Tennessee Valley Authority PARRS A 2029 (NYSE:TVE) Q3 2022 Earnings Conference Call August 2, 2022 9:30 AM ET
Company Participants
Tammy Wilson – VP, Treasurer and CRO
Jeff Lyash – President and CEO
John Thomas – Chief Financial and Strategy Officer
Conference Call Participants
David Flessner – Chattanooga Times Free Press
Kristi Swartz – E&E News
Amy Kelly – Sierra Club
Operator
Good morning everyone and welcome to the Tennessee Valley Authority’s Third Quarter Fiscal Year 2022 Conference Call. For information today’s conference call is being recorded. [Operator Instructions]
At this time for opening remarks, I’d like to turn the floor over to Ms. Tammy Wilson, TVA Vice President, Treasurer and Chief Risk Officer. Ms. Wilson, please go ahead.
Tammy Wilson
Thank you, Jamie. Good morning everyone. Hope everyone’s staying safe and cool this summer. I’d like to welcome everyone to the Tennessee Valley Authority third quarter fiscal year 2022 financial review. Today I have with me TVA’s Chief Executive Officer, Jeff Lyash; and TVA’s Chief Financial and Strategy Officer, John Thomas. Jeff will begin with the business update then John will follow with the review of TVA’s financial performance.
After our 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 quarterly report on Form 10-Q for the third quarter ended June 30 of 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 uncertainty, so please refer to our report that’s Form 10-Q for the quarter ended June 30 of 2022 and TVA’s annual report that’s Form 10-K for the fiscal year ended September 30 of 2021.
And with that, I will now turn the call over to TVA’s President and Chief Executive Officer, Jeff Lyash.
Jeff Lyash
Thank you, Tammy. Good morning, everyone and thank you for your time today. This has been a busy year at TVA as we continue to work aggressively to advance cleaner energy while meeting record power demand peaks and providing reliable low cost power for the Tennessee Valley region. We’re excited to give an update today on our progress through TVA’s fiscal third quarter.
We’re focused on strategic priorities that are helping us achieve TVA’s mission today and over the long-term. So I’ll outline our progress in the context of each of these priorities. Our first priority is partnerships. TVA works with 153 local power companies to deliver a reliable, low cost and sustainable energy supply every single day for the residents, businesses and industries in the Tennessee Valley region.
146 of our local power company customers are 95% are now on 20 year evergreen power contracts and that accounts for 77% of total operating revenue so far this fiscal year. In the first three quarters, partner credits returned to our customers totaled over $141 million. And these credits have now totaled more than $0.5 billion since TVA introduced the 20-year contract option just a few years ago.
TVA strong financial results also put us in a position to help all our customers with recovery from the pandemic. The 2.5% pandemic recovery credit TVA provided this year totaled $161 million through the third quarter alone. TVA has now provided over $380 million in pandemic related credits. This money stays in local communities and helps meet local needs.
TVA success in providing low cost and reliable power is doing large part to our dedicated team of employees and contractors. Maintaining that people advantage is another key priority because we know that when times are difficult, the skill and the hard work of our workforce matters the most. In fact, it was our employees that ensured TVA has been able to meet recent power demand challenges this summer.
During the two week period in June, TVA had six days with energy demand above 30,000 megawatts, including the highest recorded June power demand of 31,161 megawatts. Put that in perspective, TVA had only recorded six total days above 30,000 megawatts in June prior to this year. Throughout this period of historic demand TVA’s power system remained stable, reliable, and resilient.
And we continued to meet significant demand in July. In fact, we had six days above 30,000 megawatts last month as well. I want to thank our employees for their planning, preparation and execution. Keeping upwards of 30,000 megawatts flowing day after day is not an easy task, even for a system as large and diverse as TVA’s. Add to that our commitment to keep power rates low, and it’s quite a balancing act.
TVA has more than 250 individual generating units, and one of the nation’s largest transmission systems. Large power providers like TVA must maintain a margin of safety in our systems. But we also want to keep prices low by not over preparing for extreme events. TVA has been running an integrated transmission and generation model for almost 90 years.
And we have the experience and expertise to plan for extreme demand events and perform well when it matters the most. As the nation grapples with rising energy costs, TVA is cleaner more diverse power supply is also helping to keep the price of power lower for our customers. The average retail rate and TVA service area is among the lowest third of the top 100 power providers in the nation.
