Tennessee Valley Authority — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2019, the second quarter of TVA’s fiscal 2019; financial comparisons are with the corresponding 2018 periods. Amounts are in millions of dollars unless noted.
Business context and financial performance
TVA is a federally created public power provider serving nearly 10 million people across the Tennessee Valley. Electricity sales are its principal revenue source; local power companies accounted for about 91% of electricity revenue in the six-month period.
| Metric | Three months ended Mar. 31, 2019 | Year-over-year | Six months ended Mar. 31, 2019 | Year-over-year |
|---|---|---|---|---|
| Operating revenue | $2,750 | Down 1.5% | $5,475 | Up 2.5% |
| Operating income | $592 | Down 28.7% | $1,357 | Down 9.0% |
| Net income | $241 | Down 47.8% | $664 | Down 11.5% |
| Operating margin | 21.5% | Versus 29.7% | 24.8% | Versus 27.9% |
| Net margin | 8.8% | Versus 16.5% | 12.1% | Versus 14.0% |
Six-month revenue from electricity sales rose $131 million, mainly because a base-rate adjustment took effect October 1, 2018; milder-than-normal January and February weather reduced sales volume. TVA said the adjustment was expected to add approximately $200 million to fiscal 2019 revenue. Six-month operating expenses increased 7.0%, including higher operations and maintenance costs.
For the six months, operating cash flow was $1,747, down from $1,858 a year earlier; investing cash outflow was $1,040, versus $1,141; and financing cash outflow was $706, compared with $192 of financing cash inflow. Cash, cash equivalents, and restricted cash totaled $323 at March 31, 2019, versus $1.220 billion at March 31, 2018.
At March 31, 2019, total debt was $23.004 billion, down from $23.639 billion at September 30, 2018. Current assets of $3.044 billion were below current liabilities of $4.852 billion. TVA had $1.718 billion available under revolving credit facilities after letters of credit, no cash borrowings under those facilities, and no borrowings under its $150 million U.S. Treasury credit facility. Power bonds outstanding were approximately $22 billion against the TVA Act’s $30 billion borrowing limit, using TVA’s stated measure.
Material changes and unusual items
- Net income declined despite higher six-month revenue, primarily because of higher operating costs and lower sales volume. Milder weather reduced electricity sales; increased hydro generation helped reduce fuel costs.
- TVA recorded $124 million of project write-offs and $11 million of materials and supplies inventory reserves/write-offs related to planned Paradise and Bull Run retirements. It also recorded $115 million of accelerated depreciation. Paradise was not expected to restart after January 2020; Paradise Unit 3 is scheduled for retirement by December 2020 and Bull Run by December 2023.
- Operations and maintenance expense included accelerated recovery of Kingston ash-spill cleanup regulatory assets: $54 million in the quarter and $108 million for the six months.
- Six-month other income included a $21 million deposit-related item associated with the failed Bellefonte sale. The purchaser’s lawsuit seeking, among other relief, damages exceeding $30 million remained pending.
- Total asset retirement obligations increased to $4.977 billion from $4.779 billion at September 30, 2018, including an increase in estimated non-nuclear retirement costs.
Outlook, risks, and contingencies
- TVA was updating its 20-year Integrated Resource Plan and anticipated presenting final reports and recommendations to its Board in August 2019. It signed four solar power purchase agreements totaling 674 MW, expected online in 2021, and issued a request for proposals for up to 200 MW of additional renewable energy.
- Gallatin coal-combustion-residual litigation presents significant cost uncertainty. TVA estimated about $900 million for the planned onsite project; offsite relocation could cost up to $2.0 billion plus inflation-related costs. Recorded related liabilities were $864 million long term and $22 million current. Plaintiffs sought U.S. Supreme Court review after an appellate ruling in TVA’s favor; a separate state case remained pending.
- TVA estimated environmental expenditures of $1.155 billion for its CCR conversion program, $153 million for clean-air projects, and $313 million for Clean Water Act requirements, on the schedules disclosed in the filing. Estimates may change with regulations, litigation, and closure decisions.
- Other disclosed exposures include nuclear and dam safety, environmental compliance, groundwater investigations, extreme weather and flooding, cyber and physical security, fuel and power supply, and interest-rate and counterparty risks. TVA said actual costs or legal liabilities could materially exceed estimates. Accrued losses for legal proceedings were $14 million.
- TVA gave no specific earnings or cash-flow forecast. It stated that it believed available financing, power revenues, rate increases, cost reductions, or other measures could fund operations and planned capital investment over the next decade. It also disclosed that its bonds are not obligations or guaranteed obligations of the United States.
Important facts for investors to verify
- Whether the rate adjustment offsets softer demand and ongoing weather-related sales variability.
- Progress, final costs, and litigation outcomes for Gallatin CCR work, including the possibility and cost of offsite disposal.
- Cash generation, planned capital spending, short-term borrowing needs, and remaining capacity under the statutory debt limit.
- Cost and timing of Paradise and Bull Run retirements, including any further write-offs or reliability implications.
- Updates to environmental compliance estimates, asset-retirement obligations, and the Bellefonte and other legal proceedings.