Tennessee Valley Authority — FY2023 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended March 31, 2023; TVA’s fiscal year ends September 30. Financial amounts are in U.S. dollars unless otherwise noted.
Business context
TVA is a U.S. government-owned corporate agency and the nation’s largest public power system, serving about 10 million people across the Tennessee Valley. Its power program is self-supporting, with rates set by the TVA Board. Electricity sales, primarily to local power companies, generated virtually all operating revenue.
Financial performance
| Metric | Three months ended Mar. 31, 2023 | Three months ended Mar. 31, 2022 | Six months ended Mar. 31, 2023 | Six months ended Mar. 31, 2022 |
|---|---|---|---|---|
| Operating revenue | $2.959B | $2.884B | $5.974B | $5.467B |
| Operating expenses | $2.613B | $2.349B | $5.230B | $4.607B |
| Operating income | $346M | $535M | $744M | $860M |
| Net income | $48M | $209M | $149M | $220M |
| Operating margin (calculated) | 11.7% | 18.6% | 12.5% | 15.7% |
| Net margin (calculated) | 1.6% | 7.2% | 2.5% | 4.0% |
- For the six months, revenue rose 9.3%, while operating expenses rose 13.5%; operating income fell 13.5% and net income fell 32.3%.
- Fuel expense increased $291M and purchased-power expense increased $141M in the six-month comparison, mainly reflecting higher commodity and market prices. Operating and maintenance expense rose $103M, including New Nuclear Program costs and higher payroll and benefits.
- Six-month electricity sales volume declined about 3%; milder weather outweighed the demand spike during Winter Storm Elliott. Higher fuel rates lifted fuel-cost recovery revenue, which contributed $459M of the $507M revenue increase.
Cash flow, debt and liquidity
- Six-month operating cash flow was $1.154B, down from $1.459B. Investing cash outflow was $1.495B, compared with $1.290B; construction expenditures were $1.199B. Financing provided $342M, versus $166M used in the prior-year period. Cash, cash equivalents and restricted cash ended at $521M.
- Total debt outstanding was $20.452B at March 31, 2023, up from $20.034B at September 30, 2022. TVA issued $1.0B of power bonds in March. Short-term debt was $572M, down from $1.172B at fiscal year-end.
- TVA reported $2.081B available under its $2.65B revolving credit facilities, after $569M of letters of credit; there were no cash borrowings under these facilities. A separate $150M U.S. Treasury facility was also undrawn. The Treasury facility is a secondary liquidity source and may be affected by federal debt-limit conditions.
- The statutory ceiling for outstanding bonds is $30B. Power bonds outstanding, excluding specified accounting adjustments, were $19.7B. Management expects adequate capacity to meet ongoing liquidity needs and planned investment over the next decade.
Material changes, outlook and notable developments
- Winter Storm Elliott: Extreme cold and equipment issues made about 7,300 MW of generation capacity unavailable at peak. Limited imports and record demand led TVA to direct load reductions, resulting in rolling outages on December 23 and 24, 2022. TVA deferred about $149M of storm-related fuel and purchased-power costs in December and began recognizing them in expense in February 2023. A federal reliability inquiry is underway; TVA says it is implementing resilience improvements.
- Generation transition: TVA plans to retire Cumberland’s two coal units by the end of calendar 2026 and 2028, respectively, with a 1,450 MW combined-cycle plant expected by the end of 2026 to replace part of the capacity. The retirements increased six-month depreciation expense by about $16M. Bull Run’s planned retirement by December 2023 also continues to drive accelerated depreciation.
- Environmental and capital exposure: TVA estimates 2023–2027 spending of $259M for Clean Air Act requirements, $783M for its coal combustion residuals program, and $66M for Clean Water Act requirements. These are estimates and may change with regulation, remediation requirements or other developments.
- Commercial and program items: The 2023 pandemic base-rate credit is expected to total about $230M. TVA agreed to contribute up to $88M through 2026 toward small modular reactor design work; it recorded $18M of expense in the six months and expected up to another $19M for the remainder of 2023. TVA also terminated a PPA for 66 MW of solar and 66 MW of battery storage after counterparty default.
- Risks and contingencies: TVA cited commodity-price and supplier risks, supply-chain pressures, extreme weather and reliability, environmental compliance, project delays, and regulatory and litigation uncertainty. It reported $10M accrued for legal proceedings. A NEPA lawsuit challenges the Johnsonville combustion-turbine project; TVA cannot predict its outcome. A separate lawsuit concerning long-term LPC agreements was dismissed, with the appeal deadline having expired April 7, 2023.
- TVA reported no material changes to its previously disclosed market risks or risk factors, and no off-balance-sheet arrangements at March 31, 2023. Management concluded disclosure controls were effective.
Key facts investors should verify
- Whether higher fuel and purchased-power costs, weather, and storm-related costs continue to pressure margins and operating cash flow.
- Debt issuance and remaining capacity under the $30B statutory bond ceiling, as TVA funds generation, transmission and other capital needs.
- Progress, costs, permits and replacement capacity for Cumberland and other generation projects, including the terminated renewable PPA.
- Actual environmental compliance and coal-ash remediation spending versus TVA’s 2023–2027 estimates, and the outcomes of relevant regulatory and legal proceedings.
- Whether storm-response reviews and planned reliability measures address the generation outages and rolling outages experienced during Winter Storm Elliott.
- Derivative and collateral exposure: TVA reported $1.412B of derivative liabilities at March 31, including $279M for its Financial Hedging Program; unrealized commodity and swap changes are generally deferred through regulatory accounting.