NEW YORK--(BUSINESS WIRE)--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.
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.
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.
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.
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.
Criteria for Rating Prepaid Energy Transactions (pub. 10 Jul 2014)
U.S. Municipal Structured Finance Criteria (pub. 23 Feb 2015)
Dodd-Frank Rating Information Disclosure Form