Fitch Expects to Rate Tennessee Energy Acquisition Corp. Gas Proj. Ser. 2006C 'AA-'.

NEW YORK -- Fitch expects to assign a rating of 'AA-' to The Tennessee Energy Acquisition Corporation's (TEAC) $1.055 billion gas project revenue bonds, series 2006C. The Rating Outlook is expected to be Stable. This expected rating and Fitch's analysis assumes the final documents will be in a form satisfactory to Fitch for the assignment of a formal rating nearer to the offering date of the bonds. Given the structured nature of the transaction, the expected 'AA-' rating is tied to the lowest rating of the guarantor of the supplier (Goldman Sachs Group, Inc. [GSG]; the guarantor of J. Aron's obligations; rated 'AA-' with a Stable Outlook) and the commodity swap counterparties (Royal Bank of Scotland plc [RBS] rated 'AA+' with a Stable Outlook by Fitch and Royal Bank of Canada Europe Limited [RBCEL] rated 'AA' with a Stable Outlook by Fitch). The bonds are expected to price the week of Dec. 11, 2006 with Goldman, Sachs & Co. and Banc of America Securities LLC as senior managers.

Proceeds will be used to prepay for TEAC's acquisition of a fixed quantity of natural gas from J. Aron & Company (J. Aron; the supplier) over a 20 year period under a prepaid natural gas sales agreement (the sales agreement). TEAC is a public corporation of the state of Tennessee and a public instrumentality of the state and of public gas systems in Tennessee that are its associated municipalities. TEAC acquires, manages and finances gas supplies for sale to its associated municipalities and other public gas systems. This project will provide a portion of the natural gas supply needs of the six municipal gas systems (participants) participating in this project beginning in January 2007.

Going forward, the bond rating will move with Fitch's assessment of the guarantor and the two commodity swap counterparties. The participants' performance obligation is not a factor in the rating given the establishment of sufficient reserves to accommodate participant payment shortfalls until such time as their gas is remarketed by TEAC or the supplier or until a termination payment is made by the supplier and the bonds are extraordinarily redeemed. In the event of a participant default whereby the supplier assumes responsibility for remarketing the defaulting participant's gas, J. Aron is required to pay TEAC a price at least equal to the first of the month index price less a remarketing fee. This arrangement ensures sufficient revenues for TEAC to provide timely payment of principal and interest on the bonds.

The series 2006C bonds are secured by a security interest in the gas supply contracts between TEAC and the participants, funds and accounts established under the indenture (as described below) and the revenues of TEAC that will be provided by three primary sources:

--Monthly payments from each of the six participants for delivery of natural gas under take-and-pay gas supply contracts;

--Monthly netting payments from each of the commodity swap counterparties (as explained below); and

--Required payments from the supplier in the event of any delivery or receipt failure (including failures due to force majeure events) or gas remarketing under the sales agreement.

Obligations of the Gas Supplier and Guarantor:

At bond closing, TEAC will enter into the sales agreement with the supplier, which, in exchange for a prepayment amount to be received at closing, will unconditionally obligate the supplier to provide a specified, 20 year supply of natural gas to TEAC. A financial guaranty is provided by GSG, the parent company of the supplier, to secure the supplier's performance under the sales agreement.

Credit Impact of Gas Supplier and Guarantor:

The rating on the 2006C bonds is impacted by the long-term issuer default rating and Outlook that Fitch currently assigns to Goldman Sachs Group, Inc. The rating on the bonds reflects the obligation of the supplier to deliver gas (or provide financial compensation if gas is not delivered or taken) and to meet its obligation to make the required termination payment in the event of a termination of the sales agreement. The delivery of gas by the supplier triggers the participants' obligation to TEAC such that payments from the participants for the delivered gas are sufficient (along with commodity swap netting payments) to pay debt service on the bonds. Neither the supplier nor its guarantor is obligated to pay debt service on the bonds. A default by the supplier under the sales agreement provides TEAC with the option to terminate the sales agreement. In the event the sales agreement is terminated, the supplier, or its guarantor, is required to make a termination payment to TEAC that together with other available funds (as described below) is sufficient to redeem the bonds in full (including accrued interest).

Obligations Under the Commodity Swap Agreements:

At bond closing, TEAC will enter into commodity swap agreements (equally split) with each of the commodity swap counterparties. The total volume of natural gas hedged by the commodity swap agreements will equal the total volume of gas delivered by the supplier. TEAC will pay the commodity swap providers a monthly index-based gas price in exchange for payment of a fixed natural gas price established at closing.

