TVA SEC 10Q QUARTERLY REPORT, AUG 3, 2012That is the Fitch Report. Let's look at TVA's financial status based on their SEC Quarterly Report, Form 10Q, filed August 3, 2012. It should become apparent why Fitch's report, paid for by the TVA , reads "Rating Outlook Negative."
All report data is as reported by the TVA and is "unaudited as stated." Data may be found at http://investor.shareholder.com/tva/secfiling.cfm?filingID=1376986-12-30 or View TVA Securities and Exchange Commission filings. Data in all reports as of June 30, 2012.
Page 8-9, ASSETS & LIABILITIES: Assets-$46.825 billion; Liabilities- $46.825 billion
Page 18-19,-- "("JSCCG"), a newly formed entity. In connection with this transaction, TVA and the United States of America agreed to lease the John Sevier Combined Cycle Facility ("John Sevier CCF") located in Hawkins County, Tennessee, to JSCCG for a term of fifty years (the "Head Lease"). TVA also entered into a construction management agreement ("CMA") with JSCCG under which TVA was obligated to use commercially reasonable efforts to cause the John Sevier CCF to achieve substantial completion by January 14, 2013, or as soon thereafter as commercially practicable. John Sevier CCF began commercial operations on April 30, 2012."
--"January 17, 2012, TVA and JSCCG entered into a transaction under which TVA agreed to lease the John Sevier CCF from JSCCG (the "Facility Lease") through January 15, 2042."
--"JSCCGSevier CCF through a $ 900 million secured note issuance (the “JSCCG notes”) and the issuance of $ 100 million of membership interests subject to mandatory redemption. The membership interests were purchased by John Sevier Holdco LLC (“Holdco”). Holdco is a newly formed special single-purpose entity established to acquire and hold membership interests in JSCCG. A non-controlling interest in Holdco is held by a third party through nominal membership interests, to which none of the income or expenses of Holdco are allocated."
--"Due to its participation in the design, business conduct and credit and financial support of JSCCG and Holdco, TVA is deemed to have a variable interest in each of these entities...TVA has the power to direct the activities of an entity when it has the ability to make key operating, investing and financing decisions, including, but not limited to, capital investment and the issuance or redemption of debt. Based on its analysis, TVA has determined that it is the primary beneficiary of JSCCG and Holdco and, as such, is required to account for the VIEs on a consolidated basis. Holdco’s membership interests in JSCCG are eliminated in consolidation." (It seems this statement is saying JSCCG & Holdco are both shill corporations established to shield TVA from the Congressional mandated debt restrictions.)
--Total liabilities of the variable interest entity (VIE) carried on TVA's books: $1.022 billion
Page 21 Debt Outstanding: Short term total net debt- $3.937 billion; Long term total net debt- $21.177.
TOTAL OUTSTADING DEBT TOTAL- $25.114 BILLION
Page 36 Long term outstanding Power Bonds (Congressional mandated debt cap):
Carried Amount- $21.584 billion; Fair Market Value- $27.078 billion (2011 fair market value of debt was $29.190 billion equals $2,112 billion lowered debt amount between June 2011 and June 2012.)
Page 43 Net Income loss for first 9 months ending June 2012: $-290 million, a 728.6% increase over 2011 which displayed a 35 million income loss. Operating expenses decreased by 3.3% for the same period, while operating income decreased for the same period by 28.1%.
Page 49 Cash flow was (negative) $-260 million for this period as compared to (positive) $214 million for 2011 the same period. The loss is attributed to decreased power sales and in a smaller part investment activity.
Page 50 Total long term commitments and contingencies $65.891 billion reflecting the periods from 2012 thru 2016 and thereafter.
Pages 51 thru 59 of the 10Q report are extremely valuable as they contain a discussion concerning problems faced by the TVA.
