Tennessee Valley Authority quarterly report, Q3 FY2015

Tennessee Valley Authority — Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended June 30, 2015; TVA’s fiscal year ends September 30. Amounts are in millions of dollars unless otherwise noted. TVA is a federally created public power agency serving about nine million people. Its power program is intended to be self-supporting through power revenues and financing.

Financial results and position

Metric	Three months ended June 30, 2015	Three months ended June 30, 2014	Nine months ended June 30, 2015	Nine months ended June 30, 2014
Operating revenues	$2,558	$2,651	$7,832	$7,971
Operating income	$306	$198	$1,446	$992
Net income (loss)	$32	$(81)	$609	$147
Net interest expense	$282	$289	$862	$882
Operating cash flow	Not presented separately	Not presented separately	$2,016	$1,987

• Operating margin was approximately 12.0% for the quarter and 18.5% year to date, compared with 7.5% and 12.4%, respectively, in the prior-year periods.
• Quarterly electricity sales rose 1.0% to 37,243 million kWh; nine-month sales fell 0.7% to 115,710 million kWh. Revenue from electricity sales declined 3.7% for the quarter and 1.9% year to date, mainly reflecting lower fuel-cost recovery.
• Operating expenses fell 8.2% for the quarter and 8.5% year to date. Lower natural-gas prices reduced fuel and purchased-power costs; cost savings, fewer outages, and lower recognized pension costs also reduced operating and maintenance expense. These benefits were partly offset by higher depreciation, including accelerated coal-unit depreciation.
• At June 30, cash and cash equivalents were $500; current assets were $3,831 and current liabilities $5,265. Short-term debt was $2,582, versus $596 at September 30, 2014. Total debt, including VIE debt, was $25,654, compared with $24,887.
• TVA reported $1,400 of availability under its $2.5 billion revolving credit facilities, after $1.1 billion of letters of credit; there were no cash borrowings under those facilities. The TVA Act debt ceiling is $30 billion; reported Bonds outstanding were $24.4 billion.
• Investing cash outflow was $2,690, including $2,064 of construction expenditures, $342 for the Ackerman gas-plant acquisition, and $252 for nuclear fuel. Financing provided $674, primarily reflecting $1,986 of net short-term debt issuance. Cash remained $500.

Material changes and notable items

• Year-to-date net income increased to $609 from $147; quarterly results moved to $32 of income from an $81 loss. Lower expenses more than offset reduced revenue.
• TVA acquired the 700-MW Ackerman combined-cycle gas plant for $342 cash in April 2015, adding generation capacity and transmission flexibility as older coal units retire.
• The EPA’s April 2015 coal-combustion-residual rule led TVA to revise retirement-cost estimates. TVA recorded a $539 increase in asset retirement obligations during the quarter; total AROs rose to $3,856 from $3,169 at September 30, 2014.
• Accelerated depreciation associated with the planned retirement of Widows Creek Unit 7 added $81 of expense in the quarter and nine-month period. TVA expected approximately $137 of additional depreciation for the remainder of 2015 based on the accelerated retirement timing.
• TVA’s cost-reduction objective is to lower operating and maintenance costs by $500 by the end of 2015 versus its 2013 budget. Management reported it was positioned to achieve the goal; a May 2015 limited workforce reduction was expected to affect about 200 employees.

Outlook, risks, and contingencies

• Watts Bar Unit 2 remained on track, with estimated completion cost of $4.4–$4.5 billion, fuel loading forecast for the fourth quarter of 2015, and commercial operation expected in the second quarter of 2016. Complex work, testing, documentation, licensing, and transition to dual-unit operation could affect timing or cost.
• TVA’s 2015 resource plan indicated new capacity, including natural gas capacity, was needed in every scenario; the final plan was scheduled for Board consideration in August 2015. Planned gas projects at Paradise and Allen have authorized cost ceilings of $1.1 billion and $975 million, respectively.
• The coal-combustion-residual conversion program was estimated at about $2.0 billion through 2022; $710 had been incurred by June 30. The filing’s environmental expenditure table separately estimated $1.3 billion for the program, reflecting a defined set of planned expenditures. TVA continued evaluating the new rule and potential cost and timing effects.
• TVA estimated $800 of additional clean-air-control costs from 2015 to 2025, excluding potential greenhouse-gas requirements, and $300 for planned Clean Water Act compliance projects. Further environmental requirements could raise costs or make some coal units uneconomic.
• Boone Dam repairs were in planning; construction of a seepage barrier was expected to begin by early 2016. Comparable projects were cited at $200–$300 and five to seven years, but TVA’s final cost and schedule were not yet established.
• TVA had accrued $145 for probable legal-proceeding losses and could not estimate reasonably possible additional losses. The Gallatin coal-ash facility cases, pension-system litigation, and environmental and nuclear-related proceedings remained among the disclosed matters. TVA stated it had no off-balance-sheet arrangements.
• Other risks include the $30 billion statutory borrowing limit, interest-rate and derivative collateral exposure, fuel and purchased-power prices, weather and demand variability, generation reliability, dam and nuclear safety, and cyber or physical security. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.

Investor facts to verify

• Whether TVA sustains operating-cost reductions and earnings improvement after the reporting period, distinguishing recurring savings from pension accounting and accelerated depreciation effects.
• Progress and final cost of Watts Bar Unit 2, Paradise and Allen projects, Boone Dam remediation, and coal-ash compliance work.
• Short-term debt needs, remaining capacity under the statutory debt ceiling, and liquidity after letters of credit and other collateral requirements.
• Changes in environmental rules, ARO estimates, legal exposures, and any resulting impact on customer rates or cash requirements.