Tennessee Valley Authority — FY2013 Form 10-K
Business context and reporting period. TVA is a federally created public power system serving more than nine million people across seven southeastern states. Electricity sales generate virtually all revenue. This annual report covers the fiscal year ended September 30, 2013; fourth-quarter figures are unaudited. TVA is not authorized to issue equity, and its bonds are not guaranteed by the U.S. government.
Key financial results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Operating revenue | $10.956 billion | $11.220 billion |
| Operating income | $1.453 billion | $1.300 billion |
| Net income | $271 million | $60 million |
| Operating margin | 13.3% | 11.6% |
| Net margin | 2.5% | 0.5% |
| Cash from operating activities | $2.597 billion | $2.574 billion |
| Construction expenditures | $2.051 billion | $2.119 billion |
| Cash and cash equivalents at year-end | $1.602 billion | $868 million |
| Total debt, including VIE debt | $26.120 billion | $25.078 billion |
Revenue fell 2.4%, while operating expenses fell 4.2%. Fuel expense rose to $2.820 billion from $2.680 billion; purchased-power expense declined to $1.027 billion from $1.189 billion. Net interest expense decreased to $1.226 billion from $1.273 billion. The filing reports no off-balance-sheet arrangements.
For the fourth quarter, revenue was $3.034 billion, operating income was $758 million, and net income was $474 million, versus $3.271 billion, $639 million, and $350 million, respectively, in Q4 FY2012.
Material changes and operating developments
- Electricity sales volume declined 2.0% to 161.925 billion kWh, mainly because TVA’s largest directly served industrial customer, USEC, began ceasing enrichment operations. USEC sales represented 3% of FY2013 revenue, compared with 5% in FY2012.
- Hydroelectric generation rose 39% on higher rainfall and runoff, helping reduce purchased-power needs. TVA reported record hydroelectric output for the system.
- Net income increased by $211 million year over year. Lower operating and maintenance costs and reduced accelerated depreciation of idled coal units contributed; fuel expense increased as generation shifted toward coal and nuclear refueling outages increased.
- FY2013 cash flow from operations was $2.597 billion; investing activities used $2.385 billion and financing activities provided $522 million. Cash increased by $734 million during the year.
- At year-end, current assets were $4.906 billion and current liabilities were $4.982 billion. Bonds outstanding were $24.8 billion against a statutory $30 billion ceiling; short-term debt was $2.432 billion. TVA had $1.7 billion available under its $2.5 billion revolving credit facilities, after $0.8 billion of letters of credit.
Outlook, risks, contingencies, and unusual items
- The Board approved a 2.63% non-fuel wholesale base-rate increase for 2014, expected to add about $190 million to base revenue. The environmental adjustment, extended for five years, currently recovers approximately $415 million annually.
- Management targeted $500 million of operating and maintenance cost reductions by 2015 versus the 2013 budget, including organizational streamlining and potential staffing reductions. Management also cited slow or no near-term demand growth and continuing rate pressure.
- Watts Bar Unit 2 was approximately 80% complete. Estimated completion cost was $4.0–$4.5 billion, with commercial operation targeted by December 2015. Schedule, budget, licensing, and regulatory requirements remain risks.
- Environmental compliance and coal ash management could require substantial spending. Estimates included $1.3 billion for planned air controls through 2022, $1.4 billion for coal combustion residual conversion and remediation through 2023, and $700 million for planned Clean Water Act projects through 2022. Estimates may change with regulations and project scope.
- For the 2008 Kingston ash spill, estimated cleanup costs were $1.1–$1.2 billion; $956 million had been incurred and the remaining recorded liability was $169 million. Unestimated or excluded costs include potential future claims, natural-resource damages beyond specified commitments, and future regulatory requirements. TVA had accrued approximately $302 million for legal proceedings overall; reasonably possible additional losses were not clearly quantifiable.
- The qualified pension plan had $7.221 billion of assets against $11.471 billion of obligations at September 30, 2013. TVA expected to contribute $250 million to the plan in 2014. Pension funding, benefit assumptions, and investment returns remain material sensitivities.
- TVA identified nuclear safety and operating matters, including NRC oversight and hydrology findings at Browns Ferry, Sequoyah, and Watts Bar. Compliance with Fukushima-related orders was expected to cost no more than $220 million, while costs of further flood and seismic requirements were uncertain.
- TVA noted the risk of approaching its debt ceiling, potential credit-rating changes, commodity and interest-rate volatility, customer concentration, weather and water availability, asset reliability, and evolving environmental rules. The filing states that bonds are solely obligations of TVA, not the U.S. government.
Important facts for investors to verify
- Whether the 2014 rate increase and cost-reduction initiatives offset lower demand and rising operating, environmental, and capital costs.
- Actual Watts Bar Unit 2 cost and completion schedule, including NRC licensing and inspection outcomes.
- Progress and updated cost estimates for Kingston remediation, coal ash conversion, air controls, and water-compliance projects.
- Debt issuance, liquidity headroom, credit ratings, and any implications of the statutory bond ceiling or U.S. government actions.
- USEC-related revenue and the status of TVA’s power-sales and interconnection arrangements following the customer’s reduced operations.
- Changes in pension funding needs, legal proceedings, and other contingencies not fully estimable at the filing date.
Audit note: Ernst & Young issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of September 30, 2013.