Moody’s Investors Service on Sept. 21 assigned an Aaa rating to Tennessee Valley Authority‘s (TVA) $1 billion Global Power Bonds 2015 Series A Due 2065.
In addition, Moody’s said that TVA’s outlook is stable and seemed satisfied with steps that the federal utility is taking to reduce the carbon footprint of the TVA power fleet while controlling costs.
Proceeds from the bond offering will be used to pay down short-term debt and for general corporate purposes. TVA had approximately $2.6bn in short-term debt outstanding as of June 30.
TVA hailed the fact that the 50-year bonds carry a “record low rate” of 4.25%. The bonds priced at a yield of 4.383%, which now stands as the lowest on record for a 50-year bond by any corporate or government agency issuer, according to a TVA news release.
“TVA’s Aaa senior unsecured rating considers several attributes unique to TVA, including federal ownership, legislation that provides protection from competition and the statutory authority of TVA’s Board to set rates”, said Moody’s Senior Credit Officer Scott Solomon.
“These attributes, combined with TVA’s size, scale, and economic importance within the Tennessee Valley, translate into a more predictable and stable financial profile relative to all other public power and investor owned utilities,” Solomon said in a Moody’s news release.
Challenges confronting TVA include a decline in electric demand and a significant capital spending program driven by the replacement of coal-fired generating capacity in an effort to increase the company’s power supply from reduced emitting resources, Moody’s said.
To that end, TVA’s Board approved the retirement of coal units at three plant sites with more than 3,000 MW of combined generating capacity,” Moody’s said. “In addition, TVA is constructing two new combined-cycle gas plants: the 1,000-MW Paradise plant, which is expected to achieve commercial operation in 2017 and the 1,046-MW Allen Plant (2018), at an estimated cost of $2bn.
Combined with the anticipated commercial operation of Watts Bar Unit 2, a nuclear plant, in late 2015, TVA anticipates reducing the reliance on coal-fired generation from approximately 32% of total generation currently to approximately 22% by 2020 while increasing generation from gas-fired and nuclear generating assets to approximately 23% and 41% , respectively, from 19% and 35%, currently.
TVA’s near-term projected capital expenditures are expected to exceed historical levels, which averaged approximately $2.2bn annually over the past three periods, Moody’s said. Specifically, expenditures are anticipated at approximately $3.4bn in fiscal year 2015 and $2.4bn in each of 2016 and 2017, and require a modest amount of external funding.
TVA’s Aaa credit rating could be downgraded if there are any limitations placed on the independence of TVA including its ability or willingness to set rates at sufficient levels to cover operating expenses and debt service requirements, or if there are any changes in law that negatively affect TVA’s protected position in its service territory including permitting outside access through TVA’s transmission lines, Moody’s said.
Also, the credit rating could be downgraded if TVA debt approaches its $30bn debt ceiling. Moreover, pressure on the U.S. government’s credit rating or a reduction or reconfiguration of federal ties could also place pressure on TVA’s rating, Moody’s said.
TVA touts 50-year bond significance
“TVA had a chance to secure low cost financing for an extended period, with interest rates still hovering near all-time lows,” said TVA’s CFO John Thomas. “Meeting the demand for yield and duration that 50-year bonds provide to investors, while locking in savings for TVA, made this a mutually beneficial opportunity.”
More than $1 trillion of investment grade fixed-income securities have been issued so far this year, less than one percent of which had a final maturity of 50 years or longer. TVA’s 50-year bond offering drew demand from money managers, insurance companies and a variety of other investors.
Bank of America Merrill Lynch, BNP Paribas, Morgan Stanley and TD Securities were joint book-running managers for the transaction. Proceeds from the sale will be used by TVA to refinance existing debt and for other power system purposes.
The new bonds will mature on Sept. 15, 2065, and are not subject to redemption prior to maturity. Interest will be paid semi-annually each March 15 and Sept. 15.
Application is expected to be made to list the bonds on the New York Stock Exchange. The bonds will be issued, maintained and transferred through the book-entry system of the Federal Reserve Banks. Transactions may be cleared and settled by international participants through Clearstream and Euroclear. The bonds can be identified by the CUSIP number 880591ES7.