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TVC > SEC Filings for TVC > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for TENNESSEE VALLEY AUTHORITY


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions except where noted)

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") explains the results of operations and general financial condition of the Tennessee Valley Authority ("TVA"). The MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements and TVA's Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (the "Annual Report").

Executive Overview

Weather continued to be the primary driver affecting TVA's sales and results of operations for the periods ended March 31, 2013, as compared with the same periods of 2012. Weather patterns were closer to normal in 2013 as compared to milder weather in 2012 which resulted in higher sales to local power companies that distribute TVA electricity. TVA also continued to increase its off-system sales as a result of having excess generation available for resale during 2013. Sales to industrial customers lagged during the three and six month periods ended March 31, 2013, as compared with the same periods of 2012. Also, sales to TVA's largest directly served customer decreased as the customer continued to curtail operations during the second quarter of 2013.

TVA had net income for the three months ended March 31, 2013 of $54 million and net losses for the six months ended March 31, 2013, of $191 million, as compared with net losses of $94 million and $267 million for the same periods of 2012. Revenues increased primarily due to recovery of fuel costs. Although base revenues were $36 million higher for the three months ended March 31, 2013 as compared to the same period of the prior year, base revenue decreased $49 million for the six months ended March 31, 2013 as compared to the same period of 2012.

Fuel costs increased for the three months and six months ended March 31, 2013, as compared to the same periods of 2012 primarily due to the increase in the market price of natural gas and decreased lower-cost nuclear generation due to planned outages. Greater hydroelectric generation, resulting from increased rainfall and runoff during 2013 as compared to 2012, helped mitigate the increase in fuel costs and the need to purchase power to meet demand.

Although TVA experienced a slight increase in sales of electricity in 2013 as compared to 2012, TVA continues to focus on reducing costs in response to a decline in demand for electricity both regionally and across the United States. By implementing sustainable efficiency efforts to reduce routine operating and maintenance expense, TVA plans to achieve its goal of becoming one of the nation's leading providers of low-cost and cleaner energy by 2020.

TVA continued to experience operational challenges with respect to its generating plants. Browns Ferry Nuclear Plant ("Browns Ferry") is still operating under a heightened degree of oversight by the Nuclear Regulatory Commission ("NRC"). Additionally, TVA continues to work with the NRC to address identified hydrology issues at Watts Bar Nuclear Plant ("Watts Bar") and Sequoyah Nuclear Plant ("Sequoyah"). Longer term, TVA faces challenges related to fluctuating fuel prices and compliance with current and emerging environmental laws and regulations. In order to comply with these laws and regulations, TVA may install clean air equipment on coal-fired units and replace generating capacity of idled coal-fired units with cleaner-emissions nuclear and gas-fired units. Meeting these needs will require significant capital expenditures on TVA's part, but TVA is constrained by the TVA Act which authorizes TVA to issues bonds, notes, or other evidences of indebtedness ("Bonds") in an amount not to exceed $30.0 billion outstanding at any one time. Without a legislative solution, this limitation may require TVA to seek alternative financing arrangements.

Results of Operations

Sales of Electricity

The following table compares TVA's energy sales statistics for the three and six
months ended March 31, 2013, and 2012:

                                                    Sales of Electricity
                                                     (millions of kWh)
                                Three Months Ended March 31                           Six Months Ended March 31
                      2013       2012       Change     Percent Change      2013       2012       Change      Percent Change
Municipalities and
cooperatives        34,025      31,251       2,774            8.9  %     64,687      61,726       2,961            4.8  %
Industries directly
served               7,447       8,316        (869 )        (10.4 )%     15,002      16,341      (1,339 )         (8.2 )%
Federal agencies
and other              826         497         329           66.2  %      1,722       1,026         696           67.8  %
Total sales of
electricity         42,298      40,064       2,234            5.6  %     81,411      79,093       2,318            2.9  %


Table of Contents

TVA uses degree days to measure the impact of weather on its power operations since weather affects both demand and market prices for electricity. Degree days measure the extent to which average temperatures in the five largest cities in TVA's service area vary from 65 degrees Fahrenheit.

