Tennessee Valley Authority — Form 10-Q Summary
Business context and reporting period. TVA is a U.S. federal corporate agency operating a public power system serving about nine million people, alongside stewardship of the Tennessee River system. This unaudited report covers the fiscal quarter and six months ended March 31, 2016 (TVA fiscal year ends September 30); comparisons are with the corresponding 2015 periods.
Financial performance and position
| Metric (millions, except percentages) | Three months ended Mar. 31, 2016 | Three months ended Mar. 31, 2015 | Six months ended Mar. 31, 2016 | Six months ended Mar. 31, 2015 |
|---|---|---|---|---|
| Operating revenue | $2,571 | $2,863 | $4,851 | $5,274 |
| Operating income | $589 | $776 | $817 | $1,140 |
| Net income | $318 | $496 | $281 | $577 |
| Net interest expense | $279 | $288 | $556 | $580 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,330 | $1,412 |
| Capital and nuclear fuel expenditures | Not provided for quarter | Not provided for quarter | $1,615 | $1,623 |
- Quarterly revenue fell 10.2% and net income fell 35.9%; six-month revenue declined 8.0% and net income declined 51.3%. Operating margins were approximately 22.9% for the quarter and 16.8% for six months, versus 27.1% and 21.6%, respectively, a year earlier.
- Six-month cash from operations decreased $82 million year over year. Investing used $1,613 million; financing provided $284 million. Cash and equivalents were $301 million at March 31, compared with $300 million at September 30, 2015.
- At March 31, current assets were $3,247 million and current liabilities $4,619 million (current ratio about 0.70). Total debt was $25,260 million, including $1,407 million of short-term debt; total debt was $24,949 million at September 30. TVA had $7,473 million of proprietary capital and $41,643 million of total liabilities.
- TVA had $1.2 billion of availability under $2.5 billion in revolving facilities; $1.3 billion was committed to letters of credit. A separate $150 million U.S. Treasury facility had no borrowings. Bonds outstanding were $24.2 billion against a statutory $30 billion limit.
Material changes and drivers
- TVA attributed weaker results mainly to unusually mild winter weather: heating degree days for the six-month period were about 20% below normal, compared with 10% above normal in the prior-year period. Electricity sales declined 6% for the quarter and 7% for six months.
- Lower natural-gas prices and a changed generation mix reduced fuel and purchased-power costs, partially offsetting lower sales. Average Henry Hub prices were about 31% lower for the quarter and 39% lower for six months year over year.
- Six-month operating and maintenance expense rose $64 million, reflecting planned nuclear outages, dam-safety and remediation work, and inventory/project write-offs. TVA cited lower depreciation following Sequoyah’s 20-year license extension, partly offset by increased non-nuclear decommissioning-asset amortization.
Outlook, management commentary, and risks
- TVA expected Watts Bar Unit 2 to reach initial criticality in May 2016 and commercial operation in summer 2016, with project cost within the $4.7 billion approved limit. Allen and Paradise combined-cycle gas plants were under construction, with estimated in-service dates of June 2018 and June 2017, respectively.
- The October 2015 rate adjustment was expected to add about $200 million to fiscal 2016 revenue. TVA said current plans to fund operations and planned capital investment over the next decade relied on a combination of bonds, rate increases, cost reductions, or other measures.
- TVA projected little or no electricity-demand growth in coming years and said its 2015 resource plan suggested additional large baseload generation might not be needed for about two decades. It was exploring future uses for the Bellefonte site and, in February 2016, withdrew the construction and operating license application for Bellefonte Units 3 and 4.
- Environmental and compliance spending remains significant: TVA estimated $1.3 billion of additional CCR conversion-program costs through 2022, $480 million for proposed clean-air projects through 2025, and $580 million for Clean Water Act requirements through 2023. It estimated future CAA compliance costs of about $480 million from 2016–2025, excluding greenhouse-gas requirements.
- Boone Dam repair design and cost estimates were still being finalized; TVA expected construction to begin in the third quarter of 2016. Comparable composite-wall projects had ranged from $200 million to $300 million and five to seven years, but TVA had not established a Boone-specific final estimate.
- TVA accrued $89 million for probable legal-proceeding losses and could not estimate reasonably possible additional losses. Matters include Gallatin coal-combustion-residual litigation and environmental compliance. Kingston ash-spill orders from Tennessee were closed, while the EPA order remained open.
- Other risks include evolving environmental rules, nuclear and dam safety work, project execution and cost overruns, weather and demand, fuel supply and commodity prices, derivative collateral requirements, and the statutory debt limit. TVA reported no material change in market-risk disclosures, no off-balance-sheet arrangements, and effective disclosure controls.
Investor facts to verify
- Whether weak sales and earnings reflect weather-related timing or a more persistent demand trend, and the effect of the October 2015 rate adjustment.
- Watts Bar Unit 2 completion, commercial-operation timing, and final project costs; progress and budgets for the Allen and Paradise gas plants.
- Updated cost, schedule, and potential obligations for Boone Dam remediation, CCR conversions, and water- and air-quality compliance.
- Liquidity headroom, short-term borrowing needs, credit-facility availability after letters of credit, and remaining capacity under the $30 billion bond limit.
- Developments in Gallatin and other legal proceedings, and whether additional environmental or decommissioning estimates become probable or quantifiable.