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TVC > SEC Filings for TVC > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for TENNESSEE VALLEY AUTHORITY

Form 10-Q for TENNESSEE VALLEY AUTHORITY


5-Aug-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

Sales were five percent lower for the three month period ended June 30, 2013 and relatively flat for the nine month period ended June 30, 2013 as compared to the same periods of 2012. Weather patterns produced less cooling degree days in the spring and early summer of 2013 as compared to the same periods of 2012. This resulted in lower sales to local power companies that distribute TVA electricity during the three months ended June 30, 2013 as compared to the same period of 2012, but TVA had higher sales during the nine months ended June 30, 2013 as compared to the same period of 2012 due to greater heating degree days during the fall and winter of 2013. Sales to industrial customers lagged during these same periods primarily due to TVA's largest directly served customer which began ceasing operations in May 2013 and to a lesser extent from a slower economy in the TVA service area. TVA also continued to increase its off-system sales as a result of having excess generation available for resale during 2013.

TVA had net losses for the three and nine months ended June 30, 2013 of $12 million and $203 million, respectively, as compared with net losses of $23 million and $290 million for the same periods of 2012 as rates are designed to provide more revenues during the fourth quarter. Base revenue decreased $122 million for the three month period and $172 million for the nine month period ended June 30, 2013 as compared to the same periods of the prior year. Revenue from the recovery of fuel costs decreased $52 million for the three months ended June 30, 2013 as compared to the same period of the prior year due in part to higher hydroelectric generation. However, revenue from the recovery of fuel costs increased $127 million for the nine months ended June 30, 2013 as compared to the same period of 2012.

Fuel and purchased power costs decreased for the three months ended June 30, 2013, as compared to the same period of 2012 primarily due to greater hydroelectric generation resulting from increased rainfall and runoff during 2013 as compared to 2012, which helped mitigate the increase in fuel costs and the need to purchase power to meet demand. Fuel and purchased power costs increased for the nine months ended June 30, 2013, as compared to the same period of 2012 primarily due to increased higher-cost fuel generation and decreased lower-cost nuclear generation primarily due to the steam generator replacement outage at Sequoyah Nuclear Plant ("Sequoyah").

TVA continues to focus on reducing costs in response to lower electricity sales in the TVA service area in recent periods, and lower expected demand growth in the region 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 continues to experience operational challenges with respect to its generating plants. Although the Nuclear Regulatory Commission ("NRC") reported in July 2013 that the immediate problems related to a 2011 major safety violation finding at TVA's Browns Ferry Nuclear Plant ("Browns Ferry") have been fixed, the NRC will continue increased inspections to ensure improvements are made and maintained.

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. TVA continues to work with the NRC to address identified hydrology issues at Watts Bar Nuclear Plant ("Watts Bar") and Sequoyah. Addressing these challenges will require significant capital expenditures on TVA's part. TVA anticipates that capital spending needs can be met with a combination of bonds, notes, or other evidences of indebtedness ("Bonds"), lease arrangements, energy prepayments, additional power revenues through rate increases, cost reductions, or other ways.


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Results of Operations

Sales of Electricity

The following table compares TVA's energy sales statistics for the three and
nine months ended June 30, 2013, and 2012:

                                                    Sales of Electricity
                                                     (millions of kWh)
                                Three Months Ended June 30                            Nine Months Ended June 30
                      2013       2012       Change     Percent Change      2013        2012       Change      Percent Change
Municipalities and
cooperatives        31,390      32,609      (1,219 )         (3.7 )%      96,077      94,335       1,742            1.8  %
Industries directly
served               6,539       7,531        (992 )        (13.2 )%      21,541      23,872      (2,331 )         (9.8 )%
Federal agencies
and other            1,024         967          57            5.9  %       2,746       1,993         753           37.8  %
Total sales of
electricity         38,953      41,107      (2,154 )         (5.2 )%     120,364     120,200         164            0.1  %

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 June 30   261           228       14.5  %         130           228       (43.0 )%        261       130          100.8  %
Nine Months Ended June 30  3,332         3,343       (0.3 )%       2,585         3,364       (23.2 )%      3,332     2,585           28.9  %