And it’s clear power consumers in the Tennessee Valley save significantly from the low rates that TVA and our local power company partners provide. 53% of the electricity supplied by TVA in the first three quarters of our fiscal year was from sources not directly impacted by fuel prices. This is not only carbon free, but stable power, which is helping to keep TVA’s rates low.
TVA operates the nation’s third largest nuclear fleet, which meets approximately 40% of the energy needs of TVA’s service territory. TVA was proud to be presented a Nuclear Energy Institute Top Innovative Practice Award in June for our demonstrated commitment to safety, cost savings, and individual leadership.
A team of our engineers discovered that replacement steam generators made with improved materials showed a much lower rate of wear than the original equipment allowing less frequency of inspections, improving safety and reducing cost. This change goes beyond TVA to benefit the industry hence the Industry Award.
Any plant that has steam generators with the improved materials can submit an NRC request to make a technical specification change and realize the same benefits. Our employees have built a culture of continuous improvement, and this award shines a light on the powerful results that can be implemented across the nuclear industry.
We were also happy to have Watts Bar Nuclear Plant Unit 2 return to operation in early July after successfully completing the scheduled steam generator replacements and other activities. As anyone in our business knows, removing the original steam generators and installing the upgraded models, which weigh more than 800,000 pounds each was a significant engineering and operational feet.
For the steam generator replacement project alone, the team made more than 4,000 wells and poured more than 850,000 pounds of concrete. They also completed more than 26,000 work activities, including replacement of 88 of Unit 2’s 193 fuel assemblies, and installing enhancements to help the unit continue safe, reliable operation for years to come.
Watts Bar Unit 2 is now helping us meet summer demand on another 18-month fuel cycle of providing reliable and affordable carbon free power generation 24 hours a day, seven days a week. As noted in our sustainability report, TVA is among the industry leaders in cleaner energy and decreasing carbon emissions, the numbers provide the proof.
TVA has slashed carbon emissions by 57% through 2021 from 2005 levels, while maintaining residential power rates, lower than 80% of other utilities. In 2021, TVA announced our aspiration to achieve net zero carbon emissions by 2050. And we’re taking actions now to achieve reductions of 70% through 2030 and 80% through 2035.
TVA is aligned with the federal administration and other stakeholders we know that decarbonizing the economy must be a priority and it must be a shared priority. Climate change is one of the major challenges our nation in the world faces today and it must be responded to with urgency and with innovation.
As we build the energy system of the future, carbon free energy sources are an integral part of meeting our sustainability goals, while continuing to provide the low cost, reliable power that our customers expect and that they deserve. To that end, and consistent with our assets strategy TVA recently announced a request for proposal or an RFP for up to 5,000 megawatts of carbon-free energy projects with commercial operations dates through 2029.
We believe this is the largest such RFP in the history of our industry, and one that hopefully will help us go farther faster in our pursuit. The RFP welcomes a broad range of generation sources including nuclear, green gas, solar, storage, and wind, either located in the TVA service territory or delivered to TVA’s interface with neighboring transmission systems.
This RFP allows us to better assess what is currently available in the market, what may be on the horizon, and how these resources can help meet our carbon reduction efforts for 2030 and beyond. And I look forward to updating you as this process unfolds. It’s important to note that in addition to adding contracted resources, TVA is continuing to make investments in the power system to ensure we maintain a low cost reliable and sustainable power supply.
In fact, I want to mention that TVA recently completed the – Boone Dam restoration project, on time and on budget. This was a multiyear investment of over $320 million that provides a vital regional recreation and economic resource that is also an important renewable energy source for the Tennessee Valley. Innovation is another priority and focus area as we work aggressively to build the energy system of the future.
As I mentioned, TVA is executing a defined strategy toward establishing a carbon-free energy future and part of that strategy is to be a national leader in developing cost effective technology. TVA continues to actively support the development of emerging technologies, including energy storage, electric vehicle evolution, decarbonization, connected communities, regional grid transformation and advanced nuclear solutions.
These developments benefit the entire nation. And they are not something that TVA in the end can do alone. You’ve seen us announced several partnerships recently to help advance cleaner energy, especially new nuclear. We’re exploring a variety of new technologies that – would contribute to TVA and national decarbonization objectives without adversely affecting generation reliability, or unreasonably raising energy costs for our Tennessee Valley customers.
