Tennessee Valley Authority annual report, FY2011

Tennessee Valley Authority — FY2011 Form 10-K

Business context and reporting period. TVA is a federally created, self-financed public power system serving more than nine million people across parts of seven southeastern states. This annual filing covers the fiscal year ended September 30, 2011; quarterly figures below are unaudited and represent the fourth fiscal quarter.

Financial performance and condition

Metric	FY2011	FY2010
Operating revenues	$11.841 billion	$10.874 billion
Operating income	$1.437 billion	$2.242 billion
Net income	$162 million	$972 million
Net cash from operating activities	$2.437 billion	$1.901 billion
Net cash used in investing activities	$3.142 billion	$2.458 billion
Statutory debt	$24.431 billion	$23.424 billion
Cash and cash equivalents at year-end	$507 million	$328 million

Electricity sales revenue rose 9.4% to $11.723 billion, while sales volume fell 3.4% to 167.730 billion kWh. Revenue growth largely reflected higher fuel-rate recovery, including comparison against unusually low 2010 fuel rates; it was substantially offset by higher fuel and purchased-power costs. Operating expenses increased 20.5%, led by fuel, purchased power, operations and maintenance, and tax equivalents. Operating margin was approximately 12.1% versus 20.6% in FY2010; net margin was approximately 1.4% versus 8.9%.

Fourth-quarter FY2011 revenue was $3.388 billion, operating income $518 million, and net income $197 million, compared with $3.316 billion, $510 million, and $193 million, respectively, in fourth-quarter FY2010.

Cash from operations exceeded net income; investing outflows included $2.417 billion of construction expenditures and the $436 million Magnolia plant acquisition. Current liabilities exceeded current assets by approximately $866 million. TVA reported $1.9 billion available under revolving credit facilities at year-end, plus an undrawn $150 million U.S. Treasury facility. Its $30 billion statutory debt ceiling limits financing flexibility; the filing reports $24.7 billion of Bonds outstanding for ceiling purposes.

Material changes versus the prior comparable period

• Net income declined $810 million year over year, despite revenue increasing 8.9%. Higher operating costs and storm-related repair and replacement-power costs contributed to the decrease.
• Operating cash flow increased $536 million, primarily from fuel-cost recovery timing and lower Kingston cleanup cash spending. Investing cash use increased $684 million.
• Power sales declined principally because of milder weather and reduced purchases by TVA’s largest directly served industrial customer. Weather-normalized sales declined 0.7%.
• TVA acquired the 909-MW Magnolia combined-cycle plant for $436 million and increased construction spending. Statutory debt rose approximately $1.0 billion.
• The TVA Board introduced revised time-of-use and seasonal wholesale rates in April 2011, including a separate monthly fuel rate. A roughly 2% base-rate increase took effect in October 2011.

Outlook, management commentary, risks and unusual items

• Management’s strategy is to diversify generation and reduce coal reliance, with greater emphasis on nuclear, natural gas, renewables, and efficiency. The 2011 Integrated Resource Plan guides long-term resource decisions; the filing does not provide a specific earnings forecast.
• Watts Bar Unit 2 was expected to enter service in calendar 2013, later than planned, and costs were expected to significantly exceed the prior estimate of approximately $2.5 billion. Updated cost and schedule estimates were still under review. Bellefonte Unit 1 was approved for completion by 2020 at an estimated additional cost of $4.9 billion, excluding financing during construction and initial fuel.
• Environmental Agreements require retirement of 18 coal units by the end of 2017 and other unit controls, conversions, or retirements. TVA estimated $3.4 billion of planned clean-air expenditures for 2012–2018 and $1.5–$2.0 billion to convert wet coal-combustion-residual facilities to dry storage by 2022.
• Kingston ash-spill remediation was estimated at $1.1–$1.2 billion; $749 million had been incurred and $376 million remained accrued at year-end. Potential penalties, damages, future claims, and other costs were excluded where not probable or reasonably estimable.
• Pension plan assets of $6.546 billion compared with obligations of $11.255 billion, a $4.709 billion underfunding. TVA contributed $270 million in 2011; a discretionary contribution of up to $300 million for 2012 was authorized but not yet decided.
• TVA cited nuclear safety and regulatory uncertainty, including a red NRC finding at Browns Ferry and post-Fukushima reviews. It anticipated $75–$120 million in 2012 for accelerated Browns Ferry improvements. Severe weather, aging assets, fuel and power prices, regulatory costs, construction overruns, credit downgrades, and the debt ceiling are material risks.
• A rating-agency downgrade of TVA from AAA to AA+ in August 2011 required $100 million of additional collateral. Subsequent to year-end, MF Global’s bankruptcy left $33 million of TVA collateral held by its trustee; timing and amount of recovery were uncertain.

Important facts for investors to verify

• Whether the planned October 2011 rate increase and monthly fuel-rate mechanism recover costs as intended, and how they affect customer demand and collections.
• Updated Watts Bar Unit 2 cost, schedule, licensing status, and any resulting financing needs; also the assumptions and execution plan for Bellefonte Unit 1.
• Actual costs and timing for Kingston remediation, dry CCR conversions, and clean-air compliance, including liabilities and claims excluded from current estimates.
• Pension funding requirements, investment performance, and whether TVA makes the authorized discretionary contribution in 2012.
• Debt-ceiling headroom, access to credit facilities, rating-triggered collateral requirements, and recovery of the $33 million held in the MF Global proceeding.
• Quarterly and annual results are from the filing; the financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of September 30, 2011.