Tennessee Valley Authority — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. The filing also reports fourth-quarter results for the three months ended that date. TVA is a U.S. government corporate agency and the nation’s largest public power system; it serves more than nine million people, primarily through 154 local power companies. Electricity sales account for virtually all operating revenue. TVA has no equity securities and relies on operating cash and debt financing.
Financial performance and position
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Operating revenues | $10.616 billion | $11.003 billion | Down $387 million (3.5%) |
| Operating income | $2.326 billion | $2.215 billion | Up $111 million |
| Net income | $1.233 billion | $1.111 billion | Up $122 million (11.0%) |
| Operating margin | 21.9% | 20.1% | Up 1.8 percentage points |
| Net margin | 11.6% | 10.1% | Up 1.5 percentage points |
| Net cash from operations | $3.042 billion | $3.315 billion | Down $273 million |
| Construction expenditures | $2.710 billion | $2.850 billion | Down $140 million |
| Total assets | $50.494 billion | $48.745 billion | Up $1.749 billion |
| Total debt, as reported in selected data | $25.172 billion | $24.949 billion | Up $223 million |
FY2016 cash used in investing activities was $3.113 billion; financing activities provided $71 million. Cash and cash equivalents were $300 million at year-end, unchanged from FY2015. Current liabilities were $5.862 billion, including $1.407 billion of short-term debt and $1.555 billion of current power-bond maturities. TVA had $2.5 billion in revolving credit facilities, with $1.1 billion available after $1.4 billion of letters of credit. The filing states TVA met its rate and bondholder-protection tests.
TVA reported $24.1 billion of Bonds outstanding against its statutory $30 billion debt limit, leaving approximately $5.9 billion of capacity on that measure. Bonds are not guaranteed by the U.S. government. FY2016 interest expense, net of construction-related allowance for funds used during construction, was $1.136 billion.
Fourth quarter: Operating revenues were $3.286 billion, operating income $943 million, and net income $661 million. Compared with FY2015 fourth-quarter results, revenue increased 3.6%, operating income 22.6%, and net income 31.7% (from $3.171 billion, $769 million, and $502 million, respectively).
Material changes and operating developments
- Electricity sales fell 1.5% to 155.855 billion kWh. Revenue from electricity sales declined $386 million, mainly from $319 million less fuel-cost recovery and $56 million less base revenue. Lower fuel rates reflected favorable natural-gas prices and a changed generation mix; lower sales volume also reduced base revenue.
- Net income nevertheless rose as total operating expenses fell $498 million. Fuel expense declined $318 million and depreciation and amortization declined $195 million, while operating and maintenance expense was essentially flat. Purchased-power expense increased $14 million.
- Generation shifted away from coal: coal supplied 29% of total power supply versus 34% in FY2015; natural gas and/or oil supplied 16% versus 11%. Nuclear supplied 33%, and purchased renewable power 5%.
- TVA retired all Colbert coal units in April 2016. Watts Bar Unit 2 began commercial operation on October 19, 2016, after the fiscal year-end; project cost was within the Board-approved $4.7 billion limit. Two roughly 1,000-MW gas plants were under construction at Paradise and Allen.
- In August 2016, the Board approved a base-rate adjustment effective October 1, 2016, intended to add about $200 million to FY2017 revenue, approximately a 2.4% wholesale rate adjustment.
Outlook, risks, contingencies, and unusual items
- Outlook: Management expects minimal sales growth and identifies productivity, expense control, competitive rates, and coordination with local power companies as priorities. TVA said the Watts Bar addition and projects under construction mean it does not foresee needing another large baseload unit for at least a decade. Planned construction expenditures were $2.566 billion for FY2017, $1.889 billion for FY2018, and $1.592 billion for FY2019.
- Environmental and capital obligations: Estimated environmental expenditures include $1.2 billion for coal-combustion-residual conversion during 2017–2022, $375 million for proposed clean-air controls during 2017–2021, and $400 million for Clean Water Act requirements during 2017–2023. Estimates may change. CCR-related groundwater investigations and remediation could add costs. Compliance at Cumberland may be disproportionately costly; TVA could not yet predict the outcome.
- Dam and nuclear matters: TVA estimated Pickwick Dam south-embankment remediation at about $100 million. Boone Dam remediation was expected to take five to seven years based on comparable projects costing $200–$300 million, but TVA had not finalized its own cost or schedule. Nuclear risks include possible additional flood or seismic work, refueling inspections, regulation, outages, and decommissioning costs.
- Pension and retirement exposure: The qualified pension plan had $7.145 billion in assets and a $13.083 billion projected benefit obligation at September 30, 2016, a $5.938 billion funded shortfall. Amendments effective October 1, 2016 require annual TVA contributions of at least $300 million for up to 20 years, subject to the plan reaching and maintaining full funding sooner.
- Accounting and contingencies: TVA carried $10.7 billion of regulatory assets, which depend on expected recovery through future rates, and $157 million of regulatory liabilities. Asset-retirement obligations totaled $4.052 billion, including $2.492 billion for nuclear decommissioning. TVA accrued $61 million for legal proceedings; it could not estimate reasonably possible additional losses. It also reported $23 million of estimated cleanup liabilities for sites with sufficient information to estimate costs.
- Other risks: Results remain exposed to weather, fuel and purchased-power prices, supply interruptions, asset reliability, environmental rules, customer demand and distributed generation, market and counterparty risks, cyber or physical attacks, and access to debt markets. TVA’s Bonds are not obligations of the United States. The filing reports no off-balance-sheet arrangements.
- Audits and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective at year-end.
Investor verification priorities
- Reconcile the reported $25.172 billion total debt measure with the $24.1 billion of Bonds counted against the statutory debt ceiling, and review upcoming maturities and refinancing needs.
- Assess whether the planned rate increase, cost control, and low sales-growth assumptions support continued earnings and cash generation.
- Track actual costs, schedules, and funding for CCR conversion, clean-air and water projects, Boone and Pickwick remediation, and the Paradise and Allen gas plants.
- Review pension funding progress and sensitivities to discount rates, investment returns, and other actuarial assumptions.
- Follow the Gallatin CCR litigation, environmental requirements, nuclear oversight matters, and any change in legal reserves or unestimable exposures.
- Confirm Watts Bar Unit 2’s post-year-end commercial operation and performance, and monitor reliability and generation-mix changes.