The delay in finishing the Watts Bar Unit 2 reactor could force electricity rates higher in the Tennessee Valley, according to a new financial assessment of TVA.
Moody's Investors Services warns that the extra time and expense to complete TVA's newest reactor "will increase pressure on rates" and push the federal utility closer to its debt ceiling.
"The Watts Bar cost overruns will require between $1.5 billion and $2 billion of additional funding sources over the next three years, which will likely come from a combination of rate increases and additional financings," said Michael G. Haggarty, senior vice president of the finance group for Moody's in New York.
Moody's affirmed its top Aaa rating for TVA with a stable outlook for the utility despite the cost overruns for one of its biggest projects. Haggarty noted that the TVA board may raise its rates to cover higher expenses, and delaying the completion of the Watts Bar unit until 2015, as well as the start of work to finish TVA's Bellefonte nuclear plant in Alabama, will cushion any blow from the extra expenses.
TVA President Tom Kilgore said last week that finishing Watts Bar Unit 2 will take an extra three years and somewhere between $1.5 billion to $2 billion more than TVA projected when it resurrected work on the unit in 2007. Watts Bar was started in 1974 but has been delayed because of construction problems and a slowdown in power demand.
The delays will push the completion cost of Watts Bar Unit 2 above $4 billion, but Kilgore said the nuclear unit still should produce power for less than what TVA now spends to generate other power.
"I'm fairly confident that when we finish Watts Bar that won't be a rate driver because we're estimating we can finish Watts Bar and have the all-end cost at Watts Bar be somewhere in the 6 cents (per kilowatt-hour) range," Kilgore told reporters last week.
"We currently sell at our wholesale price of about 6.8 to 7.2 (cents per kilowatt-hour) and so since we're going to finish Watts Bar and have it actually be less than our current average, then I don't see any reason we can't do that and not have a major impact on rates," he said.
The delay will require extra borrowing. But TVA is paying for some of the expense of the new reactor while it is being built to hold down the amount borrowed.
At the end of 2011, TVA had $24.7 billion of bonds or notes outstanding that fell under the statutory debt ceiling, up about $1 billion from the previous year.
TVA spokesman Scott Brooks said the utility "will continue to use debt [bonds], our least-cost financing option, to fund the project and will retire the debt over the lifetime of the asset, according to TVA's financial guiding principles.
"TVA also may use alternative financing to alleviate pressure under the debt ceiling, since alternative financing transactions do not count against the debt cap," he said.