Fitch Ratings has affirmed the ratings on the following bonds issued by the Tennessee Energy Acquisition Corporation (TEAC):
--$1.85 billion gas project revenue bonds, series 2006A at 'A';
--$111.705 million gas project revenue bonds, series 2006B at 'BBB'.
The Outlook on all bonds is Stable.
The Series 2006 A and 2006 B bonds are special obligations of the issuer, payable solely from revenues and other funds pledged under the trust indenture. Revenues are derived from the fulfillment of the 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.
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 TEAC transaction for the Series 2006A bondholders include Goldman Sachs Group, Inc. (GSG; rated 'A'/Stable) and Citigroup (rated 'A'/Stable).
The principal counterparties for the Series 2006B bondholders are broader and include, GSG, Royal Bank of Canada (RBC; rated 'AA'/Stable), Citigroup, Transamerica Life Insurance Company (rated 'AA-'/Negative), Wells Fargo (rated AA-/Stable) and the 26 utilities and joint action agencies contracted to purchase gas (the Gas Purchasers).
KEY RATING DRIVERS
SOLID GUARANTEED GAS SUPPLIER: Gas is supplied to TEAC by J. Aron & Company, whose obligations are guaranteed by GSG.
COLLATERALIZED INVESTMENT AGREEMENT OBLIGATIONS: The reserve account investment agreement obligations of Citigroup, MBIA Insurance Co. (not rated), Depfa Bank plc (rated 'BBB+'/Negative) and Transamerica have all been collateralized.
EXPANDED SUPPORT FROM GSG: The Series 2006A bondholders 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 and Depfa under their respective investment agreements.
STRONG GUARANTEED COMMODITY SWAP PROVIDER: The commodity swap provider is Royal Bank of Canada, Europe Limited (RBCEL). RBCEL's obligations are guaranteed by RBC, which exhibits strong credit quality. Credit exposure to RBC for the 2006A holders is further mitigated by reserve accounts that may be drawn to meet debt service payments upon a default by the commodity swap provider.
BROADER EXPOSURE FOR SERIES 2006B HOLDERS: The Series 2006B holders are exposed to a broader range of counterparty obligations that are both collateralized (Citigroup, MBIA, Depfa, Transamerica) and uncollateralized (Wells Fargo and the 26 Gas Purchasers).
CREDITWORTHY GAS PURCHASERS: Fitch has assessed the credit quality of the portfolio of Gas Purchasers to be supportive of a 'BBB' rating. Although the Series 2006A holders are insulated from any exposure to the Gas Purchasers through certain collateralized reserve accounts and the RPA, the full payment of the Gas Purchaser obligations is required to meet the Series 2006B debt service requirements.
PARTIAL UNWIND HAS NO RATING EFFECT: The proposed retirement of $414.87 million of the outstanding series 2006A bonds and the corresponding reductions in gas deliveries will have no effect on the current rating.
CHANGE IN COUNTERPARTY RATINGS: The long-term rating on the bonds will continue to be determined by Fitch's assessment of the transaction structure, the role of each counterparty in the structure, and their credit quality.
The proceeds of the TEAC bonds were used to prepay for a specified supply of natural gas to be delivered by J. Aron. Pursuant to separate gas supply contracts (GSC), TEAC will sell the natural gas to the 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 a commodity swap agreement, 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.
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 by the Gas Purchasers, together with those required under the commodity swap agreements, investment agreements and the RPA, are expected to 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.
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. 7, 2012;
--'Prepay Gas Transactions: Focus on Counterparty Risk,' dated Feb. 23, 2009;
Applicable Criteria and Related Research:
Criteria for Rating Prepaid Energy Transactions
Prepay Gas Transactions: Focus on Counterparty Risk
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