NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the following ratings:
--$22.9 billion Tennessee Valley Authority's (TVA) global power bonds at 'AAA';
--$153.1 million Caledonia Generating LLC's (Caledonia) senior secured notes at 'AA';
--$870.3 million John Sevier Combined Cycle Generation LLC (JSCCG) secured notes 2012 series A at 'AA';
--$343 million Southaven Combined Cycle LLC (Southaven) secured notes 2013 series A at 'AA'.
The Rating Outlook on all outstanding obligations is Stable.
TVA's global power bonds are secured by net revenues of TVA's power system.
The Caledonia, Southaven and JSCCG notes are secured by basic lease rent payments made by TVA (as lessee), whose obligation to make rent payments is absolute and unconditional. Noteholders are also granted an interest in the assets under each of the lease transactions.
KEY RATING DRIVERS:
IMPLICIT GOVERNMENTAL SUPPORT: The 'AAA' rating assigned to TVA's outstanding global power bonds reflects its status as a wholly owned corporation of the U.S. Government and Fitch's expectation that repayment of the power bonds would ultimately receive the support of the U.S. Government in the event of fiscal distress.
STRONG LEASE COUNTERPARTY: The 'AA' rating assigned to the Southaven, Caledonia and JSCCG notes is based principally on the credit quality of TVA, whose absolute and unconditional obligation as the counterparty to make rent payments secures the notes. However, Fitch does not believe that the implicit federal government support benefitting the global power bonds extends to TVA's lease rent obligations.
COMPETITIVE WHOLESALE ELECTRIC SUPPLIER: TVA has an increasingly diverse resource portfolio, which provides competitively priced wholesale electricity to a population of more than nine million spanning an exceptionally large and diverse region.
RING-FENCED SERVICE TERRITORY: The Federal Energy Regulatory Commission (FERC) is prevented, pursuant to the Federal Power Act's anti-cherry-picking provision, from requiring TVA to provide open-access to its transmission lines for the purpose of serving TVA customers. This provision in essence significantly reduces TVA's risk of customer loss.
TIMELY COST RECOVERY: TVA is required, pursuant to the TVA Act of 1933 (the Act), to set rates sufficient to cover operating and maintenance costs and all other obligations, including debt service and payments to the U.S. Treasury. An automatic fuel cost adjustment made each month ensures the timely recapture of fuel costs.
SUBJECT TO DEBT LIMIT: Given the authority's sizeable capital needs, long-term borrowing capacity remains a credit concern as TVA continues to approach a $30 billion debt ceiling imposed by the Act. This concern remains partially mitigated by TVA's access to, and past use of, alternate financing that does not count against the limit.
WEAK NOTEHOLDER REMEDIES: Remedies available to Southaven, Caledonia and JSGCC noteholders following a lease event of default which includes a partial or missed rental payment, are considered weak by Fitch. Pursuant to the respective lease indentures, TVA as the lessee is afforded a lengthy 180-day cure period before it can be compelled by noteholders to accelerate lease payments.
BASIC RENT AN OPERATING EXPENSE: TVA treats basic rent payments related to various lease financings as an operating expense under its bond resolution. However, 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.
CHANGE IN U.S. SOVEREIGN RATING: Any change in the credit rating of the U.S. sovereign would likely result in a comparable change in the rating on TVA's power revenue bonds.
WEAKENING OF TVA'S CREDITWORTHINESS: Negative credit events at TVA, including the failure to establish rates sufficient to maintain financial metrics at historical levels and fund growing capital needs, would likely pressure the Southaven, Caledonia and JSCCG note ratings over time.
LARGE REGIONAL WHOLESALE SYSTEM
TVA operates the nation's largest public power system, selling power on a wholesale basis to 155 municipal and cooperative distribution systems spanning an exceptionally large and diverse service area that includes portions of Tennessee, Alabama, Mississippi, Kentucky, Georgia, North Carolina and Virginia. TVA operates as a fully self-supporting enterprise fund supported entirely from the sale of electricity and power system financings.
SATISFACTORY FINANCIAL RESULTS
Energy sales decreased again in fiscal 2014, although the 2.4% decline was less pronounced than the nearly 5% decrease incorporated into TVA's originally adopted budget. The positive variance in sales relative to the budget coupled with a modest rate increase prompted a favorable increase in funds available for debt service (FADS). The stronger cash flow, together with significantly lower annual debt service costs, resulted in Fitch-calculated debt service coverage of 2.62x.