Credit Impact of the Commodity Swap Providers:

The commodity swaps are essential to the structure and the rating on the bonds. The netting payments made under the agreements accommodate any difference between the index-based revenues from natural gas sales to the participants that TEAC will receive and the fixed debt service TEAC will pay on the bonds. Bondholders take the remote risk of a default by either (or both) of the commodity swap counterparties. In a gas market where the index price is less than the fixed price, payments from the commodity swap providers are necessary to provide TEAC with revenues sufficient to pay debt service on the bonds. If a commodity swap provider fails to perform, TEAC may terminate the affected commodity swap and, in such event, the sales agreement requires the terminated commodity swap to be replaced within a 45-day window. Failure by TEAC to replace the terminated commodity swap within this window could ultimately result in the inability of TEAC to make sufficient deposits in the debt service account. TEAC has covenanted in the indenture that it will terminate the sales agreement in the event it is unable to replace a terminated commodity swap. This would trigger an unwinding of the transaction pursuant to the indenture and an extraordinary redemption of the bonds. Therefore, Fitch's rating also reflects the credit quality of the commodity swap providers.

Obligations of the Participants:

Under gas supply contracts with each of the project's participants, TEAC has agreed to deliver and each participant has agreed to receive daily specified volumes of natural gas. Each month, the participants are obligated to pay TEAC an index price less a fixed discount for gas received the prior month. These are take-and-pay obligations and payable as an O&M expense of each participant's gas utility system.

Credit Impact of the Participants:

As a result of the combination of an MBIA Insurance Corp. ([MBIA]; rated 'AAA' with a Stable Outlook by Fitch) surety bond and the potential purchase of receivables by the supplier, the rating on the bonds is not impacted by the participants in the transaction. This combination of mitigating factors sufficiently transfers the credit risk of the participants to MBIA, the supplier and its guarantor (GSG).

Fitch's rating incorporates an assessment of TEAC's ability to make timely payments of principal and interest and timely payments due to the commodity swap counterparties in the event of default by any or all of the participants. If a participant defaults on any payment due to TEAC under its gas supply contract, TEAC may stop delivery of natural gas to the defaulting participant and remarket the participant's gas. TEAC may continue to remarket the gas until the defaulting participant has made all required payments.

Reserve and Working Capital Accounts:

If, as a result of payment default by one or more participants, TEAC is unable to meet its required monthly deposit to the debt service account, TEAC may draw upon the current reserve subaccount (funded with a surety bond from MBIA) of the debt service reserve account. The surety bond is expected to be funded to a level of approximately $41.7 million, an amount sufficient to meet over three times the largest monthly required deposit to the debt service fund from gas sales revenues collected from the participants. If the surety bond is drawn down below 67% of its initial value, the supplier will take over the remarketing of the gas of the defaulting participant, until the current reserve subaccount is restored to its required initial balance.

In the event the gas index price is higher than the fixed price, TEAC will owe netting payments to the commodity swap providers. If the revenues from the participants' payments to TEAC are insufficient to make the netting payment, the trustee will draw upon the working capital account to meet the shortfall. This account will initially be funded to a level of approximately $22.2 million and is required to be replenished through the indenture flow of funds. In the event of an extraordinary redemption of the bonds, the supplier will purchase any receivables owed to TEAC by the participants as a result of working capital account withdrawals. This will restore the account to its initial balance and enable it to be fully funded in the event of an extraordinary redemption or at final maturity of the bonds.

Early Termination Events:

The bonds are subject to extraordinary redemption prior to maturity in the event of the declaration by either the supplier or TEAC of an early termination date, which can be triggered by a number of events (as described below).

The declaration of an early termination date would result in (i) the ending of the obligation of the supplier to deliver gas and TEAC to receive gas; (ii) an early termination payment on the final business day of the month following the month of the declaration; and (iii) the extraordinary redemption of all outstanding bonds on the first day of the month following the early termination payment.

Termination Events:

An early termination (and subsequent extraordinary redemption of the bonds) may occur as a result of: (i) supplier or TEAC payment default; (ii) the bankruptcy of the supplier or TEAC; (iii) the termination, without replacement, of any commodity swap; (iv) a persistent failure by the supplier to deliver gas; (v) an inability of the supplier to remarket gas to qualified purchasers in sufficient amounts to meet IRS 'private use' and 'qualified use' limits; (vi) the failure of supplier guarantor to maintain an investment grade rating, unless alternative credit support is provided; (vii) the occurrence of specific instances of prolonged force majeure; and (vii) a change in government regulations (such as tax law) that would result in the obligations of either the supplier of TEAC under the sales agreement being prohibited or unlawful.

An extraordinary redemption, if required, would be funded by a combination of a termination payment by the supplier or its guarantor, participant receivables purchased by the supplier and certain funds held in the debt service account and working capital account under the indenture. These funds would be sufficient to redeem all outstanding series 2006C bonds and pay all accrued interest to bondholders.

Fitch notes that bondholders are not subject to early termination in the event of a prolonged force majeure (except in very specific circumstances).

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.