OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following Tennessee Valley Authority's (TVA) bonds:

--Approximately $1 billion global power bonds 2015 series A.

The 2015 series A bonds are expected to price on September 21. Proceeds will be used to refinance outstanding TVA debt and provide funds for ongoing capital investments.

The Rating Outlook is Stable.

SECURITY:

TVA's global power bonds are secured by net revenues of TVA's power system.

KEY RATING DRIVERS:

IMPLICIT GOVERNMENTAL SUPPORT: The 'AAA' rating assigned to TVA's outstanding global power bonds reflects its status as a wholly owned corporation of the U.S. Government and Fitch's expectation that repayment of the power bonds would ultimately receive the support of the U.S. Government in the event of fiscal distress.

COMPETITIVE WHOLESALE ELECTRIC SUPPLIER: TVA has an increasingly diverse resource portfolio, which provides competitively priced wholesale electricity to a population of more than nine million spanning an exceptionally large and diverse region.

RING-FENCED SERVICE TERRITORY: The Federal Energy Regulatory Commission (FERC) is prevented, pursuant to the Federal Power Act's anti-cherry-picking provision, from requiring TVA to provide open-access to its transmission lines for the purpose of serving TVA customers. This provision in essence significantly reduces TVA's risk of customer loss.

TIMELY COST RECOVERY: TVA is required, pursuant to the TVA Act of 1933 (the Act), to set rates sufficient to cover operating and maintenance costs and all other obligations, including debt service and payments to the U.S. Treasury. An automatic fuel cost adjustment made each month ensures the timely recapture of fuel costs.

SUBJECT TO DEBT LIMIT: Given the authority's sizeable capital needs, long-term borrowing capacity remains a credit concern as TVA continues to approach a $30 billion debt ceiling imposed by the Act. However, this concern continues to be partially mitigated by TVA's access to, and past use of, alternate financing that does not count against the limit.

RATING SENSITIVITIES

CHANGE IN U.S. SOVEREIGN RATING: Any change in the credit rating of the U.S. sovereign would likely result in a comparable change in the rating on Tennessee Valley's power revenue bonds.

CREDIT PROFILE:

LARGE REGIONAL WHOLESALE SYSTEM
TVA operates the nation's largest public power system, selling power on a wholesale basis to 155 municipal and cooperative distribution systems spanning an exceptionally large and diverse service area that includes portions of Tennessee, Alabama, Mississippi, Kentucky, Georgia, North Carolina and Virginia. TVA operates as a fully self-supporting enterprise fund supported entirely from the sale of electricity and power system financings.

SATISFACTORY FINANCIAL RESULTS
Energy sales decreased again in fiscal 2014, although the 2.4% decline was less pronounced than the nearly 5% decrease incorporated into TVA's originally adopted budget. The positive variance in sales relative to the budget coupled with a modest rate increase prompted a favorable increase in funds available for debt service (FADS). The stronger cash flow, together with significantly lower annual debt service costs, resulted in Fitch-calculated debt service coverage of 2.62x.

Available cash reserves remain low for the rating category, but the inclusion of multiple lines of credit provides sufficient resources relative to TVA's operating needs. Unrestricted cash and investments at fiscal year-end 2014 together with a $150 million credit facility with the U.S. Treasury and three long-term revolving credit facilities totaling $2.5 billion provide a robust 166 days liquidity on hand.

Year-to-date results through the first nine months of the current fiscal year are positive compared to the same period in the prior year. Operating income is reported as up $454 million, driven primarily by a 2.6% rate increase adopted at the outset of the current fiscal year and continued progress towards an initiative to reduce O&M costs by $500 million.

DEBT LIMITATION CURTAILS FLEXIBILITY
With nearly $24 billion of debt outstanding at the close of fiscal 2014, TVA remains close to its $30 billion debt limitation imposed under the Act. Consequently, various lease financings have been employed as a way to circumvent the current debt limitation while still continuing to finance the authority's ongoing capital program. Lease-purchase transactions are not subject to the Act's debt limitation.

The limitation placed on TVA's borrowing capacity remains a concern given its long-term capital needs exceed the remaining capacity under the debt limitation. Capital costs covering fiscals 2015-2017 are estimated at $7.5 billion, the majority of which could be financed with long-term borrowings.

WATTS BAR UNIT 2 CONSTRUCTION PROGRESSING
Fitch believes the near completion of TVA's Watts Bar Nuclear Plant's Unit 2 reactor remains a positive development. Project completion is slated for the latter part of 2015 with commercial operation expected in June 2016. The final cost remains unchanged, estimated to be within a range of $4 billion-$4.5 billion. Unit 2 appears likely to be granted an operating license in the near term by the Nuclear Regulatory Commission (NRC) following a recommendation by an advisory group to the NRC earlier this year. When online, the Unit will further diversify TVA's resource portfolio and provide 1,150 megawatts of carbon-free generating capacity.