                                                               Degree Days
                                                 Percent                                 Percent
                       2013      Normal(1)      Variation      2012      Normal(1)      Variation      2013      2012     Percent Change
Heating Degree Days
Three Months Ended
March 31              1,856         1,812         2.4  %      1,285         1,833       (29.9 )%      1,856     1,285           44.4  %
Six Months Ended
March 31              3,071         3,115        (1.4 )%      2,455         3,136       (21.7 )%      3,071     2,455           25.1  %

Cooling Degree Days
Three Months Ended
March 31                  6            12       (50.0 )%         72            12       500.0  %          6        72          (91.7 )%
Six Months Ended
March 31                 38            79       (51.9 )%        118            79        49.4  %         38       118          (67.8 )%

Note
(1) This calculation is updated every five years in order to incorporate the then most recent 30 years. It was last updated in 2011.

Sales of electricity increased 2.2 billion kilowatt hours ("kWh") and 2.3 billion kWh for the three and six months ended March 31, 2013, compared to the three and six months ended March 31, 2012, primarily due to an increase in sales to municipalities and cooperatives. Sales to municipalities and cooperatives increased by 2.8 billion kWh for the three months ended March 31, 2013, and increased by 3.0 billion kWh for the six months ended March 31, 2013, as compared to the same periods in 2012. The increases were primarily related to the milder than normal weather for the three and six months ended March 31, 2012, compared to the relatively normal weather for the three and six months ended March 31, 2013. The milder weather is evidenced by a 44 percent increase in heating degree days during the three months ended March 31, 2013, as compared to the three months ended March 31, 2012. When comparing the six months ended March 31, 2013, to the six months ended March 31, 2012, there was a 25 percent increase in heating degree days. The customers of municipalities and cooperatives are largely residential and commercial customers whose usage of electricity is typically more temperature-sensitive than that of industrial customers. An increase in sales to federal agencies and other was attributed to higher off-system sales, as TVA had excess generation available for resale. These increases were partially offset by decreased demand from industries directly served, primarily by TVA's largest directly served industrial customer.

Financial Results

The following table compares operating results for the three and six months
ended March 31, 2013, and 2012:

                           Summary Consolidated Statements of Operations
                                 Three Months Ended March 31                       Six Months Ended March 31
                            2013             2012       Percent Change        2013          2012       Percent Change
Operating revenues    $    2,741          $   2,604            5.3  %     $    5,320     $   5,172            2.9  %
Operating expenses         2,380              2,358            0.9  %          4,903         4,789            2.4  %
Operating income             361                246           46.7  %            417           383            8.9  %
Other income, net             11                (14 )        178.6  %             26            (5 )        620.0  %
Interest expense, net        318                326           (2.5 )%            634           645           (1.7 )%
Net income (loss)     $       54          $     (94 )        157.4  %     $     (191 )   $    (267 )         28.5  %


Table of Contents

Operating Revenues. Operating revenues for the three and six months ended March 31, 2013, and 2012, consisted of the following:

                                                Operating Revenues
                               Three Months Ended March 31                      Six Months Ended March 31
                          2013          2012       Percent Change         2013            2012       Percent Change
Sales of electricity
Municipalities and
cooperatives          $    2,350     $   2,160            8.8  %     $    4,539        $   4,303            5.5  %
Industries directly
served                       323           382          (15.4 )%            645              750          (14.0 )%
Federal agencies and
other                         36            27           33.3  %             74               56           32.1  %
Total sales of
electricity                2,709         2,569            5.4  %          5,258            5,109            2.9  %
Other revenue                 32            35           (8.6 )%             62               63           (1.6 )%
Total operating
revenues              $    2,741     $   2,604            5.3  %     $    5,320        $   5,172            2.9  %

Operating revenues increased $137 million and $148 million in the three and six months ended March 31, 2013, respectively, compared to the three and six months ended March 31, 2012, due to the following:

                    Three Month Change       Six Month Change
Fuel cost recovery $                 97    $           179
Base revenue                         36                (49 )
Other                                 4                 18
Total              $                137    $           148

Operating revenues increased $137 million for the three months ended March 31, 2013, compared to the three months ended March 31, 2012, primarily due to a $97 million increase in fuel cost recovery and a $36 million increase in base revenue. Of the $97 million increase in fuel cost recovery, $57 million was due to higher fuel rates and $40 million was due to an increase in sales of electricity. The $36 million increase in base revenue was primarily attributable to an increase in sales of electricity.

