NEW YORK--()--Fitch Ratings assigns an 'AAA' rating to the $1 billion 2012 series B Tennessee Valley Authority (TVA), TN's global power bonds. The bonds were priced on Dec. 18, 2012. Proceeds from the 2012 series B bonds will be primarily used to refinance outstanding debt.
In addition Fitch affirms the following parity global power bond ratings:
--$22.6 billion (as of Sept. 30, 2012) global power bonds at 'AAA'.
The Rating Outlook is Negative.
The bonds are secured by net revenues of TVA's power system.
KEY RATING DRIVERS
U.S. OWNERSHIP: The 'AAA' rating reflects TVA's status as a wholly owned corporation of the U.S. government. Fitch takes into account in its assessment the likelihood and degree of government support for TVA and similarly rated government-sponsored entities.
FEDERAL GOVERNMENT LINKS: While the TVA Act requires the utility to be self-funding and TVA's global power bonds do not constitute an obligation of the U.S. government, Fitch believes that U.S. authorities would use extraordinary efforts to support TVA's operations and its global power bond obligations in the event that the utility encountered financial difficulties.
RING-FENCED SERVICE TERRITORY: Through the Federal Power Act's anti-cherry-picking provision, the Federal Energy Regulatory Commission (FERC) is prevented from ordering TVA to provide open-access to its transmission lines for the purpose of serving TVA customers. This provision in essence reduces TVA's risk of customer loss.
POTENTIAL CLOSURE OF LARGEST CUSTOMER: United States Enrichment Corporation (USEC) is TVA's largest directly served customer accounting for 4% of revenue. USEC's Kentucky facility is expected to be operational through May 31, 2013 after which considerable uncertainty exists regarding future operations. The loss of USEC's revenue further increases the need to adjust rates in a sluggish kWh sales environment but will not be material to TVA's overall performance.
EPA SETTLEMENT: Favorably, TVA has settled with the U.S. Environmental Protection Agency (EPA); the states of Tennessee, Kentucky, Alabama, and North Carolina; and various environmental groups on past and potential future new source review (NSR) claims. TVA will incur an expense of $360 million, retrofit some coal units and retire 2200MW of coal capacity as part of the settlement.
DEBT LIMIT: Credit concerns include a reduced flexibility to issue bonds due to the cap of $30 billion, imposed by the TVA Act. This concern is partially mitigated by TVA's past use of alternate financing that does not count against the cap. Fitch notes that TVA is continuing to work with all stakeholders to increase the debt limit.
WATTS BAR 2 DELAY: Revised estimates from TVA now anticipate completion of the Watts Bar 2 nuclear unit (WB2) during fall 2015 at a cost between $4 billion and $4.5 billion. Original estimates called for completion in fall 2012 at $2.5 billion. Even if the revised cost estimate holds, Fitch believes that the significant cost increase for WB2 together with potential new safety and security requirements by the Nuclear Regulatory Commission (NRC) will require rate increases.
WHAT COULD TRIGGER A RATING ACTION
U.S. SOVEREIGN RATING LINKAGE: TVA's bonds are payable solely from net revenues of the power system and don't constitute obligations of the U.S. However, the U.S. government's extensive involvement in the operations of TVA, coupled with the vital importance of TVA in its service area results in a direct linkage between the rating on global power bonds and the U.S. sovereign.
CAPITAL RAISING FLEXIBILITY: Flexibility to raise additional debt capital as needed, given TVA's future capital expenditure plans, is important. Fitch will continue to monitor TVA's ability to finance future growth.
Dual Role of Electric Supply and Economic Development
TVA was created in 1933 as a federal government corporation via legislation enacted by the U.S. Congress. TVA operates the nation's largest public power system with a service area that includes seven states in the southeastern U.S. covering a population of more than nine million people. In addition to selling electricity, TVA is tasked with furthering the economic development of TVA's service area, and reducing the damage from destructive floodwaters within the Tennessee River system and the lower Ohio and Mississippi Rivers.
Self-Funded Power System
Initially, TVA's operations were funded by federal appropriations. Direct appropriations for the TVA power program ended in 1959, and appropriations for TVA's economic development and multipurpose activities ended in 1999. Since 1999, TVA has funded all of its operations entirely from the sale of electricity and power system financings - primarily the sale of debt securities. TVA is not authorized to issue equity securities.
All-Requirements Power Supply Contracts
TVA provides wholesale power to 155 municipalities and cooperatives pursuant to individual long-term all-requirements contracts. Revenues from TVA's municipal and cooperative customers accounted for approximately 85% of TVA's total operating revenues for fiscal 2012. TVA also sells electricity directly to industrial customers, accounting for 13% of operating revenue.
Stable Operating Performance
Total revenue declined by 5.2% in fiscal 2012 due primarily to a continued decline in kWh sales. The reduction in revenue was mostly offset by a corresponding drop in fuel and purchased power costs. Financial performance has remained satisfactory, although debt service coverage (DSC) has fluctuated over the last few years due to annual variations in the amount of debt service rather than a material change in operating cash flow. Days cash on hand remains low at 32 days of operating expenses, but liquidity improves to about 90 days of expenses after including available lines of credit.
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 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012);
--'Tennessee Valley Authority' (June 15, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria