Tennessee Valley Authority PARRS A 2029 (TVE) Q4 2022 Earnings Call Transcript

Tennessee Valley Authority PARRS A 2029 (NYSE:TVE) Q4 2022 Earnings Conference Call November 15, 2022 9:30 AM ET

Company Participants

Tammy Wilson - Vice President, Treasurer and Chief Risk Officer

Jeff Lyash - President and Chief Executive Officer

John Thomas - Chief Financial and Strategy Officer

Conference Call Participants

Amy Kelly - Sierra Club

Dave Flessner - Chattanooga Times Free Press

Operator

Good morning everyone and welcome to the Tennessee Valley Authority's Fiscal Year 2022 Conference Call. For your information, today's conference call is being recorded. All participants will be in a listen-only mode. [Operator Instructions]

At this time for opening remarks, I would like to turn the call over to Ms. Tammy Wilson, TVA Vice President, Treasurer and Chief Risk Officer. Ms. Wilson, please go ahead.

Tammy Wilson

Thank you, Matt. Good morning everyone and welcome to the Tennessee Valley Authority fiscal year 2022 financial review. TVA is unique and that our fiscal year end is on September 30. And this morning, I have with me TDA’s Chief Executive Officer, Jeff Lyash; and TVA's Chief Financial and Strategy Officer, John Thomas. And today is actually John's birthday, so happy birthday, John.

And this morning, Jeff will begin with a business updates and John will follow with a review of TVA's financial performance. After the prepared remarks, the call will be opened up to give participants the opportunity to ask questions. Now, for a few quick housekeeping items before we begin.

Today's press release and TVA's Annual Report on Form 10-K for the fiscal year ended September 30, 2022, are available on TVA's website that’s www.tva.com. A replay of this webcast will also be available on TVA's website for a period of one year. Today's discussion may include forward-looking statements that are subject to various risks and uncertainties, so please refer to TVA's annual report on Form 10-K for the year ended September 30 of 2022 for a discussion of these factors.

And with that, I will now turn the call over to TVA's President and Chief Executive Officer, Jeff Lyash.

Jeff Lyash

Thanks, Tammy. Good morning, everybody, and thank you for your time today. I'm pleased to report that in 2022, TVA made progress in many areas critical meeting our customers' needs today, while also setting us up to maintain reliability, resiliency, affordability, and sustainability in the future. Let me mention a few notable highlights from this past year.

During sustained peak this summer, we reliably met record power demand. We safely completed the replacement of all [4-C generators] [ph] at Watts Bar Nuclear Plant Unit 2. This is one of the most demanding and complex activities in the nuclear industry. TVA received the Nuclear Energy Institute Top Innovative Practices Award for our demonstrated commitment to safety, cost savings, and industry leadership.

We started a program of up to $200 million to help advance new nuclear technology, which I think is critical to enabling both EAs and the nation's decarbonization aspirations. We issued the nation's largest ever request for proposal for additional carbon free energy. We safely completed the 7-year, $326 million Boone Dam remediation project and we did it on-time and under budget. This was the largest day of safety modification in TVA history and a major geotechnical engineering feat.

TVA also posted successful financial results this year, as we work aggressively to keep costs low and further reduce debt to the lowest level in 35 years. We were able to hold TVA’s base power rates flat in 2022, and because of our continued positive financial progress, we announced in August that TVA is keeping base rates unchanged again in 2023. This will be our fourth consecutive year of holding base rates flat.

Our work in 2022 was guided by several strategic priorities that are helping TVA achieve its mission today and in the long-term. So, let me give you more details about our results and accomplishments of these areas. Our first strategic priority is powerful partnerships. TVA works with our local power company customers to deliver a reliable, low cost, and sustainable energy supply every day for the residents businesses and industries in the Tennessee Valley region.

147 of our 153 local power company customers are now on 20-year evergreen power contracts. Customers on this 20-year agreement account for about 77% of our total operating revenues based on 2022 sales. Those on the 20-year agreement are eligible for a 3.1% base rate credit, which collectively totaled $199 million for 2022 alone.

