Tennessee Valley Authority — Form 10-Q summary
Business context and reporting period
TVA is a federally created public power utility serving nearly 10 million people across seven states, with electricity sales as its primary source of revenue. This fiscal third-quarter report covers the three and nine months ended June 30, 2019; TVA’s fiscal year ends September 30. The statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Nine months ended June 30, 2019 |
|---|---|---|
| Operating revenue | $2.604 billion, down 3.8% year over year | $8.079 billion, up 0.4% |
| Operating income | $516 million, down 37.8% | $1.873 billion, down 19.3% |
| Net income | $165 million, versus $470 million | $829 million, versus $1.220 billion |
| Operating margin | 19.8%, versus 30.7% | 23.2%, versus 28.8% |
| Operating cash flow | Not presented separately for the quarter | $2.479 billion, versus $2.537 billion |
| Investing cash flow | Not presented separately for the quarter | $(1.533) billion |
| Financing cash flow | Not presented separately for the quarter | $(945) million |
At June 30, 2019, cash and cash equivalents were $300 million; total assets were $48.275 billion; total liabilities were $37.227 billion; and proprietary capital was $11.048 billion. Total debt outstanding was $22.759 billion, down from $23.639 billion at September 30, 2018. TVA had $1.444 billion of short-term debt and $1.030 billion of current power bond maturities. Its $2.65 billion of revolving credit facilities had $1.56 billion available, with no cash borrowings; approximately $1.09 billion was committed to letters of credit. A separate $150 million U.S. Treasury facility had no borrowings outstanding.
Material changes versus prior comparable periods
- Quarterly electricity sales revenue declined $104 million, primarily because lower fuel cost recovery and milder weather reduced sales volume. Nine-month electricity sales revenue rose $27 million, mainly reflecting the October 2018 base-rate adjustment, partly offset by lower volume.
- Operating and maintenance expense increased $141 million for the quarter and $408 million for nine months. Drivers included accelerated recovery of Kingston ash-spill environmental costs, costs associated with planned retirements of Paradise and Bull Run, and additional planned nuclear outage days.
- Depreciation and amortization increased $172 million for the quarter and $124 million for nine months. Accelerated depreciation for Paradise and Bull Run was $225 million and $341 million, respectively, for those periods.
- Fuel expense fell $86 million for the quarter and $114 million for nine months. Nine-month purchased-power expense rose $44 million, partly offsetting fuel savings.
- Interest expense declined $40 million for the nine-month period, largely because average debt balances were lower. The average blended interest rate nevertheless increased to 4.90% from 4.81%.
Outlook, risks, contingencies, and unusual items
- TVA provided no specific earnings or revenue guidance. Management said it believed available financing, power revenues, possible rate increases, cost reductions, and other measures could support operations and planned capital investment over the next decade.
- The 2019 Integrated Resource Plan was finalized and scheduled for TVA Board consideration in August 2019. Its scenarios indicate a need for replacement capacity, substantial solar expansion, and potential additions of gas, storage, and demand response; some scenarios include further coal retirements.
- The Board approved retirement of Paradise Unit 3 by December 2020 and Bull Run by December 2023. TVA subsequently determined Paradise would not restart after January 2020 because of its condition.
- TVA recorded a $667 million asset-retirement obligation for Gallatin coal-combustion-residual closure and post-closure work. A consent decree was approved by the court on July 24, 2019, after quarter-end; it requires removal of wet ash impoundment material, with removal due within 20 years after plan approval. The decree includes no penalties or admission of liability. Final project costs remain uncertain.
- TVA estimated additional environmental expenditures of $1.354 billion for its CCR conversion program, $189 million for clean-air projects, and $324 million for Clean Water Act requirements, based on estimates subject to change. It also reported $14 million accrued for legal proceedings. Potential claims could exceed accruals.
- Other notable exposures include a Bellefonte sale dispute, Kingston ash-spill-related litigation, nuclear decommissioning obligations, environmental compliance costs, and risks from weather, fuel supply, cyberattacks, and facility reliability. TVA reported $5.632 billion in total asset-retirement obligations, including $3.107 billion nuclear and $2.525 billion non-nuclear.
- TVA’s $30 billion statutory bond limit is a financing constraint to monitor. Power bonds outstanding were approximately $22 billion, excluding specified discounts, premiums, and foreign-currency effects.
Most important facts for investors to verify
- Whether the operating-cost increases and sharply lower net income persist after the accelerated retirement, Kingston recovery, and outage-related expenses.
- Actual costs, timing, and permitted closure approach for Gallatin and TVA’s broader CCR program, including any changes to the $667 million recorded obligation and the estimated remaining program spend.
- Progress on Paradise and Bull Run retirements, and the effect of the changed generation mix on reliability, rates, and capital requirements.
- Debt and liquidity headroom, including use of revolving facilities for derivative collateral and remaining capacity under the statutory bond limit.
- Developments in material litigation and environmental proceedings, including the Kingston and Bellefonte matters and potential liabilities beyond recorded accruals.