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Selling TVA would leave Uncle Sam no further ahead

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Next he will sell the Lincoln Memorial (and if quantitative easing continues, investors will line up to buy). Barack U.S. President Obama's budget calls for a "strategic review" of the Tennessee Valley Authority, the public utility created by Franklin D. Roosevelt to bring electricity to rural communities. A good idea, surely. There is no reason for the Feds to be running power plants today. Divest it and (as the budget says) "help put the nation on a sustainable fiscal path".

Let's run the numbers. The TVA generated $3.1-billion (U.S.) in earnings before interest, taxes, depreciation and amortization in 2012. At an industry average multiple, that would give it an enterprise value of around $29-billion. Unfortunately, the TVA is financed entirely by its operations and the debt it issues. Its net debt is $27-billion. So, the TVA's equity value (what the Feds own) is roughly $2-billion, less than a 10th of a per cent of the federal deficits anticipated over the next decade.

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To make the TVA palatable to investors, it would have to reduce its debt significantly. Selling a whopping $12-billion of shares and using the entire proceeds to pay down the debt would still leave the TVA with a net debt to equity ratio of five, high by the standards of publicly traded utilities. But simply deleveraging the balance sheet would not create value for Uncle Sam.

It is true that, by law, increases in the TVA's debt are included in the calculation of the federal deficit. But this is just accounting. The federal government does not finance the TVA's debts. As the TVA has $25-billion in capital spending planned over the next 10 years, it is likely to breach its $30-billion statutory debt limit – and soon, the administration notes. But the limit is arbitrary, and the capital plan can be financed internally. Selling the TVA will leave the nation on the exact same path. First-round bids for the Lincoln Memorial will be accepted on Monday.

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