Tennessee Valley Authority — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2014 (TVA fiscal third quarter; fiscal year ends September 30). Amounts are in millions of dollars unless stated otherwise.
Business context and financial performance
TVA is a federally created public power utility serving more than nine million people across the Tennessee Valley. Its power program is intended to be self-supporting through electricity revenues and financing.
- Quarter: Operating revenue was $2,651, up 1.9% year over year. Operating income was $198, compared with $278; net loss was $81, compared with a $12 loss. Operating margin was approximately 7.5%, versus 10.7%.
- Nine months: Operating revenue was $7,971, up 0.6%. Operating income was $992, compared with $694; net income was $147, versus a $203 loss. Operating margin was approximately 12.4%, versus 8.8%.
- Revenue and sales: Electricity sales revenue rose 1.8% for the quarter and 0.5% year to date. Electricity volume declined 5.4% for the quarter and 3.2% year to date: higher local power company sales were more than offset by declining directly served industrial sales, particularly as USEC reduced operations.
- Costs: Quarterly operating expenses rose 5.6%, including higher fuel, purchased power, and depreciation. Nine-month expenses fell 3.4%; operating and maintenance expense declined $182, mainly from cost reductions and fewer projects, partly offset by restructuring costs. Accelerated depreciation of coal units scheduled to be idled also increased expense.
- Cash flow: Nine-month operating cash flow was $1,987, up from $1,478. Investing cash outflow was $1,961, including $1,694 of construction expenditures. Financing used $1,123, and cash declined $1,097 to $505 from $1,602 at September 30, 2013.
- Debt and liquidity: Total debt outstanding was $25,129, down from $26,120; this includes $2,822 of current debt and $22,307 of long-term debt. TVA had $1,759 of short-term debt and $1,032 of current power-bond maturities. It reported $1.6 billion available under $2.5 billion of revolving facilities after letters of credit, with no cash borrowings; a separate $150 million U.S. Treasury facility was unused. Bonds outstanding were $23.8 billion against the statutory $30 billion limit.
- Margins and balance sheet: Net interest expense for nine months fell to $882 from $933. At June 30, total assets were $44,695 and total liabilities were $38,943; current assets of $3,754 were below current liabilities of $5,294.
Material changes and management commentary
- Management attributed improved year-to-date earnings to lower operating costs, lower fuel expense, and reduced net interest expense. Quarter earnings weakened as operating expenses increased faster than revenue.
- TVA used cash and operating cash flow to reduce debt by approximately $1.1 billion during the nine months.
- Management’s cost-reduction goal is to lower operating and maintenance costs by $500 million by 2015 compared with the 2013 budget. Severance liability was $46 million at June 30.
- TVA reported that the NRC closed Browns Ferry’s red finding and that Browns Ferry Unit 1’s safety-system indicators returned to the normal band. Hydrology issues at Sequoyah and Watts Bar were also closed by the NRC.
Outlook, significant items, and risks
- Projects: Watts Bar Unit 2 was expected to enter commercial operation by December 2015, with estimated completion cost of $4.0–$4.5 billion. TVA identified licensing and project-execution risks. Bellefonte Unit 1’s estimated completion cost was $7.5–$8.7 billion; work was slowed and staffing reduced.
- Generation transition: TVA planned to idle Paradise coal Units 1 and 2 in 2017 and replace them with gas-fired generation; a lawsuit sought to block the plan. The filing also describes planned coal-unit retirements and additional units removed from service.
- Environmental spending: Estimated potential expenditures included $1.4 billion for coal-combustion-residual conversion and remediation, $1.1 billion for proposed clean-air projects, and $400 million for Clean Water Act requirements. TVA estimated $1.1–$1.2 billion total Kingston cleanup costs, had spent $1.0 billion through June 30, and recorded an $82 million remaining liability. The estimates exclude certain potential claims and costs.
- Legal exposure: TVA had accrued approximately $254 million for legal proceedings, while stating that reasonably possible additional losses could not be estimated. On August 4, 2014, after quarter-end, an agreed order resolved most pending Kingston spill lawsuits and directed TVA to pay $28 million, with further proceedings anticipated for nine plaintiffs.
- Other risks: Potentially substantial costs could arise from nuclear seismic and flood-safety work, evolving environmental rules, dam and transmission upgrades, fuel and purchased-power prices, weather, and project delays. TVA’s debt ceiling may constrain future bond financing. Kingston cleanup costs, environmental liabilities, and legal outcomes remain uncertain.
- Pension and accounting: The retirement plan was closed to new employees and certain rehires effective June 30; those employees move to a defined-contribution-only benefit. TVA had contributed $126 million of its planned $250 million pension contribution for 2014 and expected to contribute the balance by fiscal year-end.
- Guidance: The filing provides project schedules and cost estimates but no general earnings or revenue guidance. Management said it expected available liquidity sources to be adequate for the foreseeable future.
Most important facts for investors to verify
- Whether the $500 million O&M savings target is achieved and how savings affect reliability and future expenses.
- Watts Bar Unit 2’s licensing, schedule, and final cost versus the $4.0–$4.5 billion estimate; progress and funding assumptions for Bellefonte.
- Future capital and operating costs from environmental rules, coal ash conversion, nuclear safety assessments, and dam and transmission work.
- Changes in industrial demand, especially USEC-related sales, and the extent to which local power company growth and rate changes offset that decline.
- Cash needs, debt maturities, revolving-credit availability, and remaining capacity under the $30 billion statutory bond limit.
- Final Kingston cleanup costs, the post-quarter $28 million settlement, and the potential for additional legal or environmental liabilities.