Tennessee Valley Authority

Transcription

1 Fourth Quarter and Full Year 2016 Earnings Call CORPORATE PARTICIPANTS President & Chief Executive Officer John Thomas Chief Financial Officer Tammy Wilson Vice President, Treasurer, & Chief Risk Officer

2 1 PRESENTATION Operator Good morning, everyone, and welcome to the s Fiscal Year 2016 Conference Call. For your information, today s call is being recorded. If you require operator assistance, please press star then zero. 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, Drew. Good morning, everyone. Welcome to the s 2016 Fiscal Year Financial Review. Leading our discussion this morning, is, TVA s President and Chief Executive Officer, and John Thomas, TVA s Chief Financial Officer. Bill will begin the discussion highlighting the key events and results from 2016 and then we ll outline our priorities for Following Bill s remarks, John will review TVA s financial performance for fiscal year Then the call will be opened up to give our participants the opportunity to ask questions. Before we begin, I would like to point out that today s press release and TVA s annual report on Form 10-K for fiscal year ended September 30, 2016 are now available on TVA s website at A replay of this call will also be available on TVA s website for a period of one year. Today s discussions 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 fiscal year ended September 30, 2016 for a discussion of these factors. And with that, I will now turn the call over to TVA s President and Chief Executive Officer,. Thank you, Tammy. Good morning, everyone, and thanks for joining us on the call this morning. As we close the books on a very strong 2016 fiscal year, it s appropriate to reflect on the achievements of our employees who have raised the standard for continued success. I m pleased to say that despite some of the factors that could have stood in the way of progress, like weather and declining energy usage, TVA achieved its highest net income of $1.2 billion in That s not a bad way to end the year, or to begin The dedication of TVA s employees to our mission of service motivates us to improve financial and operating performance, as we focus on providing low cost, clean, and reliable energy, environmental stewardship, and economic development. Rooted in the mission are the strategic imperatives to maintain low power rates, live within our means financially, meet the reliability expectations of our customers, and be responsible stewards. I d like to note a few highlights in TVA s performance around these imperatives as we serve the people of the Tennessee Valley. Our business has been challenged by flat power demand, but increased efficiencies have enabled us to execute our financial plan and meet our goals. TVA s power rates have become more competitive year-over-year for several years in a row, even as we have made necessary investments in the power system. Our total effective rate is lower today than it was five years ago, and we expect our rates to continue to become more competitive. In fiscal year 2016 our fuel and purchase power costs were nearly $1 billion less than in This was due primarily to the flexibility we now get from our more diverse generating portfolio, from lower

3 2 gas prices, and improved operating performance. Add to that the reduction of almost $800 million in O&M costs and TVA employees have reduced annual expenses by almost $1.8 billion in the past three years. We re also investing in power system assets without taking on much new debt. For fiscal years 2012 through 2019, we re on track to reduce debt by $300 million, while putting almost $20 billion new capital investment in the system. We re investing almost twice as much maintenance capital in the power system as we did in 2010, giving us better reliability and lower cost long term. I m proud of TVA s employees who have improved our efficiency, diversified the generating fleet, reduced emissions to improve air quality, and supported economic development. In energy, we ve been able to fund several large construction projects, investing almost $3 billion into the power system during the year. We did this while increasing debt by less than $100 million and maintaining competitive power rates, which are already near the lowest in the nation. I m also pleased that TVA s management, board of directors, and retirement system representatives were able to agree this year to changes that will help improve the health of TVA s retirement system, balancing the needs of our employees, retirees, customers, and the organization. We had another strong year in fulfilling TVA s mission of economic development, helping to attract and retain jobs and bring capital investment to the Valley. In 2016, almost 250 companies were recruited to the region or expanded their operations here. Together, TVA and our economic development partners attracted or retained 72,000 jobs and $8.3 billion in capital investment. TVA was recognized by Site Selection magazine, for the 11 th consecutive year, as one of the top 10 utilities in North America for economic development, leadership and results was also an important year for stewardship activities. We celebrated the 80 th birthday of the first hydroelectric project constructed by TVA, the Norris Dam, with nearly 30,000 of our friends and neighbors. And we proved the ongoing value of our stewardship work these eight decades hence, as rainfall in the first half of the fiscal year was high, hitting 184% of normal last December. And TVA successfully managed a river system to avert any material flood damage. This extreme rainfall was followed by drought conditions in the second half of the year, combined with the hottest summer in decades. The team in our river forecasting center monitored minimum flow requirements every day, while meeting downstream requirements such as flows for water quality, commercial navigation, and municipal and industrial water supply. So as this last year reminds us, stewardship is a critical component of our ongoing mission. Another important part of fulfilling our mission is our work in developing a diversified generation portfolio to ensure greater flexibility, to generate cleaner energy more efficiently, and from a variety of fuel sources. This allows us to meet power demands with the lowest cost fuel sources while also meeting our stewardship need for air and water quality. We made big strides in getting more diversified in Just weeks ago, on October 19 th, Watts Bar Unit II entered commercial operation after a multi-year completion effort, becoming the seventh unit in TVA s nuclear fleet. This addition solidifies TVA s rank as the fourth largest operator of nuclear plants in the country, and our proud role as a major part of the United States nuclear power infrastructure. With the addition of Watts Bar II, our nuclear fleet capability now provides over 8,000 megawatts of reliable emissions-free capacity to power the Tennessee Valley. Watts Bar II, along with the other nuclear units, supplies more than a third of the region s generating capacity, meeting the electricity needs of more than 4.5 million homes. Nuclear power remains the only source of carbon-free energy that is available 24-hours a day, 7 days a week. So this is an increasingly important resource for us. Earlier in the year, the nuclear regulatory

