Tennessee Valley Authority — Form 10-Q Summary
Business context and reporting period
TVA is a federally created, self-supporting public power system serving more than nine million people, alongside managing the Tennessee River system. This unaudited filing covers the fiscal second quarter and six months ended March 31, 2014; TVA’s fiscal year ends September 30. Amounts are in U.S. dollars, millions unless stated otherwise.
Financial results and position
| Metric | Three months ended March 31, 2014 | Prior year | Six months ended March 31, 2014 | Prior year |
|---|---|---|---|---|
| Operating revenue | $2,938 | $2,741 | $5,320 | $5,320 |
| Operating income | $576 | $361 | $794 | $417 |
| Net income (loss) | $295 | $54 | $228 | ($191) |
| Net cash from operating activities | Not separately presented for the quarter | $1,426 | $1,148 |
- Quarterly operating margin was approximately 19.6%, versus 13.2%; six-month operating margin was 14.9%, versus 7.8%. Net margins were approximately 10.0% versus 2.0% for the quarter, and 4.3% versus (3.6%) for six months.
- Six-month operating expenses fell 7.7% to $4,526, mainly due to lower fuel and operations and maintenance costs. Net interest expense declined 6.5% to $593.
- Six-month investing cash use was $1,374, principally construction and nuclear fuel expenditures. Financing used $1,148, reflecting debt redemptions; cash declined $1,096 to $506.
- At March 31, cash and cash equivalents were $506; current assets were $3,717 and current liabilities $4,123. Short-term debt was $1,691. Total debt outstanding was $25,063, down from $26,120 at September 30, 2013. Total assets were $45,023 and total proprietary capital $5,861.
- TVA had $1.7 billion available under $2.5 billion of revolving facilities, with $800 million of letters of credit and no cash borrowings. A separate $150 million U.S. Treasury facility had no borrowings. Statutory bond capacity is capped at $30 billion.
Material changes versus prior comparable periods
- Electricity sales volume declined 0.9% for the quarter and 2.1% for six months. Local power company sales rose, supported by colder weather, but sales to directly served industries fell sharply, primarily as USEC ceased operations.
- Quarterly electricity sales revenue increased 7.1%; six-month sales revenue was essentially flat. Six-month base revenue growth and lower fuel cost recovery largely offset each other.
- Operating and maintenance expense fell $83 for the quarter and $195 for six months, reflecting outage timing, cost savings, and lower pension-related costs. Depreciation and amortization rose, partly from accelerated depreciation on coal units scheduled to idle.
- Operating cash flow improved by $278 year over year, including $161 of Kingston-related insurance recoveries. TVA used cash on hand to reduce short- and long-term debt.
Outlook, management commentary, risks and unusual items
- TVA’s cost-reduction goal is to lower operating and maintenance costs by $500 by 2015 compared with its 2013 budget; $25 of estimated severance costs had been accrued at March 31.
- Watts Bar Unit 2 was expected to enter commercial operation by December 2015, with estimated completion cost of $4.0–$4.5 billion. The NRC licensing process and project completion/testing remain important dependencies. Bellefonte Unit 1’s estimated completion cost rose to $7.5–$8.7 billion; work was slowed to preserve the option for future development.
- TVA estimated $1.2 billion of potential Clean Air Act compliance costs for 2014–2022, $1.4 billion for coal-combustion-residual conversion and remediation, and $400 million for Clean Water Act requirements. Estimates may change with regulations and project requirements.
- Kingston ash-spill cleanup costs were estimated at $1.1–$1.2 billion; $1.0 billion had been spent and $118 remained accrued at March 31. Physical cleanup was expected to finish in spring 2015. Other claims, penalties, natural-resource damages, and future costs may not be included in the estimate.
- Probable losses for legal proceedings were accrued at $272, with an estimated range of $272–$284. TVA could not estimate reasonably possible additional losses. Active Kingston-related litigation and environmental and nuclear regulatory proceedings remain relevant.
- TVA reported $9,298 of regulatory assets, whose recovery depends on continued cost recovery through rates. Management stated that existing regulatory assets were considered probable of recovery, subject to changes in regulatory and political conditions.
- Derivative liabilities were $1.410 billion net of reported offsets; TVA had posted approximately $800 million of letters of credit as collateral. Adverse rating changes could increase collateral requirements.
- Management said liquidity sources should be adequate for the foreseeable future, while disclosing the bond ceiling, reliance on financing alternatives, and potential uncertainty surrounding U.S. government debt-limit conditions. The filing provides no specific earnings or rate guidance.
- Additional risks include pension funding, fuel and purchased-power price volatility, weather and demand, generation reliability, environmental compliance, dam safety, nuclear licensing, and outcomes of litigation. TVA reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether improved earnings and operating cash flow persist after weather effects, fuel-cost recovery timing, insurance recoveries, and outage timing.
- USEC-related demand changes and their effect on electricity sales, alongside the sustainability of local power company growth.
- Debt reduction progress, remaining borrowing capacity under the statutory bond ceiling, liquidity availability, and collateral needs.
- Actual cost and schedule performance for Watts Bar Unit 2, and whether TVA changes its plans for Bellefonte Unit 1.
- Updates to environmental capital spending, Kingston cleanup and litigation exposure, and the collectability of regulatory assets through future rates.