In fact, partner credits have totaled more than $560 million since TVA introduced the 20-year option just a few years ago. Our strong results also put us in a position to assist all our customers with credits to help reduce or help with the recovery I should say from the pandemic. The 2.5% pandemic recovery credit that TVA provided in 2022 totaled $228 million. This is money that stays in local communities helping with local needs.

TVA has now provided $449 million in total pandemic credits through 2022. And the TVA Board has authorized us to keep the pandemic recovery credit at 2.5% for 2023, which we expect to total an additional $230 million. Collectively there, TVA has now given back more than $1 billion in total partner and pandemic credits over the past several years through 2022.

While costs for many things have gone up in recent years, we're proud of TVA’s progress in keeping our power rates, as low as possible. TVA power is among the lowest cost, most reliable, and increasingly most sustainable in the nation.

The recent retail rate in the area served by TVA and our local power companies for the 12-months ended in July was [$0.0985] [ph] per kilowatt hour. By comparison, the median for the top 100 largest utilities in nation was [$0.1108] [ph]. That difference translates to about $1.9 billion in annual savings for customers in the areas served by TVA and our local power companies.

The average industrial rate in our service area is also among the lowest in the nation. So, we believe TVA offers the best value for our customers and the strong response to the long-term partnership option demonstrates the confidence our customers have in our progress and the strength of this [public panel] [ph]. We're also pleased to see the recent recommendation to the Memphis Light, Gas and Water Division Board by MLGW Management. The recommendation is to stay with TVA and enter a long-term greeting.

We remain respectful and supportive of MLGW’s process and we're committed to Memphis, regardless of which option is chosen. Maintaining of people advantage is another key priority because we know the skill and dedication of our workforce makes a difference. We had several notable accomplishments in this area in 2022. We were proud to be named as the first federal agency to earn the covenant compliance leader verification from Ethisphere.

Ethisphere is their global leader in defining and advancing the standards of the ethical business practices. This designation is a high honor and demonstrates that TVA fosters a culture of ethics and integrity that builds public trust. Savoy Magazine also named our Executive Vice President and Chief External Relations Officer, Jeannette Mills to its list of 2022's most influential Black Americans in Corporate America. This is a wonderful recognition for Jeannette, a grade team member of TVA.

TVA has been honored with recognition as a military veteran friendly company with receipt of the 2022 Military Friendly Employer Award and Military Friendly Supplier Diversity Program Award. And for the fourth consecutive year, TVA also was ranked in the Top 15 best-in-state employers in Tennessee by Forbes Magazine. Global ERG Summit named TVA a 2022 Diversity Impact Award Top 10 Diversity Action Award Recipient. And we published TVA's inaugural Diversity, Equity, Inclusion and Accessibility Report.

The closely related priority is maintaining operational excellence. TVA operates one of the largest high voltage transmission systems in North America and we are one of the largest electricity generators in the nation. In fact, TVA has been running an integrated transmission and generation model for almost 90 years and we have the experience and expertise to meet extreme demand events and perform well when it matters most.

Our systems has been 99.99% reliable for more than 20 consecutive years. More than half of the TVA's power supply in 2022 came from clean energy sources that are also not subject to volatile fuel prices. This includes 39% of TVA’s energy from our nuclear fleet, the third largest nuclear fleet in the United States.

As an example of the volume that nuclear facilities provide, Unit 3 at TVA's Browns Ferry Nuclear Plant in Alabama ran for 690 consecutive days and produced more than 20 billion kilowatt-hours of carbon-free electricity before a scheduled refueling and maintenance outage earlier this year. To put that in perspective, that’s enough electricity provide power the average home for about 1.8 million years.

