Tennessee Valley Authority — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011; filed August 11, 2011. Amounts are in millions unless noted. TVA operates a large public power system and its power program is intended to be self-supporting through power revenues and financings.
Financial results and position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Nine months ended June 30, 2011 | Nine months ended June 30, 2010 |
|---|---|---|---|---|
| Operating revenues | $2,657 | $2,587 | $8,453 | $7,558 |
| Operating expenses | $2,575 | $2,073 | $7,534 | $5,826 |
| Operating income | $82 | $514 | $919 | $1,732 |
| Net income (loss) | $(240) | $199 | $(35) | $779 |
| Electricity sales | 38,855 million kWh | 40,751 million kWh | 122,884 million kWh | 126,772 million kWh |
Operating margin, calculated as operating income divided by revenue, was approximately 3.1% for the quarter versus 19.9% a year earlier, and 10.9% for the nine months versus 22.9%. Revenue growth was chiefly attributable to fuel-rate recovery; it did not offset substantially higher expenses.
For the nine months, operating cash flow was $1,703, investing cash flow $(1,880), and financing cash flow $391; cash increased $214 to $542. Construction expenditures were $1,678. At June 30, total assets were $43,620, total liabilities $38,508, and proprietary capital $5,112. Current assets were $4,126 and current liabilities $4,066.
Debt outstanding, including current maturities, was $23,961; TVA separately reported $24.2 billion of Bonds against its statutory $30 billion borrowing limit. Long-term debt fair value was $26,208 versus a carrying amount of $23,961. TVA had no borrowings outstanding under its $2.5 billion revolving facilities, with $224 million of letters of credit outstanding; the separate $150 million U.S. Treasury facility also had no borrowings outstanding.
Changes and principal drivers
- Electricity sales fell 4.7% in the quarter and 3.1% for the nine months. Lower distributor demand was primarily weather-related; sales to TVA’s largest directly served industrial customer declined as it curtailed operations.
- Quarterly operating expenses rose $502 million year over year; nine-month expenses rose $1.7 billion. Higher fuel and purchased-power costs, nuclear outages and maintenance, employee benefit expense, tax equivalents, storm-related costs, and EPA agreement charges were cited.
- Severe April storms damaged transmission infrastructure and interrupted generation. TVA estimated $39 million for structural repairs and $95 million for replacement power; Browns Ferry returned to full availability by early June and transmission repairs were completed by mid-July.
- The April 2011 wholesale rate restructuring introduced seasonal and time-of-use pricing. Management expected it to align revenue more closely with costs without materially changing annual revenue recovery, although timing and individual customer bills may vary.
- Operating cash flow increased $493 million year over year for the nine-month period, primarily from fuel-cost recovery timing and lower Kingston cleanup cash spending. Investing outflow increased $107 million, principally due to construction spending.
Outlook, risks, and unusual items
- Environmental settlement and generation: Agreements generally limit certain Clean Air Act New Source Review claims through 2019, but retain exceptions. TVA recorded $350 million of settlement liabilities for environmental projects and payments, deferred as regulatory assets for future rate recovery; a $10 million civil penalty was expensed and paid in July. Agreements require staged retirement of coal units and decisions on additional units. TVA estimated $3.7 billion of planned clean-air projects over the next decade and $1.5–$2.0 billion for coal-combustion-product conversion and remediation over ten years.
- Kingston ash spill: The estimated cleanup cost was $1.1–$1.2 billion; TVA recorded $1.1 billion. Through June 30, $714 million had been spent and the remaining estimated liability was $411 million. Physical cleanup was expected to finish in late 2014, with final assessment and approval expected by the second quarter of 2015. Excluded items—including certain penalties, damages, lawsuits, and future claims—could add costs; the estimate remains uncertain.
- Nuclear projects and safety: TVA expected Watts Bar Unit 2 completion to extend into calendar 2013 rather than late 2012; its current cost estimate was approximately $2.5 billion, with potential overruns not yet quantified. Fukushima-related reviews and NRC actions could affect operating costs, licensing, and construction schedules. A disputed Browns Ferry Unit 1 safety finding could result in increased oversight; TVA appealed.
- Capacity plans: TVA expected coal retirements and more stringent environmental rules to require replacement capacity and potentially significant capital spending. A proposed acquisition of the 900 MW Magnolia gas plant was subject to TVA Board and FERC approval. TVA was also evaluating whether to complete Bellefonte Unit 1.
- Funding and ratings: Management said liquidity sources were expected to be adequate for the foreseeable future but warned the $30 billion debt limit could constrain capital financing. After quarter-end, one agency lowered TVA’s rating to AA+ from AAA with a negative outlook, citing its government-related entities criteria. TVA said the action could increase borrowing costs and required $100 million of additional collateral.
- Benefits and investments: TVA’s pension plan remained underfunded; it had $7.1 billion of assets at June 30 versus $10.4 billion of liabilities at September 30, 2010. From June 30 to August 9, market declines reduced retirement-system, nuclear decommissioning trust, and asset retirement trust values by 7%, 8%, and 8%, respectively.
- Other material exposures include approximately $385 million accrued for legal proceedings, concentrated customer receivables, derivative and counterparty risk, possible additional environmental obligations, and a potential TVA buyback obligation of approximately $401 million related to the Southaven facility.
Key facts for investors to verify
- Whether fuel-cost recovery and rate changes keep pace with fuel, purchased-power, outage, and other operating costs.
- Updated cost, completion schedule, and licensing status for Watts Bar Unit 2; and the TVA Board’s decision on Bellefonte and the Magnolia acquisition.
- Actual expenditures and any revised estimates for the Kingston cleanup, environmental settlement, coal-ash remediation, and emissions controls, including costs not currently accrued.
- Effects of coal-unit retirements and new environmental rules on replacement capacity, capital needs, customer rates, and compliance timelines.
- TVA’s remaining borrowing capacity, future ratings and collateral requirements, pension funding position, and exposure to further market declines.
- Developments in Kingston-related litigation, nuclear safety reviews, and other legal proceedings; the filing states outcomes and potential additional liabilities cannot be predicted with certainty.