Tennessee Valley Authority — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended December 31, 2016; comparisons are with the three months ended December 31, 2015. Balance-sheet comparisons are with September 30, 2016. Amounts are in millions unless stated otherwise.
Business context and financial results
TVA is a federally created public power system serving more than nine million people. Its power program is intended to be self-supporting through power revenues and financing. TVA attributes quarterly results in part to weather, electricity demand, fuel costs, and generation mix.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Operating revenues | $2,546 | $2,280 | Up 11.7% |
| Operating expenses | $2,117 | $2,052 | Up 3.2% |
| Operating income | $429 | $228 | Up 88.2% |
| Net income (loss) | $102 | $(37) | Improved by $139 |
| Net cash from operating activities | $617 | $516 | Up $101 |
| Net cash used in investing activities | $(707) | $(968) | Outflow lower by $261 |
| Net cash from financing activities | $90 | $463 | Down $373 |
Operating margin was approximately 16.8%, versus 10.0% in the prior-year quarter; net margin was approximately 4.0%, versus negative 1.6%. These percentages are calculated from reported revenues and income.
Revenue, costs, liquidity, and debt
- Electricity sales volume rose approximately 7%; heating degree days increased 29%. Management cited more normal weather, higher sales to local power companies and some directly served industrial customers, and a base rate adjustment effective October 1, 2016.
- Base revenue increased $155, including approximately $123 from higher sales volume and $46 from higher effective rates, partly offset by $14 of revenue capitalized during pre-commercial generation. Fuel-cost recovery revenue increased $110, reflecting higher sales and fuel rates.
- Fuel expense rose $88, driven by generation mix, higher natural-gas prices, and increased TVA generation. Purchased-power expense declined $5. Operating and maintenance expense was broadly flat. Depreciation and amortization declined $24, including an estimated $56 benefit from new depreciation rates.
- Net interest expense increased $62 to $339, mainly because the prior-year quarter included $58 of capitalized construction interest for Watts Bar Unit 2; capitalization ended in September 2016.
- Cash and cash equivalents were $300. Current assets were $3,426 and current liabilities $6,225, a $2,799 current-liability excess. TVA reported $2,027 of short-term debt and $25,233 of total outstanding debt.
- TVA had $1,515 available under its revolving facilities after $1,135 of letters of credit; a separate $150 U.S. Treasury facility was available as a conditional secondary liquidity source. TVA reported $24.3 billion of Bonds against the statutory $30 billion outstanding limit, excluding specified noncash adjustments.
- Operating cash flow increased to $617. Construction and nuclear-fuel expenditures were $725 combined. Cash remained $300 at quarter-end, with no net change during the quarter.
Material changes, outlook, and unusual items
- Watts Bar Unit 2 entered commercial operation on October 19, 2016. Project cost was $4.7 billion, within the TVA Board-approved limit. The Paradise natural-gas facility was expected to be completed in spring 2017; the Allen facility was expected in 2018.
- TVA reported minimal projected sales growth and no anticipated need for additional large baseload generation for the foreseeable future, citing efficiency, distributed generation, technology, and changing customer behavior. A base-rate adjustment was expected to contribute approximately $200 to fiscal 2017 revenues.
- TVA contracted to sell substantially all of the Bellefonte site for $111; $22 had been received, with $89 due at closing. The buyer has up to two years to close. Management said proceeds will reduce amounts collected in future rates.
- TVA had spent approximately $1.0 billion on its coal-combustion-residuals conversion program and expected a further $1.2 billion through 2022. Estimated additional environmental expenditures included $335 for clean-air requirements during 2017–2021 and $400 for Clean Water Act requirements during 2017–2023.
- Drought conditions reduced first-quarter runoff 52% below normal and hydroelectric generation 60% below the prior-year quarter. Management also cited risks to water supply, plant operations, navigation, and water quality.
- TVA accrued $51 for probable legal-proceeding losses but could not estimate reasonably possible additional losses. Gallatin coal-ash litigation could result in substantial relocation costs or penalties; trials were scheduled for 2017.
- Other notable exposures include dam safety and remediation work, nuclear safety and licensing matters, evolving environmental rules, fuel and power-supply risks, and derivative collateral requirements. TVA reported no material change in market-risk disclosures or risk factors from its prior annual report.
Most important facts for investors to verify
- Whether the revenue and earnings improvement persists when weather and fuel-price conditions normalize, and how the base-rate adjustment affects full-year results.
- Actual spending, schedules, and recoverability through rates for CCR conversion, clean-air, clean-water, and dam-safety projects.
- Liquidity headroom after short-term debt and letters of credit, and remaining borrowing capacity under the statutory Bonds limit.
- Whether the Bellefonte sale closes and the timing and ratepayer treatment of proceeds.
- Outcomes and potential financial exposure from Gallatin CCR cases and other legal, environmental, nuclear, and dam-safety matters.