Tennessee Valley Authority — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2018 (TVA fiscal third quarter); fiscal year ends September 30. Financial figures are unaudited and in millions of dollars unless stated otherwise. TVA is a federally created public power and river-management agency serving more than nine million people.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Nine months ended June 30, 2018 | Nine months ended June 30, 2017 |
|---|---|---|---|---|
| Operating revenue | $2,707 | $2,571 | $8,048 | $7,664 |
| Operating income | $765 | $561 | $2,128 | $1,524 |
| Net income | $470 | $233 | $1,220 | $546 |
| Interest expense | $306 | $340 | $942 | $1,017 |
- Margins: Operating margin was approximately 28.3% for the quarter and 26.4% for the nine-month period, versus 21.8% and 19.9%, respectively, in the prior-year periods. Net margin was approximately 17.4% and 15.2%, versus 9.1% and 7.1%.
- Cash flow: Nine-month operating cash flow was $2,524, investing cash outflow was $1,546, and financing cash outflow was $979. Cash and cash equivalents ended at $299.
- Liquidity: Current assets were $3,491 and current liabilities $5,346 at June 30. TVA had $1,738 available under revolving credit facilities, no cash borrowings under them, and a separate $150 U.S. Treasury credit facility with no outstanding borrowings. TVA states it believes it can fund operations and planned investment needs.
- Debt: Total debt outstanding was $24,335 at June 30, down from $25,253 at September 30, 2017. The statutory debt limit is $30 billion. Outstanding bonds, as described by TVA excluding specified accounting adjustments, were $23.4 billion. Revolving facilities totaled $2.65 billion, of which $912 million was used for letters of credit.
- Other balance-sheet items: Total assets were $49,607; total liabilities were $39,228; proprietary capital was $10,379. Regulatory assets totaled $8,427, largely reflecting deferred pension, derivative, decommissioning, and environmental costs.
Changes versus prior comparable periods
- Quarterly revenue rose 5.3%, while net income more than doubled; nine-month revenue rose 5.0% and net income increased 123.4%.
- Higher electricity sales and the October 2017 base-rate adjustment lifted base revenue. Sales were up approximately 6% in both the quarter and nine-month period, mainly due to weather-driven LPC demand. Directly served industrial sales declined slightly.
- Operating expenses fell 3.4% for the quarter and 3.6% for nine months. Lower operating and maintenance costs reflected fewer planned nuclear outage days and operating efficiencies. Nine-month fuel and purchased-power costs also declined.
- Interest expense declined 10.0% for the quarter and 7.4% for nine months, reflecting lower average debt balances and rates. Nine-month investing outflows were lower than the prior year, while financing outflows increased, primarily due to power-bond maturities and redemptions.
Outlook, risks, contingencies, and notable matters
- Rates and demand: TVA expects generally flat regional energy demand to continue amid efficiency, distributed generation, and changing customer preferences. A wholesale rate restructuring approved in May 2018 was scheduled to take effect October 1, 2018, with an option for local power companies to defer the Grid Access Charge to October 2019. No quantified full-year earnings guidance is provided in the filing.
- Gallatin CCR litigation: A court order requires removal of coal-combustion residuals and relocation to a lined facility. TVA estimated the on-site project at about $900 million and recorded related liabilities of $895 million. If on-site permitting is not achieved, TVA estimated off-site relocation could cost up to $2.0 billion and take about 40 years; additional penalties or costs from a separate state lawsuit could not be reasonably estimated.
- Environmental spending: TVA estimated remaining environmental expenditures of about $1.157 billion for its CCR conversion program through 2022, excluding new Gallatin lawsuit requirements; $197 million for clean-air projects through 2023; and $480 million for Clean Water Act requirements through 2024. Estimates may change with regulation, litigation, permitting, and closure methods.
- Potential asset-retirement increase: Following an updated preferred closure approach for the Allen Fossil Plant east impoundment, TVA expected its related asset-retirement obligation to increase by approximately $300 million in the fourth quarter of 2018; a NEPA review was planned.
- Operational and financial risks: The filing highlights weather, fuel and purchased-power prices and availability, nuclear and dam safety, cyber and physical security, environmental regulation, and construction or remediation cost overruns. TVA reported that its cybersecurity program had faced attacks, but none had impaired operations or compromised data as of the filing. Derivative collateral requirements and counterparty credit risk are also relevant; $912 million of letters of credit supported collateral obligations.
- Federal proposal: The administration proposed selling TVA transmission assets in its 2019 budget and reorganization materials. The filing describes a proposal, not an approved transaction, and does not quantify its effects.
- Management and controls: TVA reported 99.999% energy-delivery reliability and effective disclosure controls as of June 30. It reported no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Progress and final appellate outcomes in the Gallatin CCR cases, including whether on-site disposal is permitted and whether the estimated $900 million obligation changes.
- The scope, timing, and cost of the expected Allen impoundment asset-retirement obligation increase and related NEPA decision.
- Whether the October 2018 wholesale rate changes were implemented as planned and how they affected customer rates, revenue, and demand.
- Debt issuance and redemptions, remaining capacity under the $30 billion statutory limit, and liquidity after letters of credit and collateral needs.
- Environmental spending forecasts, nuclear and dam safety project costs, and any material regulatory or operational developments after June 30, 2018.