Tennessee Valley Authority — Q3 FY2021 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2021; TVA’s fiscal year ends September 30. Financial figures are in millions of dollars unless noted. Comparisons are with the corresponding 2020 periods.
Business context and financial performance
TVA is a federally created public power agency serving approximately 10 million people across seven states. Electricity sales account for nearly all operating revenue; local power companies are its principal customers. The statements are unaudited.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $2,527, up 12.3% from $2,251 | $7,403, up 0.7% from $7,350 |
| Operating income | $590, up 10.3% from $535 | $1,890, up 12.9% from $1,674 |
| Net income | $269, up 31.2% from $205 | $909, up 39.4% from $652 |
| Operating margin | 23.3% (prior year 23.8%) | 25.5% (prior year 22.8%) |
| Net margin | 10.7% (prior year 9.1%) | 12.3% (prior year 8.9%) |
For the nine-month period, electricity sales volume rose 5% to 113,606 million kWh, while revenue was nearly flat. The volume increase and higher energy sales were largely offset by lower effective rates, including $156 million of Pandemic Relief Credits. These credits were 2.5% monthly base-rate reductions and were expected to total approximately $200 million in FY2021.
Cash flow, debt, and liquidity
- Operating cash flow: $2,227 for the nine months, down $269 from $2,496. Investing cash outflow was $1,698, including $1,476 of construction expenditures and $243 of nuclear fuel expenditures. Financing cash outflow was $531. Cash, cash equivalents, and restricted cash ended at $519.
- Debt: Total debt outstanding was $20,668 at June 30, versus $20,889 at September 30, 2020. Short-term debt was $1,598, compared with $57 at fiscal year-end; TVA said the increase primarily funded power bonds that matured during the period. Long-term debt, net, was $19,000.
- Liquidity access: TVA reported $500 of cash and cash equivalents, $1,536 available under four revolving credit facilities, and a separate $150 U.S. Treasury facility with no borrowing outstanding. The $30 billion statutory bond limit and U.S. government debt-limit developments are relevant liquidity considerations. TVA stated it expected adequate funding capacity for operations and planned capital investment.
- Capital and financial position: Total assets were $53,019 and total liabilities $39,141. Regulatory assets were $9,314. Investment funds were $3,968, including $2.8 billion in the nuclear decommissioning trust and $1.1 billion in the asset retirement trust.
Material changes and notable items
- Nine-month operating expenses fell $163 to $5,513, principally because depreciation and amortization decreased $286 following accelerated retirement of Paradise and Bull Run units. This was partly offset by $92 higher operations and maintenance expense and $48 higher fuel and purchased-power expense.
- Fuel and purchased-power costs increased with higher natural gas and market prices and greater demand. In the quarter, TVA also recognized deferred fuel costs associated with February 2021 winter-storm market volatility.
- Construction expenditures rose to $1,476 from $1,221, reflecting generation capacity projects and nuclear fleet improvements. TVA reported $508 of operating cash flow after construction and nuclear-fuel expenditures, compared with $1,024 in the prior-year period.
- Asset retirement obligations totaled $6,952, up from $6,785 at September 30, 2020. Revisions to coal-ash closure estimates contributed to the increase; TVA also recorded a new $30 obligation for a Shawnee landfill.
- TVA’s $1.7 billion derivative liability position was partly collateralized by approximately $1.1 billion of letters of credit, reducing availability under its revolving facilities. Interest-rate swap liabilities declined $375 from fiscal year-end.
Outlook, risks, and contingencies
- Management said COVID-19 had little impact on base revenue from sales volume in the nine-month period and did not anticipate a material revenue impact for the remainder of 2021 and beyond, apart from customer relief credits. It cautioned that the pandemic and its economic, market, workforce, and supplier effects remain uncertain.
- Environmental spending estimates for 2021–2025 included approximately $800 for the coal combustion residuals program, $139 for Clean Air Act projects, and $156 for Clean Water Act requirements. Estimates may change with regulatory developments, remediation findings, and closure methods.
- TVA expected to spend a further $760 on two 750 MW gas capacity projects, with commercial operation targeted by the end of calendar 2023, and another $440 on a roughly 500 MW aeroderivative project targeted by the end of calendar 2024. These are project expectations, not earnings guidance.
- Legal proceedings included a Bellefonte sale dispute awaiting a court decision, an appeal of a dismissed rate-related class action, environmental litigation challenging long-term power agreements, and an FERC complaint by four local power companies seeking transmission and interconnection service. TVA accrued $14 for legal proceedings and estimated reasonably possible additional losses of up to $30; outcomes remain uncertain.
- Other key exposures include nuclear operations and licensing, coal-ash closure and groundwater remediation, changing environmental and climate rules, severe weather and dam safety, fuel and purchased-power supply and price volatility, cybersecurity, counterparty performance, and the statutory debt ceiling. TVA reported no material change in market-risk disclosures, no off-balance-sheet arrangements, effective disclosure controls, and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher sales volume and the end of pandemic-related credits support revenue and cash generation after FY2021, and how TVA’s rate and customer-credit decisions evolve.
- Drivers of the sharp increase in short-term debt and the remaining capacity under the $30 billion bond limit, revolving facilities, and collateral arrangements.
- Actual capital spending, project costs and schedules for new generation, nuclear work, dam remediation, and CCR closure; compare with the estimates disclosed here.
- Changes in fuel prices, demand, operating costs, environmental requirements, asset-retirement estimates, and related customer-rate recovery.
- Developments in the Bellefonte, long-term agreement, FERC transmission, and other legal matters, including any potential financial exposure beyond recorded accruals.