NCPA - National Center for Policy Analysis

GAO Report: Bond Analysts Over-Rate Tennessee Valley Authority

May 3, 2001

The Tennessee Valley Authority's bonds routinely get triple-A ratings from Moody's Investors Service and Standard & Poor's Ratings Group. But a General Accounting Office report to be released next week says the federal utility doesn't deserve such high marks.

At issue is the perception that the federal government would step in and bail out TVA if it got into financial difficulties. But there is no guarantee of that, GAO warns.

  • While the government isn't legally obligated to back TVA, ratings analysts believe it would intervene in order to protect the ratings of other government-sponsored enterprises such as Fannie Mae and Freddie Mac, which could suffer if investors were given reason to believe the federal government wouldn't stand by them in the event of an emergency.
  • Analysts note that TVA's debt burden is fairly heavy, at $26 billion -- so that without the implied guarantee, its bonds would be rated lower.
  • Most of the 119 utilities covered by Moody's garner a single-A rating, two notches below TVA -- which means they must shoulder higher interest costs on their debt than TVA.
  • TVA reports that as of last September it carried $887 in debt per kilowatt of capacity -- much more than a typical investor-owned utility.

Late in February, the GAO reported that TVA's financial condition, though improving, "compares unfavorably" to investor-owned utilities. The GAO said the nation's largest government producer of power sets aside 25 cents of every dollar of revenue to pay down its debt -- roughly two-and-a-half times more than its investor-owned rivals.

Source: Will Pinkston, "GAO Says TVA Doesn't Deserve Stellar Ratings," Wall Street Journal, May 3, 2001.

For text (for WSJ subscribers)

For earlier GAO report


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