published Saturday, April 13th, 2013

TVA could pay more for bonds

  • photo
    Tennessee Valley Authority headquarters and TVA logo
    Photo by Miranda Harple

President Obama's suggestion that the federal government study selling the Tennessee Valley Authority may not get very far in Congress.

But the budget proposal to study privatizing TVA did temporarily devalue TVA's bonds on Wall Street -- and could push up borrowing costs for America's biggest government utility if investors remain wary about the continued government ownership of TVA.

Moody's Investors Services Analyst Toby Shea said if the federal government were to sell TVA the agency would likely lose its top bond rating since the government would no longer be linked to TVA's debt. That means that TVA would have to pay higher interest rates on its $24 billion of debt.

But in a report to investors, Shea said "it is still highly unclear how this initiative will develop and how far it will go" so Moody's isn't backing off of its top "Aaa" rating for TVA.

TVA enjoys its top bond rating -- and is able to borrow at cheaper rates than investor-owned utilities like Southern Co. or Duke Energy -- because as a government-owned utility it has the implied backing of Uncle Sam. TVA is an independent agency owned by the federal government and its ratepayers are solely responsible for paying off TVA debt. But rating agencies expect that the government would ultimately step in and pay off any debt if a default occurred.

In the Obama administration's budget proposal released Wednesday, the Office of Management and Budget proposed studying whether TVA should be sold to reduce the federal debt listed on the books from TVA, and to free up the utility to borrow more without the Congressionally imposed $30 billion debt ceiling.

The OMB said TVA's capital investment plan will require more than $25 billion in new borrowing over the next decade. But the agency is already within $6 billion of its borrowing cap at $30 billion.

While freeing TVA to borrow more money for future growth, privatizing the agency also could cut the federal debt and "help put the nation on a sustainable fiscal path," OMB said. Obama budget planners said TVA has achieved its original objective "and no longer requires federal participation."

Tennessee Valley lawmakers quickly took exception to the Obama budget, although some of their comments underscore the investor concerns about TVA's future.

U.S. Sen. Lamar Alexander, R-Tenn., called the idea of selling TVA "one more bad idea in a budget full of bad ideas." U.S. Sen. Bob Corker, R-Tenn., questioned whether selling TVA would do much, if anything, to cut the federal budget deficit.

TVA no longer gets appropriated funds from the federal government for its operations and Corker doesn't think a TVA sale would yield much, if anything.

"While unfortunate but true, TVA as a going concern today is probably worth less than its debt and its rates have become increasingly less competitive, so if the goal is deficit reduction, I doubt this idea gets much traction," he said.

But the idea of selling TVA did get the attention of bond traders after it was first introduced. TVA bonds traded lower in heavier-than-normal activity on Thursday. Larry Milstein, head of government and agency trading at R.W. Presssrich Co. in New York, said he hadn't seen interest rate yields jump so much so quickly on debt from any U.S. agency. As bond prices fall, interest yields go up on the bond market.

TVA spokesman Duncan Mansfield said Friday that the federal utility has no plans in the near future to go to the bond market and the agency expects bond activity to calm as investors find out more about the Obama budget plan.

"Spreads on TVA bonds have been wider as a result of Wednesday's news," TVA treasurer John Hoskins said Friday. "Some investors may view this as a buying opportunity. We expect the trading of TVA bonds to ultimately firm up as the news is more fully analyzed."

By the end of the week, much of the investor angst appeared to subside. TVA bonds traded on the New York Stock Exchange ended the week at $26.70, up 9 cents for the week.

Contact Dave Flessner at dflessner@timesfreepress.com or at 757-6340

about Dave Flessner...

Dave Flessner is the business editor for the Times Free Press. A journalist for 35 years, Dave has been business editor and projects editor for the Chattanooga Times Free Press, city editor for The Chattanooga Times, business and county reporter for the Chattanooga Times, correspondent for the Lansing State Journal and Ingham County News in Michigan, staff writer for the Hastings Daily Tribune in Nebraska, and news director for WCBN-FM in Michigan. Dave, a native ...

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