NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on the following bonds issued by the Tennessee Energy Acquisition Corp. (TEAC):
--$971.2 million gas project revenue bonds, series 2006C at 'A-'
The Rating Outlook on the bonds is Stable.
The Series 2006C 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.
Given the structured nature of prepaid natural gas transactions and the different components of pledged revenues, ratings reflect Fitch's assessment of the relevant counterparties and structural enhancements. The principal counterparties in the TEAC Series 2006C transaction include Goldman Sachs Group, Inc. (GSG; rated 'A'; Stable Outlook by Fitch), Royal Bank of Scotland plc (RBS; rated 'A'; Stable Outlook), Royal Bank of Canada (RBC; 'AA'; Stable Outlook) and the seven municipal utilities and joint action agencies (the Gas Purchasers) contracted to take and pay for gas delivered by TEAC.
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 investment agreement obligations of Depfa Bank plc (rated 'BBB+'; Negative Outlook) covering the Working Capital, Early Termination and Debt Service accounts have all been collateralized.
COMMODITY SWAP ARRANGEMENTS: RBS and Royal Bank of Canada Europe Ltd (guarantee by RBC) each provide a commodity swap for 50% of total gas volume. Both parties are required to post collateral in the event their respective ratings are downgraded to below A/A2.
DEBT SERVICE SURETY: Although National Public Finance Guarantee Corp. (NPFG; not rated by Fitch) provides a surety bond for the debt service reserve fund, Fitch does not believe that the NPFG surety provides additional rating enhancement to the structure.
CREDITWORTHY GAS PURCHASERS: The largest purchaser (65% of remaining gas volume) is Memphis Light, Gas & Water (MLG; 'AA+'; Stable Outlook). Fitch does not publicly rate the other six participants, but believes that the credit quality of the next four largest purchasers (Cartersville GA, Huntsville AL, Patriots Energy Group, and LaGrange GA) supports the rating on the Series 2006C bonds.
EXCESS CASH FLOW SUPPORTS SMALLEST PARTICIPANTS: A portion of the gas price discount rebated to the participants at year end is subordinate to debt service and may be used to meet debt service requirements if necessary. Amounts retained by TEAC are sufficient to mitigate the risk of a potential default of the two smallest participants - Cordele, GA and Harriman, TN. The credit quality of these participants is therefore not factored into the rating on the bonds.
PARTIAL UNWIND HAS NO RATING EFFECT: The proposed retirement of $234.96 million of the outstanding series 2006C bonds and the corresponding partial reduction and restructuring of certain 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.
TEAC issued its Series 2006C bonds in December 2006 to prepay for a specified supply of natural gas to be delivered by J. Aron over a period of 20 years. Pursuant to separate gas supply contracts (GSC), TEAC sells the natural gas to the Gas Purchasers, who are obligated to purchase delivered gas as an operating expenses of their respective utility systems. The obligations under the GSCs are several with no step-up provisions or common reserves that would provide cross support among the participants in the event a participant failed to make payment for delivered gas.
PROPOSED AMENDMENTS HAVE NO AFFECT ON RATING
TEAC and J. Aron are proposing to restructure the prepaid gas volumes to facilitate a partial unwind of the Series 2006C transaction. J. Aron will deliver to TEAC approximately $235 million of Series 2006C bonds, and in exchange, TEAC will reduce J. Aron's remaining prepaid delivery obligations by approximately 52.0 Bcf. Corresponding reductions will be made to debt service requirements, the commodity swaps, and the debt service account investment agreement.
Two of the gas purchasers, La Grange and Cordele, are expected to reduce their remaining purchase commitments by 15.0 Bcf and exit the Series 2006C transaction on Nov. 1, 2013. However, to accommodate MLG's desire to maintain its existing future volumes, 37.0 Bcf of prepaid deliveries will be re-classified as pay-as-you-go (PAYGO) under the amended and restated prepaid agreement.
Fitch has concluded that the re-characterization of volumes does not affect the rating on the bonds. Specifically, in the event the transaction is terminated, J. Aron remains obligated to make a termination payment (based on revised prepaid volumes) which together with other amounts will be sufficient to redeem all outstanding bonds. In addition, expected pricing parameters for both physical deliveries and the additional termination payment related to PAYGO volumes will moderately enhance bondholder cash flows.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and Criteria for Rating Prepaid Energy Transactions, this action was informed by information from Goldman, Sachs Group, Inc.
Applicable Criteria and Related Research:
--'Criteria for Rating Prepaid Energy Transactions'(July 26, 2013);
--'Prepay Gas Transactions: Focus on Counterparty Risk'(Feb. 23, 2009).
Applicable Criteria and Related Research:
Criteria for Rating Prepaid Energy Transactions
Prepay Gas Transactions: Focus on Counterparty Risk