Debt crisis casts doubt on TVA's long-term leases

A top ratings agency has downgraded its assessment of the Tennessee Valley Authority's long-term leases, a move that could raise the financing costs for TVA next year as it tries to raise billions of dollars for new power plants.

Standard & Poor's on Tuesday dropped its ratings of TVA leases by two notches from AAA down to AA- in response to S&P's previous downgrade of U.S. Treasurys and more uncertainty about the backing of the federal government for TVA debt.

TVA is a federally owned corporation which has been self-funding for the past two decades. But the federal utility has previously enjoyed S&P's top rating because of the implied backing of federal taxpayers behind any TVA debt.

In August, Standard & Poor's downgraded its top rating for TVA by a notch, lowering its grade from AAA to AA-plus after S&P also lowered the rating on U.S. treasurys because of a congressional budget impasse.

S&P credit analyst Theodore Chapman said the risk on TVA's $1.2 billion of outstanding long-term leases on buildings and generation facilities is even greater than TVA bonds.

"We believe that the debt service associated with these leases, which are paid as operating expenses of TVA's electric system, is less likely to receive extraordinary financial support from the federal government in periods of distress compared to debt issued directly by TVA and that is denominated in TVA's name as government-sponsored enterprise debt," S&P said in its analysis.

Costlier Leasebacks

TVA spokesman Duncan Mansfield said Wednesday that TVA believes its leases and bonds are both of high credit quality.

"The fundamental financial strength of TVA and its leases of TVA-operated power facilities and other assets remains as strong today, if not stronger, than a decade ago when some of these arrangements were made," Mansfield said.

The S&P downgrade "is not expected to affect" the costs or risk of TVA's outstanding leases, Mansfield said. But the lower rating could push up the costs of leaseback arrangements TVA is preparing to finance both its new combined cycle gas plant near Rogersville, Tenn., and the completion of the Bellefonte Nuclear Power Plant in Hollywood, Ala.

With TVA's debt nearing its $30 billion cap, the agency is proposing to finance some or all of the projected $4.9 billion expense of finishing the Unit 1 reactor at Bellefonte by selling and leasing back both the new John Sevier combined cycle gas plant and the Watts Bar Unit 2 reactor.