One large problem not addressed in any TVA Financial Report Document but identified in the October 2011 report by the General Accounting Office (GAO) and is described as follows: "TVA does not have a formal capital expenditure management plan that identifies assets to be acquired, their costs, and funding sources. The lack of such a plan may impede TVA.’s long range financial planning." This is a serious deficiency by the TVA identified by the GAO and reflects poorly on executive leadership's management capability. GAO-12-107 Tennessee Valley Authority
The GAO summarizes their report regarding the TVA's lack of Capital Expenditure Planning: "TVA’s financial condition may hamper its ability to fund capital improvements. As of September 30, 2010, TVA.’s statutory debt was $23.6 billion, and TVA plans to spend almost $10 billion by fiscal year 2013 for various capital investment projects. Given the significant delays and cost overruns that TVA has historically experienced, these projects could potentially face similar issues. In addition, under a settlement with the Environmental Protection Agency, TVA agreed to invest $3 billion to $5 billion in the next 10 years on new and upgraded pollution controls on existing power plants. TVA also anticipates increases in operating costs. All of these factors could reduce the available funds TVA could use for its planned capital investments. TVA.’s financial condition leaves it with difficult decisions to make in order to meet electricity demand while keeping its debt within the statutory limit."
Flashback: Standard And Poors downgraded TVA's Bond Rating in August of 2011: "Standard & Poor’s rating service downgraded TVA’s rating from its highest level, AAA, to its next highest level, AA plus...Despite the first-ever downgrade TVA debt, the chief financial officer for the Tennessee Valley Authority, John Thomas, said “the fundamental financial strength of TVA is unchanged.” Moody’s Investors Service Inc., recently reaffirmed its top rating for TVA and Fitch rating service has yet to alter its TVA bond rating." http://www.timesfreepress.com/news/2011/aug/09/sp-downgrades-tva-bond-rating/
FITCH RATES TVA'S GLOBAL POWER BONDS - (The short term debt is is converted to long term debt notes.) "Proceeds from the 2012 series A bonds will be primarily used to retire existing short-term debt. " (The short term debt is is converted to long term debt notes.)
It is important to consider the disclaimer when reading this report: "The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings."
>>Fitch Rates Tennessee Valley Auth, TN's Global Power Bonds 2012 Series A 'AAA'; Outlook Negative<<
Link: http://finance.yahoo.com/news/fitch-rates-tennessee-valley-auth-222300108.html
In addition Fitch affirms the following parity global power bond ratings:
--$23.9 billion (as of Sept. 30, 2011) global power bonds at 'AAA'.
>>The Rating Outlook is Negative <<
**SECURITY
The bonds are secured by net revenues of TVA's power system.
**KEY RATING DRIVERS
US OWNERSHIP: The 'AAA' rating reflects TVA's status as a wholly owned corporation of the U.S. government. Fitch takes into account in its assessment the likelihood and degree of government support for TVA and similarly rated government-sponsored entities.
FEDERAL GOVERNMENT LINKS: While the TVA Act requires the utility to be self-funding, and TVA's global power bonds do not constitute an obligation of the U.S. government, Fitch believes that U.S. authorities would use extraordinary efforts to support TVA's operations and its global power bond obligations in the event that the utility encountered financial difficulties.
RING-FENCED SERVICE TERRITORY: Through the Federal Power Act's anti-cherry-picking provision, the Federal Energy Regulatory Commission (FERC) is prevented from ordering TVA to provide open-access to its transmission lines for the purpose of serving TVA customers. This provision in essence reduces TVA's risk of customer loss.
POTENTIAL CLOSURE OF LARGEST CUSTOMER: United States Enrichment Corporation (USEC) is TVA's largest directly served customer accounting for 4% of revenue. USEC's Kentucky facility is expected to be operational through May 31, 2013 after which considerable uncertainty exists regarding future operations. The loss of USEC's revenue further increases the need to adjust rates in a sluggish kWh sales environment but will not be material to TVA's overall performance.
EPA SETTLEMENT: Favorably, TVA has settled with the U.S. Environmental Protection Agency (EPA); the states of Tennessee, Kentucky, Alabama, and North Carolina; and various environmental groups on past and potential future new source review (NSR) claims. TVA will incur an expense of $360 million, retrofit some coal units and retire 2200MW of coal capacity as part of the settlement.
DEBT LIMIT: Credit concerns include a reduced flexibility to issue bonds due to the cap of $30 billion, imposed by the TVA Act. This concern is partially mitigated by TVA's past use of alternate financing that does not count against the cap. Although TVA is continuing to work with all stakeholders to increase the debt limit, Fitch believes that it is unlikely that the limit will be increased before the Presidential and Congressional elections in November 2012.
