Tennessee Valley Authority — Form 10-Q Summary
Business context and reporting period. TVA is a federally created public power and river-management agency serving about 10 million people across seven states. This fiscal 2022 third-quarter report covers the three and nine months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts are in U.S. dollars unless noted.
Financial performance and position
- Revenue: Third-quarter operating revenue was $2.970 billion, up 17.5%; nine-month revenue was $8.437 billion, up 14.0%. Electricity sales were 39.6 billion kWh for the quarter (+6.6%) and 117.5 billion kWh year to date (+3.5%). Growth reflected higher fuel-cost recovery, increased sales volume, economic growth, and warmer weather.
- Profit and margins: Third-quarter operating income was $590 million, unchanged, and net income was $256 million, down 4.8%. Nine-month operating income declined to $1.450 billion from $1.890 billion; net income fell 47.6% to $476 million from $909 million. Calculated operating margin was 17.2% for the nine months versus 25.5% in 2021; net margin was 5.6% versus 12.3%.
- Costs: Nine-month operating expenses rose 26.7% to $6.987 billion. Fuel and purchased-power costs increased by $879 million combined, mainly due to higher commodity and market prices and reduced TVA-owned generation availability. Depreciation and amortization rose $391 million, including an estimated $309 million attributable to revised depreciation rates.
- Cash flow: Nine-month operating cash flow was $1.834 billion, down from $2.227 billion. Investing cash outflow was $1.978 billion, including $1.772 billion of construction expenditures. Financing provided $147 million, compared with $531 million used in the prior-year period. Cash, cash equivalents, and restricted cash totaled $521 million at June 30.
- Debt and liquidity: Total debt outstanding was $20.475 billion, up from $20.314 billion at September 30, 2021; this included $1.034 billion of short-term debt. TVA reported $1.907 billion available under its revolving facilities, with $743 million of letters of credit outstanding and no facility borrowings. Current assets were $3.922 billion against current liabilities of $5.384 billion. The TVA Act caps bonds outstanding at $30 billion.
- Other exposures: Asset retirement obligations totaled $7.211 billion, including $3.545 billion nuclear and $3.666 billion non-nuclear. Regulatory assets totaled $8.178 billion. TVA had $3.751 billion in investment funds, principally trusts and benefit-plan assets.
Material changes versus the prior period
- Nine-month fuel and purchased-power expenses increased 29.2% and 77.1%, respectively. Higher fuel rates and purchased-power prices, the Watts Bar Unit 2 steam-generator replacement outage, and lower hydroelectric generation contributed.
- A new depreciation study shortened estimated service lives for coal-fired plants, reflecting planning assumptions that the remaining coal fleet could retire by 2035. Bull Run is approved for retirement by December 2023. The new rates increased nine-month depreciation by an estimated $309 million; additional depreciation for four other coal plants was estimated at $253 million.
- TVA’s financial hedging program resumed activity in the second quarter, hedging natural-gas price exposure. Unrealized derivative gains and losses are generally deferred through regulatory accounting rather than immediately affecting earnings.
- Interest-rate swap liabilities declined $565 million from September 30, 2021, mainly because market interest rates rose; TVA said the reduction did not affect current-year earnings under its regulatory accounting treatment.
Outlook, commentary, and risks
- Budget and plans: Subsequent to quarter-end, the Board approved a fiscal 2023 budget based on projected revenue of $12.4 billion, including $4.6 billion for fuel and purchased power, $3.3 billion for operating and maintenance, $1.1 billion for interest, and $1.0 billion for base capital spending. It authorized up to $2.0 billion of bonds and other financing. A 2.5% monthly base-rate credit is expected to cost about $230 million in 2023. This is a budget, not earnings guidance.
- Generation and transition: Watts Bar Unit 2 returned to service in July 2022 after its steam-generator replacement. TVA is evaluating retirement of the remaining coal fleet by 2035 and pursuing replacement and clean-energy options. In July 2022, TVA issued a request for up to 5,000 MW of carbon-free and renewable projects.
- Environmental and asset costs: TVA estimated about $1.0 billion of CCR-program expenditures, $124 million for Clean Air Act projects, and $128 million for Clean Water Act requirements through 2026. CCR remedy costs may rise as investigations and remedy selections continue. Non-nuclear asset-retirement estimates increased, including revisions related to coal ash closures and construction costs.
- Operational and market risks: TVA reported persistent coal supply and rail constraints, higher fuel, reagent, transportation, and other input costs, and supply-chain and inflation pressures. It also cited weather-related generation constraints, possible water-temperature limits, supplier disruptions, regulatory changes, and nuclear and other facility risks.
- Liquidity and market exposure: TVA had $721 million of collateral obligations related to derivatives and posted $743 million in letters of credit, reducing revolving-credit availability. Subsequent to quarter-end, TVA estimated significant changes in derivative fair values, primarily due to movements in interest rates and natural-gas prices; these changes were generally paired with regulatory assets or liabilities.
- Contingencies: TVA accrued $11 million for legal proceedings. Environmental and CCR matters, including potential remediation costs and a possible indemnity obligation related to worker-exposure litigation against a contractor, remain uncertain. TVA stated it did not expect the potential worker-litigation liability to have a material adverse effect. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether higher fuel and purchased-power costs continue to be recovered through rates, and the timing of fuel-cost adjustments.
- Actual cash generation, capital spending, debt issuance, and headroom under the statutory bond limit as TVA funds its investment program.
- Final cost and schedule for CCR closures, environmental compliance, plant retirements, and generation replacement projects.
- Operational effects of fuel-supply constraints, outages, extreme temperatures, and water conditions, including impacts on reliability and purchased-power needs.
- Developments in material litigation, regulatory proceedings, and the expected implementation of the fiscal 2023 customer credit and clean-energy plans.