Tennessee Valley Authority quarterly report, Q2 FY2012

Tennessee Valley Authority — Form 10-Q Summary

Reporting period: Fiscal second quarter and six months ended March 31, 2012; fiscal year ends September 30. Amounts are in millions of dollars unless noted. Comparative periods are the three and six months ended March 31, 2011.

Business context and results

TVA is a federally created public power provider serving more than nine million people in the southeastern United States. Its power program is intended to be self-supporting through power revenues and financing. Exceptionally mild winter weather reduced electricity demand, particularly among municipal and cooperative distributors.

Metric	Three months 2012	Three months 2011	Six months 2012	Six months 2011
Operating revenue	$2,604	$2,968	$5,172	$5,796
Operating expenses	$2,358	$2,401	$4,789	$4,959
Operating income	$246	$567	$383	$837
Net income (loss)	$(94)	$253	$(267)	$205
Net interest expense	$326	$324	$645	$653

Operating margin was approximately 9.4% for the quarter and 7.4% for the six-month period, down from 19.1% and 14.4%, respectively, in the comparable 2011 periods.

Cash flow, debt and liquidity

Six-month operating cash flow was $867, down from $1,333 a year earlier. Investing cash outflow was $1,359, including $1,143 of construction spending and $225 for nuclear fuel. Financing cash inflow was $356. Cash declined $136 to $371.
Total debt was $24,919 at March 31, 2012, versus $24,431 at September 30, 2011. This included $3,178 of short-term debt and $21,741 of long-term debt. TVA’s statutory power-bond ceiling is $30 billion; the filing notes that this constraint may limit bond funding for planned investment.
Current assets were $3,915 and current liabilities $5,900. TVA reported $1.6 billion available under its $2.5 billion revolving credit facilities, after $926 million of letters of credit; there were no cash borrowings under those facilities. A separate $150 million U.S. Treasury facility had no outstanding borrowings and was expected to be renewed.
TVA consolidated $1.0 billion of debt issued by entities financing the John Sevier combined-cycle facility. The entities’ creditors have no recourse to TVA’s general credit, but TVA is contractually responsible for lease payments and takes the facility’s output.

Material changes and management commentary

Electricity sales fell 6.6% in the quarter and 5.9% over six months. Municipal and cooperative sales declined 8.7% and 7.4%, respectively; these customers represented 78% of sales. Management attributed the decline mainly to unusually warm weather and lower peak demand.
Six-month operating revenue was 10.8% lower year over year. Lower base revenue and fuel-cost recovery drove the decline. Operating expenses fell 3.4% over six months, principally because lower coal generation and economic dispatch reduced fuel costs; higher maintenance, benefits and depreciation partly offset the savings.
TVA reduced its 2012 revenue outlook: revenue, initially projected at $12.1 billion, was expected to be 7% below plan, and management expected a net loss for fiscal 2012. The filing provides no revised full-year revenue amount or loss estimate.
Management cited cost-control actions, including reductions in discretionary spending and review of vacancies, overtime, consultants and non-core activities. The TVA Board approved optional wholesale rate structures for October 2012, which management expected to be revenue neutral.

Major projects, risks and contingencies

Watts Bar Unit 2: The updated completion estimate calls for an additional $1.5–$2.0 billion, bringing estimated total completion cost to $4.0–$4.5 billion, with completion anticipated between September and December 2015. TVA identified planning, leadership and oversight shortcomings and said it continued to support completion.
Generation and nuclear oversight: Three Raccoon Mountain pumped-storage units totaling 1,212 MW were out of service for rotor cracking inspections and repairs, with return expected to take several months. Browns Ferry remained under heightened NRC oversight following a red safety finding; TVA expected $75–$120 million of related 2012 improvements. New NRC safety orders require implementation by December 2016.
Coal fleet and environmental spending: TVA idled four Johnsonville units in March and planned further idlings and retirements. Estimated remaining environmental expenditures included $3.397 billion for proposed clean-air projects and $1.444 billion for coal-combustion-residual conversion and remediation; Clean Water Act costs remained undetermined.
Kingston ash spill: Estimated cleanup cost remained $1.1–$1.2 billion; TVA had recorded $1.1 billion, spent $807 million, and reported a remaining liability of $318 million. Cleanup was expected to finish in late 2014, with final approval anticipated in 2015. Potential penalties, claims and other costs excluded from the estimate could increase exposure. TVA had received $45 million in insurance proceeds and initiated arbitration in April 2012 over remaining excess-liability coverage.
Legal matters: TVA accrued approximately $382 million for legal proceedings and estimated an additional $11 million of reasonably possible losses beyond accruals. Sixty-three Kingston spill lawsuits remained active. The filing cautions that actual liabilities could exceed estimates and materially affect results, liquidity or financial condition.
Other exposures: TVA’s pension plan remained underfunded; plan assets were approximately $7.1 billion at March 31, compared with prior-year liabilities of $11.3 billion. TVA had recovered $7 million of the $33 million collateral held by bankrupt MF Global and said recovery of the balance was uncertain. A dam crack and ground movement at Blue Ridge required monitoring and further engineering analysis.

Important facts for investors to verify

Whether lower demand and the revised fiscal 2012 revenue outlook result in the projected full-year loss, and whether rate actions or cost reductions change that outlook.
Updated Watts Bar Unit 2 cost and schedule estimates, financing plans, and any effect on Bellefonte construction timing.
Progress and cost estimates for nuclear safety improvements, coal-unit retirements, clean-air compliance and coal-combustion-residual projects.
Changes in Kingston cleanup costs, insurance arbitration, litigation outcomes and unaccrued potential claims.
TVA’s ability to maintain liquidity and finance capital needs within the $30 billion bond ceiling, including the cost and terms of alternative financing.
Recovery of MF Global collateral, the condition of the pension plan, and resolution of the Blue Ridge dam issue.