4 3 commission granted a 20-year license extension on the two units at Sequoyah, and at Browns Ferry we ve completed the first steps toward extended power upgrades. This past year also saw us closing the Widows Creek and Colbert coal-fired plants. These plants powered the Tennessee Valley for many decades and were the backbone of the TVA fleet. But retirement of some legacy assets is a necessary part of moving to the cleaner, more flexible power system that the Valley needs for tomorrow. Coal will remain a strategically important part of our power mix. When all of our current planned actions are taken, TVA expects to retain about 7,800 megawatts of the most efficient and effective coal-fired capacity in our fleet. Also adding to the diversity of our power supply are new solar projects, including the region s largest solar site a 75-megawatt River Bend project in Lauderdale County, Alabama. Collectively, the investments and actions we are taking will allow us to make more than 60% of the power used in the Valley from non-emitting resources by TVA s asset initiatives are geared to provide more flexibility to meet demand under a variety of future scenarios and from a variety of sources. This program includes several new natural gas plants, including the Paradise Combined Cycle Plant in Kentucky, which is about 85% complete. It recently began pre-operational testing and conducted the first fire of unit one. These units are expected to be online to help meet peak demand next summer. The Allen Gas Plant in Memphis is about 30% complete and on schedule for operations in We re working to finish the plant in 2018 because of the need to close the Allen coal-fired plant that year to comply with EPA requirements. The new gas-fired plant will bring approximately $1 billion of investment and help Memphis meet national air quality standards, which are important, both to quality of life and to economic development. And both of these major projects are on schedule and on budget. Another part of our strategy is ensuring that the coal-fired assets we retain in our portfolio are cleaner and in full compliance with all environmental requirements. TVA has invested more than $6.5 billion in emission control equipment to improve air quality over the years, achieving significant results. Because of emissions reductions by TVA and others, we re seeing improved air quality across the Valley, including urban areas. Shelby County, which is the home of Memphis, was recently designated by the EPA as in attainment, meaning it meets ozone air quality standards, after years of being in nonattainment status. Additionally, Memphis and the rest of the Valley appear to be able to meet the new, more stringent, standards and are showing some of the best air quality ever measured. Our largest current clean air project is at Gallatin Fossil Plant near Nashville, where we re investing $1 billion in new emissions control. After almost three years of construction, the last of four dry scrubbers was placed into service this past year. These scrubbers remove up to 98% of the sulfur dioxide from the plant s exhaust flue. We invested $730 million in this part of the Gallatin project, which was completed on time and within the budget, allowing Gallatin to become compliant with the EPA MATS rule before the April 2016 deadline. Work continues there on the selective catalytic reduction systems, and the first two SCRs are scheduled to become operational this spring, and the final two scheduled for completion next fall. TVA is also committed to transforming all of its ash and gypsum ponds to dry storage over an eight to ten year period. The EPA is encouraging our industry to close ash ponds as quickly as practicable, and TVA is generally ahead of industry peers. Our ongoing wet-to-dry conversion program includes projects to address the primary requirements of the EPA s CCR rule. TVA is also actively working with state regulators to ensure we fully comply with their requirements for implementing the rule.