Available cash reserves remain low for the rating category, but the inclusion of multiple lines of credit provides sufficient resources relative to TVA's operating needs. Unrestricted cash and investments at fiscal year-end 2014 together with a $150 million credit facility with the U.S. Treasury and three long-term revolving credit facilities totaling $2.5 billion provide a robust 166 days liquidity on hand.
Year-to-date results through the first three months of the current fiscal year are positive relative to the same period in the prior year. Operating income is reportedly up nearly $150 million, driven by the rate increase noted above and continued progress towards reducing O&M costs by the $500 million stated target.
DEBT LIMITATION CURTAILS FLEXIBILITY
With nearly $24 billion of debt outstanding at the close of fiscal 2014, TVA remains close to its $30 billion debt limitation imposed under the Act. Consequently, various lease financings have been employed as a way to circumvent the current debt limitation while still continuing to finance the authority's ongoing capital program. Lease-purchase transactions are not subject to the Act's debt limitation.
The limitation placed on TVA's borrowing capacity remains a concern given its long-term capital needs exceed the remaining capacity under the debt limitation. Capital costs covering fiscals 2015-2017 are estimated at $7.5 billion, the majority of which could be financed with long-term borrowings.
WATTS BAR UNIT 2 CONSTRUCTION PROGRESSING
Fitch believes the near completion of TVA's Watts Bar Nuclear Plant's Unit 2 reactor remains a positive development. Project completion is slated for the latter part of 2015 with commercial operation expected in December 2015. The final cost remains unchanged, estimated to be within a range of $4 billion-$4.5 billion. Unit 2 appears likely to be granted an operating license in the near term by the Nuclear Regulatory Commission (NRC) following a recent recommendation by an advisory group to the NRC. When online, the Unit will further diversify TVA's resource portfolio and provide 1,150 megawatts of carbon-free generating capacity.
SOUTHAVEN COMBINED CYCLE FACILITY
The Southaven Combined Cycle facility is located in Mississippi, has a summer net generation capacity of approximately 774 megawatts and consists primarily of three gas fired combustion turbines.
With the 2013 current financing, TVA leased its undivided interest in the facility to Southaven pursuant to a head lease term (20 years) for a one-time cash payment of $400 million. Southaven then subleased the undivided interest and the ground interest back to TVA pursuant to the facility and ground leases.
JOHN SEVIER PLANT
TVA completed construction in April 2012 of the John Sevier Combined-Cycle Facility, a natural-gas fired plant located in northeastern Tennessee. The plant, which has a net summer generating capability of 870 MW, began commercial operation shortly thereafter.
Construction of the plant was initially funded by TVA, although the facility was ultimately sold to JSCCG and then leased back to TVA. The cost to acquire the plant was 90% debt financed by JSCCG, while the balance was funded with equity notes.
CALEDONIA GENERATING FACILITY
Caledonia was formed in 2000 to develop, construct, own, operate and maintain the Caledonia facility, a combined cycle, natural-gas-fired 765 MW power plant located in Caledonia, MS. The facility commenced commercial operations in 2003 and was operated on a merchant basis until 2007. MEP-III LLC (MEP), which is a wholly owned subsidiary of General Electric Capital Corporation (GECC), acquired a 100% direct equity interest in Caledonia in 2003 and remains the owner to date.
Midway through 2007 TVA entered into a triple-net lease agreement whereby the facility was leased to TVA for a period of 15 years ending Feb. 28, 2022. The lease is an operating lease with Caledonia holding title to the asset and TVA being responsible for operating and maintaining the plant. Fitch notes that the Caledonia lease transaction was initiated by GECC and that TVA did not receive proceeds from the transaction.
TVA treats all of its basic lease rental payments as operating expenses, effectively making the payments senior to all other debt service obligations. However, neither the TVA Act nor the power bond resolution defines what constitutes operating expenses of the power system. All lease structures require TVA to operate, maintain and dispatch the leased facilities. Fuel procurement and price risk are also borne by TVA.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 16, 2014;
--'U.S. Public Power Rating Criteria', March 18, 2014;
--'U.S. Public Power Peer Study', June 13, 2014.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study -- June 2014