Tennessee Valley Authority — Form 10-Q Summary
Reporting period: Three months ended December 31, 2013 (TVA fiscal 2014 first quarter). TVA operates a large public power system and also manages the Tennessee River system. Financial figures below are in millions of dollars unless noted.
Financial performance and position
- Revenue: Operating revenue was $2,382, down 7.6% from $2,579. Electricity sales revenue fell 7.8% to $2,350; total electricity sales volume declined 3.4% to 37,779 million kWh.
- Profitability: Operating income rose to $218 from $56 as expenses fell faster than revenue. The financial statements report a net loss of $67, compared with a $245 loss a year earlier. The MD&A executive overview instead states a $64 million net loss; the filing text does not reconcile the difference.
- Costs and margins: Operating expenses declined 14.2% to $2,164. Fuel expense fell $251, to $543, and operating and maintenance expense fell $112, to $807. Operating margin was approximately 9.1%, versus 2.2% in the prior-year quarter; net margin was approximately negative 2.8%, versus negative 9.5%.
- Cash flow: Operating cash flow was $508, up from $257, including $150 of Kingston ash-spill insurance proceeds. Investing cash outflow was $800, including $560 of construction spending and $242 of nuclear-fuel expenditures. Financing cash outflow was $619. Cash declined $911 during the quarter to $691.
- Debt and liquidity: Total debt was $25,530 at December 31, down from $26,120 at September 30; short-term debt was $1,825. Current assets were $3,932 and current liabilities $4,436 (current ratio approximately 0.89). TVA had $1.7 billion available on $2.5 billion in revolving facilities, after $800 million of letters of credit; no cash borrowings were outstanding on those facilities. A separate $150 million U.S. Treasury facility was unused.
- Balance sheet: Total assets were $45,032, versus $46,106 at September 30; total liabilities were $39,458 and proprietary capital $5,574. Long-term debt, net, was $23,320. TVA’s statutory bond ceiling is $30 billion; reported bonds outstanding were approximately $24.2 billion.
Changes versus the prior-year quarter
- Electricity sales to directly served industries fell 43.5%, primarily because United States Enrichment Corporation began ceasing operations. Local power company sales volume rose 6.6%, supported in part by colder weather.
- Lower fuel recovery reduced revenue by $255, partly offset by a $60 increase in base revenue, including a non-fuel base-rate increase effective October 1, 2013.
- TVA relied more on nuclear and hydroelectric generation and less on coal and gas. Nuclear generation increased 29% and hydroelectric generation 30%; coal generation declined 30%.
- Net interest expense decreased $17, to $299, primarily reflecting lower average interest rates.
- Operating cash flow benefited from the $150 insurance recovery. Financing cash flow swung from a $439 inflow to a $619 outflow, largely because the prior-year period included a $975 power-bond issuance.
Outlook, risks, and significant items
- Cost program: TVA aims to reduce operating and maintenance costs by $500 million by 2015, compared with its 2013 budget. It had accrued $12 million for estimated severance costs.
- Generation projects: Watts Bar Unit 2 was approximately 83% complete; estimated completion cost was $4.0–$4.5 billion, with commercial operation targeted by December 2015. Bellefonte Unit 1’s estimated completion cost was revised to $7.5–$8.7 billion; work was slowed while TVA considers its longer-term role. NRC licensing decisions may be affected by the unresolved spent-fuel “waste confidence” review.
- Environmental spending: Estimated potential expenditures included $1.4 billion for coal-combustion-residual conversion and remediation, $1.2 billion for proposed clean-air projects, and $700 million for Clean Water Act requirements. TVA estimated future Clean Air Act compliance costs, excluding greenhouse-gas requirements, at $1.2 billion for 2014–2022. These estimates may change with regulation and project needs.
- Kingston ash spill: TVA estimated cleanup costs at $1.1–$1.2 billion, had recorded $1.1 billion, and reported $147 million of remaining estimated liability. Cleanup completion was expected in spring 2015. The estimate excludes certain costs, claims, and damages that were not considered probable or reasonably estimable. Seventy-eight related lawsuits had been filed; 63 remained active. Mediation was scheduled through June 16, 2014.
- Other legal exposure: TVA had accrued approximately $282 million for probable losses in legal proceedings, with an estimated range of $282–$294 million. It could not estimate reasonably possible additional losses. Environmental agreements require coal-unit retirements or controls, emissions limits, and environmental payments and investments.
- Operational and financial risks: TVA cited nuclear reliability and regulatory requirements, dam and flood preparedness, coal-ash facility work, environmental regulation, fuel and purchased-power prices, weather, and its approach to the statutory bond limit. The filing states the NRC had closed Browns Ferry Unit 1’s red finding, while escalated oversight continued pending performance improvements.
- Other: TVA reported no off-balance-sheet arrangements and no material changes to previously disclosed market risks or risk factors. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the $64 million net loss cited in the MD&A overview with the $67 million loss in the financial statements and detailed results.
- Assess how the loss of demand from USEC, weather-driven local-power sales, and future rate changes may affect revenue and cash generation.
- Track available liquidity, credit-facility capacity consumed by letters of credit, and headroom under the $30 billion statutory bond limit.
- Monitor Watts Bar Unit 2 cost, schedule, licensing, and completion risks, as well as the revised Bellefonte estimate and project status.
- Review whether environmental and Kingston ash-spill estimates remain adequate, including costs excluded as not probable or estimable and the outcome of litigation and insurance recovery.
- Confirm progress toward the $500 million cost-reduction target and the effect of planned coal-unit retirements, idling, and replacement generation.