The recession may be cutting TVA’s sales, but the economy is giving at least one big break to the nation’s largest government utility.
The Tennessee Valley Authority is enjoying its cheapest borrowing costs since the 1960s. With more than $25 billion of debt, lower interest rates should cut TVA’s interest expenses this year by $70 million, even as the utility takes on more debt to finance another nuclear reactor.
“We’ve experienced the most unprecedented volatility in the financial markets since the time of the Great Depression,” TVA Treasurer John Hoskins said. “Fortunately for us, there has been significant demand for TVA securities throughout this environment.”
Last month, investors looking for safer havens for their money at one point bought $100 million in TVA notes at an unprecedented low rate of 0.06 percent. TVA paid only $770 in interest for a four-week, $100 million note.
“They were almost paying us to take their money,” TVA Chief Financial Officer Kim Greene joked. “Our long-term financing is pretty set for this year, so we keep rolling over our short-term debt at lower and lower rates.”
At its peak in the mid-1980s, TVA paid up to 15 percent on its bonds. Lower rates in recent years have helped to reduce the average interest rates paid by TVA on its debt to 5.74 percent, the lowest average borrowing rates for the utility in four decades, Mr. Hoskins said.
Lower interest rates, combined with higher expenses for fuel and other items, have cut the share of the typical TVA power bill devoted to interest expenses from a peak of 34 percent in 1997 to less than 15 percent today.
On Tuesday, TVA announced another in its series of securities that it has dubbed “electronotes” — a 15-year issue with a yield of 4.875 percent.
With TVA a federally owned agency, its debt is not implicitly backed by the federal government. But rating agencies give TVA their best bond rating, in part, because there is an implied backing by the government to repay any bonds issued by TVA.
Amid growing concerns last fall over the quality of commercial paper and corporate bonds, investor demand soared for government securities, including federally owned enterprises such as TVA. As a result, the borrowing costs for TVA and other such agencies declined.
TVA also has taken advantage of the favorable market to stretch out the average maturity of its bonds so that, if rates do go up the future, TVA will have a bigger share of its debt locked into today’s lower rates, Ms. Greene said.
“We are being aggressive in lowering our cost of debt and our refinancing risk by extending our terms,” she said. “Lots of people are worried about higher inflation and higher rates down the road when the economy recovers and government debt levels remain high. So we’re trying to lengthen the terms of our debt to get it in as good of shape as possible for the future.”
BY THE NUMBERS
5.74 — Average percent of interest paid by TVA
17 — Average number of years of TVA bonds or other debt instruments
$1.3 billion — TVA annual interest expense this year, down 5.1 percent from a year ago.
15 — Percent of TVA rates paid for interest expenses, down from peak of 34 percent in 1997
$25.4 billion — Total TVA debt obligations
Source: Tennessee Valley Authority
