The Tennessee Valley Authority expects to save more than $20 million a year in interest expenses over the next couple of years from a $1 billion bond issue priced Monday.
TVA said the two-year global bond issue - the first two-year note issued by the federal utility in more than 20 years - will carry an interest of 2.25 percent and replace a 4.5 percent note due April 1.
Although short-term interest rates have trended higher this year, TVA Treasurer Tammy Wilson said rates are still more favorable than previous debt issues by TVA.
"The proceeds from today's offering will refinance other debt maturing this year, but at a lower rate," TVA Chief Financial Officer John Thomas said. "The two-year maturity also fits well in TVA's debt profile, and will give us greater flexibility in managing obligations in the coming years."
Thomas said earlier this year he expects declining debt and the refinancing of older, higher- interest notes should combine to lower TVA's interest expenses in 2018 despite the recent uptick in some borrowing rates. Wilson said Monday's issue will keep TVA borrowing costs below budget in the current fiscal year.
TVA has more than $26 billion in debt and other long-term financing obligations and spends about 13 percent of its budget on interest expenses.
TVA continues to enjoy a top rating from bond agencies, in part, because bond rating agencies assume the government-owned utility enjoys the implied backing of the federal government.
But the bond rating agency Moody's warned Monday that "TVA's credit rating could be downgraded if there are any changes in law that negatively affect TVA's protected position in its service territory, including if the utility is required to sell its transmission assets." The Trump administration proposed in its fiscal 2019 budget proposal released last month that TVA sell its transmission assets, but there seems to be little Congressional support for such a sale as yet.
Despite the White House proposal to sell part of TVA, Moody's still reaffirmed its top AAA rating for the $1 billion global power bond series issued Monday and gave TVA a "stable outlook" for its future.
"The stable rating outlook reflects our expectations that TVA will generate significant positive free cash flow going forward that will be used for debt reduction, a strategic objective and a credit positive," said Scott Solomon, a vice president and senior credit officer for Moody's Investors Service.
TVA is on target to reach its goal to reduce its total debt and long-term obligations to $21.8 billion by 2023, Thomas said. That would be down nearly $5 billion from a decade earlier and well below TVA's debt ceiling of $30 billion.
TVA is preparing a new 20-year financial plan next year that is expected to further reduce the utility's net borrowings.
The new TVA note is the first bond issue since February 2017 and the first 2-year note since 1997.
Wilson said TVA's bond issue drew demand from money managers, governments, insurance companies and a variety of other investors when it was priced Monday.
"We were pleased to see a pocket of stability in the market, giving us a window to move forward with today's offering," Wilson said. "TVA is known for longer-term offerings, but can issue bonds across the curve, and we were pleased to see strong interest from investors who focus on shorter maturities."
Unlike investor-owned utilities that raise funds for projects from both shareholders and bond investors, TVA derives all of its funds for capital projects from borrowings on the bond market and from cash generated from its operations.
Contact staff writer Dave Flessner at email@example.com or at 423-757-6340.