Tennessee Valley Authority · NYSE:TVC
Tennessee Valley Authority — TVA LAZARD STRATEGIC ASSESSMENT
171 slides from Tennessee Valley Authority's investor presentation, Jun 4, 2014
Slide 1: Strategic Assessment January 2014
S T R A T E G I C A S S E S S M E N T J A N U A R Y 2 0 1 4
Slide 2: Disclaimer
This document has been prepared by Lazard Frères & Co. LLC (“Lazard”) based upon information supplied by the Tennessee Valley Authority (the “TVA”) and its representatives and information supplied by the Federal Government and its representatives (including representatives of the Treasury and the Of
Slide 3: Abstract
Abstract On April 10, 2013, the budget proposal for fiscal year 2014 submitted to Congress by the President of the United States included the following passage: “Since its creation in the 1930s during the Great Depression, the federally owned and operated Tennessee Valley Authority (TVA) has been pr
Slide 4: Abstract (cont'd)
Abstract (cont’d) Lazard analyzed TVA’s business and financial condition and evaluated a range of potential options for TVA, and has arrived at its conclusions based on illustrative evaluative criteria determined in consultation with the various parties involved. Lazard did not comment with regard t
Slide 5: Table of Contents
Table of Contents C O N F I D E N T I A L I EXECUTIVE SUMMARY 1 II REVIEW OF STATUS QUO TVA A TVA SWOT Analysis 13 B Overview of TVA Mission and Current Activities 14 C Financial Assessment—Current Plan 20 D Financial Assessment—Prior Plan 30 E Benchmarking Analysis 32 III COMPARISON OF TVA VS. OTHE
Slide 6: Table of Contents
Table of Contents C O N F I D E N T I A L A Illustrative Valuation Analysis—Supporting Materials 82 1 No Change in Rate Path Case 86 2 Rate Mitigation Case 95 3 IOU Returns Rate Path Case 101 4 Other Supporting Materials 110 B Supplemental Materials 1 Power & Utility Industry 113 2 Additional TVA Ma
Slide 7: Executive Summary
I Executive Summary LAZARD
Slide 8: TVA SWOT Analysis
TVA—“SWOT” Analysis I E X E C U T I V E S U M M A R Y 1 SELECTED WEAKNESSES SELECTED THREATS Efficiency initiatives may improve TVA cost structure Generation fleet rotation (coal to nuclear and gas) is expected to continue to improve environmental profile Strong post-2015 cash flow generation create
Slide 9: Observations Regarding Status Quo TVA
Observations Regarding Status Quo TVA I E X E C U T I V E S U M M A R Y FINANCIAL ASSESSMENT— CURRENT PLAN TVA’s current financial plan (FY14 LRFP Management Plan) is self-financing and does not exceed TVA’s $30 billion statutory debt limit by 2023—based on its current forecast, TVA is expected to
Slide 10: I E X E C U T I V E S U M M
I E X E C U T I V E S U M M A R Y 3 (a) In addition to various forms of interaction and oversight, TVA is recorded in the federal budget. (b) TVA is legislatively required to pay PILOTs, which appear to be approximately equal to equivalent state and local taxes for other utilities. (c) TVA voluntari
Slide 11: Illustrative Evaluative Criteria
Illustrative Evaluative Criteria CRITERIA CUSTOMER SERVICE Reliable and available system that offers the appropriate levels of service, reliability and accountability OVERSIGHT Governance principles that align TVA’s interests with its mission, foster transparency and provide for robust functioni
Slide 12: TVA Strategic Alternatives—Detailed
TVA Strategic Alternatives—Detailed 5 STATUS QUO/ ENHANCED STATUS QUO DIVESTITURE(a) Privatization Public Sector Spin-off STRATEGIC ALTERNATIVES STRUCTURING ALTERNATIVES (a) TVA strategic alternatives are not mutually exclusive—full or partial divestiture, involving one or more structuring alternati
Slide 13: TVA Strategic Alternatives—General Observations
= Better = Worse TVA Strategic Alternatives—General Observations(a) 6 STRATEGIC ALTERNATIVES STATUS QUO/ ENHANCED STATUS QUO(b) PUBLIC SECTOR SPIN-OFF(c) PRIVATIZATION(d) “ DI FFERE NTIA TI NG ” CRITERI A NON-POWER MISSION Integrated and continuing non-power mission within TVA Logical placement
Slide 14: Divestiture Implementation Issues
7 I E X E C U T I V E S U M M A R Y Divestiture Implementation Issues The high level of implementation complexity associated with a potential TVA divesture would likely lead to a costly, multi-year process to execute any such strategy, during which time TVA’s ongoing internal initiatives would exper
Slide 15: The TVA Ecosystem
The TVA Ecosystem Over its 80-year history, TVA has developed into a complicated “ecosystem” that is intertwined within its seven-state service territory—any effort to substantially reorganize the TVA would be an extraordinarily complex political, economic, regulatory, and financial undertaking 8 No
Slide 16: I E X E C U T I V E S U M M
9 I E X E C U T I V E S U M M A R Y OVERVIEW The analysis presented herein is based on financial forecasts provided by TVA, which have been adjusted to reflect taxation, capital structure and financing assumptions similar to those of a typical IOU, including the following: TVA pays federal taxes
Slide 17: I E X E C U T I V E S U M M
10 I E X E C U T I V E S U M M A R Y Source: TVA FY14 LRFP. Note: Illustrative valuation based on publicly-traded comparables as of November 14, 2013, applied as if TVA were valued on September 30, 2013 (reflecting TVA’s fiscal year end). IPO values have been adjusted for illustrative 3.5% underwrit
Slide 18: Illustrative Factors Enhancing and Reducing TVA's Value
11 I E X E C U T I V E S U M M A R Y Illustrative Factors Enhancing and Reducing TVA’s Illustrative Value Ability to achieve higher ROEs or having greater certainty of earning targeted ROE (or earning on a larger ratebase), due to regulation that is constructive for TVA shareholders and/or other f
Slide 19: Summary Conclusions
12 Summary Conclusions I E X E C U T I V E S U M M A R Y Based on information received, current financial market conditions and analyses performed, and considering the criteria provided, Lazard recommends that TVA focus on long-term internal strategies to fully realize the benefits of cost and capit
Slide 20: Review of Status Quo TVA
II Review of Status Quo TVA LAZARD.
Slide 21: TVA SWOT Analysis
A TVA SWOT Analysis LAZARD.