In 2022, TVA achieved industry top quartile fleet performance. Thanks to our talented nuclear staff and a commitment to continuous improvement and a range of recent equipment upgrades. Those upgrades included substantial investment in our nuclear facilities, such as the upgrade of Browns Ferry Unit 3 this spring with four high pressure [clear water heaters] [ph] and the replacement of 4-C generators at Watts Bar Unit 2 this summer.

Nuclear power is critical to life in the Tennessee Valley. And to ensure we continue to count on this valuable resource, we're starting the process of applying for operating license extensions for the three ground surgeon. The licenses don’t expire until the 2030s, but this process is detailed and it will take several years, so we're [starting to pass] [ph].

TVA also continues to make investments in projects, including our new system operations center, energy management system, fiber optic network, and other projects to improve our system and ensure a more resilient energy grid for the future. Several of these projects were included in our recently published report on the use of proceeds from the first TVA green bond issued in September 2021.

And we continue to reduce our reliance on coal as we invest in our energy system to make sure reliability remains high for those that we serve. Environmental reviews evaluating the potential retirement of the Cumberland and Kingston Fossil Plants, our two largest remaining coal sites are now underway.

The capital expenditures include modernizing our gas fired power footprint. Gas fired power is firm, flexible, dispatchable energy, and the capacity that will be a [indiscernible] and an insurance policy as we build out the energy system of the future. [Gasoil] [ph] is also important for maintaining a diverse power capability along with nuclear, hydroelectric, and other expanding renewable resources.

TVA is also in the top quartile in renewable energy production in the south and is aggressively expanding renewable capacity. We have over 8,000 megawatts of renewables online or under development. And earlier this summer, TVA announced the request for proposal for up to 5,000 megawatts of carbon free energy projects with commercial operation base through 2029. This is one of the largest renewable RFPs in U.S. history.

And the TVA Board just approved a $216 million first of its kind pilot program at the Shawnee Fossil plant to explore the potential of developing a utility scale solar project on a closed coal ash storage location. Additionally, the 80 local power companies that participate in TVA's power supply flexibility program are now able to generate power under this program outside of their service territories, giving them even greater flexibility to meet their customers' needs.

TVA is already a national leader in cargo production, and has achieved a 57% reduction in mass carbon emission since 2005. This is one of the largest [decreases] [ph] in the industry. [They were reasonably] [ph] released by the energy information administrator also confirms that Tennessee had the largest reduction in carbon intensity from [2016 to 2022] [ph] of any state in the U.S.

We're proud of the TVA's record and leadership, but we all know there's a lot more to do. TVA is taking actions to achieve interim reductions through 2035 and we aspire to achieve net zero carbon emissions by 2050. We recognize the urgency to lead the nation in driving, sort of clean energy economy. That's why innovation is another priority and focus area for TVA as we work aggressively to build the energy system in the future.

We were pleased to see the passage of the Inflation Reduction Act earlier this summer, which contains provisions to allow public power entities like TVA to be able to use incentives for investments in non-carbon assets that are available for the broader industry. We're evaluating this new act and the potential benefits and opportunities it offers. TVA is actively supporting the development of emerging technologies, including energy storage, electric vehicle evolution, decarbonization, connected communities, regional grid transformation, and advanced nuclear solutions.

You've seen us announce several partnerships recently to help advance cleaner energy. Just week ago, we announced that TVA is joining a newly formed coalition with several of our regional investor on [indiscernible]. With Battelle, and others to pursue federal support for Southeast Hydrogen Hub. Hydrogen is attractive as an energy resource because it has immediate potential to accelerate decarbonization in the southeast and across all sectors in the U.S. economy, including transportation, which generates the largest share of greenhouse gas emissions in the country.

We think a Hydrogen Hub will also bring economic development benefits to our region. We've announced other partnerships recently to support development of other technologies, including new nuclear. In February, TVA’s Board of Directors announced the launch of TVA’s new nuclear program and approved up to [$200 million] [ph] to explore advanced reactor technology options.

