Tennessee Valley Authority quarterly report, Q1 FY2012

Tennessee Valley Authority — Form 10-Q Summary

Reporting period: First quarter of fiscal 2012, the three months ended December 31, 2011. TVA operates a public power system serving more than nine million people and manages the Tennessee River system. Amounts below are in millions of dollars unless stated otherwise.

Financial performance

Metric	Q1 FY2012	Q1 FY2011	Change
Operating revenue	$2,568	$2,828	Down $260 (9.2%)
Operating expenses	$2,431	$2,558	Down $127 (5.0%)
Operating income	$137	$270	Down $133
Net loss	$(173)	$(48)	Loss increased $125
Net cash from operations	$257	$528	Down $271
Construction and nuclear fuel expenditures	$826	$738	Up $88

Electricity sales were 39.0 billion kWh, down 5.1%. Electricity sales revenue fell 9.3% to $2,540; other revenue was $28. Fuel expense declined 13.3% to $640 and purchased power expense declined 11.4% to $319, while depreciation and amortization rose 2.1% to $441. Net interest expense was $319, down from $329. The filing does not provide a clear standalone gross-margin measure.

Balance sheet, debt, and liquidity

At December 31, 2011, cash was $213, down from $507 at September 30, 2011. Current assets were $3,748 versus current liabilities of $4,955.
Total assets were $46,209 and total liabilities were $41,115; proprietary capital was $5,094.
Total outstanding debt was $24,712, including $2,343 of short-term debt and current maturities and $22,369 of long-term debt. TVA’s statutory debt ceiling is $30 billion.
TVA had $1.7 billion available under revolving credit facilities at quarter-end, after $756 million of letters of credit; there were no cash borrowings under those facilities. A separate $150 million U.S. Treasury facility also had no outstanding borrowings.
Operating cash flow of $257 did not cover investing outflows of $822; financing provided $271. Cash declined by $294 during the quarter.

Material changes and management commentary

Management attributed the $260 revenue decline primarily to $102 lower fuel-cost recovery, $100 lower base-volume revenue, and $58 lower base-rate revenue. Milder weather compared with unusually cold weather a year earlier contributed to lower residential and distributor sales.
Generation was down 2%. Coal-fired generation fell 29%, while nuclear, natural-gas combined-cycle, and hydroelectric generation rose 18%, 71%, and 31%, respectively. Higher hydro output and the generation mix helped reduce fuel and purchased-power costs.
TVA lowered its FY2012 sales forecast by 2% and said it was reviewing expenditures, including possible project scope or schedule changes and other productivity measures. Its previously projected FY2012 revenue was $12.1 billion, including estimated fuel-cost recovery.
Watts Bar Unit 2 faced lower productivity, schedule delays, and expected costs significantly above the prior $2.5 billion estimate. Management was reassessing the schedule and cost estimates; completion could extend beyond calendar 2013, versus the prior target of late 2012.
TVA planned to idle four Johnsonville coal units beginning March 1, 2012, earlier than previously required. It recorded $25 million of additional depreciation in the quarter and expected approximately $45 million more during the remainder of FY2012.
The Kingston ash-spill cleanup estimate remained $1.1 billion, within a stated estimated range of $1.1–$1.2 billion. TVA had spent $774 million and recorded a remaining liability of $351 million at December 31; physical cleanup was expected to finish in late 2014. Future penalties, claims, and other costs not considered probable or estimable were excluded.

Outlook, risks, and unusual items

On January 17, 2012, TVA received approximately $970 million from a $1.0 billion financing transaction for the John Sevier combined-cycle facility. TVA leased the facility to a special-purpose entity and leased it back for 30 years; TVA determined it was the entity’s primary beneficiary and would consolidate it for accounting purposes. The facility was expected to begin commercial operation by June 2012.
The filing identifies substantial environmental investment needs: estimated coal-combustion-residual conversion and remediation expenditures of $1.48 billion through 2022 and proposed clean-air projects of $3.414 billion through 2018. Clean Water Act expenditures remained undetermined.
TVA had accrued approximately $386 million for legal proceedings. Kingston-related litigation and unresolved insurance claims could result in additional costs; the timing and amount of recovery of $26 million of MF Global collateral still held by the bankruptcy trustee could not be estimated.
Other risks include the $30 billion debt limit, construction cost and schedule overruns, tighter environmental rules, nuclear safety and regulatory matters, weather and electricity demand, fuel and purchased-power prices, and customer or supplier credit risk. Management said liquidity sources were expected to be adequate for the foreseeable future, while noting capital needs may require alternative financing or other measures.
TVA reported effective disclosure controls as of December 31, 2011, and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether lower-than-expected sales and the revised 2% sales forecast affect the $12.1 billion FY2012 revenue projection, rates, or planned expenditures.
The updated Watts Bar Unit 2 completion schedule and total cost estimate, expected after management’s reassessment.
Cash-flow and borrowing needs relative to the $30 billion debt ceiling, including the accounting and payment obligations arising from the John Sevier financing.
Potential additional Kingston cleanup, litigation, penalties, natural-resource damages, and insurance recoveries beyond amounts accrued.
Timing, scope, and funding of environmental compliance projects and any effects on coal-unit operations or retirements.
Developments concerning the major industrial customer and uranium-enrichment supplier, plus recovery of the remaining MF Global collateral.