action was
informed by information from Goldman, Sachs Group, Inc.
Applicable Criteria
Criteria for Rating Prepaid Energy Transactions (pub. 10 Jul 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752050
U.S. Municipal Structured Finance Criteria (pub. 23 Feb 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862222
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991959
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991959
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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