Fitch Rates John Sevier Combined Cycle Generation LLC Lease Note Obligations 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AA' to the John Sevier Combined Cycle Generation LLC (LLC or the Lessor) lease note obligations. The notes are expected to price during the week of Jan. 16.

The Rating Outlook is Stable.

SECURITY:

The notes are secured by basic lease rent payments to be made by the Tennessee Valley Authority (TVA) whose obligation to make rent payments is absolute and unconditional. Noteholders are also granted a first mortgage interest in the assets under the lease.

KEY RATING DRIVERS:

STRONG LEASE COUNTERPARTY: The rating of the LLC notes reflects TVA's absolute and unconditional obligation to make basic rent payments. However, Fitch does not believe that the implicit federal government support enjoyed by the global power bonds (rated 'AAA', with a Negative Outlook by Fitch) extends to TVA's lease rent obligations.

BASIC RENT AN OPERATING EXPENSE: It is the intention of TVA to consider basic rent payments as operating expenses under its bond resolution. TVA shows existing lease payments as debt service in its financial statements. Fitch notes that neither the TVA Act nor the bond resolution defines what constitutes the cost of operating and maintaining the power system. There is also no judicial precedent and the rating on the notes reflects this uncertainty.

WEAK NOTEHOLDER REMEDIES: The rating also reflects the relatively weak remedies, as compared to typical debt transactions, available to noteholders in the event of a partial or a missed rent payment. If a lease event of default such as a partial or a missed payment is the only indenture event of default, there is a 180-day grace period before any remedies including acceleration can be initiated.

MINIMAL CONSTRUCTION AND TECHNOLOGY RISK: The rating reflects minimal construction and technology risk. The John Sevier plant is an 880 megawatt (MW) natural gas-fired combined cycle plant which is currently 85% complete and has a targeted completion date of May 1, 2012.

NO FUEL AND OPERATING RISK: The structure requires TVA to operate, maintain and dispatch the plant. Fuel procurement and price risk are also borne by TVA.

WHAT COULD TRIGGER A RATING ACTION

TVA's CREDITWORTHINESS: Material credit events at TVA, whose absolute and unconditional obligation to make basic rent payments will be an important credit factor in the rating going forward.

CREDIT PROFILE:

The John Sevier combined cycle generation plant (plant) is an 880MW natural gas fired plant currently under construction at Rogersville, TN. The plant consists of three General Electric 7FA combustion turbines totaling 480MW and steam turbine with a capacity of 400MW. Construction of the plant commenced in April 2010 with completion expected in May 2012. The plant is currently about 85% complete. Full commercial operation is expected in June 2012.

TVA is currently constructing the John Sevier plant on its balance sheet. Prior to substantial completion TVA plans a lease and leaseback of the plant from the LLC for a period of 30 years. The LLC will fund a portion of the lease purchase with the proceeds from the current issuance.

The closing date of the lease is the date when the asset will be transferred to the LLC and is expected to be at or around the debt financing date. The lease commencement date which is separate from the closing date is the earlier of the substantial completion date, as certified by an independent engineer, and the second debt service payment. Because basic rent payment and debt service is due semi-annually and the first rent payment is included in the financing, noteholders are substantially insulated from construction risk as TVA is obligated to start make basic rent payments on the lease commencement date regardless of whether substantial completion has been achieved. Upon commissioning, TVA is responsible for operating, maintaining, fuel procurement and dispatch of the plant. TVA is also obligated to make rent payments regardless of whether the plant is operating.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 20, 2011;

--'Rating Criteria for Infrastructure and Project Finance, August 16, 2011;

--'Public Power Rating Guidelines', March 28, 2011;

--'US Public Power Peer Study', June 20, 2011;.

--'Tennessee Valley Authority', June 15, 2011.

Applicable Criteria and Related Research:

Tennessee Valley Authority (Knoxville, TN)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=634430

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=613065

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

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