The new nuclear program coordinates TVA's collaborative efforts with other utilities, with government agencies, research institutions, and organizations on advanced nuclear technologies, and it helps spread the financial and technical risks associated with developing new solutions. TVA’s Clinch River Nuclear site near Oak Ridge is currently the only site in the nation where the early site permit from the Nuclear Regulatory Commission for small monoclonal reactors. And one of the first tasks that our new nuclear program is pursuing is to develop an NRC construction permit application to potentially deploy a light water SMR at the Clinch River site.

And we announced in August that TVA signed a two-party agreement with General Electric- Hitachi, which will support our planning and preliminary licensing efforts based on the GE- Hitachi BWRX-300 light water SMR design. This agreement builds on a collaboration we announced this past spring with Ontario Power Generation that developed small molecule reactors as an effective long-term source of 24/7 carbon free energy in both Canada and the U.S.

Working together, the knowledge gained from collaborative efforts with GE- Hitachi, OPG, and others will help us make the best decision on whether to proceed with the project at Clinch River.

Finally, we're focused on maintaining financial strength and delivering value by keeping rates low, which creates an attractive business environment. We were excited about the announcement a few weeks ago that Novartis economic development project in the history of the state of Mississippi was finalized. This is a $2.5 billion investment by [Steel Dynamics] [ph], which has expanded its [Columbus campus] [ph] on a Tennessee Valley Authority mega site creating a thousand new jobs.

For fiscal year 2022, TVA and our local partners work together and create or retain an estimated 66,500 jobs and over $10 billion in projected capital investments. TVA has also remained the top utility in economic development for the 17th consecutive year by Site Selection Magazine. Those are results that we are very proud.

So now, let me turn the call over to John to give more details on our financial performance. John?

John Thomas

Thanks, Jeff. And so, I'll begin with the highlights. The overall operating revenues were 19% higher. This is really driven by three factors: One, we are seeing load growth in the valley, partly due to in-migration. People moving here. We also had a very hot start to the summer. So, weather was a factor. And then lastly, higher natural gas prices drove our fuel cost recovery higher.

From a rate perspective, as Jeff mentioned, the base rates are flat year-over-year and remain flat into 2023. Our customers continue to benefit from both the partner and the pandemic credits. And then this diverse power system that we have along with our hedging activities has helped to mitigate some of the impact of these higher natural gas prices that I'll talk about later.

And then lastly, strong financial performance has led to lower overall debt balances, which has resulted in lower interest expense. And so, I mentioned the weather and the impacts that it had with the early summer, if you will. And so, overall, cooling degree days certainly in June and July where we had some record peaks, helped contribute overall to higher loads.

In terms of our overall sales and revenue, our power sales were up 3.3% [then] [ph]. Overall base rates, again flat. The overall total effective rate was higher driven by these higher natural gas prices, but just to spend a minute in looking at the diversity of the fleet and overall natural gas prices, the natural gas prices this year were roughly tripled what they were back in 2020 and almost double what they were in 2021. But even with those really high gas prices, the balance of this fleet, as Jeff mentioned, the 39% of our generation coming from nuclear that has essentially no price volatility. And that 39% was in a year where there was a [single generator] [ph] project.

So, a significant outage project and that the fleet was still able to produce 39% is just outstanding performance on the nuclear side. Then you can see 13% hydro and other renewables, coal contributed 13%, and then natural gas 22% with some offset some purchases, which is predominantly natural gas as well.

And so that wide range, as well as the fact that regarding much of this natural gas was actually hedged at lower than market prices. And so, the overall diversity of the fleet then, these pie-charts give you a good representation of how TVA sits relative to the nation.

So, 52% of our generation is carbon free, compared to the average for the nation at 34% and you can see the significant contribution that our renewables and our nuclear fleet makes to that mix. So, in terms of the income statement, overall total operating revenue is up about $2 billion, again [1.8 million] [ph] of that driven by the fuel cost recovery and just over 200 million of base revenue, which was the volume in the weather.

