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Global Credit Research - 21 Sep 2010
US$1 billion of debt securities rated
New York, September 21, 2010 -- Moody's Investors Service assigned a Aaa senior unsecured rating
to a new issue of Tennessee Valley Authority (TVA) Global Power Bonds
2010 Series A due September 15, 2060 and affirmed the Aaa rating
on all other outstanding TVA power bonds and other long-term debt
obligations. The rating outlook is stable.
In accordance with Moody's Government Related Issuer (GRI) rating
methodology, the rating of TVA, a wholly owned U.S.
government corporation, reflects the following rationale:
- A baseline credit assessment (BCA) of 1 (on a scale of 1 to 21,
where 1 represents the equivalent risk of a Aaa, 2 represents a
Aa1, and so forth);
- The Aaa rating of the U.S. government;
- Low dependence, reflecting TVA's statutory rate setting
mechanisms and protected monopoly position in its service territory,
making it highly likely that it will meet its debt obligations independent
of the financial condition of the U.S. government;
- High support, reflecting its status as a 100% wholly
owned U.S. government corporation.
Under the provisions of the Tennessee Valley Authority Act of 1933 as
amended in 1959, TVA has the statutory authority to set rates subject
to the requirement that rates are sufficient to recover operating costs;
to service all of its debt obligations; and to make payments in lieu
of taxes to the states and counties in which it operates. The TVA
Act is the key factor supporting the organization's credit strength
and stability as rates have historically been set at levels sufficient
to meet these obligations. TVA does not receive financial support
from the U.S. government and is a wholly-owned U.S.
government corporation, limiting political influence in its rate
making process. Rates are set independently by its Board of Directors
and are not subject to judicial review or approval by any state or federal
TVA is protected from competition in its service territory, which
is defined both in the TVA Act and in an amendment to the Federal Power
Act known as the "anti-cherrypicking" provision.
Under this law, TVA is not required to deliver power from other
suppliers for consumption within its service territory using its system.
This provision protects TVA's competitive position in its service
territory and reduces the company's exposure to revenue loss.
In addition, TVA's power contracts to the cooperative and
municipal utilities to which is sells much of its power include provisions
that require from 5 to 15 years termination notice, contributing
to the stability of its service territory and customer base.
Compared to investor owned utilities and for-profit power companies,
TVA's financial metrics are low and by themselves would not by themselves
be sufficient to justify a Aaa rating, in accordance with Moody's
rating methodology for regulated electric and gas utilities. From
2007 through 2009, TVA's average CFO pre-working capital
interest coverage was 2.7x and its average CFO pre-W/C to
Debt ratio was 9.7%, on a Moody's adjusted basis.
Similarly, debt to capital was a high 84% at June 30,
2010, as the company does not issue common or preferred securities
while maintaining a modest amount of proprietary capital consisting mostly
of its original U.S. government appropriation investment.
With no shareholders and a mandate to set rates only at levels sufficient
to cover costs and debt service, traditional financial metrics are
not as meaningful as they are for most other utilities. These below
average metrics are offset by its statutory rate making authority,
U.S. government status, and other protective credit
TVA has significant capital spending needs over the next several years
and capital expenditures are projected to increase substantially from
$1.8 billion in 2009 to the $4 billion range by 2014.
Much of this spending is designated for new capacity expansion,
including the possible completion of Unit 1 at its Bellefonte nuclear
facility, as well as for environmental expenditures. TVA
also recently announced the closing of several coal units, partly
in an effort to limit future environmental compliance expenditures.
TVA's capital expenditures will be met by a combination of internal
cash flow, rate increases, and long-term debt issuance.
Under the TVA Act, TVA cannot have bonds or notes outstanding in
excess of $30 billion at any time and as of June 30, 2010,
TVA had $23.2 billion of bonds and notes outstanding falling
under this cap. While debt has been decreasing slightly over the
last few years, Moody's expects debt levels to begin rising
again as the company begins to finance part of its growing capital expenditure
program. TVA also has a severely underfunded pension plan,
to which it contributed $1 billion in September 2009, that
will likely require additional contributions in coming years.
TVA continues cleanup and recovery work related to the Kingston ash spill
and has recorded an estimate of $1.1 billion for the total
cost of the cleanup. TVA has booked a regulatory asset for this
amount, which is being expensed as it is collected in rates over
a period of 15 years. TVA is subject to sixty lawsuits related
to the ash spill which are not likely to be resolved for several years.
In the first seven lawsuits to proceed through the courts, the plaintiffs'
demand for punitive damages and for a jury trial were dismissed.
TVA funds its liquidity and working capital needs primarily through the
issuance of discount notes, short-term obligations with maturities
of up to one year. In 2009, the average outstanding balance
of discount notes was $1.7 billion and there were $834
million outstanding at June 30, 2010. TVA experienced strong
and consistent access to the short-term debt markets throughout
the credit crisis in late 2008 and early 2009. TVA's liquidity
is also supported by two 364-day bank credit facilities,
totaling $1 billion each, that expire in November 2010 and
May 2011, respectively. These credit facilities, although
not directly linked to the discount note program, are available
to repay such notes, if necessary. TVA also maintains a $150
million credit facility through a memorandum of understanding with the
U.S. Treasury. As of June 30, 2010, TVA
had no borrowings under any of its credit facilities, although there
were $133 million of letters of credit outstanding under the bank
TVA's rating is based in large degree on the statutory authority
granted under the TVA Act and the Federal Power Act, including the
TVA Board's rate making authority. TVA's Aaa rating
could be downgraded if there are limitations placed on the independence
of TVA, including its ability or willingness to set rates at sufficient
levels to cover operating expenses and debt service requirements;
if there are any changes in law negatively affecting TVA's protected
position in its service territory; or if TVA approaches its $30
billion debt ceiling.
TVA Global Power Bonds 2010 Series A -- Aaa
TVA Aaa rating an all outstanding power bonds and other rated long-term
debt obligations, including Pass Through Certificates issued by
New Valley Generation I, II, III, IV, and V.
The Tennessee Valley Authority is a public power system and a U.S.
government corporation headquartered in Knoxville, Tennessee.
Michael G. Haggarty
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Aaa rating to new issue of TVA Global Power Bonds
250 Greenwich Street
New York, NY 10007
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