Operating revenues increased $148 million for the six months ended March 31, 2013, compared to the six months ended March 31, 2012, primarily due to a $179 million increase in fuel cost recovery and an $18 million increase in other revenue sources. Of the $179 million increase in fuel cost recovery, $143 million was due to higher fuel rates and $36 million was due to an increase in sales of electricity. The increase of $18 million in other revenue sources was attributable to higher off-system sales, as TVA had excess generation available for resale. Partially offsetting these increases was a $49 million decrease in base revenue resulting in part from a decrease in the effective base rate. The decrease in the effective base rate was partially the result of a change in distributor wholesale rate elections (see below).

In August 2010, the TVA Board approved the implementation of a new wholesale rate structure. That structure provided for two wholesale rate options, a default time-of-use ("TOU") option and a seasonal demand and energy ("SDE") option. The SDE option was to serve as an interim transition rate and terminate in September 2012. Based on customer request for additional optionality, the TVA Board approved two additional wholesale structures for distributor consideration: a modified time-of-use ("MTOU") and a modified seasonal demand and energy ("MSDE") structure. The proposed options were designed to better align wholesale rates with TVA's underlying cost to provide service. TVA allowed distributors to elect one of these wholesale rate structures and make retail adjustments consistent with their wholesale elections. Distributor elections went into effect October 1, 2012, as follows: 142 chose the MTOU structure, six chose the default TOU structure, and seven chose the MSDE structure. As expected, aligning rates with the cost of service reduced overall effective base rates during transition and winter months, in comparison to the same period of 2012, and is expected to produce higher revenues during the summer months.


Table of Contents

Operating Expenses. Operating expenses for the three and six months ended March 31, 2013, and 2012, consisted of the following:

                                              Operating Expenses
                                    Three Months Ended March 31                Six Months Ended March 31
                                                            Percent                                     Percent
                                  2013          2012        Change          2013            2012        Change
Fuel                          $      672     $     524       28.2  %   $    1,466        $   1,164       25.9  %
Purchased power                      288           329      (12.5 )%          533              648      (17.7 )%
Operating and maintenance            876           863        1.5  %        1,795            1,743        3.0  %
Depreciation and amortization        408           493      (17.2 )%          836              934      (10.5 )%
Tax equivalents                      136           149       (8.7 )%          273              300       (9.0 )%
Total operating expenses      $    2,380     $   2,358        0.9  %   $    4,903        $   4,789        2.4  %

The following table summarizes TVA's net generation and purchased power in millions of kWh by generating source and the percentage of all electric power generated and purchased for the periods indicated:
Power Supply from TVA-Operated Generation Facilities and Purchased Power

(millions of kWh)

                                  Three Months Ended March 31               Six Months Ended March 31
                                    2013                2012                2013                 2012
Coal-fired                     14,648       34 %   11,405     27 %    32,299       39 %   23,866        30 %
Nuclear                        13,151       31 %   13,830     34 %    23,740       29 %   28,507        35 %
Hydroelectric                   5,606       13 %    4,736     12 %     9,019       11 %    8,714        11 %
Natural gas and/or oil-fired    3,873        9 %    3,851      9 %     7,683        9 %    6,843         8 %
Renewable resources
(non-hydro)                         1        - %        2      - %         5        - %       10         - %
Total TVA-operated
generation facilities          37,279       87 %   33,824     82 %    72,746       88 %   67,940        84 %
Purchased power                 5,707       13 %    7,300     18 %    10,070       12 %   12,905        16 %
Total power supply             42,986      100 %   41,124    100 %    82,816      100 %   80,845       100 %

Fuel expense increased $148 million during the three months ended March 31, 2013, as compared to the same period of the prior year, primarily due to the utilization of more expensive generation resources. During the three month period ended March 31, 2013, TVA completed a nuclear refueling outage on one unit at Sequoyah, which included a steam generator replacement project, and began an additional refueling outage on one unit at Browns Ferry, compared to one nuclear refueling outage during the same period of the prior year, which contributed to a five percent decrease in nuclear generation. A 28 percent increase in coal-fired generation helped to offset the decrease in nuclear generation. Additionally, higher market prices for natural gas caused a 35 percent increase in the average cost of gas-fired generation. The increase in coal-fired generation and the increase in the average cost of gas-fired generation contributed to a $102 million increase in fuel expense. Higher sales of electricity led to an increase in overall generation and accounted for the remaining $46 million of the increase in fuel expense.