WATTS BAR 2 DELAY: Revised estimates from TVA now anticipate completion of the Watts Bar 2 nuclear unit (WB2) during fall 2015 at a cost between $4 billion and $4.5 billion. Original estimates called for completion in fall 2012 at $2.5 billion. Even if the revised cost estimate holds, Fitch believes that the significant cost increase for WB2 together with potential new safety and security requirements by the Nuclear Regulatory Commission (NRC) will require rate increases.
**WHAT COULD TRIGGER A RATING ACTION
U.S. SOVEREIGN RATING LINKAGE: TVA's bonds are payable solely from net revenues of the power system and don't constitute obligations of the U.S. However, the U.S. government's extensive involvement in the operations of TVA, coupled with the vital importance of TVA in its service area results in a direct linkage between the rating on global power bonds and the U.S. sovereign.
CAPITAL RAISING FLEXIBILITY: Flexibility to raise additional debt capital as needed, given TVA's future capital expenditure plans, is important. Fitch will continue to monitor TVA's ability to finance future growth.
**CREDIT PROFILE
Dual Role of Electric Supply and Economic Development
TVA was created in 1933 as a federal government corporation via legislation enacted by the U.S. Congress. TVA operates the nation's largest public power system with a service area that includes seven states in the southeastern U.S. covering a population of more than nine million people. In addition to selling electricity, TVA is tasked with furthering the economic development of TVA's service area, and reducing the damage from destructive floodwaters within the Tennessee River system and the lower Ohio and Mississippi Rivers.
Self-Funded Power System
Initially, TVA's operations were funded by federal appropriations. Direct appropriations for the TVA power program ended in 1959, and appropriations for TVA's economic development and multipurpose activities ended in 1999. Since 1999, TVA has funded all of its operations entirely from the sale of electricity and power system financings - primarily the sale of debt securities. TVA is not authorized to issue equity securities.
All-Requirements Power Supply Contracts
TVA provides wholesale power to 155 municipalities and cooperatives pursuant to individual long-term all-requirements contracts. Revenues from TVA's municipal and cooperative customers accounted for approximately 85% of TVA's total operating revenues for fiscal 2011. TVA also sells electricity directly to industrial customers, accounting for 12% of operating revenue.
Stable Operating Performance
Revenues from sale of electricity were $11.84 billion in 2011, which is 10% higher than 2010 due to fuel and power cost adjustment despite a 3% reduction in kWh sales. Financial performance has remained steady, though debt service coverage (DSC) has fluctuated over the last few years. The fluctuation in DSC is mainly driven by annual variations in the amount of debt service rather than a change in operating cash flow. Days cash on hand remains low at 22 days of operating expenses, but liquidity improves to 105 days of expenses after including available lines of credit.
Link: http://finance.yahoo.com/news/fitch-rates-tennessee-valley-auth-222300108.html
FITCH RATES TVA'S GLOBAL POWER BONDS - (The short term debt is is converted to long term debt notes.) "Proceeds from the 2012 series A bonds will be primarily used to retire existing short-term debt. " (The short term debt is is converted to long term debt notes.)
It is important to consider the disclaimer when reading this report: "The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings."
>>Fitch Rates Tennessee Valley Auth, TN's Global Power Bonds 2012 Series A 'AAA'; Outlook Negative<<
Link: http://finance.yahoo.com/news/fitch-rates-tennessee-valley-auth-222300108.html
Mon, Aug 6, 2012 - NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AAA' rating to the $1 billion 2012 series A Tennessee Valley Authority (TVA), TN's global power bonds. The bonds are expected to price around Aug. 6, 2012. Proceeds from the 2012 series A bonds will be primarily used to retire existing short-term debt.
In addition Fitch affirms the following parity global power bond ratings:
--$23.9 billion (as of Sept. 30, 2011) global power bonds at 'AAA'.
>>The Rating Outlook is Negative <<
**SECURITY
The bonds are secured by net revenues of TVA's power system.
**KEY RATING DRIVERS
US OWNERSHIP: The 'AAA' rating reflects TVA's status as a wholly owned corporation of the U.S. government. Fitch takes into account in its assessment the likelihood and degree of government support for TVA and similarly rated government-sponsored entities.
FEDERAL GOVERNMENT LINKS: While the TVA Act requires the utility to be self-funding, and TVA's global power bonds do not constitute an obligation of the U.S. government, Fitch believes that U.S. authorities would use extraordinary efforts to support TVA's operations and its global power bond obligations in the event that the utility encountered financial difficulties.
