Tennessee Valley Authority quarterly report, Q1 FY2019

Tennessee Valley Authority — Form 10-Q Summary

Business context and reporting period

TVA, a federally created public power agency, supplies electricity across seven southeastern states and also manages the Tennessee River system. This unaudited report covers its fiscal first quarter, the three months ended December 31, 2018; comparisons are with the three months ended December 31, 2017. Balance-sheet comparisons are with September 30, 2018.

Financial performance and position

Metric	Q1 FY2019	Q1 FY2018	Change
Operating revenue	$2.725 billion	$2.549 billion	+6.9%
Operating expenses	$1.960 billion	$1.888 billion	+3.8%
Operating income	$765 million	$661 million	+15.7%
Net income	$423 million	$288 million	+46.9%
Net cash from operations	$502 million	$626 million	Down $124 million
Capital and nuclear-fuel expenditures	$597 million	$622 million	Down $25 million

• Electricity sales revenue was $2.681 billion, up $172 million. Total operating revenue also included $44 million of other revenue. Colder-than-normal weather and a base-rate adjustment effective October 1, 2018, supported revenue growth. Electricity sales volume rose approximately 2%.
• Operating margin was approximately 28.1%, compared with 25.9% in the prior-year quarter; net margin was approximately 15.5%, compared with 11.3%.
• Fuel expense fell $34 million, but purchased-power expense rose $77 million and operating and maintenance expense increased $99 million. The latter included $54 million of accelerated Kingston cleanup-cost recovery and $50 million of additional planned nuclear outage expense. Depreciation and amortization fell $78 million, partly reflecting prior-year regulatory-asset amortization and plant retirements.
• Interest expense declined $20 million to $302 million, mainly because of lower average long-term debt balances and rates. Other income included a $21 million Bellefonte sale-deposit item, partly offset by $7 million of unrealized losses on SERP and deferred-compensation investments.
• At December 31, total assets were $48.747 billion, total liabilities $38.077 billion, and proprietary capital $10.670 billion. Total debt was $23.740 billion, including $2.333 billion of short-term debt. Short-term debt increased from $1.216 billion at September 30; current power-bond maturities fell from $1.032 billion to $32 million after redemptions.
• Current assets were $3.346 billion versus current liabilities of $4.525 billion. Cash and cash equivalents were $301 million; cash, cash equivalents, and restricted cash totaled $324 million. Operating cash flow remained positive but declined year over year, primarily due to payment timing and higher operating costs.
• TVA had $1.796 billion available under $2.650 billion of revolving facilities after $854 million of letters of credit; there were no cash borrowings under those facilities. TVA also had an unused $150 million U.S. Treasury credit facility. The statutory debt limit is $30 billion; power bonds outstanding, excluding specified accounting adjustments, were $22.8 billion.

Material changes versus the prior period

• Net income rose $135 million, reflecting higher revenue, lower depreciation and interest expense, and the Bellefonte deposit income. Revenue growth was partly offset by higher purchased power and maintenance costs.
• Power supply shifted: TVA-operated generation represented 82% of supply versus 87% a year earlier; nonrenewable purchased power rose to 13% from 8%. Nuclear generation declined 15% and coal generation declined 14%, while hydro generation increased 42%.
• TVA adopted new accounting standards for revenue recognition and defined-benefit costs. Revenue adoption had no material impact; the benefit-cost presentation shifted non-service costs from operating expenses to non-operating expenses and was applied retrospectively.
• TVA implemented a wholesale rate-structure change, including a grid access charge for participating local power companies. Seventy-nine local power companies implemented it in October 2018; 75 are scheduled to do so in October 2019.

Outlook, management commentary, risks and unusual items

• TVA said its August 2018 base-rate adjustment is expected to contribute approximately $200 million to FY2019 revenue. This is an expectation, not comprehensive earnings guidance. Management cited 99.999% delivery reliability and more than $4.3 billion in investment and 25,000 jobs created or retained during the quarter.
• Management expects to fund operating needs and planned capital investment through a combination of debt, power revenues, cost reductions, or other financing. TVA said it does not foresee needing additional large baseload generation units for at least the next decade, following completion of Allen Combined Cycle and certain clean-air projects.
• Gallatin coal-combustion-residual litigation creates significant cost uncertainty. TVA estimates approximately $900 million for onsite relocation and closure; offsite relocation could cost up to $2.0 billion plus inflation-related costs. A separate Tennessee case could result in additional orders or penalties that TVA cannot currently estimate. The Sixth Circuit reversed an earlier federal-court relocation order; plaintiffs could seek Supreme Court review. The Tennessee case was expected to go to trial in October 2019.
• TVA estimated $1.1 billion of remaining CCR conversion-program spending through 2023, excluding new Gallatin lawsuit requirements; $160 million for clean-air projects from 2019–2023; and $442 million for Clean Water Act projects from 2019–2024. Estimates may change as requirements and project conditions evolve.
• Other environmental and operational exposures include groundwater investigations, changing emissions and water rules, nuclear safety and licensing requirements, dam remediation, severe weather, fuel-supply and purchased-power risks, and cyber or physical threats. TVA estimated $31 million of environmental cleanup liabilities for identified sites and had accrued $17 million for legal proceedings generally.
• TVA approved changing the preferred closure method for the Allen West impoundment to removal; it expects to increase non-nuclear asset-retirement obligations by about $31 million in Q2 FY2019. A separate Kingston cleanup workers’ case against TVA’s contractor could create contractual reimbursement exposure for TVA.
• The Bellefonte purchaser failed to complete the plant sale by the November 30, 2018 deadline. TVA recognized the $21 million deposit as income and faces a lawsuit seeking completion of the sale or damages exceeding $30 million.
• TVA’s CEO informed the Board of his intention to retire during the first half of calendar 2019. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether colder weather and the October 2018 rate changes explain the quarter’s revenue and earnings improvement, and how results develop under more typical weather.
• Progress on short-term borrowing, available revolving-credit capacity, and remaining headroom under TVA’s $30 billion statutory debt limit.
• Updated Gallatin litigation status, selected cleanup approach, cost estimates, and potential penalties or additional orders.
• Whether forecast environmental spending, nuclear and dam projects, and the Allen West closure decision affect future costs, capital needs, or power rates.
• Outcome of the Bellefonte sale litigation and any contractual exposure related to the Kingston workers’ case.