Slide 22: TVA SWOT Analysis
TVA—“SWOT” Analysis A T V A S W O T A N A L Y S I S 13 SELECTED WEAKNESSES SELECTED THREATS Efficiency initiatives may improve TVA cost structure Generation fleet rotation (coal to nuclear and gas) is expected to continue to improve environmental profile Strong post-2015 cash flow generation creates
Slide 23: Overview of TVA Mission and Current Activities
B Overview of TVA Mission and Current Activities
Slide 24: Overview of TVA Mission
14 B O V E R V I E W O F T V A M I S S I O N A N D C U R R E N T A C T I V I T I E S Overview of TVA Mission Source: TVA Act, TVA website, TVA 2013 10-K and TVA’s February 2013 President’s Report. (a) One notable difference, however, is the lack of the shareholder as a key constituency. TVA ACT OF 1
Slide 25: Overview of Current TVA Business Mix
15 B O V E R V I E W O F T V A M I S S I O N A N D C U R R E N T A C T I V I T I E S Source: TVA Brown Book and TVA data. (a) Per net PP&E and O&M breakdown provided by TVA. Overview of Current TVA Business Mix TRANSMISSION TVA Transmission Lines TVA Act Service Area 16,086 Line-Miles of Transmi
Slide 26: Current TVA Activities—Non-power Mission
Overview of Current TVA Activities—Non-power Mission B O V E R V I E W O F T V A M I S S I O N A N D C U R R E N T A C T I V I T I E S STAKEHOLDERS The residents of the Tennessee Valley are the key stakeholder for TVA’s non-power mission(a) WATER AND LAND STEWARDSHIP Responsible for stewardship
Slide 27: Current TVA Activities—Power Generation
Overview of Current TVA Activities—Power Generation B O V E R V I E W O F T V A M I S S I O N A N D C U R R E N T A C T I V I T I E S GENERATION ASSETS Owns and operates ~35 GW of electricity generating capacity 2013 capacity mix consists of 39% coal, 26% gas/oil, 19% nuclear and 16% hydro/renew
Slide 28: Current TVA Activities—Transmission
Overview of Current TVA Activities—Transmission B O V E R V I E W O F T V A M I S S I O N A N D C U R R E N T A C T I V I T I E S TRANSMISSION ASSETS Owns and operates one of the largest electric transmission systems in North America, comprised of: 16,086 miles of transmission lines; 103,485 tra
Slide 29: TVA Rate-setting and Financial Guiding Principles
B O V E R V I E W O F T V A M I S S I O N A N D C U R R E N T A C T I V I T I E S 19 TVA Rate-setting and Financial Guiding Principles Source: “Rate Design: A Brief Discussion of Wholesale and Retail Rate Design” (TVA whitepaper) and TVA public filings (Delivering the Vision, September 2011). (a) TV
Slide 30: Financial Assessment—Current Plan
C Financial Assessment—Current Plan
Slide 31: Financial Forecast 2013-2023
For the Fiscal Year Ended September 30, '13 - '23 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E CAGR GWh Sales 160,289 153,638 154,390 155,015 155,526 156,270 156,997 158,007 158,358 159,047 159,831 (0.0%) % Growth -- (4.1%) 0.5% 0.4% 0.3% 0.5% 0.5% 0.6% 0.2% 0.4% 0.5% Gross Reve
Slide 32: Revenue Requirement: Fuel and O&M Costs
Nuclear Fuel $328 Coal $1,873 Gas $317 Other (Fuel Handling) $64 Purchased Power $918 26% 9% 54% 9% 2% The majority of TVA’s 2014E forecasted revenue requirement is comprised of fuel and O&M costs (~66% of total revenues), with financing costs (interest expense and net income) comprising approximate
Slide 33: TVA Rate Forecast
TVA Rate Forecast 22 FORECAST RETAIL RATES(a) AND VOLUMES GROSS REVENUES 160 154 154 155 156 156 157 158 158 159 160 8.70 8.82 9.05 9.17 9.43 9.74 10.06 10.33 10.67 11.03 11.48 0.00 4.00 8.00 12.00 135 145 155 165 175 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Rate ¢/kWh Volum
Slide 34: Cash Flow Profile
For the Fiscal Year Ended September 30, '14 - '23 CASH FLOW PROFILE 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Net Income $88 $1 $470 $364 $327 $570 $744 $936 $1,073 $1,463 $1,840 $7,787 Depreciation & Amortization 2,085 2,187 2,178 2,398 2,482 2,594 2,728 2,769 2,834 2,
Slide 35: TVA Sources & Uses of Capital
TVA Sources & Uses of Capital ($ in billions) 24 SOURCES USES $7.4 $6.9 $6.8 $6.6 $6.8 $7.0 $7.2 $7.3 $7.6 $7.7 $8.0 $1.3 $1.3 $1.3 $1.5 $1.6 $1.5 $1.5 $1.5 $1.4 $1.4 $1.3 $0.7 $0.4 $0.5 $0.4 $0.3 $0.5 $0.4 $1.1 $0.0 $0.4 $1.5 $0.8 $0.9 $1.0 $1.0 $1.1 $1.0 $1.0 $1.0 $1.2 $1.3 $1.1 $1.5 $1.9 $1.7 $1.
Slide 36: TVA Capital Expenditure Program
$800 $946 $1,027 $1,032 $1,106 $1,037 $1,026 $1,042 $1,206 $1,290 $1,091 $312 $741 $693 $485 $423 $424 $513 (b) $513(b) $513(b) $513(b) $513(b) $426 $274 $317 $385 $202 $307 $501 $536 $622 $880 $749 $696 $858 $619 $102 $29 $32 $37 $42 $2,263 $2,851 $2,694 $2,046 $1,731 $1,768 $2,040 $2,092 $2,341 $2
Slide 37: TVA Resource Plan
49% 9% 12% 30% TVA Resource Plan TVA expects to retire, idle, or convert ~4.6 GW of coal capacity over the next decade and expects to replace these capacity reductions with nuclear and gas capacity expansions and new construction TVA’s increased reliance on gas-fired generation and decreased relia
Slide 38: Potential TVA Cost and Capital Efficiency Opportunities
Potential TVA Cost and Capital Efficiency Opportunities 27 C F I N A N C I A L A S S E S S M E N T — C U R R E N T P L A N BALANCE SHEET DELEVERAGING RATE BENEFITS ENHANCED ENVIRONMENTAL PROFILE BALANCED RESOURCE PORTFOLIO Additional non-fuel O&M reductions Fuel purchasing efficiency Energy ef
Slide 39: TVA Cost and Capital Efficiency Initiatives—Current
TVA Cost and Capital Efficiency Initiatives—Current 28 OBSERVATIONS OBJECTIVES TVA has an overall goal to reduce O&M expenses by $500 million in 2015 ORGANIZATIONAL CHANGES TVA is currently engaged in an organizational realignment to achieve its expense reduction goal New functional organizati
Slide 40: Overview of Selected TVA Liabilities
Overview of Selected TVA Liabilities ($ in millions) C F I N A N C I A L A S S E S S M E N T — C U R R E N T P L A N 29 ASSETS LIABILITIES NET OVERFUNDED/ (UNDERFUNDED) POSITION OBSERVATIONS PENSION $7,221 ($11,471) ($4,250) TVA’s current plan includes $250 million of annual pension contributions
Slide 41: Financial Assessment—Prior Plan
D Financial Assessment—Prior Plan
Slide 42: Differences Between Prior Plan and Current Plan
Summary Observations: Differences Between Prior Plan and Current Plan 30 PRIOR PLAN CURRENT PLAN KEY DRIVERS ELECTRICITY SALES 173 TWh in 2023 0.4% CAGR over 2013 – 2023 160 TWh in 2023 (0.0%) CAGR over 2013 – 2023 13 TWh (8%) difference by 2023 based on revised load forecast RATES TVA r
Slide 43: TVA Financial Comparison: Prior Plan vs. Current Plan
The replacement of the planned construction of the Bellefonte nuclear facility in the prior plan with natural gas generation(a) accounts for the majority of the difference in forecasted debt levels between the two forecasts, with cost reductions and other factors also contributing to the forecasted