You’ll recall that in February TVA’s Board of Directors announced the launch of TVA new nuclear program and the Board approved up to $200 million to explore advanced reactor technology options as a component of TVA’s decarbonization goals. This through a programmatic approach to exploring advanced nuclear technology.
The new nuclear program coordinates TVA’s collaborative efforts with other utilities government agencies, research institutions and or other organizations on advanced nuclear technologies. Working with other interested parties helps us spread the financial and technical risks associated with development of new innovative solutions.
One of the first tasks the new nuclear program is pursuing is to develop a nuclear regulatory commission construction permit application to potentially deploy a light water small modular reactor at the Clinch River nuclear site, near Oak Ridge. Clinch River is currently the only site in the nation with an NRC early site permit for an SMR.
Back in February, we discussed our interest in supporting the development of the GE-Hitachi BWRX-300 light-water SMR design, as this would give us the necessary information to make the most informed decision about potential deployment in the future. I’m pleased to announce the TVA has taken another step on that road and signed a two-party agreement with GE-Hitachi, which will support our planning and preliminary licensing for the potential deployment of an SMR at the Clinch River site.
The agreement will provide additional information needed to analyze the viability of SMRs in the valley, subject to Board approval of course. This agreement builds on a collaboration we announced in April with Ontario Power Generation to develop small modular reactors as an effective long-term source of 24/7 carbon-free energy in both Canada and the U.S. It’s important to understand that no final decisions have been made.
But 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. This is all part of a rigorous project planning process. And we intend to take a deliberate and cautious approach. TVA is planning process includes several decision gates and if any of the metrics lead us to believe continuation of the program isn’t practicable, we could cease design and licensing activities.
Our planning work is expected to take two to three years. And then we’ll decide on whether to pursue the next steps in construction of the project. Finally, we’re focused on maintaining financial strength and delivering value by keeping rates low. TVA’s business model is based on generating the revenue needed to manage our system, while keeping our power rates low, and providing reliable and sustainable power which creates an attractive business environment.
TVA and our partners in economic development work together to help create or retain more than 57,000 jobs, and to attract over $9.6 billion in capital investments to our region so far this fiscal year. This is already shaping up to be one of our best years. And we still have another quarter to go. I’m excited about it.
So let me now turn the call over to John, to give more details of our financial performance. John?
John Thomas
Thanks, Jeff.
I’ll begin with the highlight of overall, higher sales some of this because of economic growth, a lot of in migration in the valley. But also as Jeff mentioned, the weather has been quite a factor here in June and July. Overall operating revenues are higher because of the higher load, but also because of higher fuel cost.
But overall, our effective power rate still stays on trend, in line with – saw almost a decade ago so very happy for long, sustained performance and the benefit of this diverse fleet that we have I’ll talk more about that later. And overall interest expense is lower due to lower debt balances. So to talk about the weather because it was such a factor through June, this chart shows you can see that other than 2018 which was, an extremely hot year as well.
This would be the second highest this is cooling degree days here and as Jeff mentioned, as well the highest number of cooling degree days ever, when you include July, so the heat continues for sure. So if you look, overall power sales were 3.5% higher. As I said, operating revenues were 14% higher. If you look at the impact overall on rate, you can see again, TVA holding base rates flat, we continue to do that and then our overall effective rate at about 11% higher.
If you can get to the next slide, we look for a minute overall at fuel prices. And as everybody’s aware, natural gas prices are significantly higher, 90% higher than they were a year ago. And, and coal prices are just as significant. When you’re looking at these 90% to over 100%, we’ll include coal increases in fuel prices, the fact that our overall effective rate is only up about 11% is a tribute to one, the diversity of this fleet that you see with 39% of our electricity coming from nuclear.
And then the benefit of the hydro system we have, the layer on top of that the fact that we have hedging programs, to fix the price for our natural gas and for our coal, that we help mitigate a significant portion of this price volatility for our customers. You do see that nuclear is down slightly, that’s really just attributed to nuclear the re-fuelling outages and the fact that we had the steam generator replacement, so we had 85 more nuclear re-fuelling outage days this year than we did last year, but the fleet continues to perform very well.
So then, in terms of the income statement, I’ve talked about the revenue, you can see driven significantly by the fuel cost recovery, and then the fuel and purchase power expense in line with that overall operating and maintenance expense at $163 million higher than the previous year. This is driven by a couple of factors one, than the outages, just the expense associated with doing the outages and starting to see a little bit of inflationary pressure as well.
