Tennessee Valley Authority — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2013 (TVA fiscal 2013 second quarter); results also cover the six months ended March 31. Dollar amounts are in millions unless stated otherwise. TVA operates a large public power system and is a self-supporting federal corporate agency.
Financial performance
| Metric | Three months ended March 31, 2013 | Six months ended March 31, 2013 | Prior-year comparison |
|---|---|---|---|
| Operating revenues | $2,741 | $5,320 | Up 5.3% and 2.9%, respectively |
| Operating income | $361 | $417 | Up 46.7% and 8.9% |
| Operating margin | 13.2% | 7.8% | Prior year: 9.4% and 7.4% |
| Net income (loss) | $54 | $(191) | Prior year: $(94) and $(267) |
| Net margin | 2.0% | (3.6)% | Prior year: (3.6)% and (5.2)% |
| Net cash from operating activities | $1,148 for six months | Prior year: $867 |
For the six-month period, sales of electricity were 81.4 billion kWh, up 2.9%. Sales to municipalities and cooperatives rose 4.8%, while directly served industrial sales fell 8.2%. Revenue growth reflected higher fuel-cost recovery and increased sales; six-month base revenue declined $49 million. More normal weather compared with unusually mild prior-year weather supported demand.
Six-month fuel expense rose 25.9% to $1,466, mainly because of higher natural-gas prices, more coal-fired generation, and lower nuclear output amid planned outages. Purchased-power expense fell 17.7% to $533 as purchase volumes declined. Operating and maintenance expense rose 3.0% to $1,795; depreciation and amortization fell 10.5% to $836, partly because prior-year accelerated depreciation on idled coal units was higher. Net interest expense declined 1.7% to $634.
Financial position, debt and liquidity
- At March 31, 2013, cash and cash equivalents were $919; current assets were $4,119 and current liabilities $6,228. Current assets therefore did not cover current liabilities.
- Total debt outstanding was $25,234, including $3,300 of current debt and $21,934 of long-term debt. Debt increased from $25,078 at September 30, 2012. TVA’s statutory limit on outstanding bonds is $30 billion.
- TVA reported $1,148 of operating cash flow, $1,204 of investing cash outflow (including $996 of construction spending), and $107 of financing cash inflow for the six months. Cash increased $51 to $919.
- TVA had $2.5 billion of revolving credit facilities, with $1.4 billion available at March 31 after $1.1 billion of letters of credit; there were no cash borrowings. A $150 million U.S. Treasury credit facility was also undrawn.
- Regulatory assets totaled $10,936, chiefly deferred pension and post-retirement costs, derivative losses, nuclear decommissioning, and Kingston cleanup costs. Their recovery depends on continued cost-based ratemaking and future customer rates.
Material changes, outlook and risks
- TVA attributed improved quarterly earnings and cash flow largely to weather-driven demand and fuel-cost recovery. For the six months, the net loss narrowed year over year, but TVA remained loss-making.
- Management emphasized continued cost reduction and a goal of becoming a leading provider of low-cost, cleaner energy by 2020. The filing gives no specific consolidated earnings or revenue guidance.
- Capital needs are substantial: TVA cited more than $24.6 billion of planned capital investment over ten years. Environmental estimates included $1.4 billion for coal-combustion-residual conversion and remediation, $2.2 billion for proposed clean-air projects, and $1.2 billion for Clean Water Act requirements; estimates may change.
- Watts Bar Unit 2 completion was estimated at $4.0–$4.5 billion, with construction expected to finish by December 2015; management identified regulatory and licensing matters as principal risks. Bellefonte Unit 1’s interim review indicated its cost estimate might rise.
- Generation and reliability concerns included heightened NRC oversight at Browns Ferry, hydrology and flooding issues at Watts Bar and Sequoyah, outages and repair needs at John Sevier combined-cycle units, and unavailable Raccoon Mountain units. Management said some related costs could be significant or remained unknown.
- The Kingston ash-spill cleanup estimate was $1.1–$1.2 billion; TVA had spent $908 million and recorded a remaining liability of $217 million at March 31. Cleanup was expected to finish in early 2015, but the estimate excludes several uncertain potential costs and claims.
- TVA had accrued approximately $340 million for legal proceedings and could not estimate reasonably possible losses beyond those accruals. Active matters include Kingston spill lawsuits and environmental, nuclear licensing, and permit proceedings.
- TVA stated that it had no material changes to previously disclosed risk factors or market risks, and no off-balance-sheet arrangements. Management judged disclosure controls effective as of March 31.
- The U.S. government’s FY2014 budget proposal cited TVA’s debt constraints and raised a possible divestiture review; this was a government proposal, not a TVA operating forecast.
Important facts for investors to verify
- Whether higher fuel and operating costs, planned nuclear outages, and industrial customer weakness affect subsequent-period margins and cash generation.
- TVA’s plan to finance major capital and environmental projects while managing the $30 billion statutory bond ceiling and refinancing needs.
- Updated cost, schedule, and licensing status for Watts Bar Unit 2, Bellefonte Unit 1, and environmental compliance projects.
- Changes in Kingston cleanup costs, litigation exposure, and the outcome of insurance arbitration and other legal proceedings.
- Whether hydrology, NRC oversight, generating-unit repairs, and transmission requirements lead to additional outages, costs, or reliability constraints.