Purchased power expense decreased $41 million during the three months ended March 31, 2013, as compared to the same period of the prior year, primarily due to a 22 percent decrease in the volume of power purchased. Higher market prices for natural gas contributed to the volume decrease, as TVA's primary source of purchased power is natural gas-fired generation. This reduced purchased power expense by $72 million.

Operating and maintenance expense increased by $13 million for the three months ended March 31, 2013, as compared to the same period of the prior year. The increase was primarily attributable to a $17 million increase in nuclear expense and a $10 million increase in pension benefit expense. The increase in nuclear expense was driven by outage-dependent projects and other maintenance expenses that occurred during the steam generator replacement project at Sequoyah. The increase in pension benefit expense was the result of the use of a lower assumed discount rate in the actuarial calculation of pension liabilities. Offsetting these increases was a $19 million decrease in coal-fired operation expenses, due to the idling of several coal-fired units at Johnsonville Fossil Plant ("Johnsonville"), John Sevier Fossil Plant ("John Sevier"), and Widows Creek Fossil Plant ("Widows Creek") during 2012 and the first quarter of 2013.

Depreciation and amortization expense decreased $85 million for the three months ended March 31, 2013, as compared to the same period of the prior year, primarily due to a decrease in the amount of accelerated depreciation that was recognized on certain coal-fired units that were idled during 2012 and the first quarter of 2013.


Table of Contents

Tax equivalents expense decreased $13 million in the three months ended March 31, 2013, compared to the same period of the prior year. This change primarily reflects a decrease in gross revenues from the sale of power (excluding sales or deliveries to other federal agencies and off-system sales with other utilities) during 2012 compared to 2011.

Fuel expense increased $302 million during the six months ended March 31, 2013, as compared to the same period of the prior year, primarily due to the utilization of more expensive generation resources. During the six month period ended March 31, 2013, TVA completed three nuclear refueling outages on units at Watts Bar, Browns Ferry, and Sequoyah, which included a steam generator replacement project, and began a fourth refueling outage on another unit at Browns Ferry, compared to one nuclear refueling outage at Sequoyah during the same period of the prior year, which contributed to a 17 percent decrease in nuclear generation. A 35 percent increase in coal-fired generation and a 12 percent increase in gas-fired generation helped to offset the decrease in nuclear generation and contributed to a $214 million increase in fuel expense. Higher sales of electricity led to an increase in overall generation and accounted for the remaining $88 million of the increase in fuel expense.

Purchased power expense decreased $115 million during the six months ended March 31, 2013, as compared to the same period of the prior year, primarily due to a 22 percent decrease in the volume of power purchased. Higher market prices for natural gas contributed to the volume decrease, as TVA's primary source of purchased power is natural gas-fired generation. This reduced purchased power expense by $142 million.

Operating and maintenance expense increased by $52 million for the six months ended March 31, 2013, as compared to the same period of the prior year. The increase was primarily attributable to a $149 million increase in nuclear expense. There were four planned nuclear refueling outages during the six months ended March 31, 2013, compared to one during the same period of the prior year. Additionally, there were increases in nuclear outage projects and other scheduled maintenance and labor costs. This increase was partially offset by a $59 million decrease in coal-fired operations, related to fewer outage and project expenses. In the six months ended March 31, 2013, there were 68 percent fewer planned outage days for coal-fired units as compared to the same period of the prior year. In addition, with the idling of units at Johnsonville, John Sevier, and Widows Creek during 2012 and the first quarter of 2013, coal-fired scheduled maintenance expense decreased $37 million in the six months ended March 31, 2013, compared to the same period of the prior year.