Cooling Degree Days
Three Months Ended June 30   598           586        2.0  %         757           586        29.2  %        598       757          (21.0 )%
Nine Months Ended June 30    637           666       (4.4 )%         875           666        31.4  %        637       875          (27.2 )%

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 decreased 2.2 billion kilowatt hours ("kWh") for the three months ended June 30, 2013, compared to the three months ended June 30, 2012, primarily due to a decrease in sales to both municipalities and cooperatives and industries directly served. The decrease in sales to municipalities and cooperatives was primarily the result of relatively normal weather for the three months ended June 30, 2013, as compared to warmer than normal weather for the three months ended June 30, 2012. Cooling degree days were only 2.0 percent above normal for three months ended June 30, 2013, as compared to 29.2 percent above normal for the three months ended June 30, 2012. The decrease in sales to industries directly served was primarily due to decreased demand from TVA's largest directly served industrial customer, which began ceasing operations during the third quarter of 2013 (see 2013 Key Initiatives and Challenges - Customers/Counterparties Risk).

Sales of electricity increased 164 million kWh for the nine months ended June 30, 2013, compared to the nine months ended June 30, 2012, primarily due to increases in sales to both municipalities and cooperatives and federal agencies and other.
The increase in sales to municipalities and cooperatives was primarily related to the milder than normal winter during the nine months ended June 30, 2012, compared to the relatively normal winter during the nine months ended June 30, 2013. Heating degree days were 23.2 percent below normal during the nine months ended June 30, 2012, compared to 0.3 percent below normal during the nine months ended June 30, 2013. Offsetting these increases was a decrease in demand by industries directly served driven by decreased demand from TVA's largest directly served industrial customer, which began ceasing operations during the third quarter of 2013 (see 2013 Key Initiatives and Challenges - Customers/Counterparties Risk).


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Financial Results

The following table compares operating results for the three and nine months
ended June 30, 2013, and 2012:

                         Summary Consolidated Statements of Operations
                                Three Months Ended June 30                      Nine Months Ended June 30
                          2013            2012       Percent Change        2013          2012       Percent Change
Operating revenues    $    2,602       $   2,777           (6.3 )%     $    7,922     $   7,949           (0.3 )%
Operating expenses         2,324           2,499           (7.0 )%          7,228         7,288           (0.8 )%
Operating income             278             278              -  %            694           661            5.0  %
Other income, net             10              21          (52.4 )%             36            16          125.0  %
Interest expense, net        300             322           (6.8 )%            933           967           (3.5 )%
Net income (loss)     $      (12 )     $     (23 )         47.8  %     $     (203 )   $    (290 )         30.0  %

Operating Revenues. Operating revenues for the three and nine months ended June 30, 2013, and 2012, consisted of the following:

                                                   Operating Revenues
                                  Three Months Ended June 30                         Nine Months Ended June 30
                            2013             2012       Percent Change         2013            2012       Percent Change
Sales of electricity
Municipalities and
cooperatives          $    2,227          $   2,339           (4.8 )%     $    6,766        $   6,643            1.9  %
Industries directly
served                       302                366          (17.5 )%            946            1,115          (15.2 )%
Federal agencies and
other                         43                 36           19.4  %            118               92           28.3  %
Total sales of
electricity                2,572              2,741           (6.2 )%          7,830            7,850           (0.3 )%
Other revenue                 30                 36          (16.7 )%             92               99           (7.1 )%
Total operating
revenues              $    2,602          $   2,777           (6.3 )%     $    7,922        $   7,949           (0.3 )%

Operating revenues decreased $175 million and $27 million in the three and nine months ended June 30, 2013, respectively, compared to the three and nine months ended June 30, 2012, due to the following:

                    Three Month Change      Nine Month Change
Fuel cost recovery $            (52 )     $            127
Base revenue                   (122 )                 (172 )
Other                            (1 )                   18
Total              $           (175 )     $            (27 )

Operating revenues decreased $175 million for the three months ended June 30, 2013, compared to the three months ended June 30, 2012, due to a $122 million decrease in base revenue and a $52 million decrease in fuel cost recovery. Both the $122 million decrease in base revenue and the $52 million decrease in fuel cost recovery were primarily attributable to a decrease in the sales of electricity.

