Tennessee Valley Authority — Form 10-Q Summary
Reporting period: Three months ended December 31, 2015 (TVA fiscal first quarter 2016); comparisons are with the three months ended December 31, 2014 unless noted. TVA is a federally created agency operating a public power system serving approximately nine million people. Financial figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015 / comparison |
|---|---|---|
| Operating revenue | $2,280 | $2,411; down 5.4% |
| Operating income | $228 | $364; down 37.4% |
| Operating margin | Approximately 10.0% | Approximately 15.1% |
| Net income (loss) | $(37) | $81 |
| Net margin | Approximately (1.6)% | Approximately 3.4% |
| Net cash from operations | $516 | $473 |
| Cash and cash equivalents at period-end | $311 | $300 at September 30, 2015 |
| Total debt outstanding | $25,395 | $24,949 at September 30, 2015 |
Margins are approximate calculations from reported revenue and income. Net interest expense was $277, down from $292. Construction expenditures were $866 and nuclear fuel expenditures were $101; net cash used in investing activities was $968. Financing activities provided $463.
At December 31, current assets were $3,284 and current liabilities $4,610. Short-term debt was $1,504; current maturities of power bonds were $554. TVA had $1.4 billion available under its $2.5 billion revolving facilities, after $1.1 billion of letters of credit, and no facility borrowings. A separate $150 million U.S. Treasury credit facility was unused. TVA reported $24.3 billion of Bonds outstanding against the statutory $30 billion limit. Regulatory assets totaled $10,740.
Material changes and operating drivers
- Electricity sales volume fell 8% (3.0 billion kWh), primarily as heating degree days were 43% below the prior year and normal levels amid unusually warm weather. Revenue declined $131, including lower base revenue ($67) and fuel-cost recovery ($63).
- Operating expenses were nearly flat at $2,052. Fuel expense fell $70, reflecting lower sales, favorable natural gas prices, and generation mix; operating and maintenance expense rose $52, including nuclear outage work, Boone Dam remediation, and inventory reserves.
- Natural gas generation increased 76% and hydro generation increased 9%; record rainfall produced runoff reported at 235% of normal. Lower fuel costs and higher hydro generation helped offset revenue weakness, but did not prevent the quarterly loss.
- Depreciation was affected by the 20-year Sequoyah license extensions, which reduced quarterly depreciation by $22. Net interest expense declined $15, partly due to higher construction allowance for funds used during construction.
Outlook, management commentary, risks and contingencies
- TVA expected Watts Bar Unit 2 commercial operation by June 30, 2016. Project costs had exceeded the previously approved $4.5 billion upper range; in January 2016 the Board authorized funding up to a revised estimated total of $4.7 billion.
- The October 2015 rate adjustment was expected to contribute approximately $200 million to FY2016 revenue. TVA said it believed it could fund planned operations and investment through a combination of debt, power revenues, cost reductions, and other means.
- TVA notified the EPA of planned retirements of Allen Units 1–3 and Colbert Unit 5 by December 31, 2018, and Colbert Units 1–4 by June 30, 2019. TVA had already retired 19 coal units, with 3,210 MW of summer capability.
- TVA estimated a further $1.3 billion of CCR conversion program spending through 2022, $650 million for proposed clean-air projects through 2025, and $260 million for planned Clean Water Act projects through 2022. These estimates may change as requirements and project designs develop.
- Boone Dam remediation cost and duration were not yet finalized; comparable composite-wall work at other facilities had ranged from $200 million to $300 million and five to seven years. TVA said its own estimate would follow design and construction planning.
- TVA accrued $99 million for legal proceedings and could not estimate reasonably possible additional losses. The Gallatin CCR lawsuits seek injunctive relief and civil penalties; an agreed temporary injunction requires further studies and a corrective-action plan. TVA also faces environmental, nuclear licensing, and other proceedings.
- Key exposures include increasingly stringent environmental rules, coal-plant compliance and retirement costs, dam and flood safety, nuclear project execution, weather-driven demand, fuel and purchased-power prices, pension funding, and debt capacity. TVA disclosed no material change in its previously reported risk factors and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether Watts Bar Unit 2 met its commercial-operation schedule and remained within the revised $4.7 billion estimate.
- Actual electricity demand, weather effects, and rate-adjustment revenue versus management’s FY2016 expectation.
- Progress, final cost, and schedule for Boone Dam remediation and the CCR, clean-air, and water-compliance programs.
- Debt issuance and borrowing capacity relative to the $30 billion statutory bond limit, including availability after letters of credit and collateral needs.
- Developments in Gallatin and other legal or environmental matters, and whether accrued contingencies remain adequate.