Tennessee Valley Authority — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017. Dollar amounts are in millions unless otherwise noted. TVA is a federally created public power agency serving more than nine million people; its power program is intended to be self-supporting through power revenues and financing.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Operating revenue | $2,549 | $2,546 |
| Operating expenses | $1,951 | $2,117 |
| Operating income | $598 | $429 |
| Interest expense | $322 | $339 |
| Net income | $288 | $102 |
| Operating cash flow | $613 | $617 |
| Capital and nuclear fuel expenditures | $622 | $725 |
- Operating margin was approximately 23.5%, versus 16.9%; net margin was approximately 11.3%, versus 4.0%.
- At December 31, 2017, total assets were $49,977, total liabilities $40,521, and proprietary capital $9,456. Cash and cash equivalents were $300; an additional $13 was restricted.
- Total debt was $25,286, including $4,840 of current debt and $2,721 of short-term debt. Current liabilities of $7,210 exceeded current assets of $3,410.
- TVA had $1,621 available under its revolving credit facilities, no borrowings under those facilities, and a separate unused $150 U.S. Treasury facility. TVA’s statutory debt limit is $30 billion; bonds outstanding under the Act were $24.2 billion.
- Operating cash flow covered investing outflows of $628; financing provided $15. Cash and cash equivalents were unchanged at $300.
Changes versus the prior comparable period
- Net income rose $186, or 182%, while revenue was essentially flat. Operating expenses fell 7.8%, lifting operating income 39.4%.
- Fuel and purchased-power expense declined $115, mainly due to lower natural-gas prices and a generation mix with substantially more hydroelectric output. Hydroelectric generation increased to 3,387 million kWh from 1,692 million kWh; coal generation fell 26%.
- Operating and maintenance expense declined $32, including $24 from fewer planned nuclear outage days and $8 from workforce efficiencies and staffing changes. Interest expense fell $17.
- Electricity sales increased approximately 2%, helped by colder weather and a 26% increase in heating degree days. A base-rate adjustment effective October 1, 2017 contributed approximately $54 to the quarter’s higher base revenue; management expects the adjustment to contribute about $195 to FY2018 revenue.
- Operating cash flow was down $4. Investing outflows declined $79, primarily as major capacity and environmental projects were completed or entered pre-commercial operation.
Outlook, significant developments, and risks
- Outlook and strategy: No specific earnings guidance was provided. Management said it believes available financing, future power revenues, cost reductions, and other measures can support operating needs and planned capital investments over the next decade. TVA is beginning a new Integrated Resource Plan to assess future demand and resource options; demand has been essentially flat over the past five years, and distributed energy resources and changing customer preferences may affect future generation needs.
- Environmental obligations: A court ordered relocation of Gallatin coal-combustion residuals to a lined facility. TVA appealed. The on-site project estimate is approximately $900, with about $898 recorded as a liability at quarter-end; off-site relocation could cost up to $2.0 billion and take approximately 40 years. Additional costs or penalties in a separate Gallatin case could not be reasonably estimated.
- Other environmental spending: TVA estimated about $1.0 billion of remaining CCR-conversion spending through 2022, $175 for clean-air projects from 2018–2022, and $500 for Clean Water Act requirements from 2018–2024. These estimates exclude costs arising from new Gallatin lawsuit requirements. Regulatory changes, permits, litigation, and project conditions could alter costs.
- Operations and investment: TVA retired Johnsonville Fossil Plant Units 1–4 in December 2017 and completed specified Gallatin and Shawnee emissions-control installations during the quarter. The Allen combined-cycle plant was expected to enter commercial operation in spring 2018. A $300 multi-year fiber initiative is planned over ten years.
- Other exposures: TVA reported $18 accrued for legal proceedings. Nuclear decommissioning obligations were estimated at $2.9 billion and non-nuclear decommissioning obligations at $1.5 billion. TVA also identified dam-safety, nuclear regulatory and safety-culture, environmental compliance, supplier-performance, weather, fuel-price, cybersecurity, and customer-demand risks. Westinghouse was in bankruptcy; TVA was assessing potential effects on contracted nuclear fuel and plant services.
- Liquidity and market risks: TVA’s derivatives included approximately $1.5 billion of liabilities with credit-related collateral provisions; about $1 billion of letters of credit had been posted, reducing revolving-facility availability. TVA has suspended its Financial Trading Program. Management reported no material change in market risks from its prior annual filing.
- Controls and accounting: Management concluded disclosure controls were effective at December 31, 2017, with no material change in internal control over financial reporting during the quarter. Adoption of accounting standards in the quarter had no material impact.
Most important facts for investors to verify
- Progress and ultimate cost of the Gallatin CCR litigation, permitting, and cleanup; particularly the risk of off-site relocation and any additional penalties.
- How TVA plans to manage debt and liquidity, given the $30 billion statutory limit, current debt maturities, and collateral usage under credit facilities.
- Whether the $195 FY2018 revenue contribution expected from the base-rate adjustment is realized, and how weather, fuel costs, and generation mix affect results.
- Execution, cost, and timing of environmental, dam-safety, nuclear, and generation projects, including Allen plant commercial operation and remaining compliance spending.
- Effects of flat demand, distributed generation, and evolving customer preferences on TVA’s resource plan, rates, and long-term capital needs.