The Internal Revenue Service is auditing $3.19 billion of gas project revenue bonds that the Tennessee Energy Acquisition Corp. issued in 2006.

The IRS notified TEAC of the audit with two separate letters dated April 23. TEAC disclosed the IRS letters in an event notice it filed with the Municipal Securities Rulemaking Board’s online EMMA system late last week.

TEAC is a nonprofit corporation in Tennessee that provides natural gas, transportation and management services for 21 associated municipalities, as well as the state. The IRS told TEAC that it “routinely examines municipal debt issuances to determine compliance with federal income tax requirements.”

TEAC said it believes the bonds complied with all provisions of the IRS code and will cooperate with the IRS in its examination, according to the notice it posted on EMMA.

TEAC issued $1.99 billion of Series A, $132.5 million of unrated Series B subordinate bonds and $1.06 billion of Series C pre-pay gas bonds.  The bonds were sold to pre-pay contracts for 20-year supplies of natural gas to 17 municipalities and nine other municipal gas systems or joint-action agencies in the Southeast. 

The gas was to be delivered over the 20 year period by J. Aron & Co. under a prepaid natural gas sales agreement. J.Aron, the commodities division of Goldman, Sachs & Co., agreed to deliver specified daily quantities of gas each month while TEAC agreed to make a lump-sum prepayment to J. Aron for the cost of the gas project.

The total quantity of gas to be delivered by J. Aron over the term of the prepaid agreement was around 486 billion cubic feet, bond documents said.

TEAC entered into natural gas commodity price swap agreements with Royal Bank of Canada Europe Ltd., a subsidy of Royal Bank of Canada, for both the Series A and C bonds. Banc of America Securities LLC, now Bank of America Merrill Lynch, purchased the Series B bonds.

Goldman Sachs  and Banc of America Securities underwrote the Series A bonds, while B of A, Goldman and Harvestons Securities Inc. underwrote the Series C bonds. Orrick, Herrington & Sutcliffe LLP was bond counsel for all three bond series.

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