Tennessee Valley Authority — Form 10-Q Summary
Business context and reporting period
TVA is a federally created public power agency serving nearly 10 million people across the southeastern United States. This filing covers the fiscal second quarter and six months ended March 31, 2020; TVA’s fiscal year ends September 30. Dollar amounts are in millions unless stated otherwise. The filing was signed May 4, 2020.
Financial performance
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Operating revenue | $2,521 | $2,750 | $5,099 | $5,475 |
| Operating income | $607 | $592 | $1,139 | $1,357 |
| Net income | $255 | $241 | $447 | $664 |
| Operating margin | 24.1% | 21.5% | 22.3% | 24.8% |
| Net margin | 10.1% | 8.8% | 8.8% | 12.1% |
Quarterly revenue declined 8.3%, while net income increased 5.8%. For the six-month period, revenue declined 6.9% and net income fell 32.7%. Six-month electricity sales revenue decreased $372 million, largely reflecting lower sales volume in milder weather and lower fuel-cost recovery. Reduced fuel and purchased-power costs and lower operating and maintenance expense partly offset lower revenues and higher depreciation.
Six-month operating cash flow was $1,870, up from $1,747 a year earlier. Investing cash outflow was $1,010, and financing cash outflow was $324. Cash, cash equivalents and restricted cash totaled $858 at March 31, 2020, compared with $322 at September 30, 2019. TVA increased its cash target by $500 million in March, funded with discount notes.
Total debt outstanding was $21,928, down from $22,197 at September 30, 2019. Current debt outstanding increased to $3,489 from $2,014, including $1,875 of short-term debt. TVA had $1,253 of availability under its revolving credit facilities after letters of credit, and no cash borrowings under those facilities. Bonds outstanding for purposes of the TVA Act debt limit were $21.1 billion against a $30.0 billion limit.
Material changes and unusual items
- Electricity sales revenue decreased $223 in the quarter and $372 for the six months. Management attributed the reductions primarily to milder weather, lower effective rates and lower sales volume; it also reported COVID-19-related sales declines in March.
- Six-month depreciation and amortization expense rose $230, primarily because of accelerated depreciation associated with the Paradise and Bull Run retirements. Paradise Unit 3 went offline February 1, 2020; Bull Run is planned to retire by December 2023.
- Six-month operating and maintenance expense fell $212, including lower prior-year Kingston ash-spill cleanup expense and fewer plant-closure write-offs. Lower prior-year expense was partly offset by higher payroll and benefit costs.
- Market volatility associated with COVID-19 led to lower investment values and higher derivative liabilities. Unrealized interest-rate swap losses are deferred as regulatory assets rather than immediately recorded in earnings; the filing reports $2,150 of interest-rate swap liabilities at March 31.
- TVA adopted lease accounting on October 1, 2019, recognizing operating lease assets and liabilities; adoption did not materially affect operations or cash flows. At March 31, reported total lease liabilities were $548.
Outlook, risks and contingencies
TVA estimated that base revenue for the remainder of 2020 could be $300–$500 below plan due to COVID-19-related economic disruption. It began deferring selected capital projects and reducing discretionary spending. Management said operations and power delivery had not been materially affected at the reporting date, but the pandemic’s duration and economic effects were uncertain. TVA offered up to $1.0 billion in payment-deferral support to local power companies; $1 million had been approved as of May 4, 2020.
TVA reported operating cash flow and continued access to debt markets, but identified risks from customer demand and payment deferrals, fuel and supplier performance, market volatility, pension-asset declines, environmental compliance costs, and nuclear and infrastructure operations. Pension plan assets declined from $8.0 billion at September 30, 2019, to $6.8 billion at March 31, 2020; TVA had not determined whether additional pension contributions would be needed in 2020.
Environmental spending remains significant: TVA estimated $1.053 billion of remaining CCR conversion program expenditures through 2024, alongside $124 for air-control projects and $238 for Clean Water Act requirements. A Tennessee regulatory change extending CCR post-closure care requirements contributed to a $120 increase in non-nuclear asset-retirement estimates. The filing also describes Kingston-related litigation, other environmental and personal-injury claims, and a Bellefonte sale dispute. TVA had accrued $13 for probable legal-proceeding losses and stated that actual liabilities could exceed estimates. A potential June 2020 bond reset could require repurchase of up to $273.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. TVA reported no off-balance-sheet arrangements at March 31, 2020.
Important facts for investors to verify
- Whether the projected $300–$500 base-revenue shortfall for the remainder of 2020 materialized, and how demand, collections and local power company deferrals evolved.
- Whether cash reserves, debt issuance and revolving-credit availability remained adequate as maturities came due; monitor the $1.5 billion power-bond maturity identified for February 2021 and TVA’s statutory debt capacity.
- How lower pension-asset values affected funding requirements, benefit costs and any additional contributions.
- Whether environmental and CCR rules, closure methods, or groundwater findings changed projected compliance costs or schedules.
- Developments in the disclosed legal proceedings and the potential financial exposure beyond recorded accruals.
- Whether the Paradise and Bull Run retirement plans, associated depreciation and any further project or inventory write-offs changed.