Slide 44: Benchmarking Analysis
E Benchmarking Analysis
Slide 45: TVA Economic Development Achievements
H:\! GRAPHICS\MAPINFO\Kimberly Kim\2012-12-17\TVA Generation.wor OTHER ECONOMIC DEVELOPMENT ACHIEVEMENTS IN 2013 Selected as a Top 10 utility for economic development (8th consecutive year) by Site Selection magazine Received a Gold Excellence Award for its Megasites program by the International
Slide 46: TVA Economic Impact on Tennessee Valley Region
Overview of TVA Economic Impact on Tennessee Valley Region (cont’d) E B E N C H M A R K I N G A N A L Y S I S 33 JOBS CREATED AND RETAINED(a): 2009-2013 CAPITAL INVESTMENT ATTRACTED(b): 2009-2013 36,000 28,500 35,500 30,500 50,000 25,906 40,899 43,018 48,561 52,029 0 10,000 20,000 30,000 40,000 50,0
Slide 47: TVA Comparison—Retail Rates
0¢ 5¢ 10¢ 15¢ Kentucky Utilities Kentucky Power Entergy-Mississippi Mississippi Power Ameren Missouri Entergy-Arkansas Louisville G&E Duke-Carolinas Duke-Indiana Appalachian Power TVA Duke Energy-Progress Virginia Electric Power Georgia Power Alabama Power Ameren Illinois Florida P&L South Carolina
Slide 48: TVA Comparison—Industrial Rates
0¢ 5¢ 10¢ 15¢ 20¢ 25¢ 30¢ 35¢ TVA Comparison—Industrial Rates 35 TOP 100 U.S. COMPANIES ( 12 MONTHS ENDING DECEMBER 2012) REGIONAL ELECTRIC COMPANIES ( 12 MONTHS ENDING DECEMBER 2012) 0¢ 5¢ 10¢ 15¢ Ameren-Illinois Ameren-Missouri Kentucky Power Kentucky Utilities Mississippi Power Duke-Carolinas Geo
Slide 49: Industry Benchmarking—Cost Structure
Industry Benchmarking—Cost Structure(a) 36 TVA PERFORMANCE STEAM(b) NUCLEAR HYDRO OTHER(c) TOTAL PRODUCTION NON-FUEL O&M 4th Quartile (15th of 18 Peers) TVA: $10.61/MWh Median: $7.70/MWh Range: $4.37 – $10.80(d) 4th Quartile (8th of 10 Peers) TVA: $16.66/MWh Median: $14.14/MWh Range: $11.77 – $21.42
Slide 50: Benchmarking—Non-nuclear Generation Operational Performance
Industry Benchmarking—Non-nuclear Generation Operational Performance 37 EQUIVALENT AVAILABILITY FACTOR (COAL)(a) EQUIVALENT AVAILABILITY FACTOR (GAS)(b) Source: TVA Benchmarking Study. Note: Peer sets are confidential. (a) Represents average figures over the 2008 – 2012 period. (b) Represents averag
Slide 51: Benchmarking—Nuclear Generation Operational Performance
Industry Benchmarking—Nuclear Generation Operational Performance 38 EQUIVALENT AVAILABILITY FACTOR (NUCLEAR)(b) INPO INDEX(a) Source: TVA Benchmarking Study and SNL data. Note: Peer sets are confidential. (a) The INPO Index is a weighted combination of several key safety and performance indicators i
Slide 52: Net Generation and Transmission Reliability
39 2012 NET GENERATION (GWh) TRANSMISSION SYSTEM RELIABILITY (MINUTES LOAD NOT SERVED PER YEAR)(b) 0.4 2.4 3.1 4.4 5.6 6.8 7.9 8.4 10.2 13.7 24.3 36.4 51.7 189.2 0 50 100 150 200 1 2 3 TVA 4 5 6 7 8 9 10 11 12 13 79.8 73.3 80.7 46.4 13.1 6.5 6.7 68.1 38.5 42.6 57.9 2.8 14.5 2.5 21.2 26.4 10.8 57.0 9
Slide 53: Industry Benchmarking—Emissions
Industry Benchmarking—Emissions 40 Source: TVA Benchmarking Study. (a) From 2014 levels. (b) Emissions reduction (tons) between 2005 baseline and 2012 level. (c) Average emissions rate (tons/GWh) over the five year period 2008 – 2012. TVA has exhibited 1st and 2nd quartile performance in emissions r
Slide 54: Factors Potentially Affecting Benchmarking Comparability
Factors Potentially Affecting Benchmarking Comparability 41 E B E N C H M A R K I N G A N A L Y S I S Various factors which may affect the comparability of TVA’s performance relative to its peers are highlighted below: Non-power mission Water management Economic development activities Other Le
Slide 55: Comparison of TVA vs. Other Power Provider Models
III Comparison of TVA vs. Other Power Provider Models
Slide 56: Comparison of TVA vs. Other Power Provider Models
I I I C O M P A R I S O N O F T V A V S . O T H E R P O W E R P R O V I D E R M O D E L S 42 (a) In addition to various forms of interaction and oversight, TVA is recorded in the federal budget. (b) TVA is legislatively required to pay PILOTs, which appear to be approximately equal to equivalent sta
Slide 57: TVA vs. Power Marketing Administrations
TVA POWER MARKETING ADMINISTRATIONS EXAMPLES OWNERSHIP/ GOVERNANCE Owned by Federal Government; operates as standalone entity Created by act of Congress Board members appointed by U.S. President and confirmed by U.S. Senate TVA also interacts with multiple federal departments Owned by Fede
Slide 58: TVA vs. State/Municipal Authorities and Coops
TVA STATE/MUNICIPAL PUBLIC AUTHORITIES POWER SUPPLY COOPERATIVES (“COOPs”) EXAMPLES OWNERSHIP/ GOVERNANCE Owned by Federal Government Created by act of Congress Board members appointed by U.S. President and confirmed by U.S. Senate TVA also interacts with multiple federal departments Owned
Slide 59: TVA vs. Investor Owned Utilities and IPPs
TVA INVESTOR OWNED UTILITIES INDEPENDENT POWER PRODUCERS EXAMPLES OWNERSHIP/ GOVERNANCE Owned by Federal Government Created by act of Congress Board members appointed by U.S. President and confirmed by U.S. Senate TVA also interacts with multiple federal departments Owned by private sector
Slide 60: TVA vs. Non-Federal Public Power and IOU Structure
$10,467 $192 $789 $790 $12,237 6,000 9,000 12,000 $15,000 2014E TVA Revenue Requirement Increased Interest Cost Revised Capital Structure (Need to Earn Equity Return) Loss of Tax Exemption 2014E Comparable IOU Revenue Requirement +$1,770 ?(d) $10,467 $10,467 6,000 9,000 12,000 $15,000 2014E TVA Reve
Slide 61: Factors of Current TVA Structure Affecting Rates
FACTORS OF CURRENT TVA STRUCTURE POTENTIALLY AFFECTING RATES NON-PROFIT VS. FOR-PROFIT Potential for private sector entity to operate differently, given profitability considerations FENCE ISSUES No competing power providers allowed to sell to customers in TVA service territory(a) Inability to
Slide 62: Summary Review of Strategic Alternatives
IV Summary Review of Strategic Alternatives
Slide 63: TVA Strategic Alternatives—Overview
TVA Strategic Alternatives—Overview 48 STATUS QUO/ENHANCED STATUS QUO DIVESTITURE(a) Privatization Public Sector Spin-off STRATEGIC ALTERNATIVES STRUCTURING ALTERNATIVES (a) TVA strategic alternatives are not mutually exclusive—full or partial divestiture, involving one or more structuring alternati
Slide 64: Illustrative Evaluative Criteria
Illustrative Evaluative Criteria CRITERIA CUSTOMER SERVICE Reliable and available system that offers the appropriate levels of service, reliability and accountability OVERSIGHT Governance principles that align TVA’s interests with its mission, foster transparency and provide for robust functioni
Slide 65: TVA Strategic Alternatives—Detailed
