Tennessee Valley Authority — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; fiscal year ends September 30. Amounts are in millions of dollars unless stated otherwise. Financial statements are unaudited.
Business context and results
TVA is a federally created corporate agency operating a public power system serving nearly 10 million people in the southeastern United States. Its power program is self-supporting, with rates set by the TVA Board. Electricity sales provide virtually all operating revenue.
| Metric | Three months ended June 30, 2020 | Prior year | Nine months ended June 30, 2020 | Prior year |
|---|---|---|---|---|
| Operating revenue | $2,251 | $2,604 | $7,350 | $8,079 |
| Operating income | $535 | $516 | $1,674 | $1,873 |
| Net income | $205 | $165 | $652 | $829 |
| Operating margin | 23.8% | 19.8% | 22.8% | 23.2% |
| Net margin | 9.1% | 6.3% | 8.9% | 10.3% |
| Electricity sales | 34,272 million kWh | 37,272 million kWh | 108,396 million kWh | 113,609 million kWh |
Cash flow, debt, and liquidity
- Nine-month cash flow: Operating cash flow was $2,496, compared with $2,479 a year earlier; investing cash outflow was $1,467 versus $1,533; financing cash outflow was $528 versus $945. Cash, cash equivalents, and restricted cash ended at $823, up from $322 at fiscal year-end September 30, 2019.
- Debt: Total debt outstanding was $21,735 at June 30, 2020, versus $22,197 at September 30, 2019. Current debt was $2,734 and long-term debt, net, was $19,001. TVA issued $1.0 billion of power bonds in May at 0.75% and had a $1.5 billion power-bond maturity due in February 2021.
- Liquidity: Current assets were $3,463 and current liabilities were $5,443, for a current ratio of approximately 0.64. TVA had $1,140 of availability under revolving facilities at June 30; the facilities had $1,510 of letters of credit outstanding and no cash borrowings. TVA also had a $150 million U.S. Treasury credit facility, with no outstanding borrowing.
- TVA increased its target cash balance by $500 million beginning in March because of market volatility. Its statutory bond limit is $30 billion; bonds outstanding for purposes of that limit were $20.9 billion at June 30.
Material changes and drivers
- Third-quarter operating revenue fell 13.6% year over year and nine-month revenue fell 9.0%. Electricity sales decreased approximately 8% for the quarter and 5% for the nine months. Management attributed the decline to COVID-19-related customer curtailments and milder overall weather; TVA estimated COVID-19 reduced base revenue by about $130 million over nine months.
- Nine-month electricity revenue declined $721 million. Lower base revenue accounted for $384 million of the decline and lower fuel-cost recovery revenue for $337 million. Lower effective fuel and purchased-power rates and reduced sales also lowered expenses.
- Quarterly net income increased 24.2% despite lower revenue, as operating expenses fell 17.8%, including a substantial year-over-year reduction in depreciation associated with prior-year accelerated depreciation at Paradise and Bull Run. Nine-month net income declined 21.4%.
- Operating and maintenance expense declined $275 million over nine months, largely reflecting prior-year Kingston environmental cleanup expense recovery and lower plant-closure-related write-offs. Depreciation and amortization increased $43 million over nine months, primarily due to plant additions and decommissioning-cost amortization.
- Paradise Unit 3 went offline February 1, 2020, effectively retiring the unit earlier than previously planned. Bull Run remains scheduled for retirement by December 2023. TVA reported cumulative accelerated depreciation of $916 million for these retirements, including $350 million in the first nine months of fiscal 2020.
Outlook, risks, contingencies, and unusual items
- Outlook: TVA said base revenue could be up to $100 million below plan in fiscal fourth quarter 2020 because of COVID-19. It said the impact beyond 2020 was uncertain. No formal earnings or revenue guidance was provided.
- TVA is deferring and prioritizing certain capital projects and reducing discretionary spending in response to expected revenue pressure. It reported that power delivery had not been materially affected and stated system reliability was 99.999%.
- TVA offered up to $1.0 billion of payment-deferral credit support to local power companies; $1 million had been approved as of August 3, 2020. The program allows approved repayment schedules of up to two years. TVA also reported more than $4 million of Back-to-Business credits and approximately $2 million in Community Care Fund matching support.
- Environmental obligations: TVA estimated about $1.0 billion of additional CCR conversion program spending through 2024; it had spent approximately $2.0 billion by June 30. Estimated environmental expenditures also included $132 million for clean-air projects and $211 million for Clean Water Act requirements over the periods shown. These estimates may change with regulations, closure choices, and project costs.
- Asset retirement obligations increased $455 million over nine months to $6,071 million. Revisions to non-nuclear estimates increased the liability by $387 million, including changes related to Tennessee CCR rules and Allen Fossil Plant CCR estimates.
- Legal matters: TVA had accrued $14 million for legal proceedings. Ongoing matters include lawsuits related to the Kingston ash spill, alleged CCR exposure, a Bull Run exposure claim, the Bellefonte sale, and a challenge to TVA rate changes. TVA said actual liabilities materially exceeding estimates could adversely affect results, liquidity, and financial condition.
- At June 30, interest-rate swap liabilities were $2,108 million, and total derivative liabilities were $2,412 million. TVA had posted approximately $1.5 billion of letters of credit as collateral. Financial-market volatility also affected investment portfolios and pension assets; TVA had not determined whether additional pension contributions would be made in 2020.
- On August 3, 2020, the filing reported that the President had removed two TVA directors effective immediately. TVA was reviewing a federal executive order concerning contracting and hiring practices and had not determined its operational impact.
- Management reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during the quarter. TVA reported no off-balance-sheet arrangements at June 30.
Important facts for investors to verify
- Whether COVID-19-related demand and revenue weakness exceeded the estimated $100 million fourth-quarter base-revenue shortfall, and whether local power company payment deferrals or customer credit support increased materially.
- Cash generation, available revolving-credit capacity, and refinancing plans ahead of the February 2021 bond maturity, including TVA’s bond-limit headroom.
- Actual costs and timing for CCR conversion, ARO revisions, and other environmental compliance projects, including whether estimates change as rules and closure plans develop.
- Developments in the cited legal proceedings, including the rate challenge and CCR-related cases, and any effect on accrued liabilities or potential indemnification exposure.
- How pension and investment performance affects required contributions, and whether derivative collateral requirements or market volatility put further pressure on liquidity.
- Any consequences of the board-member removals, federal executive orders, or changes in TVA’s customer contracts and generation plans.