Overall fuel purchase power, expense was up in direct alignment with the fuel cost recovery revenue. Overall operating and maintenance expenses were up $96 million and these were really planned activities, particularly around improving the performance of our fleet. Relative to our business plan, we're actually favorable because there was continued operational efficiencies inside the business.

Depreciation and amortization of 521 million and this is really associated with our new depreciation study. Every five years, we update our depreciation schedules. And this update, the acceleration of the coal retirements with our planned fleet transition resulted in accelerated depreciation for those coal plants.

Overall tax equivalents are higher by 87 million. This is because we pay in lieu of taxes that are based on our revenue. So, as our revenues are higher, so are our tax equivalent payments. And then lastly interest expense at right around $1 billion. So, overall net income was 1.1 billion, which is 400 million less than last year, predominantly driven by the higher depreciation expense.

In terms of cash flow, overall almost $3 billion worth of operating cash flows, so really strong operating cash flow coming in. It's 300 million less than last year. Last year had a couple anomalies. One was the really hot summer in 2020. We carried in some positive cash flows into 2021, as well as this year, we had more coal ash remediation projects that showed up in operating cash flow.

Overall investing at almost $2.7 billion financing activities then balance that out. And so, overall, we still had a reduction in debt this year, even with a strong capital spending year of almost $200 million. So, overall total financing obligations at 203 billion, so plenty of headroom for us.

As Jeff mentioned, the cumulative partner and pandemic credits of $1 billion and that grows to $1.4 billion by the end of 2023 with the commitments we've made. Again, no change in base rates. This diverse fleet helps mitigate these extreme gas prices and overall very strong financial health. So, I'll talk a bit about that. Jeff mentioned the rates. So, when you look at TVA both from a retail, residential, and industrial, our rates are extremely competitive.

In terms of our overall debt trend, you can see down at 20.3 billion and as Jeff mentioned the lowest in over 35 years. And then just a couple of financial metrics in terms of our interest coverage, good positive trend there both on an annual basis, but also on a yearly average basis and then overall continued improvement in our leverage, if you look at debt to asset ratio, now at 39%.

And then lastly, in terms of a look ahead with the plans that we have for the continued restructuring of our fleet, and meeting our decarbonization objectives, you can see that we will have significantly higher capital spend, particularly in the capacity expansion area, up to – going up to $4 billion in 2024 and 2025.

So, these will be the highest capital expenditure years that we have seen. And then we'll certainly need the support of the investment community as this will predominantly be funded through operating cash flows and through power volumes. And so, overall in terms of our strategic financial plan objectives maintaining flat base rates that we're in good shape there even with the inflationary pressures we've seen, we have now kind of stabilized at around the $20 billion our debt, which is what we had planned. The 147 customers on [20-year] [ph] contracts provides strong revenue stability for the significant capital investments that we'll be making. We continue to focus on operational efficiencies and looking for increased opportunities to partner with our customers to advance the public power model.

And so with that, I will turn it back over to Matt to queue up questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question will come from Amy Kelly with Sierra Club. Please go ahead.

Amy Kelly

Hello. I just wanted to ask a question about the Inflation Reduction Act. We are seeing utilities across the country make changes in planning decisions or estimating [indiscernible] customer savings, [indiscernible] accelerate the retirement of multiple coal units and increase the amount of renewables they plan to secure, and the [Technical Difficulty] changes. Similar with Duke Energy, they're canceling [Technical Difficulty]. How has the IRA impacted the [Technical Difficulty]? And will TVA take advantage of the IRA to eliminate or shrink the amount [Technical Difficulty] that it's planning as a replacement for the [Cumberland Fossil Plant] [ph]?

Jeff Lyash

Yes. So thanks for the question. TVA has very aggressive goals for carbon reduction, our goals are as aggressive. We're in many cases more aggressive than the companies that you mentioned. And we're executing [indiscernible] significantly has already [reduced carbon] [ph]. Renewables are an important part of that, including solar, which we think is a good resource for the footprint. As we've said many times, our objective is to build 10,000 megawatts in solar and that effort is in progress.

