In President Barack Obama's 2015 budget proposal released March 4 the administration reiterated its belief that reducing or eliminating federal ties to the Tennessee Valley Authority (TVA) would mitigate risks to taxpayers.
A reduction, elimination or reconfiguration of federal ties is credit negative for TVA because it would include revoking the TVA Act of 1933 and eliminate the possibility of government support, key considerations that support TVA's Aaa rating.
While the language provided in the 2015 budget is somewhat similar to statements made last year, the administration was more specific in outlining potential mechanisms to eliminate federal ties, citing transfer of ownership in TVA to state or local shareholders as potential strategies.
The administration further cited that it was ready to work with Congress and TVA's stakeholders to explore options to achieve such objectives.
The barriers to executing such a transfer appear high as it would involve many complexities, including requiring the approval by both the House of Representatives and the Senate, where the issue would likely encounter significant political discussion.
Should a reduction, elimination or reconfiguration of Federal ties occur, TVA is unlikely to maintain its Aaa rating. Specifically TVA's Aaa rating incorporates the benefits of its statutory rate setting mechanism granted in the TVA Act, its strong, multi-state monopoly position and its federal ownership structure, which increases the possibility of government support, if needed. The ultimate rating level would be determined by the extent to which TVA is able to maintain its rate-setting authority, monopoly position and financial integrity.
We believe TVA's Aaa rating remains appropriate at this time. Moreover, we are unlikely to take any rating action until tangible steps are taken by the administration to affect TVA's transfer. We note that, at various times in the authority's history, politicians have made statements about the desire to divest TVA.