Tennessee Valley Authority quarterly report, Q3 FY2016

Tennessee Valley Authority — Form 10-Q Summary

Reporting period: Third quarter and nine months ended June 30, 2016 (TVA fiscal year ends September 30). Financial amounts are in millions of dollars unless otherwise stated. TVA is a federally created public power agency serving more than nine million people; its power program is principally funded by power revenues and debt.

Financial performance and position

Metric	Three months ended June 30, 2016	Prior year	Nine months ended June 30, 2016	Prior year
Operating revenue	$2,479	$2,558	$7,330	$7,832
Operating income	$566	$306	$1,383	$1,446
Net income	$291	$32	$572	$609
Operating expenses	$1,913	$2,252	$5,947	$6,386
Net interest expense	$284	$282	$840	$862

Revenue and earnings: Third-quarter revenue declined 3.1%, while net income rose to $291 from $32, largely as lower fuel, purchased-power, depreciation and maintenance expenses lifted operating income. Nine-month revenue fell 6.4% and net income declined 6.1%.
Margins: Operating margin was approximately 22.8% for the quarter (12.0% prior year) and 18.9% for nine months (18.5% prior year). Nine-month net margin was approximately 7.8%, little changed year over year.
Cash flow and investment: Nine-month cash from operations was $1,878 versus $2,016. Construction expenditures were $2,072 versus $2,064; net investing cash outflow was $2,253 versus $2,690. Financing provided $376, and cash increased by $1 to $301.
Balance sheet and liquidity: Total assets were $49,980 and total liabilities $42,244 at June 30. Current assets of $3,535 were below current liabilities of $4,776. Debt outstanding was $25,308, versus $24,949 at September 30, 2015; short-term debt was $1,542. Cash was $301. TVA reported $1.3 billion available under $2.5 billion of revolving facilities after letters of credit, and no borrowings under its separate $150 million Treasury facility.
Debt capacity: The statutory limit on TVA bonds is $30 billion; bonds outstanding were $24.4 billion at June 30, excluding specified accounting adjustments. TVA said it believed it could fund operations and planned investment over the next decade through a combination of debt, power revenues, cost reductions and other means.

Changes versus prior comparable periods

Electricity sales rose slightly for the quarter but fell approximately 5.2 billion kWh, or 5.2%, for nine months. Mild winter weather drove lower heating demand; lower excess generation also reduced off-system sales.
Nine-month revenue decreased $502, primarily from $406 lower fuel-cost recovery and $99 lower base revenue. Favorable natural-gas prices and generation mix reduced fuel costs; lower sales volume and milder weather weighed on base revenue.
Operating expenses fell 15.1% for the quarter and 6.9% for nine months, mainly due to lower fuel and purchased-power costs. Nine-month operating income nevertheless decreased 4.4%.
Cash from operations declined $138, primarily reflecting lower revenue collections, fuel-recovery timing, higher decommissioning settlements and lower Kingston ash-spill insurance receipts.

Outlook, projects and material risks

Demand and generation planning: TVA expects little or no electricity-sales growth in coming years amid efficiency gains and growth in distributed generation. Its 2015 Integrated Resource Plan indicated that additional large baseload generation may not be needed for about two decades. TVA planned an auction of the surplus Bellefonte site, expected in October 2016.
Major projects: Watts Bar Unit 2 achieved initial criticality in May 2016 and was forecast to enter commercial service in summer 2016, within its $4.7 billion approved cost limit. The approximately $1.1 billion Paradise gas plant was about 75% complete and expected online in spring 2017; the approximately $1.0 billion Allen gas plant was expected in June 2018. Gallatin clean-air controls were estimated at $1.1 billion, with completion expected in December 2017.
Environmental spending: TVA estimated $1.3 billion of additional coal-combustion-residual conversion spending through 2022; it had spent about $890 million by June 30. Estimated future expenditures also included $420 million for proposed clean-air projects through 2025 and $440 million for Clean Water Act requirements through 2023. These estimates may change with regulation and project development.
Dam and nuclear safety: Boone Dam remediation was under construction, but final cost and duration were not yet determined; comparable work was cited at $200–$300 million and five to seven years. Flood and seismic analyses, potential NRC requirements, and recommended inspections of Sequoyah reactor baffle-former bolts could require further work; costs for possible future modifications were not clear.
Retirement obligations: Asset-retirement obligations totaled $4,007, including a $198 increase in nuclear decommissioning estimates following Watts Bar Unit 2’s initial criticality. TVA’s qualified pension plan had $6.8 billion in assets against $12.8 billion in liabilities at September 30, 2015; TVA expected to contribute a further $137 million in fiscal 2016.
Legal and environmental contingencies: TVA accrued $77 million for probable legal losses and said it could not estimate reasonably possible additional losses. Gallatin coal-ash litigation seeks injunctive relief and penalties; TVA also faces environmental compliance and cleanup uncertainty. The Kingston ash-spill TDEC orders were closed, while the EPA order remained open.
Other exposures: Derivative liabilities included $1.912 billion for interest-rate swaps; TVA had posted about $1.2 billion in letters of credit against derivative collateral obligations of approximately $1.4 billion. Commodity, interest-rate, currency, counterparty, weather, fuel-supply, and environmental-regulatory risks remain relevant.
The Clean Power Plan was stayed pending court review. TVA reported no material change in the risk factors disclosed in its prior annual report and no off-balance-sheet arrangements at June 30, 2016. Management stated disclosure controls were effective.

Key facts for investors to verify

Whether Watts Bar Unit 2 entered sustained commercial operation as forecast, and whether final project costs remained within the $4.7 billion limit.
How electricity demand, fuel-cost recovery, weather and generation mix affect future revenue and margins.
Whether TVA’s debt and short-term funding needs remain manageable relative to the $30 billion bond limit and available credit facilities.
Updated cost, schedule and regulatory requirements for CCR conversion, clean-water and clean-air projects, and Boone Dam remediation.
Developments in Gallatin CCR litigation, the open Kingston EPA order, other legal proceedings, and the potential for losses beyond the $77 million accrual.
Progress on pension funding, nuclear decommissioning estimates, and derivative collateral requirements.