An anonymous group of investors has purchased a new natural gas plant from the Tennessee Valley Authority. The so-called “lease-purchase transaction” helps TVA raise a billion dollars without running into a congressionally-imposed debt ceiling. The accounting maneuver has raised questions about who is on the other side.
In the first of several deals in the works, TVA sold its soon-to-be-completed John Sevier Combined Cycle Plant to a limited liability corporation registered in Delaware. It’s name…John Sevier Combined Cycle Generation.
TVA’s chief financial officer John Thomas says he’s legally bound and can’t disclose who is behind the LLC. But he says they are large institutional investors with names people would recognize.
“It’s not that there’s anything nefarious going on. They’re really trying to protect their competitive interest.”
TVA’s own workforce has been asking who the company is. The utility told them TVA itself is not an investor, nor are any of its employees.
Fitch Ratings agency calls it an “arms length transaction.” For that reason, though, analyst Bhala Mehendale says the LLC’s debt is not as highly rated as TVA’s bonds, which enjoy the implied backing of the federal government.
“That implicit guarantee we don’t think will extend to these off-balance sheet obligations.”
TVA would prefer to just issue its global power bonds to pay for new plants. But the public utility has had to get creative to avoid its $30 billion debt ceiling. The “lease-purchase” agreement is a bit like refinancing a house just before moving in. Except TVA isn’t trying to get a better interest rate. The utility needs to free up cash for other projects. It’s actually a more expensive way of doing business.
TVA says it will cost an extra $10 million a year compared to issuing its own power bonds. That’s $300 million over the term of the agreement.
But CFO John Thomas says he doesn’t have much choice. It would take a 12 percent hike in electricity rates to raise the same cash as selling this one natural gas plant in upper East Tennessee.
“We still would like to see the debt ceiling raised. We think it’s the most cost effective way and is appropriate to finance the assets, but it’s really something that requires legislation.”
With little appetite in congress to raise anything called a “debt ceiling,” TVA has more so-called “lease-purchase” deals in the works.
While there are more hoops to jump through, TVA eventually wants to sell a nuclear reactor that’s under construction at Watts Bar Lake to free up several billion dollars.