5 4 This is also the 17 th year that TVA maintained % reliability in delivering power to our customers, despite serious weather events in December and January, and the hottest summer of the last 55 years. Transmission is always a top priority because getting the power system cleaner and more diversified hinges on maintaining a robust delivery capability. Now turning to our priorities for We will continue to deliver on our strategic plan, the ten-year financial and asset plan, our three-year business plan and the annual goals and metrics that drive dayto-day performance. We have our work cut out for us, but TVA s commitment is to supply energy at the lowest rate with the highest reliability that we can. The power demand continues to be essentially flat. We are currently projecting very slight load growth over the long term and demand might even go lower, or decline. New technologies, new generating resources, and new consumer preferences are all impacting our business. So we re working with customers to stay ahead of these changes as we continue to fulfill our regulatory and oversight responsibilities. In 2017, we ll also begin to address needed upgrades to our fiber network. We use this network for a number of operational activities, and that usage will increase over time as the energy world becomes more digital. There s also public interest in expanding fiber access into rural areas of our footprint where many of our operational assets are located. We will be considering options to help address this public need as we develop our own upgrade plan. This year s strong financial results are the product of high performance and continuous improvement. They also show a cumulative effect, continued sustainable reductions in O&M, investments in our generation and transmission assets, debt reduction, diversifying our portfolio, and working with our customers to bring the best value to ratepayers. Our employees have performed very well this year and the results are in the numbers, but we won t be resting on our laurels. Every level of achievement has to be the starting point for even greater achievement. That s the nature of continuous improvement. I continue to have high expectations of our management and employees as we work to serve the region with low cost, clean, and reliable energy, to promote economic development, and to carry out our important stewardship work. And now, I ll turn the call over to John Thomas for more details on the financial results. John Thomas Thank you, Bill. I ll begin with the summary before I get into the details. So to start, as Bill mentioned, $1.2 billion worth of net income, the highest in TVA s history, and $122 million above last year. More importantly than that, what we re most proud of is that the effective rate that our customers saw reduced from 6.9 cents to 6.7 cents, much of that driven by the favorability of fuel costs and, as Bill mentioned, the diversification of our fleet, as well as the improved performance, helped drive this lower rate for our customers. In terms of operations and maintenance expenditures, that was flat to last year. However, because of inflationary pressures that required the employees at TVA to generate $100 million worth of productivity year-over-year to hold that O&M flat, and we ve reduced our overall O&M expenditures $800 million from our 2013 budget. All of these favorable results that we generate get reinvested back into the business, much of that goes towards our debt profile. So, overall, less debt than what we had planned resulted in less interest expense as well. Now I ll talk a bit about the year. While overall, the number of heating and cooling degree days were slightly below normal, we really had two extremes. We started out with an incredibly mild winter, the

6 5 second mildest winter in 55 years. Then, as Bill mentioned, we had this long hot summer, the warmest in 55 years. It didn t have the extreme heat that we ve had in some of the past years, but it was a sustained heat, 73 days where the system average temperature was above 90 degrees in the Valley, which is twice what the average it should be. How did that impact our results? Overall, our power sales were down 1.5%. While we did have this long hot summer, it was not enough to make up for the mild winter that we saw. And our overall operating revenues were down 3.5%. While the reduction in revenue was impacted somewhat by base revenue, much of this was also impacted by the favorability in fuel costs that are recovered through our rates. So you can see our overall effective rate, at the bottom, was down 2.3%. As I mentioned, overall revenues were down $387 million. The fuel and purchase power that we mentioned, was down $304 million. Operations and maintenance expenditures was flat. Depreciation and amortization is lower, this is primarily driven by the nuclear license extension that we got at our Sequoyah facility, as well as the timing associated with when Watts Bar II was placed in service. Then at the bottom you can see $122 million, or 11%, increase in our net income. In terms of cash flow from operations, at almost $3.1 billion, a very strong year, so you can see much of the results on the income statement flowing through into real operating cash. This is down slightly from the year before where it was $3.3 billion. We had an incredibly cold winter in the previous year, as well we had some insurance settlements associated with the Kingston ash spill. In terms of investing, $3.1 billion worth of investment. So another very heavy year, not as high as the $3.6 billion we had in But if you look at the amount of construction work that we did, we had the purchase of a natural gas facility included in 2015 for, let s say round numbers, $350 million. So we had as much construction work and investment in 2016 as we had in 2015, and we were able to accomplish this with just $71 million worth of financing activities. To focus on the balance sheet, just for a second. With that heavy investment you would expect our plant property and equipment to go up, and it did $2.8 billion, and our total debt and financing obligations only went up $82 million. To kind of back up, Bill had mentioned the track record of performance. We re proud of the fact that if you look at the top left of this chart, you can see our overall effective rate to our customer dropping from 6.9 cents in 2012 to 6.7 cents this year. If you went back one year further you d see it was at 7.2 cents. So in line with our mission, the work that we re doing to improve the financial performance gets translated indirectly into lower rates for our customers. The $800 million reduction in O&M moved us from a 76% gap to top quartile, down to a 27% gap, so significant improvement in our overall competitiveness of our nonfuel operating costs. At the bottom you can see at $23, where we started a megawatt hour for fuel and purchase power, I would say this is one of the best in the industry. We ve continued to diversify our fleet and driven that cost down even more to $20, and taken away a significant amount of the volatility that others may see because of the diversification of the fleet. Finally, $19 billion worth of capital investment while driving down total financing obligations by $300 million. In summary, a strong year financially in The continuation of a strong track record really driven by a well-put-together plan that the board enacted back in 2013, and the hard work of all the employees at TVA. So now, I ll turn it back over to Andrew to queue up the questions. QUESTIONS AND ANSWERS

