Tennessee Valley Authority — FY2021 First-Quarter Form 10-Q
Reporting period: Three months ended December 31, 2020, compared with the three months ended December 31, 2019, unless otherwise noted. TVA’s fiscal year ends September 30. Financial statements are unaudited; amounts are in millions of dollars unless stated otherwise.
Financial results and position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Operating revenue | $2,304 | $2,578 | Down 10.6% |
| Operating income | $515 | $532 | Down 3.2% |
| Net income | $184 | $192 | Down 4.2% |
| Operating margin | 22.4% | 20.6% | Up about 1.8 percentage points |
| Net margin | 8.0% | 7.4% | Up about 0.6 percentage points |
| Operating cash flow | $595 | $838 | Down $243 |
| Cash, cash equivalents and restricted cash, quarter-end | $529 | $327 | Up $202 year over year |
Electricity sales revenue was $2,270, down $262; other revenue was $34, down $12. Electricity volume was essentially flat at 36,672 million kWh versus 36,667 million kWh. Sales to local power companies represented 90.8% of operating revenue, including 74.7% from customers with 20-year termination-notice contracts.
Operating expenses fell 12.6% to $1,789. Fuel expense declined $54 and purchased-power expense declined $13, primarily reflecting lower natural-gas prices, improved nuclear performance, more hydro generation and greater availability of TVA-owned generation. Depreciation and amortization declined $206, largely due to accelerated depreciation associated with the Paradise and Bull Run retirements. Operating and maintenance expense rose $26, including higher planned nuclear outage and payroll costs. Interest expense was $281, down $6; the average blended interest rate increased to 5.17% from 5.06%.
Cash used in investing activities was $644, including $564 of construction expenditures; financing activities provided $57. The quarter-end balance sheet showed total assets of $52,563 and total liabilities of $39,396. Total debt outstanding was $20,992, including $112 of short-term debt, versus $20,889 at September 30, 2020. Current assets were $3,144 and current liabilities $4,614. TVA had $1,286 of availability under revolving credit facilities after letters of credit, no borrowings under those facilities, and no borrowings under its $150 million U.S. Treasury facility.
Material changes and management commentary
- Revenue decreased $274 year over year. Base revenue declined $194, including $133 less demand revenue, primarily because the prior-year quarter had exceptional October heat and November cold; the new Pandemic Relief Credit reduced revenue by $49. Fuel-cost recovery revenue fell $69, primarily with lower natural-gas prices.
- Management estimated COVID-19-related economic conditions reduced base revenue by approximately $10 in the quarter, without materially disrupting power operations or delivery. TVA had planned for $10.0 billion in total operating revenue for FY2021 and said pandemic-related revenue effects could continue through the year; effects beyond 2021 were uncertain.
- The Pandemic Relief Credit is a 2.5% monthly base-rate credit, estimated at approximately $200 for 2021. TVA also reported $42 of long-term partnership credits to local power companies in the quarter.
- TVA continued its elevated cash target because of financial-market volatility. It reported continued access to debt markets and expects adequate borrowing capacity for ongoing liquidity needs and planned capital investment over the next decade. The TVA Act caps outstanding bonds at $30.0 billion; power bonds outstanding were approximately $20.1 billion at quarter-end. A $1.5 billion material bond maturity was due in February 2021.
- Generation mix shifted: coal supplied 9% of power versus 14% a year earlier; nuclear supplied 44% versus 42%; hydro supplied 13% versus 10%. TVA reported 99.999% delivery reliability.
Outlook, risks and unusual items
- Major investment and environmental costs: TVA estimated remaining CCR conversion program expenditures of $902 through 2025, Clean Air Act control costs of $147 through 2025, and Clean Water Act-related expenditures of $173 through 2025. Estimates may change with regulatory requirements, closure methods and project developments.
- Generation and infrastructure projects: Paradise and Colbert gas-turbine expansions were expected to add approximately 1,500 MW, with total project costs capped at approximately $503 per site; TVA had spent $132 combined by December 31, 2020. The Johnsonville turbine project was expected to cost up to $499, with about $1 spent to date. Costs, timing and operating plans remain subject to execution and regulatory factors.
- Regulatory and environmental uncertainty: The D.C. Circuit vacated the Affordable Clean Energy rule in January 2021; future greenhouse-gas regulation and effects on coal operations were uncertain. Revised wastewater rules could require treatment investments or affect coal-plant utilization. TVA also faces CCR groundwater monitoring, remediation and closure obligations.
- Legal matters: TVA had accrued $14 for probable legal-proceeding losses. Matters include Kingston-related claims and possible indemnity exposure, litigation concerning Bellefonte and rate changes, challenges to long-term local power company agreements, and a January 2021 FERC petition by four local power companies seeking transmission and interconnection service. Outcomes and any additional exposure are uncertain.
- Other notable exposures: Nuclear decommissioning obligations were $3.3 billion and non-nuclear obligations $3.5 billion; actual costs may differ from estimates. TVA’s maximum contingent Price-Anderson retrospective premium was approximately $963 for a nuclear incident. COVID-19, severe weather, supplier performance, cyber and physical security, regulatory changes, and debt-limit capacity are identified risks.
- Subsequent events: TVA amended a $150 million community-bank credit agreement on February 9, 2021, extending maturity to February 9, 2024. The filing also reports new CEO compensation arrangements and an executive severance plan.
Key facts for investors to verify
- Whether FY2021 operating revenue reaches management’s $10.0 billion plan, and how pandemic credits, demand, weather and customer usage affect results.
- Whether operating cash flow and liquidity remain sufficient as TVA funds capital spending, environmental obligations and scheduled debt maturities; monitor debt against the $30 billion statutory limit.
- Actual costs and schedules for CCR remediation, emissions and water-compliance work, and generation and dam-safety projects compared with current estimates.
- Developments in FERC and local power company disputes, rate and contract litigation, Kingston-related claims, and regulatory proceedings.
- Whether nuclear-unit operating constraints, supplier delays, changing environmental rules or market conditions affect generation reliability, costs or planned investments.