Operating revenues decreased $27 million for the nine months ended June 30, 2013, compared to the nine months ended June 30, 2012. The change was primarily due to a $172 million decrease in base revenue resulting 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 as described below. Offsetting the decrease was an increase of $127 million in fuel cost recovery primarily due to higher fuel rates. Additionally, offsetting the decrease was an $18 million increase in other revenue sources as a result of higher off-system sales, as TVA had excess generation available for resale.

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-


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of-use ("MTOU") structure 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.

Operating Expenses. Operating expenses for the three and nine months ended June 30, 2013, and 2012, consisted of the following:

                                                 Operating Expenses
                                       Three Months Ended June 30                   Nine Months Ended June 30
                                                                 Percent                                     Percent
                                    2013             2012        Change          2013            2012        Change
Fuel                          $      652          $     683       (4.5 )%   $    2,118        $   1,847       14.7  %
Purchased power                      263                277       (5.1 )%          796              925      (13.9 )%
Operating and maintenance            866                882       (1.8 )%        2,662            2,625        1.4  %
Depreciation and amortization        412                505      (18.4 )%        1,248            1,439      (13.3 )%
Tax equivalents                      131                152      (13.8 )%          404              452      (10.6 )%
Total operating expenses      $    2,324          $   2,499       (7.0 )%   $    7,228        $   7,288       (0.8 )%

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 June 30               Nine Months Ended June 30
                                    2013               2012               2013                 2012
Coal-fired                    14,501       36 %   16,164     39 %    46,801      38 %    40,030        33 %
Nuclear                       13,755       35 %   12,910     31 %    37,495      31 %    41,417        34 %
Hydroelectric                  4,671       12 %    1,389      3 %    13,690      11 %    10,103         8 %
Natural gas and/or oil-fired   2,234        6 %    4,732     11 %     9,916       8 %    11,576         9 %
Renewable resources
(non-hydro)                        1        - %        7      - %         5       - %        17         - %
Total TVA-operated
generation facilities         35,162       89 %   35,202     84 %   107,907      88 %   103,143        84 %
Purchased power                4,411       11 %    6,698     16 %    14,482      12 %    19,596        16 %
Total power supply            39,573      100 %   41,900    100 %   122,389     100 %   122,739       100 %

Fuel expense decreased $31 million during the three months ended June 30, 2013, as compared to the same period of the prior year, primarily due to the utilization of less expensive generation resources. During the three month period ended June 30, 2013, conventional hydroelectric generation increased by 226 percent, primarily due to a 108 percent increase in rainfall and a 171 percent increase in runoff within the Tennessee River Basin. Hydroelectric generation is TVA's least expensive type of generation. In addition, due primarily to higher market prices of natural gas, TVA decreased its natural gas-fired generation by 53 percent. The use of less expensive generation resources and lower sales of electricity resulted in a decrease in fuel expense of $67 million. However, this was offset by a $36 million increase in fuel expense as a result of the higher market prices for the natural gas that was used during the period.

Purchased power expense decreased $14 million during the three months ended June 30, 2013, as compared to the same period of the prior year, primarily due to a 34 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 $94 million, but the higher market prices for the power that was purchased offset this reduction by $80 million.

Operating and maintenance expense decreased by $16 million for the three months June 30, 2013, as compared to the same period of the prior year. Coal-fired operations was the primary driver of the decrease with 105 fewer planned outage days for coal-fired units, due in part to the retirement or idling of less efficient units during 2012 and the first quarter of 2013.


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Depreciation and amortization expense decreased $93 million for the three months ended June 30, 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.