7 6 Operator Thank you. Ladies and gentlemen, at this time, we will begin today s question and answer session. TVA would like to provide the financial community with the first opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from of Fidelity. Please go ahead. Hi. Good morning. Good morning, Carrie. It s been a busy morning so I apologize, but I wanted to just congratulate you on the strong results and if this was already mentioned I just wanted to get a couple things clarified. First off, I think there s been some changes in the nuclear management team, and I just wanted you to review that, as well as what are the focus areas for you now that Watts Bar is up and running. There s been some others in the industry that have had some setbacks on nuclear performance. Where are you kind of focused over the next 12 months with respect to the nuclear portfolio? I ll take that, Carrie. We have had some changes driven by Chip Pardee s decision to retire. He s decided he wants to go and do something else and not work as hard as he s been working. Frankly, that s a loss to us because he is one of the greatest COO s in the business. But when that happened, Mike Skaggs was done building the Watts Bar II, so we have Mike Skaggs and Joe Grimes, two very confident and capable executives. So we have split Chip s duties and given them to Mike and Joe. Joe will continue to be the CNO and run generation, and Mike will have operations. It s sort of like having two smaller COO s at the same time. Okay. So we re able to do the same work with fewer executives, which is always a good efficiency move, and I think we re well covered here. Okay. Our focus, over the next 12 months, I would say a couple things. The continuing integration of Watts Bar I and II, as a single site and a single operation, that would be first. Addressing the chilled work environment issues at Watts Bar is also first. We have a heavy year of outages. We re also in the middle stages of power upgrades at Browns Ferry. So continued focus on improving operations at the nuclear plants. We had a couple hiccups this year, but our trend continues to be significantly positive.

8 7 Just trying to drive that nuclear fleet to the highest levels of performance, integrating Watts Bar, working on the chilled work environment, and the power upgrades, I think, are the focus for the next 12 months. Okay, great. And then, obviously, you guys have done a great job managing your debt levels in spending and costs. Could you just talk about where you re focused on the next 12 months, with respect to that, and any expectations for issuance? John Thomas Yes. Hi, Carrie, this is John. Just a couple of comments. In terms of, maybe more broadly, the financial focus is we continue to drive efficiencies. As I said, we generated $100 million worth of O&M efficiency last year and we had the same challenge for this year. Understanding what the load projections look like and how we adjust our capital profile in our fleet to match that, those will be the areas of focus and finishing up the big projects on budget and on schedule. From an overall debt portfolio, we have $1.5 billion that s maturing in We re currently at just over about $1.5 billion of short-term debt, so I fully expect that we will be in the market. We re just trying to evaluate what s going on right now, and relative to the volatility, but I expect sometime, if not later this calendar year, into next year that we would be in the markets. And then, Bill, obviously you ve been at TVA now a few years, and I just wanted to kind of get an update on what your thinking is about your time there. Is it something that you feel you re enjoying continuing to do, or what s your thoughts on your long-term vision for your view at TVA? So I will have been here, at the end of this year, for four years. I have to say this is one of the most rewarding and interesting places to work anywhere. The mission here is meaningful every day and you can actually see the results of your work in improving the quality of life for people who live here. So if anybody is thinking about coming to work here, I think it s a fabulous idea and I would welcome you. Carrie, I do plan to retire someday, but I don t know when that day is. Good for you. We have momentum here; we have things going in the right direction. There s still a lot of work to do, so I m planning to be around a little while. I think we have the opportunity, when we get out of this capital program and keep working on efficiencies, to have a pretty good following decade in financial and rate space. So that s really what I m focused on, continuing the legacy of TVA for the next eight decades. Okay. Can I just ask two follow ups? I forget, just because I m not as familiar with the governance in TVA, but when they are looking into CEO successors, is that the TVA board that works through that, or how does that occur? Yes. The TVA board is responsible for succession of the CEO.