Depreciation and amortization expense decreased $98 million for the six months ended March 31, 2013, as compared to the same period of the prior year, primarily due to a decrease in the amount of accelerated depreciation recognized for certain coal-fired units to be idled. Several coal-fired units at Johnsonville and John Sevier were idled during 2012 and the first quarter of 2013, which resulted in accelerated depreciation of $126 million for the six months ended March 31, 2012, compared to only $32 million of accelerated depreciation for the six months ended March 31, 2013 on the same units at Johnsonville and John Sevier.

Tax equivalents expense decreased $27 million in the six months ended March 31, 2013, compared to the same period of the prior year. This change primarily reflects a decrease in gross revenues from the sale of power (excluding sales or deliveries to other federal agencies and off-system sales with other utilities) during 2012 compared to 2011.


Table of Contents

Interest Expense. Interest expense and interest rates for the three and six months ended March 31, 2013, and 2012, were as follows:

                                                 Interest Expense
                                      Three Months Ended March 31                 Six Months Ended March 31
                                                               Percent                                    Percent
                                   2013            2012         Change         2013          2012          Change
Interest Expense(1)
Interest expense               $     359       $     368         (2.4 )%   $     714      $     726         (1.7 )%
Allowance for funds used
during construction and
nuclear fuel expenditures            (41 )           (42 )       (2.4 )%         (80 )          (81 )       (1.2 )%
Net interest expense           $     318       $     326         (2.5 )%   $     634      $     645         (1.7 )%

                                                               Percent                                    Percent
                                   2013            2012         Change         2013          2012          Change
Interest Rates (average)
Long-term outstanding power
bonds(2)                           5.777 %         5.753 %        0.4  %       5.767 %        5.753 %        0.2  %
Long-term debt of variable
interest entities                  4.875 %         4.829 %        1.0  %       4.875 %        4.829 %        1.0  %
Discount notes                     0.085 %         0.002 %    4,150.0  %       0.104 %        0.001 %   10,300.0  %
Blended                            5.498 %         5.662 %       (2.9 )%       5.455 %        5.671 %       (3.8 )%

Notes
(1) Interest expense includes interest on long-term debt obligations, including amortization of debt discounts, issuance, and reacquisition costs, net.
(2) The average interest rates on long-term debt obligations reflected in the table above are calculated using an average of long-term debt balances at the end of each month in the periods above and interest expense for those periods.
(3) While the average interest rates increased for the long-term outstanding power bonds and the discount notes, the impact of adding the long-term debt of variable interest entities to the blended interest rate calculation decreased the blended interest rate in the three and six months ended March 31, 2013.

Net interest expense decreased $8 million for the three months ended March 31, 2013 as compared to the same period of the prior year. This was primarily attributable to a decrease in interest expense of $18 million as a result of a decrease in the average balance of long-term debt. This was partially offset by a $10 million increase in interest expense primarily due to an increase in amortization of debt reacquisition cost as a result of prior year refinancing.

Net interest expense decreased $11 million for the six months ended March 31, 2013 as compared to the same period of the prior year. This was primarily attributable to a decrease in interest expense of $40 million as a result of a decrease in the average balance of long-term debt. This was partially offset by a $29 million increase in interest expense primarily due to an increase in amortization of debt reacquisition cost as a result of prior year refinancing and due to the financing of the John Sevier Combined Cycle Facility ("John Sevier CCF"). See Note 7.

Liquidity and Capital Resources

Sources of Liquidity

To meet cash needs and contingencies, TVA depends on various sources of liquidity. TVA's primary sources of liquidity are cash from operations and proceeds from the issuance of short-term and long-term debt. Current liabilities may exceed current assets from time to time in part because TVA uses short-term debt to fund short-term cash needs, as well as to pay scheduled maturities and other redemptions of long-term debt. The daily balance of cash and cash equivalents maintained is based on near-term expectations for cash expenditures and funding needs.

In addition to cash from operations and proceeds from the issuance of short-term and long-term debt, TVA's sources of liquidity include a $150 million credit facility with the United States ("U.S.") Treasury, three revolving credit facilities totaling $2.5 billion, and proceeds from any other financing arrangements such as lease financings, call monetization transactions, sales of assets, and sales of receivables and loans. Management expects these sources, certain of which are described below, to provide adequate liquidity to TVA for the foreseeable future.

. . .

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