Fitch Affirms Tennessee Energy Acquisition Corp Proj Revs Ser 2006C Bonds at 'A'; Outlook Stable
--$695.47 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 generally reflect Fitch's assessment of the relevant counterparties and structural enhancements. The principal counterparty in the TEAC transaction for the series 2006C bondholders include Goldman Sachs Group, Inc. (GSG; rated 'A'/Stable Outlook by Fitch), Memphis Light, Gas & Water (MLG; rated 'AA+'/Stable Outlook) and Huntsville Utilities (not rated).
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 2006C bondholders further benefit from a receivables purchase agreement (RPA) with J. Aron (supported by a GSG guaranty) designed to provide secondary credit support for the obligations of three gas purchasers: Patriots Energy Group (PEG), Cartersville, GA and Harriman, TN.
CREDITWORTHY GAS PURCHASERS: As a result of the RPA, direct bondholder exposure is limited to the two largest purchasers, MLG and Huntsville Utilities, which together account for approximately 78% of gas volumes. Although not publicly rated by Fitch, the credit quality of Huntsville, assessed from publicly available information, supports the rating on the bonds. A National Public Finance Guarantee Corp. (NPFG; not rated) surety bond provides primary support for all gas purchase obligations, but does not provide any rating enhancement.
COMMODITY SWAP PROVIDER CUSTODIAL AGREEMENT: Royal Bank of Scotland Plc (RBS; rated 'BBB+'/Stable Outlook) and Royal Bank of Canada Europe Ltd. (guaranteed by Royal Bank of Canada; rated 'AA'/Stable Outlook) each provide a commodity swap for 50% of the total gas volume. Credit exposure to the commodity swap providers is mitigated by a custodial arrangement with The Bank of New York Mellon Trust Company, N.A. (BNY Mellon; rated 'AA-'/Stable Outlook) which insulates bondholders from any failure by RBS or RBC to pay under the respective swap agreements.
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 2006C bonds is determined by the weakest credit quality of the following counterparties: GSG, Memphis Light, Gas & Water and Huntsville Utilities.
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.
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 and RBS, 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.
In 2013, a custodial arrangement was implemented on the back-end commodity swap between RBC/RBS and J. Aron that requires all swap payments to be made initially into custodial accounts. The custodial agreement provides that payments made by J. Aron on the back-end swap may be directly remitted to TEAC in the event that RBC and/or RBS fail to make the corresponding required payment to TEAC on the front-end commodity swap. In short, this arrangement mitigated the risk of non-payment by RBC and RBS as swap counterparties.
THE GAS PURCHASERS
The gas purchasers currently include four municipal utility systems and a wholesale joint action agency that have agreed to purchase shares of the delivered gas. In 2013, two of the original purchasing utility systems - LaGrange (GA) and Cordele (GA) - ceased their purchases altogether as part of a partial unwind of the transaction. The gas purchaser obligations are supported by a debt service reserve surety bond (Current Reserve Subaccount) from NPFG, however the surety provides no rating enhancement. The obligations of three purchasers - PEG, Cartersville, GA and Harriman, TN - are further supported by the RPA.
Bondholder exposure is now limited to the direct payment obligations of only MGLW and Huntsville Utilities.
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.