TVA Strategic Alternatives—Detailed 50 STATUS QUO/ ENHANCED STATUS QUO DIVESTITURE(a) Privatization Public Sector Spin-off STRATEGIC ALTERNATIVES STRUCTURING ALTERNATIVES (a) TVA strategic alternatives are not mutually exclusive—full or partial divestiture, involving one or more structuring alternat
Slide 66: Strategic Alternatives—General Observations
STRATEGIC ALTERNATIVES STATUS QUO/ ENHANCED STATUS QUO(b) PUBLIC SECTOR SPIN-OFF(c) PRIVATIZATION(d) “ DI FFERE NTIA TI NG ” CRITERI A NON-POWER MISSION Integrated and continuing non-power mission within TVA Logical placement of non-power mission would need to be determined Logical placement o
Slide 67: Summary Assessment of Status Quo/Enhanced Status Quo Alternatives
A Summary Assessment of Status Quo/Enhanced Status Quo Alternatives
Slide 68: Summary Assessment—Status Quo
DESCRIPTION Continue to execute TVA’s current strategic plan, including with respect to strategic realignment, cost reduction initiatives and resource planning BENEFITS Ongoing/uninterrupted execution of TVA’s regional (power and non-power) mission Status quo plan appears achievable and is exp
Slide 69: Summary Assessment—Enhanced Status Quo
DESCRIPTION Implement additional cost reduction and capital optimization initiatives beyond the goals established in TVA’s 2014 budget May also entail improved tracking of distinct power and non-power costs to more accurately benchmark operating performance relative to peers BENEFITS Ongoing/u
Slide 70: Enhanced Capital Allocation, Leaseback, Joint Venture
54 ENHANCED CAPITAL ALLOCATION LEASEBACK(a) JOINT VENTURE DESCRIPTION Sell individual assets (facilities, generation and/or transmission, etc.) to raise capital for reinvestment, deleveraging or return of capital Pursue leaseback(s) of generation and/or other assets to finance future development
Slide 71: Summary Assessment—Allow TVA to Expand Operations
DESCRIPTION Allow TVA to expand operations beyond its current mandate, including expansion outside its existing service territory and/or the pursuit of new business activities (e.g., acquire gas utilities, vertically integrate with LPCs, etc.) BENEFITS Potential for TVA to realize economies of s
Slide 72: Allow Alternate Suppliers into Region/Open Transmission Access
56 Summary Assessment—Allow Alternate Suppliers into Region/Provide Open Transmission Access DESCRIPTION Allow alternate suppliers of electricity to provide power to TVA’s LPCs and other wholesale customers through the provision of open transmission access throughout TVA’s service territory BENEFI
Slide 73: Summary Assessment of Public Sector Spin-off Alternatives
B Summary Assessment of Public Sector Spin-off Alternatives
Slide 74: Summary Assessment—Integrated Regional Cooperative
DESCRIPTION Establish a single, standalone regional public power cooperative to own and operate TVA Cooperative would be owned and governed by member LPCs Potential governing body and/or counterparty for transaction could be the Tennessee Valley Public Power Association (“TVPPA”), the represen
Slide 75: Summary Assessment—Integrated Regional Authority
58 Summary Assessment—Integrated Regional Authority DESCRIPTION Establish a single, standalone regional public authority to own and operate TVA Authority’s governance and control would span multiple states (i.e., across TVA’s seven-state service territory) Could be owned and governed by indivi
Slide 76: Summary Assessment—Separated Regional Authorities
DESCRIPTION Separate TVA into individual regional public authorities for power generation, transmission and non-power activities (or variations thereof) Each authority’s governance and control could span multiple states (i.e., across TVA’s seven-state service territory) Each authority could be
Slide 77: Summary Assessment—State-level Ownership
DESCRIPTION Separate TVA into seven individual state-owned authorities to own and operate TVA assets in each respective state Could be regulated by state-level PUCs or established as individual entities with independent rate-setting authority Each authority could have separate regulatory and g
Slide 78: Summary Assessment—LPC/Municipal Ownership
DESCRIPTION Separate TVA into individual/localized entities (or groups of entities) owned and operated by TVA’s current LPCs and/or municipalities Could be regulated by state-level PUCs or established as individual entities with independent rate-setting authority Each entity could have separat
Slide 79: Summary Assessment—Transfer of Non-power Mission
DESCRIPTION Transfer some or all of TVA’s non-power mission to another party or parties (e.g., federal, state or local agencies) Examples of entities which may take on all or certain non-power activities might include the U.S. Army Corps of Engineers, the U.S. Department of the Interior, the Nat
Slide 80: Summary Assessment of Privatization Alternatives
C Summary Assessment of Privatization Alternatives
Slide 81: Summary Assessment—Privatize 100% of TVA via IPO
DESCRIPTION Privatize TVA power operations in its entirety via an IPO IPO may entail selling a stake in the Federal Government’s ownership of TVA to public equity investors, and subsequently selling additional stakes to fully divest its ownership Assumes privatized TVA would be regulated via F
Slide 82: Summary Assessment—Privatize 100% of TVA via Sale
64 Summary Assessment—Privatize 100% of TVA via Sale(a) DESCRIPTION Privatize TVA power operations in its entirety via a sale process Buyer would likely be an IOU, although other buyers are also possible (e.g., traditional private equity consortium, infrastructure investor consortium, etc.) As
Slide 83: Summary Assessment—Privatize Excluding Hydro Assets
DESCRIPTION Privatize TVA power operations, except for TVA’s hydro assets, under a regulated utility framework Federal Government would retain non-power activities along with hydro assets Could be effected as a sale or an IPO Buyer would likely be an IOU, although other buyers are also possi
Slide 84: Summary Assessment—Privatize TVA with Acquisition of LPCs
DESCRIPTION Privatize TVA power operations in its entirety, combined with the acquisition of all of TVA’s LPCs to effectively replicate a traditional utility model that is vertically integrated from generation through distribution Would require non-power activities to be retained by a federal (o
Slide 85: Summary Assessment—Privatize Generation Assets
DESCRIPTION Privatize TVA’s generation assets TVA would retain transmission assets and non-power activities Could be effected as a sale or an IPO Buyer would likely be an IOU, although other buyers are also possible (e.g., traditional private equity consortium, infrastructure consortium, etc
