Tennessee Valley Authority — Form 10-Q Summary
Reporting period: Fiscal 2013 third quarter ended June 30, 2013; comparisons include the three and nine months ended June 30, 2012. Amounts are in millions unless otherwise stated. TVA is a federally created public power agency serving more than nine million people; its power program is intended to be self-supporting.
Financial performance and position
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Nine months ended June 30, 2013 | Nine months ended June 30, 2012 |
|---|---|---|---|---|
| Operating revenue | $2,602 | $2,777 | $7,922 | $7,949 |
| Operating income | $278 | $278 | $694 | $661 |
| Operating margin | 10.7% | 10.0% | 8.8% | 8.3% |
| Net income (loss) | $(12) | $(23) | $(203) | $(290) |
| Net margin | (0.5)% | (0.8)% | (2.6)% | (3.6)% |
| Net interest expense | $300 | $322 | $933 | $967 |
Margins are calculated from reported revenue and income. TVA reported operating cash flow of $1,478 for the nine months, versus $1,252 a year earlier; investing cash outflow was $1,745 versus $1,867, and financing cash inflow was $379 versus $355. Cash and cash equivalents rose to $980 from $868 at September 30, 2012. Construction expenditures were $1,510 and nuclear fuel expenditures $238.
At June 30, 2013, total assets were $46,480 and total liabilities $41,326. Total debt was $25,569, up from $25,078 at September 30, 2012; short-term debt was $2,395. Current assets of $4,267 were below current liabilities of $6,136. TVA had $1.5 billion available on revolving credit facilities after $1.0 billion of letters of credit; no cash borrowings were outstanding under those facilities. The $150 million U.S. Treasury credit facility was also undrawn.
Material changes versus the prior period
- Third-quarter electricity sales fell 5.2% to 38,953 million kWh, primarily reflecting less unusually warm weather than in 2012 and reduced industrial demand. Nine-month sales were nearly flat, up 0.1%.
- Quarterly revenue declined 6.3%, while nine-month revenue declined 0.3%. Nine-month base revenue fell $172, partly offset by $127 higher fuel-cost recovery and $18 higher other revenue, including off-system sales.
- Quarterly fuel and purchased-power costs fell, aided by increased hydroelectric generation and lower purchased volumes. For the nine months, fuel expense rose $271, driven principally by greater coal generation and reduced nuclear generation during additional refueling outages, including Sequoyah steam-generator work. Purchased-power expense fell $129.
- Nine-month operating income improved 5.0%, and the net loss narrowed to $203 from $290. Depreciation and amortization fell $191, primarily because the prior-year period included more accelerated depreciation on coal units being idled.
- TVA’s statutory bond limit is $30 billion; it reported $24.7 billion of bonds outstanding for purposes of that limit at June 30. Management cautioned that the limit could constrain financing of planned investment.
Outlook, management commentary, risks and contingencies
- TVA said rates are designed to provide more revenue in the fourth quarter. It continues cost-reduction efforts and expects capital needs to be funded through a combination of borrowing, leases, energy prepayments, rate increases, cost reductions and other financing. No specific earnings or revenue guidance was provided.
- Management cited lower recent electricity sales and lower expected demand growth, alongside fuel-price volatility, environmental compliance costs, generation reliability and substantial capital requirements. Planned environmental expenditures were estimated at $1.4 billion for coal-combustion-residual work, $2.2 billion for proposed clean-air projects and $1.2 billion for Clean Water Act requirements; estimates may change.
- Watts Bar Unit 2 completion was estimated at $4.0–$4.5 billion, with commercial operation planned by December 2015; the construction schedule estimated completion between September 2015 and June 2016. TVA said Bellefonte Unit 1’s eventual completion estimate would exceed its current approved amount, but a validated estimate was not yet available.
- TVA committed to a $1.1 billion Gallatin emissions-control project and estimated $1.5–$2.0 billion to convert wet coal-ash facilities to dry collection. Colbert Unit 5 was moved to an October 1, 2013 idling date, expected to add about $14 million of fourth-quarter depreciation.
- Kingston ash-spill cleanup was estimated at $1.1–$1.2 billion; $938 had been spent and the remaining recorded liability was $187 at June 30. The estimate excludes some uncertain or not-yet-estimable costs, including certain potential claims and damages. TVA had accrued $319 for legal proceedings, with estimated probable losses of $319–$349; additional losses could materially affect results, liquidity or financial condition.
- TVA faces nuclear safety and flood-risk issues, supplemental NRC inspections and potential additional regulatory requirements. Compliance with Fukushima-related orders was estimated to exceed $200 million; other potential requirements and dam or plant modifications could have significant, presently uncertain costs.
- USEC, TVA’s largest directly served industrial customer and a uranium-enrichment supplier, announced it was ceasing enrichment at its Paducah site. Power sales were extended at greatly reduced levels for June and July 2013, and may be extended. TVA cited near-term nuclear-fuel inventory and alternative procurement as mitigants.
- The Administration’s FY2014 budget called for a strategic review of options concerning TVA, including possible divestiture. TVA stated it does not receive taxpayer dollars and its debt is not taxpayer funded. Management reported disclosure controls were effective, with no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether lower industrial demand, including reduced USEC activity, continues to affect electricity sales and revenue.
- Progress, cost and schedule for Watts Bar Unit 2, Bellefonte Unit 1 and major environmental and dam-safety projects.
- TVA’s financing plan as debt approaches the $30 billion statutory limit, including liquidity needs and availability of alternative financing.
- Changes to the Kingston cleanup estimate, outstanding litigation and other legal or environmental liabilities not currently estimable.
- Whether NRC actions, environmental rules, fuel prices, weather and generation outages create additional costs or operating constraints.