New York, December 20, 2016 -- Summary Rating Rationale
Moody's Investors Service has assigned the issuer rating of A2 to the Tennessee Energy Acquisition Corporation (TEAC). The rating outlook is stable. This issuer rating is intended to be used as an assessment of TEAC's financial and operational strength and the credit strength of the TEAC associated municipalities in their take-and-pay requirements gas purchase contracts.
The A2 rating incorporates the A2 weighted average credit quality assessment of the municipal gas enterprises located in Tennessee that participate in TEAC and the sound provisions of the Natural Gas Supply and Transportation Storage, and Load Management Agreement between TEAC and the associated municipalities.
The rating also considers that TEAC has the ability to pass all gas costs through to the municipal gas utilities that have unregulated rate setting; and sound record of payment to TEAC without default. Failure to pay by a TEAC municipal purchaser, which has not happened, results in TEAC shutting off natural gas supply.
Most of the municipal gas utilities provide gas service at fixed rates with a "cost of gas" mechanism, that enables them to fully recover on a timely basis their costs of purchasing the gas at wholesale from TEAC. Low natural gas prices and continued economic growth in Tennessee are positive factors about the business environment. The outlook is for stable business conditions in the next year. TEAC provides natural gas supply at competitive prices to the utilities with about 50% of supply benefitting from existing prepay revenue bonds that provide a discount over the spot price.
TEAC's participants have a take-and-pay obligation to purchase from TEAC the gas which is an O&M expense of the municipal gas utility. The customer base of the TEAC municipal gas purchasers is generally diversified with limited exposure to any one customer. However, one utility does have a dominant customer that went bankrupt in 2016, but the facility, an aluminum smelter, was purchased by a new firm and the facility is back in operation. That customer represented over one-half the revenues of The West Tennessee Public Utility District (not rated). The district has a record of strong financial liquidity and an accounts receivable policy which somewhat mitigates the customer dominance risk.
Total gas purchases of the TEAC municipal purchasers was 12.9 billion cubic feet for 2016, which was 14% lower than in 2015 due to relatively low heating degree days. TEAC and its associated municipality revenues were also down in 2014-2016 largely due to lower natural gas prices. TEAC members use natural gas for space heating and are very sensitive to heating degree days.
An important rating consideration is TEAC has had a good record as a joint action agency in the acquisition, management and financing of natural gas supplies, including it has financed natural gas prepayment revenue bonds on behalf of its members. The management of the reduction in demand is an example of TEAC's capabilities in remarketing excess supply.
The natural gas prepayment debt is non-recourse to TEAC municipal members. See Moody's report on TEAC Gas Project Revenue Bonds, Series 2006 A and 2006 C. TEAC municipal participants that are associated municipalities have a take and pay obligation for natural gas as long as it is delivered under the prepay arrangement but if gas is not taken TEAC uses commercially reasonable efforts to remarket the gas. Under the Prepaid Gas Purchase Agreement, the supplier J Aron is required to remarket the remaining gas and if it can't be remarketed it is used for its own account. While the prepay bonds are shown on the TEAC balance sheet, if gas is not delivered or remarketed, there is no direct obligation to secure the debt by the associated municipalities nor TEAC. That risk is born by Goldman Sachs as guarantor.
TEAC's value added role is not only in the management services it brings but the economies of joint purchasing and also the benefits derived from the price discount from the prepayment transactions. TEAC also provides hedging services and has limited exposure to losses. TEAC has no outstanding direct debt based on its own credit.
Moody's believes the outlook is stable given TEAC's sound record of management of its natural gas acquisition program and meeting the natural gas requirements of the municipal utilities served.
Factors that Could Lead to an Upgrade
If TEAC municipal gas purchasers credit quality improves
Significant improvement in liquidity
Factors that Could Lead to a Downgrade
Should there be any successful challenge to TEAC's cost recovery process
If TEAC municipal gas purchaser credit quality weakens
Significant customer dominance in West Tennessee Public Utility District
No direct debt -bonds outstanding
TEAC was established in 1996 under state statute Energy Acquisition Corporation Act, Title 7, Chapter 39, Tennessee Code Annotated, as amended. The main purpose of TEAC to provide comprehensive gas management services to municipalities.
The principal methodology used in this rating was US Municipal Joint Action Agencies published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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