9 8 Okay. You mentioned, John, the $100 million in cost efficiencies this year and it s the same mandate for next year. Do I think of that as incremental to that $500 million program that you had begun, or is that just kind of on an annual basis trying to maybe remove the impact of inflation and things like that? John Thomas Yes. It s the latter. We started out with the $500 million that turned into $800 million. That was real absolute reduction, and this is the productivity to offset the inflationary pressures. Okay. Great. Thanks so much for the call, guys. Thank you. Bye, bye. Bye. Operator Once again, if you have a question please press star then one on a touchtone phone. The next question comes from David Flessner of The Chattanooga Times Free Press. Please go ahead. David Flessner Good morning, and thanks for taking the call, gentlemen, appreciate it. A couple questions. First, the clean power program, you mentioned the improvements you ve made in reducing carbon. First of all, do you envision being in full compliance of that law as it exists? And then, with the political changes, if that s repealed, would that in any way change your strategy going forth about your generation mix? Morning, Dave. No. Nobody really knows what s going to happen at this point. And, you know, the plan has been stayed because of the death of one of the Supreme Court Justices, it s unclear. We have been following a path that is consistent with the direction of the clean power plan, but we ve been following it based on what s the best for customers, and they happen to line up. But we really have been following the plan that says if we modernize the fleet as we diversify, what is the best economic and rate path to follow. And that s really what we will continue to do in every decision we make. David Flessner Secondly, real quick, Bellefonte, with the sale of that at $111 million, did you carry much debt on that? Will you have any write off on your assets if you sell it at that price? John Thomas No, Dave. We had set up with the board, an amortization schedule for Bellefonte that we re in the last years now. And so we had not anticipated any recovery out of Bellefonte. So whatever we get out of that will just be positive to our overall performance. David Flessner And finally, I noted in the pension funding level, and I may read this wrong, but it looked like in 2016 you put $281 million, which was compared to $282 million in 2015, just $1 million less. But I wonder if you could speak to a pension fund, which I guess you have over $13 billion in liabilities and only $7

10 9 billion in assets in that plan, are you sort of, go forth and you did have some savings this year, and how you see that playing forth in terms of adequately funding that plan that seems to still be underfunded quite a bit at this point. John Thomas Yes, Dave. The pension calculations have a bit of complexity to them. If you look at overall, we put in place this 20-year funding plan with the TVARS board. So that went into effect, and the impacts of that you would have traditionally seen in 2016 in the liability, but because of the volatility of interest rates, these are long-term liabilities that are discounted back at a discount rate that dropped from 4.5% to 3.65%. So what you saw was basically an offset of the liability reduction from this change in discount rate, which doesn t really change the cash flow required out of this plan. If you look underneath that, there actually was very positive news for our pension fund. The assets this year earned 11.2%, so $733 million of incremental value that flowed into the plan, that s over the policy expectations. So we re expecting around 7% returns. So we put together a long-range plan. You re not going to see this thing change drastically from year-to-year. It did inch up slightly, but we re ahead of where we expected we would be just several months after reaching agreement about a long-term funding status. So the asset performance is really the key here. As a matter of fact, if you look over the last three years the asset balance has stayed at roughly $7.1 billion, so it s been flat. And we ve paid out over $2.1 billion in employee benefits. And so I think people can get distracted by the fair value accounting impact on a liability, but I think overall it s going to take a 20-year sustained commitment to this that we ve made. But it s a bit hard to look at this year-to-year and draw any conclusions. But I m pretty pleased with what we saw in David Flessner Thanks. Congratulations. Appreciate it. Operator Once again, if you have a question, please press star then one on a touchtone phone. This concludes our question-and-answer session. I would like to turn the conference back over to Bill Johnson for any closing remarks. CONCLUSION Thank you, Drew. Thanks for joining us on today s call and for your continuing support of TVA. We entered 2017 in a stronger position than a year ago. We have momentum from our progress in 2016, and previous years, in providing reliable low cost power to our customers, meeting our stewardship responsibilities, and promoting economic development. And we re focused on doing these things with even greater efficiency every day. So, thanks, and talk to you next quarter. Bye, bye. Operator The conference has now concluded. Thank you for attending today s presentation. You may now disconnect.