Fitch Affirms Tennessee Energy Acquisition Corp Proj Revs Series 2006B at 'BBB'; Outlook Stable

Fitch Ratings has affirmed the rating on the following bonds issued by the Tennessee Energy Acquisition Corp. (TEAC):

--$111.7 million gas project revenue bonds, series 2006B at 'BBB'.

The Rating Outlook on the bonds is Stable.

SECURITY

The series 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 $1.2 billion outstanding series 2006A bonds (rated 'A' by Fitch with a Stable Outlook).

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 counterparties in the TEAC transaction for the series 2006B bondholders include Goldman Sachs Group, Inc. (GSG; rated 'A'/Outlook Stable), Citigroup (rated 'A'/Outlook Stable), Royal Bank of Canada (RBC; rated 'AA'/Outlook Stable), Transamerica Life Insurance Company (AEGON; rated 'AA-'/Outlook Negative), Wells Fargo (rated 'AA-'/Outlook Stable) and the 26 utilities and joint action agencies contracted to purchase gas (the Gas Purchasers).

KEY RATING DRIVERS

PARTICIPANT CREDIT QUALITY: The rating reflects the combined credit quality of the 26 municipal utility systems that are the purchasing utilities. The full payment of the Gas Purchaser obligations is required to meet the series 2006B debt service requirements. Fitch has assessed the credit quality of the portfolio of Gas Purchasers to be supportive of a 'BBB' rating.

GAS SUPPLIER: J. Aron & Company is the gas supplier and remarketer for the series 2006B bonds. The obligations of J. Aron are guaranteed by GSG.

STRONG COMMODITY SWAP PROVIDER: The commodity swap provider is RBC, which exhibits strong credit quality.

INVESTMENT AGREEMENT PROVIDERS: The obligations of financial institutions AEGON and Citigroup for investment returns on the junior reserve subaccount and investments in the debt service fund have both been collateralized.

RATING SENSITIVITY

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.

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, particularly at final maturity, when all of the reserves will be used to fund a portion of the final required payments along with Gas Purchaser payments. The credit quality of the Gas Purchasers is therefore a rating factor for the 2006B bonds. Fitch assesses the pool of Gas Purchasers to be supportive of a 'BBB' rating.

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', dated July 26, 2013;

--'Prepay Gas Transactions: Focus on Counterparty Risk,' dated Feb. 23, 2009.

Applicable Criteria and Related Research:

Criteria for Rating Prepaid Energy Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714538

Prepay Gas Transactions: Focus on Counterparty Risk

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=427254

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816971

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