Overall depreciation and amortization is significantly lower at $391 million. This is due to the new depreciation study that we implemented for 2022. We update these depreciation studies every five years. And so because of the accelerated amortization and depreciation with our coal fleet decisions, you see that depreciation and amortization is higher. You can see $33 million lower interest expense and then overall net income at $476 million, $433 million less than prior period, driven largely by the increase in O&M and depreciation and amortization.
But as I said in previous quarters, you know, really not motivated by net income, but more by operating cash flow. And so our operating cash flow at just over $1.8 billion for the nine months, that is down approximately $400 million from the prior period, really driven by three factors. One is the fact that we really had a strong 2020. And we had some cash flow that moved into the beginning of 2021.
The second is more spending on coal combustion residuals, which has an AR or show up in our operating cash flow adjustment. And then a little bit associated with the cash gap, just the timing between the increasing fuel prices and when we pay for fuel versus when we recover the cost of revenue so three factors really driving that $400 million overall investing activity at just approaching $2 billion.
We continue to invest both in terms of the fleet for its ongoing performance, as well as in our transmission system for the reliability that we provide. And so you see overall financing activity, so TFO, up approximately $150 million. We still expect that we’ll have a slight reduction year-over-year in TFO by the time we get to the end of the fiscal year.
And so just to recap, higher sales driven by this economic growth and a really, really hot summer so far, our customers continued to benefit from the pandemic recovery credit. And overall the power system in this time of high fuel prices continues to provide significant benefits for our customers.
So with that, I’ll turn it over to Jamie to queue up the questions.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question today comes from David Flessner from Chattanooga Times Free Press. Please go ahead with your question.
David Flessner
Good morning, and thanks for taking the question. The last point you John Thomas was talking about the total financial obligations, they seem to be fairly stable now at $20 billion after declining for a number of years. As you look to new investments in tech, both the existing fleet and the new technologies, new nuclear technologies, is that TFO level going to stay fairly even is that the right debt level is TVA through with the Europe trying to slash much more debt?
John Thomas
Yes Dave, this is John. So thanks for the question. When we put together the 20 year long-term partnership proposal, one of the beliefs as a part of that was that – this in the low 20 range of TFO for TVA was, was a good healthy level. And it matched with this 20-year period of commitment that the customers had made to TVA. But the other factor was that it gave us some room to be able to finance new assets, as we had to further transition the fleet.
And so, I would expect that over the next decade, as we invest further in the transition of the fleet that our debt will go up slightly, not significantly, but it will kind of level out where we are today and then begin to increase slightly as we add new assets.
David Flessner
Thank you.
Operator
And our next question comes from Kristi Swartz from E&E News. Please go ahead with your question.
Kristi Swartz
Hi, I wanted to touch base on two things. First is the Board of which I know you all are not. You are hands off on that process, but remind me again, how many seats are vacant? And then I think we’re up to now four people then appointed that might be in the queue?
Jeff Lyash
Yes Kristi, good morning. So TVA has nine Board seats. We currently have five Board members. So we have four vacancies and five as a quorum. Two of those five, their term will expire either when they’re replaced, or at the end of the congressional session that the end of the year essentially, the President has nominated six new members of the Board. Three of them have already been through the Senate committee, hearing process three have yet to undergo that process.
So – if I make the assumption that the process proceeds and the six Board members are confirmed, sometime before the end of the congressional session that will result in a full TVA Board with all nine members by the end of the year. So hopefully that gives you an idea of where we’re at here.
Kristi Swartz
Sure okay great. Thank you. And then I – it’s going to take me a minute to get through this. What I’m kind of seeing across the Board and yours industry is a perfect storm for the lack of a better term in terms of electric companies making huge capital investments to transition their fleet plus, it’s hot – so that’s high – that’s demand on the system, and then demand on power bills and then fuel cost going up?
As I recall, TVA isn’t planning on raising rates until or looking at rates until what 2025? I mean, how are you all balancing everything and then making sure your end customers aren’t experiencing great shock down the road?
Jeff Lyash
That’s quite a question Kristi let me try to go at it from a couple of different angles. So three years ago, TVA communicated to our customers that our objective was to hold base rates flat for a decade. And so three years in, we have done that. And we’re optimistic about our ability to continue to meet that objective, even as we invest in maintaining reliability and in modernizing the fleet. So we believe we are well positioned to keep that balance.