Slide 86: Summary Assessment—Privatize Generation as Merchant Power
DESCRIPTION Privatize TVA’s generation fleet as merchant power assets IPP model likely entails break-up of TVA generation in order to diffuse market power Would require the creation of a functioning power market in the region TVA would retain transmission assets and non-power activities Co
Slide 87: Summary Assessment—Privatize Transmission Assets
DESCRIPTION Privatize TVA’s transmission assets as a regulated entity TVA would retain generation assets and non-power activities Could be effected as a sale or an IPO Buyer would likely be an IOU, although other buyers are also possible (e.g., traditional private equity investors, infrastru
Slide 88: Summary Assessment—Privatize Selected Assets
DESCRIPTION Privatize selected TVA transmission and generation assets TVA would retain selected transmission and generation assets and non-power activities Buyers could be a mix of IOUs, IPPs and financial sponsors BENEFITS Reduction in Federal Government exposure to TVA operating risks (alb
Slide 89: Summary Assessment—Outsourced O&M Contract
DESCRIPTION Enter into an operations and maintenance (“O&M”) contract with one or more third parties to operate and manage TVA Could encompass all of TVA’s power activities or could be limited to selected aspects of TVA’s operations (e.g., information technology, nuclear generation operations, e
Slide 90: Divestiture Implementation Issues
V Divestiture Implementation Issues
Slide 91: Illustrative Strategic Implementation Issues
Illustrative Strategic Implementation Issues V D I V E S T I T U R E I M P L E M E N T A T I O N I S S U E S 72 ILLUSTRATIVE ISSUES EVALUATIVE CRITERIA What would be the Federal Government’s primary objectives for divestiture (e.g., achieve specific public policy goals, maximize transaction procee
Slide 92: Illustrative Stakeholder Implementation Issues
Illustrative Stakeholder Implementation Issues V D I V E S T I T U R E I M P L E M E N T A T I O N I S S U E S 73 ILLUSTRATIVE ISSUES LEGISLATIVE CHANGES/ OTHER APPROVALS Given TVA’s unique organizational structure and its myriad of stakeholders at the federal, state and local levels, approvals an
Slide 93: The TVA Ecosystem
The TVA Ecosystem Over its 80-year history, TVA has developed into a complicated “ecosystem” that is intertwined within its seven-state service territory—any effort to substantially reorganize the TVA would be an extraordinarily complex political, economic, regulatory, and financial undertaking 74 N
Slide 94: Illustrative Regulatory Implementation Issues
Illustrative Regulatory Implementation Issues V D I V E S T I T U R E I M P L E M E N T A T I O N I S S U E S 75 ILLUSTRATIVE ISSUES REGULATORY MATTERS Most privatization structures and certain public sector spin-off structures would likely require all or a portion of TVA’s assets/activities to be
Slide 95: Illustrative Execution-related Implementation Issues
Illustrative Execution-related Implementation Issues V D I V E S T I T U R E I M P L E M E N T A T I O N I S S U E S 76 ILLUSTRATIVE ISSUES EXECUTION PROCESS TVA would need to engage legal, financial, regulatory, tax and other advisors in order to assess the requirements for executing a potential
Slide 96: Execution-related Issues: Debt and Other Liabilities
Illustrative Execution-related Implementation Issues (cont’d) V D I V E S T I T U R E I M P L E M E N T A T I O N I S S U E S 77 ILLUSTRATIVE ISSUES DEBT AND OTHER LIABILITIES All divestiture scenarios will require a careful examination of strategies and tactics for addressing TVA’s existing debt
Slide 97: Illustrative Valuation Analysis
VI Illustrative Valuation Analysis
Slide 98: Illustrative Valuation Analysis Overview
78 V I I L L U S T R A T I V E V A L U A T I O N A N A L Y S I S OVERVIEW The analysis presented herein is based on financial forecasts provided by TVA, which have been adjusted to reflect taxation, capital structure and financing assumptions similar to those of a typical IOU, including the follow
Slide 99: Illustrative Valuation Summary
79 V I I L L U S T R A T I V E V A L U A T I O N A N A L Y S I S Source: TVA FY14 LRFP. Note: Illustrative valuation based on publicly-traded comparables as of November 14, 2013, applied as if TVA were valued on September 30, 2013 (reflecting TVA’s fiscal year end). IPO values have been adjusted for
Slide 100: Factors Enhancing and Reducing TVA's Illustrative Value
80 V I I L L U S T R A T I V E V A L U A T I O N A N A L Y S I S Illustrative Factors Enhancing and Reducing TVA’s Illustrative Value Ability to achieve higher ROEs or having greater certainty of earning targeted ROE (or earning on a larger ratebase), due to regulation that is constructive for TVA
Slide 101: Conclusions
VII Conclusions
Slide 102: Summary Conclusions
81 Summary Conclusions V I I C O N C L U S I O N S Based on information received, current financial market conditions and analyses performed, and considering the criteria provided, Lazard recommends that TVA focus on long-term internal strategies to fully realize the benefits of cost and capital eff
Slide 103: Appendix
Appendix LAZARD
Slide 104: Illustrative Valuation Analysis—Supporting Materials
A Illustrative Valuation Analysis—Supporting Materials
Slide 105: Key Financial Model Assumptions
82 A I L L U S T R A T I V E V A L U A T I O N A N A L Y S I S — S U P P O R T I N G M A T E R I A L S Key Financial Model Assumptions CAPITAL STRUCTURE 50% equity/capitalization ratio REGULATORY CAPITALIZATION 50% authorized equity/capitalization ratio Starting ratebase equal to current TVA n
Slide 106: Illustrative TVA Valuation Analysis—No Change in Rate Path Case
$23.0 $31.5 $24.3 $24.8 $33.7 $24.4 $33.4 $25.9 $26.2 $35.8 10.0 20.0 30.0 40.0 $50.0 E n te rp ri se V a lu e 83 A I L L U S T R A T I V E V A L U A T I O N A N A L Y S I S — S U P P O R T I N G M A T E R I A L S IPO Sale The Comparable Companies Multiples methodology (which only captures near-term
Slide 107: Illustrative TVA Valuation Analysis—Rate Mitigation Case
$23.0 $25.0 $24.3 $24.8 $26.9 $24.4 $26.4 $25.9 $26.2 $28.5 10.0 20.0 30.0 40.0 $50.0 E n te rp ri se V a lu e 84 A I L L U S T R A T I V E V A L U A T I O N A N A L Y S I S — S U P P O R T I N G M A T E R I A L S TVA 2013YE Net Debt: $25.6 billion IPO Sale The Comparable Companies Multiples methodo
Slide 108: Illustrative TVA Valuation Analysis—IOU Returns Rate Path Case
Source: TVA FY14 LRFP. Note: Illustrative valuation based on publicly-traded comparables as of November 14, 2013, applied as if TVA were valued on September 30, 2013 (reflecting TVA’s fiscal year end). IPO analyses have been adjusted for illustrative 3.5% underwriting fee and 7.5% IPO discount on a