Tax equivalents expense decreased $21 million in the three months ended June 30, 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 $271 million during the nine months ended June 30, 2013, as compared to the same period of the prior year, primarily due to the utilization of more expensive generation resources. During the nine month period ended June 30, 2013, TVA completed four nuclear refueling outages on units at Watts Bar, Browns Ferry, and Sequoyah, which included a steam generator replacement project, compared to two nuclear refueling outages on units at Browns Ferry and Sequoyah during the same period of the prior year. This contributed to a nine percent decrease in nuclear generation. A 17 percent increase in coal-fired generation offset the decrease in nuclear generation and contributed to a $248 million increase in fuel expense. While coal-fired generation contributed to the increase in fuel expense, this was mitigated due to a 32 percent increase in conventional hydroelectric generation, primarily due to a 27 percent increase in rainfall and a 33 percent increase in runoff within the Tennessee River Basin.

Purchased power expense decreased $129 million during the nine months ended June 30, 2013, as compared to the same period of the prior year, primarily due to a 26 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. Lower volume reduced purchased power expense by $241 million, but the higher market prices for the power that was purchased offset this reduction by $112 million.

Operating and maintenance expense increased $37 million in the nine months ended June 30, 2013, as compared to the same period of the prior year. The increase was primarily attributable to a $145 million increase in nuclear expense related to more planned nuclear refueling outages as well as increased outage projects and scheduled maintenance during the nine months ended June 30, 2013 as compared to the same period of the prior year. This increase was partially offset by a $75 million decrease in coal-fired operations due to approximately 600 fewer planned outage days for coal-fired units compared to the same period in the prior year. In addition, scheduled maintenance expense decreased $34 million in the nine months ended June 30, 2013, compared to the same period of the prior year due in part to the retirement or idling of less efficient units during 2012 and the first quarter of 2013.

Depreciation and amortization expense decreased $191 million for the nine months ended June 30, 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. Incremental depreciation associated with the idling of coal-fired units was $236 million for the nine months ended June 30, 2012, compared to $20 million for the nine months ended June 30, 2013.

Tax equivalents expense decreased $48 million in the nine months ended June 30, 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.


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Interest Expense. Interest expense and interest rates for the three and nine months ended June 30, 2013, and 2012, were as follows:

                                               Interest Expense
                                      Three Months Ended June 30                Nine Months Ended June 30
                                                               Percent                                 Percent
                                   2013            2012         Change        2013          2012        Change
Interest Expense(1)
Interest expense               $     343       $     366        (6.3 )%   $   1,057      $  1,092       (3.2 )%
Allowance for funds used
during construction and
nuclear fuel expenditures            (43 )           (44 )      (2.3 )%        (124 )        (125 )     (0.8 )%
Net interest expense           $     300       $     322        (6.8 )%   $     933      $    967       (3.5 )%

                                                               Percent                                 Percent
                                   2013            2012         Change        2013          2012        Change
Interest Rates (average)
Long-term outstanding power
bonds(2)                           5.713 %         6.090 %      (6.2 )%       5.750 %       5.859 %     (1.9 )%
Long-term debt of variable
interest entities                  4.875 %         4.819 %       1.2  %       4.875 %       4.824 %      1.1  %
Discount notes                     0.082 %         0.084 %      (2.4 )%       0.094 %       0.063 %     49.2  %
Blended                            5.202 %         5.549 %      (6.3 )%       5.370 %       5.640 %     (4.8 )%

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.

Net interest expense decreased $22 million for the three months ended June 30, 2013 as compared to the same period of the prior year. This was primarily attributable to a decrease in the average interest rate.

Net interest expense decreased $34 million for the nine months ended June 30, 2013 as compared to the same period of the prior year. This was primarily attributable to a decrease in interest expense of $62 million as a result of a decrease in the average balance of long-term debt and a decrease in the average interest rate. This was partially offset by a $28 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 also 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.

The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30.0 billion outstanding at any time. At June 30, 2013, TVA had $24.7 billion of Bonds outstanding (not including noncash items of foreign currency exchange gain of $16 million and net discount on sale of Bonds of $82 million). Due to this limit on Bonds, TVA may not be able to use Bonds to finance all of the capital investments planned over the next decade. However, TVA believes that other forms . . .

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