Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Tennessee Valley Authority (TVA)

What it is:

The Tennessee Valley Authority (TVA) is the largest public power company in the United States. It supplies electricity, economic development assistance and natural resource management to millions of people in Tennessee and parts of Mississippi, Kentucky, Alabama, Georgia, North Carolina and Virginia.

How it works (Example):

The TVA is a federally owned corporation and is not authorized to issue stock. Additionally, the TVA does not receive any federal funding. Instead, it finances its operations through the sale of TVA bonds and through the sale of energy.

Its overall goal is to remain profit-neutral and to offer inexpensive energy to the area, which in turn attracts industry and jobs to the region. The below-average energy costs for TVA customers also spurs local economic development by diverting residents' disposable income away from energy bills to other areas of the economy. These characteristics make the TVA much different from other government-sponsored enterprises, such as Fannie Mae or Freddie Mac, which have shareholders and operate for profit.

How the TVA Operates
The TVA produces most of its electricity from coal-burning plants, but it also operates nuclear plants, hydroelectric dams, a storage plant and renewable-resource systems. Most of the TVA's electricity is used as it is produced, meaning it increases production when demand is high and lowers production when demand is low.

The TVA has a board of directors, of which all nine are appointed and confirmed by the President of the United States.

TVA Bonds
The TVA sells four kinds of bonds: Putable Automatic Rate Reset Securities (PARRS); TVA ElectroNotes; Discount Notes; and Other TVA Power Bonds, which are issued domestically and internationally and carry a wide variety of maturities, terms, returns and currency denominations.

Per Congressional mandate, the TVA cannot have more than $30 billion of debt outstanding at any one time, and it can only issue bonds to fund its power program or refinance existing debt. The TVA is also legally required to set its power rates at a level sufficient to repay its debt.

PARRS are the most popular TVA security and resemble preferred stock, even though they are actually debt. PARRS pay interest quarterly and contain a provision that allows the TVA to reduce the coupon rate every year under certain circumstances. If the TVA reduces the coupon rate, the PARRS become putable at par value. PARRS are traded on the New York Stock Exchange as TVC and TVE. PARRS and other long-term TVA bonds are not callable prior to maturity.

ElectroNotes are a relatively new retail bond program from the TVA, offering a series of issues with a variety of structures targeted to individual investors. ElectroNotes are callable, and the TVA gives 30 days' notice to the Depository Trust Company or the Federal Reserve when it intends to call debt.

Because of the TVA's operating history and its status as a government-sponsored enterprise, TVA securities are generally very highly rated. However, the federal government does not explicitly guarantee TVA bonds, meaning that if the TVA defaults on any of its debt, the government is not obligated to repay the TVA's creditors or bondholders.

Individual investors cannot purchase bonds directly from the TVA, but they can purchase them through banks, financial institutions and brokers.

Why it Matters:

It is important to note that principal and interest from TVA securities are usually exempt from state and local income taxes, but are taxable at the federal level. TVA securities are issued electronically.

TVA bonds are not backed by the full faith and credit of the U.S. government. As a result, TVA bond yields are typically higher than Treasuries but lower than corporate bonds. As with any agency bond, the degree to which the agency is independent from the government affects the default risk associated with its securities. Thus, even though TVA securities carry no guarantee by the U.S. government, the TVA is owned by the government and its securities are therefore considered less risky than similar ones offered by Fannie Mae or Freddie Mac.

Like all bonds, TVA bonds are sensitive to changes in interest rates. When interest rates increase, TVA bond prices fall, and vice versa. The low returns on TVA bonds, relative to corporate bonds, also means their returns are more affected by inflation.

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