Slide 109: No Change in Rate Path Case
1 No Change in Rate Path Case LAZARD.
Slide 110: Comparable Companies Multiples Analysis—No Change (IPO)
$21.9 $24.7 $23.3 $23.2 $26.3 $24.8 20.0 25.0 30.0 35.0 40.0 45.0 $50.0 E n te rp ri se V a lu e 86 Comparable Companies Multiples Analysis—No Change in Rate Path Case (IPO Scenario) ($ in billions) 1 N O C H A N G E I N R A T E P A T H C A S E Source: TVA FY14 LRFP. Note: Illustrative valuation bas
Slide 111: Discounted Cash Flow Valuation—Terminal Year EBITDA Multiple
Discounted Cash Flow Valuation of TVA Using Public Market Terminal Year EBITDA Multiple PV PV of Terminal Value at Enterprise Value at Implied Growth Rate for Discount of FCF + TY EBITDA Multiple = TY EBITDA Multiple TY EBITDA Multiple Rate '14 - '23 8.125x 8.250x 8.375x 8.125x 8.250x 8.375x 8.125x
Slide 112: Financial Forecast—No Change in Rate Path (IPO)
For the Fiscal Year Ended September 30, '14 - '23 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E CAGR GWh Sales 153,638 154,390 155,015 155,526 156,270 156,997 158,007 158,358 159,047 159,831 0.4% % Growth (4.1%) 0.5% 0.4% 0.3% 0.5% 0.5% 0.6% 0.2% 0.4% 0.5% Gross Revenue $10,468 $10,766
Slide 113: Cash Flow Profile
For the Fiscal Year Ended September 30, '14 - '23 CASH FLOW PROFILE 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Net Income $355 $675 $633 $622 $764 $855 $950 $1,026 $1,250 $1,457 $8,587 Depreciation & Amortization 2,187 2,178 2,398 2,482 2,594 2,728 2,769 2,834 2,809 2,780 25,7
Slide 114: Precedent Transaction Multiples Analysis—Sale Scenario
$23.2 $26.3 $24.8 $24.6 $27.9 $26.2 20.0 25.0 30.0 35.0 40.0 45.0 $50.0 E n te rp ri se V a lu e 90 Precedent Transaction Multiples Analysis—No Change in Rate Path Case (Sale Scenario) ($ in billions) 1 N O C H A N G E I N R A T E P A T H C A S E Source: TVA FY14 LRFP. Note: Illustrative valuation b
Slide 115: Comparable Company Multiples Analysis—Sale Scenario
$22.6 $26.1 $24.3 $24.0 $27.8 $25.9 20.0 25.0 30.0 35.0 40.0 45.0 $50.0 E n te rp ri se V a lu e 91 Comparable Company Multiples Analysis—No Change in Rate Path Case (Sale Scenario) ($ in billions) 1 N O C H A N G E I N R A T E P A T H C A S E Source: TVA FY14 LRFP. Note: Illustrative valuation base
Slide 116: Discounted Cash Flow Valuation—Sale Scenario
Discounted Cash Flow Valuation of TVA Using Public Market Terminal Year EBITDA Multiple PV PV of Terminal Value at Enterprise Value at Implied Growth Rate for Discount of FCF + TY EBITDA Multiple = TY EBITDA Multiple TY EBITDA Multiple Rate '14 - '23 8.125x 8.250x 8.375x 8.125x 8.250x 8.375x 8.125x
Slide 117: Financial Forecast—No Change in Rate Path (Sale)
For the Fiscal Year Ended September 30, '14 - '23 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E CAGR GWh Sales 153,638 154,390 155,015 155,526 156,270 156,997 158,007 158,358 159,047 159,831 0.4% % Growth (4.1%) 0.5% 0.4% 0.3% 0.5% 0.5% 0.6% 0.2% 0.4% 0.5% Gross Revenue $10,380 $10,589
Slide 118: Cash Flow Profile
For the Fiscal Year Ended September 30, '14 - '23 CASH FLOW PROFILE 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Net Income $407 $786 $745 $736 $879 $971 $1,068 $1,145 $1,371 $1,579 $9,687 Depreciation & Amortization 2,187 2,178 2,398 2,482 2,594 2,728 2,769 2,834 2,809 2,780 25
Slide 119: Rate Mitigation Case
2 __ Rate Mitigation Case LAZARD
Slide 120: Discounted Cash Flow Valuation—Rate Mitigation Case
Discounted Cash Flow Valuation of TVA Using Public Market Terminal Year EBITDA Multiple PV PV of Terminal Value at Enterprise Value at Implied Growth Rate for Discount of FCF + TY EBITDA Multiple = TY EBITDA Multiple TY EBITDA Multiple Rate '14 - '23 8.125x 8.250x 8.375x 8.125x 8.250x 8.375x 8.125x
Slide 121: Financial Forecast—Rate Mitigation Case
For the Fiscal Year Ended September 30, '14 - '23 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E CAGR GWh Sales 153,638 154,390 155,015 155,526 156,270 156,997 158,007 158,358 159,047 159,831 0.4% % Growth (4.1%) 0.5% 0.4% 0.3% 0.5% 0.5% 0.6% 0.2% 0.4% 0.5% Gross Revenue $10,468 $10,766
Slide 122: Cash Flow Profile
For the Fiscal Year Ended September 30, '14 - '23 CASH FLOW PROFILE 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Net Income $355 $675 $633 $622 $791 $760 $735 $716 $709 $728 $6,725 Depreciation & Amortization 2,187 2,178 2,398 2,482 2,594 2,728 2,769 2,834 2,809 2,780 25,757 Wor
Slide 123: Free Cash Flow Build—Rate Mitigation Case
Fiscal Year Ending September 30th, 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E TY EBITDA $3,055 $3,149 $3,688 $3,921 $4,020 $4,331 $4,354 $4,321 $4,346 $4,290 $4,277 $4,384 Less: Depreciation & Amortization (1,710) (1,791) (1,749) (1,903) (1,956) (2,014) (2,087) (2,098) (2,146)
Slide 124: Financial Forecast—Rate Mitigation Case (Sale)
For the Fiscal Year Ended September 30, '14 - '23 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E CAGR GWh Sales 153,638 154,390 155,015 155,526 156,270 156,997 158,007 158,358 159,047 159,831 0.4% % Growth (4.1%) 0.5% 0.4% 0.3% 0.5% 0.5% 0.6% 0.2% 0.4% 0.5% Gross Revenue $10,380 $10,589
Slide 125: Cash Flow Profile
For the Fiscal Year Ended September 30, '14 - '23 CASH FLOW PROFILE 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Net Income $407 $786 $745 $736 $906 $876 $853 $835 $830 $850 $7,825 Depreciation & Amortization 2,187 2,178 2,398 2,482 2,594 2,728 2,769 2,834 2,809 2,780 25,757 Wor
Slide 126: IOU Returns Rate Path Case
3 _IOU Returns Rate Path Case LAZARD.
Slide 127: Comparable Companies Multiples Analysis—IOU Returns (IPO)
$36.3 $36.2 $35.7 $34.7 $35.7 $37.8 $37.7 $37.9 $36.9 $37.6 20.0 25.0 30.0 35.0 40.0 45.0 $50.0 E n te rp ri se V a lu e 101 Comparable Companies Multiples Analysis—IOU Returns Rate Path Case (IPO Scenario) ($ in billions) 3 I O U R E T U R N S R A T E P A T H C A S E Source: TVA FY14 LRFP. Note: Il
Slide 128: Free Cash Flow Build—IOU Returns Case
