Fitch Rates $2B Tennessee Energy Acquisition Gas Proj. Ser. 2006A 'AA-'.

NEW YORK -- Fitch Ratings assigns an 'AA-' rating to the Tennessee Acquisition Corporation's (TEAC) $1.994 billion of gas project revenue bonds, series 2006A. The proceeds from the transaction will be used to acquire a fixed quantity of natural gas to be delivered over a 20-year period by J. Aron & Company (J. Aron) under a Prepaid Natural Gas Sales Agreement between J. Aron and TEAC. The bonds are fixed rate and will close on July 20, 2006 with Goldman, Sachs & Co. and Banc of America Securities LLC as co-senior managers. TEAC will also be issuing subordinate gas project revenue bonds series 2006B, to fund certain reserves and pay costs of issuance. The series 2006B bonds are not rated by Fitch.

The 'AA-' rating is based on that of the Goldman Sachs Group (GSG; the gas purchase agreement guarantor) and the transaction's structure, with legal provisions that secure the revenue streams and other funds that provide for timely payment of principal and interest on the bonds and under certain circumstances, the full redemption price. The rating on the bonds is influenced by the rating of GSG, and it will move with Fitch's future assessment of GSG.

While this structure will provide the timely payment of principal and interest on the bonds under various gas pricing levels, Fitch evaluated several stress scenarios to test the adequacy of reserves (to cover an extraordinary redemption of the series 2006A bonds) in the event of a default by either J. Aron, TEAC, or Royal Bank of Canada Europe Limited (RBCEL). It is Fitch's view that these circumstances are sufficiently remote and the transaction is structured with adequate reserves and true-up mechanisms to support an 'AA-' rating.

--Purpose: TEAC is a public corporation of the state of TN and a public instrumentality of the state and of public gas systems in TN that are its associated municipalities. TEAC acquires, manages and finances gas supplies for sale to its associated municipalities and other public gas systems. Through this transaction TEAC will purchase a 20-year supply of natural gas for 17 associated members and nine independent public gas systems and joint action agencies (participants). The gas volumes represent less than 45% of requirements of the participants. In addition to securing a gas supplier and gas supply for 20 years, the transaction benefits the participants by locking in natural gas costs at a discount to the regional market index price.

--Mechanics: TEAC will pay J. Aron with bond proceeds for a 20-year supply of natural gas. Under the Prepaid Natural Gas Sales Agreement (Purchase Agreement) between J. Aron and TEAC, J. Aron will deliver specified daily amounts of natural gas to TEAC for the term of the agreement. Under separate Natural Gas Supply Agreements (Supply Agreements), TEAC will sell a predetermined amount of natural gas to the participants who are obligated to take-and-pay for gas as long as it is delivered by J. Aron to TEAC. The price of the natural gas sold to the participants (index less a discount) is structured to generate revenues sufficient to pay debt service on the bonds and provide excess funds to be deposited in the general reserve fund. Balances in the general reserve fund at the end of the year will be rebated back to the participants.

To mitigate TEAC's associated market risk, that is the difference between payments from the participants (tied to index) and TEAC's fixed cost associated with debt service, TEAC will enter into a SWAP with RBCEL (guaranteed by Royal Bank of Canada, rated 'AA/F1+' by Fitch). Under this SWAP TEAC will pay index and receive a fixed price (plus an associated discount) that will match the cost of debt service (plus the associated discount). This swap will also be matched with a mirror SWAP between J. Aron paying RBCEL a fixed price (plus the associated discount) and receiving index.

--Security Interest: Bondholders have a security interest in the trust estate pledged under the indenture which includes payments from the participants to TEAC (under the supply agreements), amounts receivable under the commodity swap, amounts receivable under the Purchase Agreement and all other income available to the gas project.

--Structure Performance: If J. Aron does not perform its obligations under the Purchase Agreement (e.g. not delivering specified volumes of gas, fails to remarket gas), J. Aron (backed by the GSG guarantee) is obligated to make required payments to TEAC, which will be sufficient to cover debt service payments and ultimately the payment of the extraordinary redemption. In the event of a default by TEAC that results in a draw on the debt service reserve fund (DSRF) below 60 days, TEAC or the trustee will request J. Aron to remarket the gas or purchase it for its own account. Under this scenario, J. Aron's payments from the remarketing of the gas or purchase of the gas for their own account would be based upon index prices and will be more than sufficient to pay debt service and begin to replenish the reserve.

Also reviewed were the events of default associated with the SWAPs, such as non performance. Under these events, replacement mechanisms and reserve funds are sufficient to pay debt service and an extraordinary redemption. In addition, Fitch reviewed multiple default stress scenarios happening simultaneously (such a DSRF level below 60 days, J. Aron remarketing 100% of the gas, and an immediate termination resulting from a swap default) and found that the structure and reserves proved to be adequate to pay timely principal and interest and an extraordinary redemption of the bonds.

--Supply Agreement: TEAC has entered into a Supply Agreement with each participant. These agreements are take-and-pay obligations paid as an O&M expense of each participant. Under the contract, so long as gas is delivered by J. Aron to TEAC, it is deemed that the participants have received the gas and are obligated to pay. Each participant has covenanted to set rates sufficient to pay all amounts due, step-up an addition 25% of its contracted daily volumes in the event of a default by another participant, and use the gas in a manner that is compliant with tax covenants.

--Payments: Payments on the bonds will be made semi-annually on the 1st of each March and September, beginning in March 1, 2007. At closing, two debt service reserve sub-accounts will be established for the series 2006A bonds in the following amounts. The first will be $65.3 million (DSRF), sized to exceed maximum payments by participants for three months. The second is $10.25 million (sub-account), sized to cover a debt service payment if due between a termination event and termination payment date. If utilized, the reserves will be replenished to the required amount via monthly deposits derived from excess savings through the flow of funds.

The bonds are subject to extraordinary redemption prior to maturity. Under circumstances (designated 'Seller default', 'Buyer Default') or other events (designated 'No-Default Termination Events' such as changes in tax laws), the bonds will be called prior to the stated maturity through the extraordinary redemption mechanism. The termination payment together with other available funds will equal an amount sufficient to pay off the series 2006A bonds plus accrued interest (ultimately covering all principal, unamortized premium, and accrued interest). The funds required to pay the redemption price will be provided by J. Aron and guaranteed by GSG.

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