Tennessee Valley Authority — Form 10-Q Summary
Business context and reporting period. TVA is a federally created, self-financing public power system serving about nine million people in the southeastern United States, alongside river and stewardship responsibilities. This unaudited report covers the quarter and six months ended March 31, 2015, in TVA’s fiscal year 2015; comparisons are with the same periods of 2014. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Three months ended Mar. 31, 2015 | Three months ended Mar. 31, 2014 | Six months ended Mar. 31, 2015 | Six months ended Mar. 31, 2014 |
|---|---|---|---|---|
| Operating revenue | $2,863 | $2,938 | $5,274 | $5,320 |
| Operating expenses | $2,087 | $2,362 | $4,134 | $4,526 |
| Operating income | $776 | $576 | $1,140 | $794 |
| Net income | $496 | $295 | $577 | $228 |
| Net cash from operating activities | Not separately presented for the quarter | $1,412 | $1,426 |
Operating margin was approximately 27.1% for the quarter and 21.6% for the six-month period, compared with approximately 19.6% and 14.9%, respectively, a year earlier. TVA attributed stronger earnings chiefly to lower operating expenses, including lower fuel and purchased-power costs and reduced operations and maintenance (O&M) expense. Revenue declined 2.6% for the quarter and 0.9% for six months; electricity sales volume fell 1.5% in both periods.
- Cash flow and investment: Six-month operating cash flow was $1.412 billion. Investing activities used $1.644 billion, including $1.407 billion of construction expenditures; financing activities provided $234 million. Cash was $502 million at March 31, 2015, versus $500 million at September 30, 2014.
- Debt and liquidity: Total debt outstanding was $25.089 billion, versus $24.887 billion at September 30, 2014. Current liabilities were $4.610 billion and current assets $3.792 billion. TVA reported $939 million of short-term debt, $21.768 billion of long-term power bonds, and $1.263 billion of long-term VIE debt. Its $2.5 billion revolving facilities had $1.3 billion available after letters of credit; the separate $150 million U.S. Treasury facility had no borrowings.
- Other balance-sheet items: Total assets were $46.394 billion and total liabilities $39.707 billion. Regulatory assets totaled $9.742 billion, including deferred pension and derivative-related balances.
Material changes versus the prior period
- Net income increased 68.1% for the quarter and 153.1% for six months, although electricity sales revenue and volume were lower.
- Six-month O&M expense fell $255 million, including a $118 million reduction in reported pension and post-retirement costs following a change in regulatory accounting, approximately $56 million attributed to cost initiatives, and lower project and outage costs. The reported expense decline therefore reflects both savings and accounting/timing effects.
- Fuel and purchased-power expense declined, principally due to lower natural-gas and other fuel prices. TVA said the average Henry Hub spot price was 43% lower for the quarter and about 25% lower for the six-month period.
- Construction expenditures rose to $1.407 billion from $1.141 billion in the prior-year six months, driven mainly by capacity expansion projects.
Outlook, management commentary, risks and unusual items
- Cost program: TVA remained on track toward its goal of reducing O&M costs by $500 million by the end of 2015 compared with its 2013 budget. It had achieved its $300 million 2014 target and reduced staffing by about 2,000 positions. Further restructuring may follow.
- Generation and rates: Watts Bar Unit 2 was forecast to reach commercial operation between September 2015 and June 2016, with an estimated completion cost of $4.0–$4.5 billion; management’s then-current forecast targeted commercial operation by December 2015, subject to construction, testing, and licensing risks. TVA planned to present its long-term resource plan to the Board in summer 2015 and notified customers of intended rate-structure changes for October 2015.
- Capital and environmental exposure: TVA estimated $1.5–$2.0 billion for coal-combustion-residual work, with $680 million incurred by March 31, and $800 million of proposed clean-air projects over 2015–2025. The EPA’s final coal-residual rule was issued after quarter-end; TVA was evaluating possible schedule and cost effects. Dam-safety work at Pickwick and Boone remained under review, and final remediation costs were not yet estimable.
- Legal and contingency matters: TVA had accrued approximately $151 million for probable legal losses, while it could not estimate reasonably possible additional losses. The Kingston ash-spill cleanup estimate was $1.1 billion, with $23 million of estimated liability remaining at March 31; certain potential penalties, claims, and other costs were excluded because they were not considered probable or reasonably estimable. New Gallatin coal-ash litigation sought injunctive relief and civil penalties.
- Subsequent events: On April 14, 2015, TVA acquired a 700-MW combined-cycle gas plant for $342 million. A potential bond repurchase of up to $324 million could arise from a June 2015 rate reset. TVA also reported that the April 2015 coal-residual rule was under evaluation.
- Other risks: TVA identified exposure to environmental regulation, fuel and power prices, weather and demand, construction cost and schedule, nuclear licensing and safety, dam integrity, cyber and physical security, pension funding, and its statutory $30 billion debt limit. Management stated that available sources were expected to provide adequate liquidity for the foreseeable future, while noting the debt ceiling and financing costs as constraints.
Important facts for investors to verify
- How much of the earnings and O&M improvement is recurring cost reduction versus lower fuel prices, pension regulatory accounting, and timing of outages and projects.
- Progress, final cost, and licensing status for Watts Bar Unit 2, including whether the commercial-operation forecast was met.
- Updated cost and timing estimates for coal-residual compliance, dam remediation, clean-air projects, and other environmental obligations.
- Debt-limit headroom, refinancing needs, available revolving capacity after letters of credit, and any cash demands from the bond rate reset.
- Potential changes in legal exposure, especially the Gallatin matters and claims or costs not included in the Kingston ash-spill estimate.
- Final resource-plan and rate-structure decisions and their potential effects on customer demand, revenue, and affordability.