Fiscal Year Ending September 30th, 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E TY EBITDA $3,055 $4,787 $4,796 $5,163 $5,277 $5,316 $5,354 $5,355 $5,403 $5,367 $5,413 $5,548 Less: Depreciation & Amortization (1,710) (1,791) (1,749) (1,903) (1,956) (2,014) (2,087) (2,098) (2,146)
Slide 129: Financial Forecast—IOU Returns Rate Path Case
For the Fiscal Year Ended September 30, '14 - '23 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E CAGR GWh Sales 153,638 154,390 155,015 155,526 156,270 156,997 158,007 158,358 159,047 159,831 0.4% % Growth (4.1%) 0.5% 0.4% 0.3% 0.5% 0.5% 0.6% 0.2% 0.4% 0.5% Gross Revenue $12,194 $12,051
Slide 130: Cash Flow Profile
For the Fiscal Year Ended September 30, '14 - '23 CASH FLOW PROFILE 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Net Income $1,491 $1,535 $1,557 $1,549 $1,531 $1,518 $1,511 $1,510 $1,524 $1,541 $15,267 Depreciation & Amortization 2,187 2,178 2,398 2,482 2,594 2,728 2,769 2,834 2
Slide 131: Comparable Company Multiples Analysis—IOU Returns (Sale)
$37.6 $38.7 $36.8 $36.8 $37.5 $39.2 $40.4 $39.1 $39.2 $39.5 20.0 25.0 30.0 35.0 40.0 45.0 $50.0 E n te rp ri se V a lu e 105 Comparable Company Multiples Analysis—IOU Returns Rate Path Case (Sale Scenario) ($ in billions) 3 I O U R E T U R N S R A T E P A T H C A S E Source: TVA FY14 LRFP. Note: Ill
Slide 132: Valuation Summary—IOU Returns (Sale)
Source: TVA FY14 LRFP. Note: Illustrative valuation based on publicly-traded comparables as of November 14, 2013, applied as if TVA were valued on September 30, 2013 (reflecting TVA’s fiscal year end). (a) Enterprise value includes net debt of $14.7 billion. (b) EBITDA adjusted to remove amortizatio
Slide 133: Discounted Cash Flow Valuation—IOU Returns Case
Discounted Cash Flow Valuation of TVA Using Public Market Terminal Year EBITDA Multiple PV PV of Terminal Value at Enterprise Value at Implied Growth Rate for Discount of FCF + TY EBITDA Multiple = TY EBITDA Multiple TY EBITDA Multiple Rate '14 - '23 8.125x 8.250x 8.375x 8.125x 8.250x 8.375x 8.125x
Slide 134: Financial Forecast—IOU Returns (Sale)
For the Fiscal Year Ended September 30, '14 - '23 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E CAGR GWh Sales 153,638 154,390 155,015 155,526 156,270 156,997 158,007 158,358 159,047 159,831 0.4% % Growth (4.1%) 0.5% 0.4% 0.3% 0.5% 0.5% 0.6% 0.2% 0.4% 0.5% Gross Revenue $12,161 $11,974
Slide 135: Cash Flow Profile
For the Fiscal Year Ended September 30, '14 - '23 CASH FLOW PROFILE 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Net Income $1,579 $1,712 $1,734 $1,726 $1,708 $1,695 $1,688 $1,687 $1,701 $1,718 $16,949 Depreciation & Amortization 2,187 2,178 2,398 2,482 2,594 2,728 2,769 2,834 2
Slide 136: Other Supporting Materials
4 Other Supporting Materials
Slide 137: Comparable Companies Trading Multiples
Price / Enterprise Value / 2013E I/B/E/S 2013E PE/ Equity Enterprise I/B/E/S EPS Book EBITDA Dividend Dividend Long-Term Total Total Company Name Value Value 2014E 2015E Value 2014E 2015E Payout Yield Growth Rate Return Return Ameren $8,969 $15,109 16.2x 14.5x 1.3x 7.5x 7.1x 76.8% 4.3% 1.5% 5.8% 2.7
Slide 138: Precedent Transactions
Close Equity Purchase Price Premium Transaction Multiples Announc. Date/ Purchase Transaction % Cash / 1-Day 5-Day 20-Day P/E EV/EBITDA Date Status Acquiror Target Price Value % Stock Prior Average Average LTM FY+1 LTM FY+1 12/11/2013 Pending Fortis UNS $2,531 $4,286 100% / 0% 31.4% 28.3% 26.1% 18.3
Slide 139: TVA Energy Comparables—Beta and Leverage
Stock Price Equity Net Debt/ Net Debt/ Net Debt/ Levered Unlevered TVA Energy Comparables 11/14/2013 Value Debt Book Cap. Ent. Value Equity Value Beta (a) Beta (b) Ameren AEE $36.67 $8,969 $6,140 47.2% 40.6% 68.5% 0.63 0.43 Duke DUK $71.51 50,932 39,100 49.1% 43.4% 76.8% 0.57 0.38 Pinnacle West PNW
Slide 140: Supplemental Materials
B Supplemental Materials
Slide 141: Power & Utility Industry
1 Power & Utility Industry LAZARD.
Slide 142: Industry Valuation Dynamics: Interest Rates
After a disruption following the fiscal/credit crisis, the correlation between Industry dividend yields and 10-year Treasury yields appears to be re-emerging (90-day correlation of 0.71). Industry dividend yields remain well above 10-year Treasury yields on a historical basis (1.51x 90-day average r
Slide 143: Industry Valuation Dynamics: LCUI vs. S&P 500 Forward P/E
0.3 0.5 0.7 0.9 1.1 1.3 1.5x Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 NTM P/E Ratio LCUI-to-S&P 500 P/E Ratio: 0.95x Average: 0.79x Average Ratio of LCUI P/E to S&P 500 P/E: 0.79x 2003 Dividend Tax Cut Industry Valuation Dynamics: LCUI vs. S&P 500 Forward P/E Sour
Slide 144: Power & Utility Industry Dividend Payouts
Source: FactSet. Note: As of January 24, 2014. Power & Utility Industry Dividend Payouts: Historical Perspective With Industry dividend yields continuing to approach historically low levels, dividends may provide less valuation support going forward, as investors rotate out of defensive sectors in a
Slide 145: Natural Gas Prices: Henry Hub
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 $16.00 Jan 99 Apr 01 Jul 03 Oct 05 Jan 08 Apr 10 Jul 12 Sep 14 Dec 16 Henry Hub 30-Day Moving Avg. Henry Hub Forward Curve (Current) CERA Projections Wall Street Research Henry Hub Forward Curve (6-30-08) Henry Hub Forward Curve (12-31-06) GAS HISTORICAL SU
Slide 146: Natural Gas Prices: The Bull and the Bear Cases
? BULL CASE BEAR CASE 117 Natural Gas Prices: The Bull and the Bear Cases Residential, commercial and industrial demand recovery Greater utilization and growth of gas-fired generating capacity Alternative Energy technologies challenged by high cost, transmission, intermittency and storage issu
Slide 147: How Do Regulated Utility Companies Make Money?
How Do Regulated Utility Companies “Make Money”? ($ in millions) 118 (a) Assumes (for illustrative purposes) 50% equity capital at 12% allowed ROE, 50% debt capital at cost of 7% and tax rate of 37.5%. (b) Assumes (for illustrative purposes) 50% equity capital at 10% allowed ROE, 50% debt capital at
