Sale of TVA could push up borrowing costs, but AAA-rating stands for now

photo Pedestrians walk past the main entrance to TVA in downtown Chattanooga.

The Tennessee Valley Authority would probably lose its favorable borrowing authority if it gives up ownership by Uncle Sam, but bond rating agencies are discounting the chance of the federal government selling TVA and are sticking with their top AAA-rating for the federal utility.

"There is little likelihood of any sale or disposal of TVA," Moody's ratings service said after the Office of Management and Budget released its fiscal 2015 plan calling for the possible sale of TVA.

Moody's and Standard & Poor's bond rating agency both said without the ownership and implied backing of the federal government, TVA bonds would likely lose their top rating.

"There is a very high likelihood the U.S. government would provide extraordinary support to TVA in the event of financial distress," S&P said in its most recent review of TVA. Without federal ownership and such backing, however, TVA's bond rating could be hurt.

But for now, bond rating agencies aren't making any changes and the market reaction among investors trading TVA bonds has been limited this month -- much less than when the Obana administration first proposed the sale of TVA a year ago

The Obama administration said in its annual budget plan unveiled this month that TVA had achieved its original mission and should now be sold or transferred to state governments or local power cooperatives in the Tennessee Valley to run the 81-year-old utility and service its $25 billion debt.

Obama's budget planners said they are willing to work with Congress to split up TVA or sell it to state or local governments in the region.

"The administration continues to believe that reducing or eliminating the federal government's role in programs such as TVA, which have achieved their original objectives, can help mitigate risk to taxpayers," OMB said in the budget plan. "The administration recognizes the important role TVA serves in the Tennessee Valley and stands ready to work with the Congress and TVA's stakeholders to explore options to end federal ties to TVA, including alternatives such as a transfer of ownership to state and local stakeholders."

But that suggestion for the fiscal 2015 federal budget lacks the support to get through Congress, industry analysts said.

"At various times in the Authority's history, politicians have made statements about the desire to divest TVA," Moody's said in its review of the new budget plan and its potential impact on TVA's AAA rating. "The barriers to executing such a transfer appear high as it would involve many complexities, including requiring the approval by both the House of Representatives and the Senate, where the issue would likely encounter significant political discussion. Should a reduction, elimination or reconfiguration of Federal ties occur, TVA is unlikely to maintain its Aaa rating."

Moody's put TVA on a negative watch because of the OMB budget, but Moody's noted that talk about selling or privatizing TVA through its history has never gained traction.

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U.S. Sen. Lamar Alexander, R-Tenn., said the talk about selling TVA is unnecessary and only threatens to hurt TVA's bond rating and drive up borrowing costs and TVA rates in the region.

TVA Director Barbara Haskew said the agency is working to improve TVA's financial standing within its current structure.

"TVA is financially healthy today and we are committed to continuously improve both our operating and financial performance," she said.

OMB noted the improvement at TVA, which has pledged to cut operating and maintenance expenses by $500 million a year to improve TVA costs and rates.

No state and energy officials in TVA's service territory have yet to take up Obama's offer to work with local stakeholders to transfer TVA to a regional agency under local control.

TVA spokesman Duncan Mansfield said trading in TVA bonds "has been relatively muted since the announcement" by OMB about the administration's interest in a sale.

TVA President Bill Johnson said the agency "will continue to work collaboratively with the Office of Management and Budget" in its review of TVA finances.

"Although TVA is owned by the Federal government, it does not receive taxpayer dollars and its debt is not taxpayer funded." Johnson said.