When it comes to fuel price as John and I talked about earlier, almost 60% of our generation, wind, solar, hydro, nuclear really has zero or very low and stable fuel prices. So that helps the diversity of the fleet helps to mitigate fuel price increase for our customers. Now, it doesn’t eliminate it. As John said, the doubling of natural gas and coal has resulted in about an 11% increase in our base plus fuel costs, and we’re working hard to minimize that impact on folks.
As we look to the future, we are in a generational transition on the fleet as our others. Our 2050 objective is to be zero or very low carbon on this fleet, essentially, net zero. And that’s going to take investment in our existing assets, which we’re executing on a good example is the Watts Bar Unit 2 steam generator project, which not only extends the life of those plants, but add it over 20 megawatts of additional zero carbon generation investing in our hydro fleet to preserve it extend it and get more out of it.
And it modernizing our gas fleet, simple cycle and combined cycle so that if we can integrate large amounts of renewables and continue to reduce our reliance on coal. And so all of these things are in flight and a great example of a step here for us is this 5,000 megawatt clean energy RFP where we’re looking for any source of zero carbon energy that can factor into our 2030 carbon goal – and accelerate our progress there.
So our approach to this Kristi is, is fourfold we are focused on maintaining the price affordable during this transition. Reliable, so people can count on it resilient, so that our customers can be confident when faced with a challenge, expected or unexpected, we’ll recover well, and then ever more clean, lower carbon. And we think maintaining the balance between those four, affordability, reliability, resilience, and clean is the key to serving our customers over the next three decades.
Operator
[Operator Instructions] Our next question comes from Amy Kelly from Sierra Club. Please go ahead with your question.
Amy Kelly
Hi, we have been seeing announcements from all over the TVA service region by local power companies saying their rates are increasing due to TVA’s natural gas investment and fuel costs adjustment. How is TVA continuing to assess its current plans to build approximately 5,000 megawatts of methane gas plants, especially factoring in a recent resolution from the city of Nashville and EPA comments, which both asked the agency to instead choose renewable energy to save customers money and significantly decrease carbon emissions compared to gas?
Jeff Lyash
Well, let me start out TVA’s rates haven’t increased at all, because of our ongoing investment in modernizing the gas fleet. Fuel price has increased because of natural gas and coal price increases. And as I mentioned, the diversity of TVA fuel of our generation fleet in fact, produces best decile fuel cost performance for our customers when compared to the industry. And even though we’ve seen an increase, we are still some of the lowest fuel cost in the industry.
We’re also a leader in carbon emissions. So we’ve even reduced our carbon emissions 57% against the 2005 benchmark. That’s one of the highest percentage reductions in the industry. And we’re continuing to head down that path with the industry’s largest ever clean energy RFP, in order to be able to go farther faster. Now, we are equally committed to maintaining reliability and resiliency.
And our investment in modernizing the gas fleet continues to help us reduce reliance on coal, which we expect to eliminate by 2035. Importantly, it is a requirement for integrating the 10,000 or more megawatts of solar that we’re adding to the system to maintain reliability and resiliency. And even as we do that, we’re developing technologies with others, such as low carbon fuels and carbon capture that in the long-term can take that natural gas bridge and reduce its carbon emissions.
We hope to zero in the long-term. So TVA, rather than picking a single technology that would unbalance this system. We are deploying the entire suite of technologies in a proportion that ensures affordability, reliability, resiliency, and ever more, lower carbon resources.
Operator
And ladies and gentlemen, with that will conclude today’s question and answer session. I’d like to turn the floor back over to Mr. Lyash for any closing remarks.
Jeff Lyash
Well, thank you again for your time this morning and for your excellent questions. We appreciate you and – we enjoy the dialogue. In closing, let me just reiterate how proud I am of TVA employees for their tireless work that’s allowed us to meet record power demand this summer. They keep the power flowing across our 16,000 mile transmission system for the 10 million people that rely on us every day, especially when it matters the most.
And as we work diligently to meet the day-to-day challenges of providing low cost and reliable power for our region TVA is also 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. And I thank you for your time today.
Operator
Ladies and gentlemen, with that will conclude today’s conference call and presentation we do thank you for joining. You may now disconnect your lines.
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