Slide 148: Additional TVA Materials
2 Additi 1 TVA Materials LAZARD.
Slide 149: Rating Agency Commentary
RATING AGENCY RATING/ OUTLOOK DATE OF REPORT SELECTED COMMENTARY AA+/Stable 08/06/2013 “The stable outlook on the Authority’s long-term debt reflects the rating outlook on the U.S., which is TVA’s sponsoring sovereign.… However, the continuing pattern of problems at key generating assets could resul
Slide 150: TVA History Timeline
1933: President Franklin Delano Roosevelt announces support for Muscle Shoals development 1933: TVA Act passed by Congress and signed into law 1933: TVA power policy announced 1939: TVA acquires power assets of Tennessee Electric Power Company, including seven dams constructed between 1911 a
Slide 151: TVA History Timeline (cont'd)
1981: TVA defers construction on Phillips Bend 1 nuclear unit (subsequently cancelled in 1982) 1982: TVA defers construction on Hartsville A 1 & 2 and Yellow Creek 1 nuclear units (subsequently cancelled in 1984) 1988: TVA sets goals to freeze power rates for three years, reduce overhead from
Slide 152: Prior Plan Financial Forecast
For the Fiscal Year Ended September 30, '13 - '23 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E CAGR GWh Sales 165,155 159,891 161,999 163,893 164,825 166,046 167,214 168,888 170,715 171,714 172,619 0.4% % Growth -- (3.2%) 1.3% 1.2% 0.6% 0.7% 0.7% 1.0% 1.1% 0.6% 0.5% Gross Revenu
Slide 153: Prior Plan Cash Flow Profile
For the Fiscal Year Ended September 30, '14 - '23 CASH FLOW PROFILE 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Net Income $82 $355 $394 $169 $629 $770 $847 $595 $879 $833 $362 $5,832 Depreciation & Amortization 2,025 2,084 2,170 2,532 2,249 2,395 2,513 2,803 2,975 3,093
Slide 154: TVA Summary Capitalization
TVA SUMMARY CAPITALIZATION Face Value Market Price Market Value Debt/2013E S&P Debt Annual Of Debt 11/4/2013 11/4/2013 EBITDA (a) Rating Structure YTW Coupon Interest Maturity Short-term Debt Discount Notes $3,261 -- $3,261 -- -- -- 0.043% $1 U.S. Treasury Line of Credit ($150 million) 0 -- 0 -- --
Slide 155: TVA Summary Capitalization
TVA SUMMARY CAPITALIZATION Face Value Market Price Market Value Debt/2013E S&P Debt Annual Of Debt 11/4/2013 11/4/2013 EBITDA (a) Rating Structure YTW Coupon Interest Maturity Electronotes 88059TEL1 Feb 13, 2009 $17 102.3% $18 Aaa* 11-year Amort 2.301% 2.650% $0 May-20 88059TFN6 Feb 28, 2013 10 90.1
Slide 156: TVA Summary Capitalization—Leasebacks
TVA SUMMARY CAPITALIZATION Initial Value Market Price Market Value S&P Termination Annual Final Leasebacks Financing Outstanding 11/4/2013 11/4/2013 Rating Asset Value Coupon Interest Payment John Sevier $1,000 $981 -- $981 AA- John Sevier $989 4.626% $45 Jan-42 Southaven 400 400 -- 400 AA- Southave
Slide 157: Revenue Requirement: Interest Cost, Capital Structure, Tax Exemption
Interest Cost Capital Structure (a) Tax Exemption TVA 2014E Adjustment Variance Adjustment Variance Adjustment Variance Equity return 0.0% 0.0% 10.0% (a) 10.0% Debt return 4.6% (b) 5.3% (a) 5.3% 5.3% Tax rate 0.0% 0.0% 0.0% 35.0% Equity/Total Capitalization 6.7% 6.7% 50.0% 50.0% Debt/Total Capitaliz
Slide 158: Public Sector Spin-off
3. Public Sector Spin-off LAZARD
Slide 159: Public Power Entities—Cost of Capital Observations
Public Power Entities—Cost of Capital Observations 128 3.2% 3.2% 4.5% 2.8% 2.9% 2.9% 3.3% 3.4% 3.2% 3.3% 3.3% 4.4% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% A AA A+ AA- A AA- NA A AA+ A- A- Aa2 Source: Bloomberg and S&P. (a) Cost of debt based on yield-to-worst on 10-year bonds as of November 20, 2013. (b) Cred
Slide 160: TVA Relative Cost of Capital Analysis—Public Power Entities
129 COOPS ENTERPRISE VALUE(a) $25,580 $5,708 $7,673 $8,315 CAPITAL- IZATION DEBT EQUITY (a) COST OF DEBT(b)(c) 3.2% 3.2% 4.5% 3.2% TAXABLE/TAX-EXEMPT DEBT Taxable Tax-exempt Tax-exempt Tax-exempt CREDIT RATING AA+/Aaa A/A1 AA-/Aa2 A/Baa2 92% 8% 82% 18% TVA Relative Cost of Capital Analysis—Public Po
Slide 161: Relative Cost of Capital—State Authorities and Other Entities
130 STATE AUTHORITIES OTHER ENTITIES ENTERPRISE VALUE(a) $25,580 $9,035 $9,590 $24,265 $70,517 $11,240 CAPITAL- IZATION DEBT EQUITY(a) COST OF DEBT(b)(c) 3.2% 2.8% 2.9% 3.5% 4.4% 3.2% TAXABLE/TAX-EXEMPT DEBT Taxable Tax-exempt Tax-exempt Taxable Taxable Tax-exempt CREDIT RATING AA+/Aaa AA-/Aa2 AA-/A
Slide 162: Selected Profiles of Public Power Entities—Coops
Selected Profiles of Public Power Entities—Coops 3 P U B L I C S E C T O R S P I N - O F F 131 ORGANIZATIONAL STRUCTURE Associated Electric Cooperative Inc. (“AECI”) provides generation and transmission services to cooperatives in Missouri, Iowa and Oklahoma Five member G&T coops control AECI
Slide 163: Selected Profiles of Public Power Entities—State Authorities
3 P U B L I C S E C T O R S P I N - O F F 132 ORGANIZATION STRUCTURE The Grand River Dam Authority (“GRDA”) is an Oklahoma state agency that manages the Grand River and its drainage basin, as well as hydro and non-hydro generation assets The Lower Colorado River Authority (“LCRA”) is a Texas con
Slide 164: Selected Profiles of Public Power Entities—Other
3 P U B L I C S E C T O R S P I N - O F F 133 ORGANIZATION STRUCTURE BPA is a federal agency operating under the U.S. DOE BPA operates generation and transmission assets in the Pacific Northwest BPA maintains a close financial relationship with the Federal Government via credit lines and direc
Slide 165: Rating Agency Commentary—Coops
134 Source: Moody’s and S&P. The credit strengths of public power cooperatives appear to be related to independent rate-setting authority and long-term contracts with creditworthy counterparties, among other factors—importantly, these public power entities do not benefit from federal or state suppor
Slide 166: Rating Agency Commentary—State Authorities
135 RATING AGENCY COMMENTARY Selected Public Power Entity Rating Agency Commentary—State Authorities 3 P U B L I C S E C T O R S P I N - O F F “Our assessment of the following factors supports the rating: The willingness of board members, three of whom directly represent the interests of electric cu
Slide 167: Rating Agency Commentary—Other Entities
136 RATING AGENCY COMMENTARY Selected Public Power Entity Rating Agency Commentary—Other Entities 3 P U B L I C S E C T O R S P I N - O F F “The ratings reflect what we view as the following strengths: the financial flexibility flowing from autonomous rate-setting authority and its competitive rates
Slide 168: Privatization
4 Privatization LAZARD
Slide 169: Cost of Capital—Electric-Oriented Regulated Utilities
137 ELECTRIC-ORIENTED REGULATED UTILITIES MARKET VALUES EQUITY VALUE -- $50,932 $37,260 $14,228 ENTERPRISE VALUE $25,580 $90,032 $61,357 $25,622 CAPITAL- IZATION DEBT EQUITY OTHER(a) TAX RATE(b) 0.0% 35.0% 35.0% 35.0% CREDIT RATING AA+/Aaa BBB+/Baa1 A/Baa1 A-/Baa1 COST OF DEBT INTEREST RATE(c) 3.2%
Slide 170: Cost of Capital—Independent Power Producers
138 INDEPENDENT POWER PRODUCERS MARKET VALUES EQUITY VALUE -- $3,584 $9,736 ENTERPRISE VALUE $25,580 $11,302 $18,141 CAPITAL- IZATION DEBT EQUITY OTHER(a) TAX RATE(b) 0.0% 35.0% 35.0% CREDIT RATING AA+/Aaa B+/B1 BB-/Ba3 COST OF DEBT INTEREST RATE(c) 3.2% 6.1% 6.0% AFTER-TAX COST OF DEBT 3.2% 4.0% 3.
Slide 171: Illustrative Equity Value of Recapitalized TVA vs. Ten Largest Utilities
ILLUSTRATIVE EQUITY VALUE OF RECAPITALIZED TEN LARGEST UTILITIES BY MARKET CAPITALIZATION TVA AS % OF BUYER MARKET CAPITALIZATION (a) Market Capitalization Enterprise Value No Change in Rate Path Case Rate Mitigation Case IOU Returns Rate Path Case Berkshire Hathaway/MidAmerican $285,263 $311,972 4.
Tennessee Valley Authority — TVA LAZARD STRATEGIC ASSESSMENT on 6ix