Tennessee Valley Authority annual report, FY2015

Tennessee Valley Authority — FY2015 Form 10-K

Reporting period: Fiscal year ended September 30, 2015. This is an annual filing, not a standalone fourth-quarter filing; the filing also provides unaudited quarterly results. TVA is a federal corporate agency and the nation’s largest public power system, serving more than nine million people across seven states. Electricity sales generated virtually all revenue. TVA has no equity securities and funds operations mainly through power revenues and debt.

Financial performance and position

Metric	FY2015	FY2014
Operating revenue	$11.003 billion	$11.137 billion
Operating income	$2.215 billion	$1.589 billion
Net income	$1.111 billion	$469 million
Net cash from operations	$3.315 billion	$2.980 billion
Total assets	$48.825 billion	$45.596 billion
Total debt	$25.029 billion	$24.887 billion
Cash and cash equivalents	$300 million	$500 million

• Operating margin was approximately 20.1%, up from 14.3%; net margin was approximately 10.1%, up from 4.2%.
• Operating expenses declined to $8.788 billion from $9.548 billion. Operating and maintenance expense fell $503 million, including lower pension and post-retirement costs, cost-reduction savings, fewer nuclear outage days and project timing. Depreciation and amortization rose $188 million, largely due to accelerated depreciation of retiring coal units.
• Operating cash flow increased $335 million. Investing cash outflow was $3.585 billion, including $2.850 billion of construction expenditures and the $342 million Ackerman gas-plant acquisition. Cash decreased by $200 million over the year.
• Current assets of $3.506 billion were below current liabilities of $3.935 billion. TVA reported $1.4 billion available under its $2.5 billion revolving facilities after $1.1 billion of letters of credit; it also had a $150 million U.S. Treasury facility, unused at year-end.
• The statutory debt ceiling is $30 billion; reported bonds outstanding were approximately $23.9 billion. Long-term debt of variable-interest entities brings total reported debt to $25.0 billion.

Changes versus prior year

• Revenue decreased $134 million, despite a $230 million increase in base revenue, because fuel-cost recovery declined $371 million as fuel rates fell. Electricity sales volume was nearly flat at 158.163 billion kWh, versus 158.057 billion kWh.
• Net income rose $642 million, supported by lower fuel, purchased-power and O&M expenses. Management said its cost-reduction initiative exceeded its $500 million target by more than $100 million.
• Debt edged up $142 million; capital investment and construction spending increased. Cash from operations improved, but cash balances declined.
• Asset retirement obligations increased to $3.682 billion on the balance sheet. The coal-ash ARO estimate rose $469 million following the EPA’s CCR rule and revised project-cost estimates.

Outlook, risks and unusual items

• The Board approved an approximately 2.49% wholesale rate adjustment effective October 1, 2015, expected to add about $200 million to FY2016 revenue. New time-of-use and class-specific fuel pricing structures are intended to align charges more closely with costs.
• The 2015 Integrated Resource Plan anticipates low demand growth and a diverse mix emphasizing natural gas, nuclear, renewables, efficiency and demand response. It identifies no immediate need for new baseload capacity beyond Watts Bar Unit 2 and Browns Ferry upgrades.
• Watts Bar Unit 2 was estimated to cost approximately $4.5 billion, with commercial operation expected in 2016. The filing gives differing timing descriptions—June 2016 in some passages and the third quarter of 2016 in the executive overview. Construction, testing, licensing and transition to dual-unit operation remain execution risks.
• Planned major investments include roughly $1.0 billion for the Allen gas plant and $1.1 billion for Paradise, alongside coal retirements and environmental compliance work. Estimated environmental expenditures include $1.25 billion for CCR conversion and closure, $750 million for planned clean-air controls, and $300 million for Clean Water Act requirements; estimates may change.
• Boone Dam seepage remediation was expected to take five to seven years; costs were not finalized, with comparable work cited at $200 million to $300 million. Dam safety, nuclear seismic and flood assessments could require further spending.
• Environmental, legal and operating exposures include the Clean Power Plan and other evolving rules, groundwater and coal-ash matters, nuclear decommissioning, and legal proceedings. TVA accrued $115 million for legal proceedings, but said reasonably possible additional losses could not be estimated. The 2008 Kingston ash spill had cost $1.1 billion to date; the remaining estimated liability was $6 million, while insurance recovery claims remained in process.
• The qualified pension plan was materially underfunded: $6.8 billion in assets against $12.8 billion in projected obligations at September 30, 2015. TVA’s FY2015 pension contribution was $275 million; management expected a further $275 million contribution in FY2016.
• TVA reported no off-balance-sheet arrangements. Its bonds are not guaranteed by the U.S. government. The financial-statement audit and internal-control audit received unqualified opinions; management concluded disclosure controls and internal control over financial reporting were effective.

Important facts for investors to verify

• Confirm Watts Bar Unit 2’s current completion date, final cost and remaining commissioning risks.
• Track the debt balance against the $30 billion statutory limit, liquidity availability and any ratings-related collateral requirements.
• Review actual realization of the FY2016 rate increase and whether lower fuel-cost recovery or demand changes offset it.
• Monitor pension funding, coal-ash ARO revisions, environmental project costs and Boone Dam remediation estimates.
• Check the outcomes and potential financial effects of the Gallatin CCR cases, remaining Kingston insurance matters and other legal proceedings.