Tennessee Valley Authority — Q3 FY2017 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2017. Amounts are in millions of dollars unless noted. TVA is a federally created public power agency; its power program is intended to be self-supporting through power revenues and financing.
Financial results and position
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Nine months ended June 30, 2017 | Nine months ended June 30, 2016 |
|---|---|---|---|---|
| Operating revenue | $2,571 | $2,479 | $7,664 | $7,330 |
| Operating income | $561 | $566 | $1,524 | $1,383 |
| Net income | $233 | $291 | $546 | $572 |
| Net cash from operations | Not provided for the quarter | Not provided for the quarter | $1,979 | $1,878 |
- Operating margin was approximately 21.8% for the quarter versus 22.8% a year earlier; for nine months, approximately 19.9% versus 18.9%.
- Quarterly revenue rose 3.7%, while net income fell 19.9%. Nine-month revenue rose 4.6%, while net income fell 4.5%.
- Nine-month investing cash outflow was $1,898, principally construction and nuclear fuel expenditures; financing cash outflow was $80. Cash increased $1 to $301.
- At June 30, total debt was $25,179, including $3,750 of current debt and $21,429 of long-term debt. Total liabilities were $41,000. Cash was $301 and current assets were $3,413 versus current liabilities of $6,176.
- TVA had $1,525 of availability under its $2.65 billion revolving facilities; $1,125 was committed to letters of credit. A separate $150 million U.S. Treasury facility was unused. TVA reported $24.2 billion of bonds outstanding against its $30 billion statutory bond limit.
Changes and management commentary
- Electricity sales volume declined approximately 1% in both the quarter and nine-month period. Management attributed lower LPC sales primarily to mild weather; direct industrial sales increased, partly offsetting declines.
- Revenue growth reflected the October 1, 2016 base-rate adjustment and higher fuel-cost recovery. The rate adjustment was expected to contribute about $200 million to FY2017 revenue.
- Operating expenses increased 5.1% in the quarter and 3.2% for nine months. Higher fuel and purchased-power costs reflected generation mix, reduced availability of TVA generation, and higher natural gas prices. Planned nuclear refueling outages and benefit costs also increased operating and maintenance expense.
- Operating income improved for the nine-month period, but net income was pressured by higher net interest expense: $1,017 for nine months versus $840. The prior-year period included $175 of capitalized construction interest related to Watts Bar Unit 2; TVA stopped capitalizing that interest after September 2016.
- A new depreciation study reduced depreciation and amortization expense by an estimated $168 for nine months versus the prior year. Watts Bar Unit 2 and the Paradise combined-cycle plant entered commercial operation; Paradise coal Units 1 and 2 were retired.
Outlook, risks and contingencies
- Management projected minimal, if any, sales growth and no need for additional large baseload generation in the foreseeable future. The Allen combined-cycle plant was expected in 2018; TVA’s $300 million multi-year fiber initiative was approved in May 2017.
- TVA expected approximately $1.1 billion of additional CCR conversion spending through 2022, $300 million for clean-air requirements from 2017–2022, and approximately $500 million for Clean Water Act compliance from 2017–2026. Costs may change with regulatory developments and project findings.
- Gallatin CCR litigation could result in injunctive relief; removal of CCR material could cost up to approximately $2.0 billion above current estimates for closure in place, excluding potentially material penalties. One trial concluded and a decision was expected later in 2017; another trial was scheduled for December 2017.
- TVA had accrued $32 million for probable legal-proceeding losses. Its estimated environmental cleanup liability for identified sites was approximately $27 million.
- Westinghouse filed for Chapter 11 bankruptcy protection. TVA was assessing potential effects on nuclear fuel, component, maintenance, and outage-support contracts; disruption or replacement costs could be material but were not quantified.
- Other significant execution and safety matters include Boone Dam remediation, preliminarily estimated at up to $450 million with completion targeted in 2022, and Pickwick Dam work estimated at approximately $100 million. TVA also disclosed increasing ransomware activity, though recent incidents had not compromised TVA or disrupted operations.
- TVA stated it believed it had adequate financing capacity for operating needs and planned capital investment over the next decade. It cautioned that actual results may differ due to weather, demand, fuel and power prices, environmental requirements, construction costs, asset reliability, supplier performance, legal outcomes, and debt-market or statutory borrowing constraints.
Most important facts for investors to verify
- Whether rate increases and fuel-cost recovery continue to offset weak electricity sales and higher generation costs.
- Near-term debt maturities, bond capacity under the $30 billion limit, and actual availability of revolving facilities after letters of credit.
- Outcome and remedy in Gallatin CCR litigation, including any cost beyond the approximately $2.0 billion removal estimate and potential penalties.
- Final scope, timing, and cost of CCR, clean-air, clean-water, dam-safety, and other environmental projects.
- Whether Westinghouse-related supply and service contracts affect plant outages, fuel supply, or operating costs.
- Completion and operating performance of major generation projects, including Allen, and whether demand trends match management’s low-growth outlook.