Tennessee Valley Authority — FY2018 Form 10-K
Business context and reporting period. TVA is a U.S. government agency and the nation’s largest public power system, serving nearly 10 million people across parts of seven southeastern states. It primarily sells wholesale electricity to local power companies and also serves large industrial and federal customers. This filing covers the fiscal year ended September 30, 2018; it is an annual report, not a standalone fourth-quarter filing. TVA has no equity securities, and its bonds are not guaranteed by the U.S. government.
Financial performance and position
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Operating revenue | $11.233 billion | $10.739 billion | Up $494 million, or 4.6% |
| Operating income | $2.312 billion | $1.975 billion | Up 17.1% |
| Net income | $1.119 billion | $685 million | Up $434 million |
| Operating / net margin | 20.6% / 10.0% | 18.4% / 6.4% | Calculated from reported revenue and income |
| Net cash from operating activities | $3.955 billion | $2.736 billion | Up $1.219 billion |
| Net cash used in investing activities | $2.269 billion | $2.536 billion | Lower spending, including completion of major projects |
| Total debt, net | $23.639 billion | $25.253 billion | Down $1.614 billion |
| Cash and cash equivalents | $299 million | $300 million | Current liabilities exceeded current assets |
Electricity sales revenue was $11.075 billion, nearly all operating revenue. Sales volume was 160.338 billion kWh, up about 5% year over year. Approximately 91% of operating revenue came from local power companies. FY2018’s fourth quarter reported revenue of $3.185 billion, operating income of $184 million, and a net loss of $101 million, compared with FY2017 fourth-quarter net income of $139 million.
TVA’s $30 billion statutory bond limit compares with $22.7 billion of power bonds outstanding at year-end. It reported $1.729 billion of unused availability under revolving credit facilities, after $921 million of letters of credit, and a separate $150 million U.S. Treasury facility with no borrowings. These facilities support liquidity but do not remove reliance on debt-market access.
Material changes versus prior year
- Revenue growth reflected higher sales volume, notably weather-driven demand, and a base-rate adjustment effective October 1, 2017. Fuel cost recovery revenue fell $142 million, principally due to lower fuel rates.
- Operating and maintenance expense decreased $508 million, mainly because FY2017 included a discretionary $500 million pension contribution and FY2018 had fewer nuclear planned-outage days.
- Depreciation and amortization rose $810 million. This included $857 million of accelerated amortization of certain regulatory assets, partly offset by lower depreciation following generating-unit retirements.
- Power supply shifted further from coal: nuclear provided 39% of generation and purchased power, versus 38% in FY2017; coal fell to 19% from 25%; natural gas and/or oil rose to 20% from 16%.
- Operating cash flow increased, enabling $1.6 billion of net debt redemptions. TVA issued $1.0 billion of power bonds during the year.
Outlook, risks, contingencies, and unusual items
- Rates and planning: A base-rate adjustment effective October 1, 2018 is expected to add approximately $200 million to FY2019 revenue. Rate restructuring reduces Standard Service wholesale energy rates while adding a Grid Access Charge to recover fixed costs; 79 local power companies adopted the changes in October 2018 and 75 deferred them until October 2019. TVA was updating its 20-year Integrated Resource Plan and expected to issue a draft in February 2019.
- Capital spending: Planned capital expenditures were $2.339 billion for FY2019, including $428 million for transmission and $298 million for environmental projects. TVA projected total capital spending of $2.230 billion in FY2020 and $2.161 billion in FY2021. Management said it did not foresee needing another large base-load generating unit for at least a decade.
- Environmental exposure: Planned environmental spending includes approximately $1.2 billion for the CCR conversion program through 2023, excluding new Gallatin lawsuit requirements, and $466 million for Clean Water Act compliance through 2024. Gallatin CCR costs were estimated at about $900 million for onsite relocation; offsite relocation could reach $2.0 billion plus inflation, and additional penalties or orders were not estimable. A Sixth Circuit panel reversed an order requiring relocation, but plaintiffs sought rehearing; other Gallatin litigation remained pending.
- Pension and retirement obligations: The qualified pension plan had $8.0 billion of assets against $11.7 billion of obligations, a $3.7 billion shortfall. TVA contributed $300 million in FY2018 and expected to contribute at least $300 million in FY2019. Total recorded asset retirement obligations were $4.779 billion, including $3.0 billion for nuclear decommissioning.
- Other operating and regulatory risks: Key exposures include nuclear safety and licensing, CCR and groundwater remediation, dam safety, weather and water availability, fuel and purchased-power costs, cyber and physical security, and potential changes to environmental rules. The filing identifies customer concentration and the risk that statutory service-territory protections could change. TVA also has a $1.122 billion interest-rate-swap liability and had posted $921 million of letters of credit as collateral.
- Unusual accounting and events: FY2018 included $857 million of accelerated regulatory-asset amortization. FY2017 included the one-time $500 million discretionary pension contribution. The auditor issued an unqualified opinion on the financial statements and internal controls. A jury verdict in November 2018 in litigation against TVA’s Kingston cleanup contractor could lead to reimbursement obligations for TVA, but the amount was not estimable; TVA was not a party to that case.
Most important facts for investors to verify
- Whether the FY2018 earnings and cash-flow improvement persists without unusual weather, accelerated amortization, or comparison against FY2017’s pension contribution.
- Available liquidity after letters of credit, upcoming debt maturities, refinancing needs, and progress against the $30 billion statutory bond limit.
- Final Gallatin litigation outcomes and closure method, including whether costs approach the onsite estimate or the higher offsite estimate.
- Actual environmental compliance spending, pension funding needs, and changes in recorded asset-retirement obligations.
- Implementation and revenue effects of the FY2019 rate changes, alongside demand, customer retention, and results of the updated resource plan.