Tennessee Valley Authority — Form 10-Q Summary
Business context and reporting period. TVA is a federally created public power agency serving more than nine million people in the southeastern United States. This unaudited report covers the quarter and six months ended March 31, 2017, in TVA’s fiscal year ending September 30. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and condition
| Metric | Three months ended March 31, 2017 | Three months ended March 31, 2016 | Six months ended March 31, 2017 | Six months ended March 31, 2016 |
|---|---|---|---|---|
| Operating revenue | $2,547 | $2,571 | $5,093 | $4,851 |
| Operating income | $534 | $589 | $963 | $817 |
| Operating margin | 21.0% | 22.9% | 18.9% | 16.8% |
| Net income | $211 | $318 | $313 | $281 |
| Net interest expense | $338 | $279 | $677 | $556 |
- Quarterly electricity sales revenue fell $21 million; total operating revenue declined 0.9%. For the six-month period, electricity sales revenue increased $241 million and total operating revenue rose 5.0%.
- Quarterly net income declined 33.6%; six-month net income increased 11.4%. The six-month result benefited from higher revenue and lower depreciation, while quarterly earnings were pressured by lower sales and higher expenses.
- Operating cash flow for the six months was $1,516, up from $1,330 a year earlier. Investing cash use was $1,302, including $1,119 of construction expenditures and $195 of nuclear fuel expenditures. Financing cash use was $214; cash remained $300.
- At March 31, total debt outstanding was $24,987, versus $25,172 at September 30, 2016. Total liabilities were $41,031 and total proprietary capital was $8,773. Current assets of $3,279 were below current liabilities of $5,169; TVA also had $815 of short-term debt.
- Liquidity included $1,546 of availability under revolving facilities totaling $2,650, plus a $150 U.S. Treasury credit facility with no borrowings outstanding. TVA’s statutory debt limit is $30 billion; reported Bonds outstanding were $24.1 billion, excluding specified accounting adjustments.
Changes, outlook, and material matters
- Drivers versus prior year: TVA reported unusually warm winter weather; heating degree days were 25% lower for the quarter and 8% lower for the six months. Electricity sales fell about 7% and 1%, respectively. The October 2016 base-rate adjustment supported revenue, while higher natural-gas prices and significantly lower hydroelectric generation raised fuel costs.
- Interest expense itself was broadly stable, but net interest expense rose because TVA stopped capitalizing allowance for funds used during construction after Watts Bar Unit 2 entered service. A new depreciation study lowered depreciation expense by an estimated $112 million for the six months.
- Management expects minimal, if any, sales growth and does not foresee a need for additional large baseload generation for the next decade. It said operating funds should be sufficient for planned capital needs, with potential to avoid additional borrowing or reduce debt.
- Watts Bar Unit 2 began commercial operation in October 2016 but shut down on March 23, 2017, following a non-nuclear turbine-support equipment issue; management expected return to service in summer 2017. The Paradise gas combined-cycle facility began commercial operation April 7, 2017, and coal-fired Paradise Units 1 and 2 were retired April 15.
- Environmental spending estimates include $1.1 billion for coal-combustion-residuals conversion through 2022, $300 million for clean-air compliance through 2023, and $500 million for Clean Water Act requirements through 2024. These estimates may change.
- TVA had accrued $40 million for legal proceedings. Gallatin coal-ash lawsuits could result in material relocation costs or penalties; a federal court decision was pending. Westinghouse filed for Chapter 11 on March 29, and TVA was assessing potential effects on nuclear fuel, equipment, and maintenance contracts. The filing says resulting operational and financial effects were uncertain.
- Other risks include environmental regulation and litigation, dam safety and remediation costs, nuclear operations and regulatory requirements, fuel and power-price volatility, weather and drought, supplier performance, and the statutory borrowing limit. TVA reported no material change in risk factors from its 2016 Form 10-K.
Key facts for investors to verify
- Whether sales and earnings recover from the unusually warm winter, and how the base-rate adjustment and fuel-cost recovery affect margins.
- Watts Bar Unit 2’s return-to-service timing and any resulting generation, outage, or repair costs.
- Progress, final cost, and schedule for CCR conversion, clean-water compliance, dam remediation, and related Gallatin litigation.
- Whether Westinghouse and Toshiba continue performing under TVA contracts, and any effects on nuclear fuel supply, plant maintenance, or outage schedules.
- Debt issuance and repayment plans, unused revolver capacity, and remaining capacity under TVA’s statutory debt limit.
- Whether regulatory and environmental changes alter the timing or amount of projected compliance expenditures.