RING-FENCED SERVICE TERRITORY: Through the Federal Power Act's anti-cherry-picking provision, the Federal Energy Regulatory Commission (FERC) is prevented from ordering TVA to provide open-access to its transmission lines for the purpose of serving TVA customers. This provision in essence reduces TVA's risk of customer loss.
POTENTIAL CLOSURE OF LARGEST CUSTOMER: United States Enrichment Corporation (USEC) is TVA's largest directly served customer accounting for 4% of revenue. USEC's Kentucky facility is expected to be operational through May 31, 2013 after which considerable uncertainty exists regarding future operations. The loss of USEC's revenue further increases the need to adjust rates in a sluggish kWh sales environment but will not be material to TVA's overall performance.
EPA SETTLEMENT: Favorably, TVA has settled with the U.S. Environmental Protection Agency (EPA); the states of Tennessee, Kentucky, Alabama, and North Carolina; and various environmental groups on past and potential future new source review (NSR) claims. TVA will incur an expense of $360 million, retrofit some coal units and retire 2200MW of coal capacity as part of the settlement.
DEBT LIMIT: Credit concerns include a reduced flexibility to issue bonds due to the cap of $30 billion, imposed by the TVA Act. This concern is partially mitigated by TVA's past use of alternate financing that does not count against the cap. Although TVA is continuing to work with all stakeholders to increase the debt limit, Fitch believes that it is unlikely that the limit will be increased before the Presidential and Congressional elections in November 2012.
WATTS BAR 2 DELAY: Revised estimates from TVA now anticipate completion of the Watts Bar 2 nuclear unit (WB2) during fall 2015 at a cost between $4 billion and $4.5 billion. Original estimates called for completion in fall 2012 at $2.5 billion. Even if the revised cost estimate holds, Fitch believes that the significant cost increase for WB2 together with potential new safety and security requirements by the Nuclear Regulatory Commission (NRC) will require rate increases.
**WHAT COULD TRIGGER A RATING ACTION
U.S. SOVEREIGN RATING LINKAGE: TVA's bonds are payable solely from net revenues of the power system and don't constitute obligations of the U.S. However, the U.S. government's extensive involvement in the operations of TVA, coupled with the vital importance of TVA in its service area results in a direct linkage between the rating on global power bonds and the U.S. sovereign.
CAPITAL RAISING FLEXIBILITY: Flexibility to raise additional debt capital as needed, given TVA's future capital expenditure plans, is important. Fitch will continue to monitor TVA's ability to finance future growth.
**CREDIT PROFILE
Dual Role of Electric Supply and Economic Development
TVA was created in 1933 as a federal government corporation via legislation enacted by the U.S. Congress. TVA operates the nation's largest public power system with a service area that includes seven states in the southeastern U.S. covering a population of more than nine million people. In addition to selling electricity, TVA is tasked with furthering the economic development of TVA's service area, and reducing the damage from destructive floodwaters within the Tennessee River system and the lower Ohio and Mississippi Rivers.
Self-Funded Power System
Initially, TVA's operations were funded by federal appropriations. Direct appropriations for the TVA power program ended in 1959, and appropriations for TVA's economic development and multipurpose activities ended in 1999. Since 1999, TVA has funded all of its operations entirely from the sale of electricity and power system financings - primarily the sale of debt securities. TVA is not authorized to issue equity securities.
All-Requirements Power Supply Contracts
TVA provides wholesale power to 155 municipalities and cooperatives pursuant to individual long-term all-requirements contracts. Revenues from TVA's municipal and cooperative customers accounted for approximately 85% of TVA's total operating revenues for fiscal 2011. TVA also sells electricity directly to industrial customers, accounting for 12% of operating revenue.
Stable Operating Performance
Revenues from sale of electricity were $11.84 billion in 2011, which is 10% higher than 2010 due to fuel and power cost adjustment despite a 3% reduction in kWh sales. Financial performance has remained steady, though debt service coverage (DSC) has fluctuated over the last few years. The fluctuation in DSC is mainly driven by annual variations in the amount of debt service rather than a change in operating cash flow. Days cash on hand remains low at 22 days of operating expenses, but liquidity improves to 105 days of expenses after including available lines of credit.
Link: http://finance.yahoo.com/news/fitch-rates-tennessee-valley-auth-222300108.html
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