Tennessee Valley Authority quarterly report, Q1 FY2013

Tennessee Valley Authority — Q1 FY2013 Form 10-Q

Reporting period: Three months ended December 31, 2012; comparisons are with the three months ended December 31, 2011 unless stated otherwise. Financial figures are in millions of dollars unless noted. TVA is a U.S. government-created public power agency serving more than nine million people; its power program is intended to be self-supporting.

Financial results and position

Metric	Q1 FY2013	Q1 FY2012
Operating revenues	$2,579	$2,568
Operating expenses	$2,523	$2,431
Operating income	$56	$137
Operating margin	2.2%	5.3%
Net loss	$(245)	$(173)
Net interest expense	$316	$319
Operating cash flow	$257	$257
Investing cash flow	$(652)	$(822)
Financing cash flow	$439	$271

• Electricity sales revenue was $2,549, up 0.4%; sales volume rose 0.2% to 39,113 million kWh. Total revenue was nearly flat, while operating expenses rose 3.8% and operating income fell 59.1%.
• Fuel expense increased 24.1% to $794, mainly because nuclear generation fell 28% amid three refueling outages, including Sequoyah Unit 2 steam-generator replacement. Coal generation rose 42% and gas generation 27%. Purchased-power expense declined 23.2% to $245 as TVA relied more on its own generation.
• Operating and maintenance expense rose 4.4% to $919, primarily reflecting higher nuclear outage costs. Depreciation and tax equivalents declined.
• At December 31, 2012, cash was $912 (versus $868 at September 30, 2012); current assets were $4,193 and current liabilities $6,057. Outstanding debt was $25,540, up from $25,078 at fiscal year-end; total liabilities were $41,830 and proprietary capital $5,103.
• Construction expenditures were $576 and nuclear-fuel expenditures $74. Operating cash flow less these expenditures was approximately $(393); this is a simple cash-flow comparison, not a reported free-cash-flow measure.

Material changes and management commentary

• Management said total operating revenues were on plan. Sales were broadly stable; higher fuel-cost recovery and other revenues largely offset lower base revenue. Distributor wholesale-rate elections effective October 1, 2012 reduced effective base rates during the transition and winter months; management expected higher revenues in summer months.
• The $245 net loss compared with a $173 loss a year earlier, primarily reflecting higher fuel and operating costs associated with nuclear outages. Operating cash flow nevertheless remained $257 in both periods, with working-capital movements offsetting the larger loss.
• TVA issued $1.0 billion of 3.50% bonds due 2042 in December and used proceeds in part to fund short-term debt maturities. It had $1.4 billion available under $2.5 billion of revolving credit facilities, with $1.1 billion committed to letters of credit and no cash borrowings. The $150 million Treasury facility was undrawn.
• The TVA Act caps outstanding bonds at $30 billion. Management cautioned that this may constrain bond financing for planned capital investment and identified leases and other financing, rates, and cost reductions as possible funding sources. Management expected available liquidity sources to be adequate for the foreseeable future.

Outlook, risks, contingencies, and unusual items

• Generation and capital projects: Watts Bar Unit 2 was under construction, with estimated completion cost of $4.0–$4.5 billion. Management expected completion by December 2015, within a broader revised schedule of September 2015 to June 2016; licensing, Fukushima-related requirements, spent-fuel review, and an aquatic contention remained risks. Costs or timing could change.
• Asset availability: Raccoon Mountain pumped-storage units were largely out of service pending repairs; TVA expected returns during 2013–2014 and could dispatch other generation or purchase power. Browns Ferry remained under heightened NRC oversight. TVA also cited potential summer generation curtailment from cooling-tower issues.
• Environmental spending: TVA estimated potential expenditures of $13 for site remediation, $1,381 for coal-combustion-residual conversion and remediation, $2,240 for proposed clean-air projects, and $1,224 for Clean Water Act requirements. These estimates are subject to change and exclude potential greenhouse-gas compliance projects. Conversion of wet coal-ash facilities to dry collection was estimated at $1.5–$2.0 billion.
• Kingston ash spill: TVA estimated total cleanup costs of $1.1–$1.2 billion, had recorded $1.1 billion, spent $881 million through December 31, and reported a remaining estimated liability of $244 million. Physical cleanup was expected to finish in Q1 2015, with final assessment and approvals anticipated by Q3 2015. Certain possible penalties, damages, claims, and other costs were excluded because they were not considered probable or reasonably estimable.
• Litigation and obligations: TVA accrued approximately $351 million for legal proceedings but could not estimate reasonably possible losses beyond accruals. Kingston-related lawsuits remained active; plaintiffs allege property and other damages, with potential damages unspecified. Additional environmental, nuclear, dam-safety, and regulatory costs could be significant.
• Other exposures: Nuclear regulatory actions following Fukushima could entail significant costs. TVA also disclosed counterparty and supplier credit risks, including exposure to a large industrial customer and uranium-enrichment supplier with weak credit ratings. Derivative-related collateral posted was $1.1 billion in letters of credit, reducing facility availability.
• TVA reported no material changes to previously disclosed risk factors or market risks, no off-balance-sheet arrangements, and effective disclosure controls as of December 31, 2012. The filing provided no specific consolidated earnings or rate guidance.

Most important facts for investors to verify

• Whether nuclear refueling outages and other generation constraints normalize, and how the fuel mix affects costs and margins.
• Progress, final cost, schedule, licensing, and financing for Watts Bar Unit 2 and other major capital projects.
• Actual environmental-compliance and coal-ash conversion spending versus the preliminary estimates, including any new regulatory requirements.
• Whether Kingston cleanup costs, litigation, penalties, or natural-resource damages exceed recorded estimates.
• Debt capacity under the $30 billion statutory limit, upcoming maturities, access to revolving facilities, and collateral needs.
• Effects of wholesale-rate elections, fuel-cost recovery timing, weather, and customer concentration on future revenue and cash flows.