What constraints that effort is right now isn't our intent to build it, it’s the availability of material and panel supplies and pricing. And so, we'll continue to be aggressive there. We'll continue to drive the drive down our carbon emissions, which is the ultimate goal. And of course, the Inflation Reduction Act helps lower the cost of that.

I don't know that it materially changes plan, it may make the plan lower cost to our customers, but we will continue to maximize the amount of solar the system can accommodate without jeopardizing affordability, reliability, or resiliency using the mix of access that it takes to deliver that. We'll be watching closely in implementing rules associated with the IRA. No one knows what those look like yet, but we're engaged, more common, and when they become clear, we'll certainly utilize it to the maximum extent we can.

Operator

Our next question will come from Dave Flessner with Chattanooga Times Free Press. Please go ahead. Pardon me, Mr. Flessner, your line might be muted.

Dave Flessner

Apologize, my line was muted. Good morning. Thanks for taking the call very much. The $12 billion you referenced, John Thomas over the next three years for bowering, can you put that in the historical context? Have you bowered that much before in that period ever? And then what kind of target – is that targeted for new nuclear or for new generation or is that just what's the – what – why such a big increase in capital spending?

John Thomas

Yes. Thanks, Dave. So, the 12 billion is not incremental debt it’s incremental capital. But of course, with [subordinated debt] [ph]. But then within that [capital plan] [ph], when we did kind of go back to the early 2014 and 2015 when we did the first wave of our restructuring of our fleet, we were spending roughly $3 billion a year during that time period. So, this is $4 billion a year, so it's about $1 billion higher. And it really goes across a range of items.

It goes from the investments we continue to make in our – the maintenance and the reliability of our fleet in our transmission system. It goes towards the ash – coal ash remediation projects that we are committed to. And then lastly, it goes towards expansion projects to compensate for and allow for increased renewables on the system as well. And so, we have not made any specific commitments around what that capacity expansion will look like. We're still in the environmental review processes, but there will be some capacity expansion there as well. So, it covers the whole range. But [indiscernible].

Dave Flessner

[Indiscernible] was meant for your debt levels in the future going forward now?

John Thomas

Yes. Our debt levels will go up a couple of billion dollars over the next several years. If you think about we have roughly $3 billion worth of operating cash flow. And if you're spending $4 billion for a few years, capacity expansion, then you're looking at about $1 billion a year the next several years.

Dave Flessner

On your pension fund, if I could ask one more question. It looks like you're 77% funding, can you talk about how interest rates have impacted that in the [coal] [ph] restrictions you had before? Is it in sort of the status of the [TVA’s] [ph] pension account at this point?

John Thomas

Yes. So, we had committed back in 2013 to a 20-year fully funded pension and we have been steadily progressing. We were 58% a couple of years ago. We were 68% last year and now we're 77% this year. And again, this was a year where overall market returns were 4% at best. But yes, the fact that these long-term liabilities are impacted by as interest rates rise, the discount rate rises.

And so that was a factor, but we're – we had in the last several years that go the other way when we had record low interest rates. And so, we're really committed to the long-term health of that plan. And I think the 77% shows that we're headed in a very a positive direction.

Was there another part of your question Dave? Sorry.

Dave Flessner

No, no, thank you. That's helpful. Appreciate it.

John Thomas

Yes, sure.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Lyash for any closing remarks.

Jeff Lyash

Well, thank you again for your time this morning. In closing, just let me say that the success and momentum and strong performance in 2022 has set the stage for a successful 2023. In May, we'll be celebrating TVA's 90th anniversary year. As we remain focused on the key priorities that will help us continue to sustain TVA’s mission.

We'll continue to work with our partners and customers to meet the day-to-day challenges of providing low cost and reliable power for our region, while working aggressively on all fronts to advance the clean energy technologies that will ensure a sustainable future for all of us. We appreciate your ongoing support of our work. Thanks to everyone.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.