TVA debt cap puts it in bind

TVA debt cap puts it in bind

October 22nd, 2011 by Dave Flessner in Business Around the Region

Document: Inspector General report on TVA debt

Inspector General report on TVA debt.

The Tennessee Valley Authority needs more flexibility with its congressionally imposed debt ceiling to fund new and cleaner power plants, a TVA audit concludes.

"TVA is fast approaching a crossroads," TVA Inspector General Richard Moore said in a new 48-page review of TVA's financial standing. "TVA may experience issues with its ability to adequately fund operations, maintenance and capital projects without increasing the debt ceiling, raising rates, or choosing among options."

While TVA's debt is creeping closer to its $30 billion cap, the audit suggests that TVA's borrowing is not necessarily out of line with that of other utilities. The current debt ceiling for TVA was adopted by Congress in 1979 and, adjusted for inflation, would be worth more than $90 billion today.

TVA's debt reached nearly $27 billion in 1997 before the agency set a goal of cutting its borrowings in half within the next decade by turning to more outside suppliers for new energy. TVA later reversed that path and is trying again to generate nearly all of its own power.

As a result, TVA's long-term debt obligations began rising in 2010 after dropping by $2 billion in the previous decade.

To pay the $2.5 billion bill to complete Watts Bar Nuclear Plant Unit 2, the $820 million cost of the new combined-cycle natural gas plant at the John Sevier Plant and the $4.9 billion plan to finish to Bellefonte Nuclear Plant Unit 1, TVA is having to turn to outside lenders.

TVA Chief Financial Officer John Thomas said TVA plans to put the John Sevier plant up for sale under a leaseback option by next spring and put the Watts Bar Unit 2 up for sale under a similar leaseback arrangement within the next year.

"It certainly would help TVA and its ratepayers to have more flexibility," Thomas said, noting that the alternative financing is likely to raise the cost of borrowing for TVA. "For TVA, issuing our own debt is the cheapest cost of capital and considered as a whole, our debt is very reasonable."

Neither Thomas nor the TVA inspector general directly called upon Congress to raise the $30 billion limit on TVA's borrowing authority. But TVA Chairman Dennis Bottorff said Friday that he would like to see TVA given more borrowing authority commensurate with its ability to pay back extra borrowings.

"The debt cap for TV is a bunt instrument for the management of financial soundness," Bottorff said. "This is not a good time to talk about more debt in Washington, but ideally what should happen is that we should replace the ceiling with another, more reasonable financial standard."

TVA has boosted its assets by 55 percent and its customers by 66 percent since 1979 when the current cap on borrowing was set, the TVA audit reports.

Bottorff said TVA is well positioned to repay its debt and would not put the federal treasury at greater risk with a new type of debt limit.

As an independent federally owned utility, TVA is self-financing. But the implied backing of the federal government for TVA helps the federal utility maintain a top bond rating, even with the highest debt of any U.S. electric utility.

Other for-profit utilities pay dividends on equity, Thomas said. But TVA funds all of its projects through either debt of ratepayer fees.

Stephen Smith, executive director for the Southern Alliance for Clean Energy in Knoxville, said if the debt cap is raised then Congress "needs to structure an arrangement so there isn't an open-ended check book" for TVA to build more plants and take on billions more of debt that ultimately must be repaid by electricity users in TVA's seven-state region.

Both U.S. Sens. Lamar Alexander and Bob Corker, R-Tenn., have said they are open to talking about a new debt ceiling for TVA but neither is pushing the idea.

"Politically, I think it is a dead issue in the near term because of the hyper sensitivity in Washington right now over any addition to the federal debt," Smith said.