Tennessee Valley Authority — Fiscal Q1 2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; comparative period is the three months ended December 31, 2018. TVA is a federally created public power agency serving nearly 10 million people. Its power program is intended to be self-supporting through customer revenues and financing.
Financial results and condition
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenues | $2.578 billion | $2.725 billion | Down 5.4% |
| Operating income | $532 million | $765 million | Down 30.5% |
| Net income | $192 million | $423 million | Down 54.6% |
| Operating margin | 20.6% | 28.1% | Down 7.5 percentage points |
| Net margin | 7.4% | 15.5% | Down 8.1 percentage points |
| Net cash from operating activities | $838 million | $502 million | Up $336 million |
| Net cash used in investing activities | $590 million | $601 million | Improved $11 million |
| Net cash from (used in) financing activities | $(243) million | $101 million | Down $344 million |
Electricity sales revenue fell $149 million, including a $123 million decline in energy revenue and a $97 million decline in fuel cost recovery. Other revenue was $46 million. Fuel and purchased-power expenses declined by a combined $96 million; operating and maintenance expense fell $56 million. Depreciation and amortization expense increased $239 million to $584 million, primarily reflecting accelerated depreciation tied to the Paradise and Bull Run retirements. Interest expense decreased $15 million to $287 million; the average blended interest rate rose to 5.06% from 4.88% while the average blended debt balance fell 6.1%.
At December 31, 2019, cash and cash equivalents were $304 million ($327 million including restricted cash); current assets were $3.051 billion and current liabilities were $4.133 billion. Total assets were $50.199 billion, total liabilities $38.367 billion, and proprietary capital $11.832 billion. Total debt outstanding was $22.015 billion, including $1.985 billion of current debt and $20.030 billion of long-term debt. The balance sheet does not present a conventional net-debt measure.
Cash from operations benefited from collections and lower outage expenses. Construction expenditures were $465 million and nuclear fuel expenditures were $117 million. TVA had $1.460 billion available under its revolving credit facilities, after $1.190 billion of letters of credit; it had no cash borrowings under those facilities. A separate $150 million U.S. Treasury credit facility was also unused. TVA’s statutory bond limit is $30 billion; power bonds outstanding, measured on the basis described in the filing, were $21 billion.
Changes, outlook, and significant items
- Lower demand and revenue: Electricity sales fell approximately 4%, principally because total degree days were 8.8% below the prior-year period and the service territory experienced milder overall weather. Direct industrial sales also declined, particularly in the polysilicon sector.
- Retirements and depreciation: TVA had recorded $791 million of cumulative accelerated depreciation related to Paradise and Bull Run, including $225 million in the quarter. Paradise Unit 3 was taken offline on February 1, 2020, earlier than the originally approved retirement deadline; Bull Run is scheduled for retirement by December 2023. Additional closure-related write-offs may occur.
- Comparative unusual item: Other income was $12 million, versus $24 million a year earlier. The prior-year period included $21 million related to a Bellefonte sale deposit; the purchaser’s failure to complete the transaction is the subject of litigation.
- Financial plan: TVA’s 2020–2030 Strategic Financial Plan targets debt stabilization in an $18–$20 billion range, a $300 million cash balance, rates as low as feasible, and operating efficiencies. These targets assume 100% long-term partner participation; the filing says lower participation could result in debt stabilization below the range. Debt at quarter-end was $22.015 billion.
- Customer contracts: 134 local power companies had signed the 20-year Partnership Agreement, representing 57% of quarterly operating revenue. Participating customers receive a 3.1% wholesale bill credit. TVA reported 99.999% delivery reliability and said more than $2.4 billion in investments and over 27,500 jobs had been created or retained through the quarter.
- Environmental spending and obligations: TVA estimated $1.510 billion of remaining potential environmental expenditures through 2024: $1.117 billion for the coal-combustion-residuals conversion program, $132 million for clean-air projects, and $261 million for Clean Water Act requirements. A Tennessee regulatory change increased the estimated non-nuclear asset retirement obligation by $117 million during the quarter; the change included a $129 million effect from extended CCR post-closure requirements.
- Legal and regulatory exposure: TVA had accrued $13 million for legal proceedings, but warned additional claims could materially affect results, liquidity, or financial condition. Matters include Kingston ash-related litigation and a Bellefonte sale dispute. Environmental requirements, CCR groundwater issues, evolving water rules, and plant-closure costs may add expense or capital needs; estimates may change.
- Other developments: TVA received an NRC Early Site Permit for potential small modular reactors at Clinch River, valid through 2039; construction would require TVA Board approval. TVA adopted lease accounting on October 1, 2019, recording $205 million of operating lease assets and $210 million of liabilities at adoption, with no material effect on operations or cash flows. No material changes to market-risk or risk-factor disclosures were reported; management said disclosure controls were effective.
The filing provides no specific near-term earnings or revenue guidance. Management’s outlook is framed through its long-term financial plan and stated environmental, generation, reliability, and customer initiatives. Results remain exposed to weather, demand, fuel and purchased-power prices, debt-market access and the statutory borrowing limit, environmental rules and litigation, asset performance, and nuclear, cybersecurity, and other operational risks.
Important facts for investors to verify
- Whether lower electricity sales and revenue reflect temporary weather comparisons or a more persistent demand trend, including the effect of industrial customer changes.
- How much additional accelerated depreciation, closure expense, and capital spending will result from Paradise and Bull Run retirements.
- Whether operating cash flow remains sufficient to fund capital needs, pension contributions, debt service, and the plan’s cash and debt targets.
- How final CCR, water-quality, and other environmental requirements affect the estimated $1.510 billion of spending through 2024 and asset retirement obligations.
- Developments and potential exposure in Kingston-related claims, the Bellefonte dispute, and other proceedings beyond the $13 million accrued amount.
- Whether the Partnership Agreement participation and associated credits support TVA’s debt and rate objectives, and how available credit capacity is affected by letters of credit and derivative collateral requirements.