Tennessee Valley Authority - Quarter Report: 2006 December (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
x QUARTERLY REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
For the transition period from ____ to ____
Commission file number 000-52313
TENNESSEE VALLEY AUTHORITY
(Exact name of registrant as specified in its charter)
A corporate agency of the United States created by an act | 62-0474417 | |
of Congress | (I.R.S. Employer Identification No.) | |
(State or other jurisdiction of incorporation or organization) | ||
400 W. Summit Hill Drive | 37902 | |
Knoxville, Tennessee | (Zip Code) | |
(Address of principal executive offices) |
(865) 632-2101
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes o No x
Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No x
Yes o No x
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EX-10.1 AMENDMENT TO CREDIT AGREEMENT 11/02/06 | ||||||||
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO | ||||||||
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO | ||||||||
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO | ||||||||
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO |
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FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q (this Quarterly Report) contains forward-looking
statements relating to future events and future performance. All statements other than those that
are purely historical may be forward-looking statements.
In certain cases, forward-looking statements can be identified by the use of words such as
may, will, should, expect, anticipate, believe, intend, project, plan, predict,
assume, forecast, estimate, objective, possible, probably, likely, potential, or
other similar expressions.
Examples of forward-looking statements include, but are not limited to:
| Statements regarding strategic objectives; | ||
| Projections regarding potential rate actions; | ||
| Estimates of costs of certain asset retirement obligations; | ||
| Estimates regarding power and energy forecasts; | ||
| Expectations about the adequacy of Tennessee Valley Authoritys (TVA) pension plans and nuclear decommissioning trust; | ||
| The impact of new accounting pronouncements and interpretations, including Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R); | ||
| Estimates of amounts to be reclassified from Other Comprehensive Income to earnings over the next year; | ||
| TVAs plans to continue using short-term debt to meet current obligations; and | ||
| The anticipated cost and timetable for returning Browns Ferry Nuclear Plant Unit 1 to service. |
Although the TVA believes that the assumptions underlying the forward-looking statements are
reasonable, TVA does not guarantee the accuracy of these statements. Numerous factors could cause
actual results to differ materially from those in the forward-looking statements. These factors
include, among other things:
| New laws, regulations, and administrative orders, especially those related to: |
TVAs protected service area, | |||
The sole authority of the TVA Board of Directors to set power rates, | |||
Various environmental and nuclear matters, | |||
TVAs management of the Tennessee River system, | |||
TVAs credit rating, and | |||
TVAs debt ceiling; |
| Performance of TVAs generation and transmission assets; | ||
| Availability of fuel supplies; | ||
| Compliance with existing environmental laws and regulations; | ||
| Significant delays or cost overruns in construction of generation and transmission assets; | ||
| Significant changes in demand for electricity; | ||
| Legal and administrative proceedings; | ||
| Weather conditions; | ||
| Failure of transmission facilities; | ||
| An accident at any nuclear facility, even one unaffiliated with TVA; | ||
| Catastrophic events such as fires, earthquakes, floods, pandemics, wars, terrorist activities, and other similar events, especially if these events occur in or near TVAs service area; | ||
| Events at non-TVA facilities that affect the supply of water to TVAs generation facilities; | ||
| Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, electricity, and emission allowances; | ||
| Changes in the prices of equity securities, debt securities, and other investments; | ||
| Changes in interest rates; | ||
| Creditworthiness of TVA or its counterparties; | ||
| Rising pension costs and health care expenses; | ||
| Increases in TVAs financial liability for decommissioning its nuclear facilities; | ||
| Limitations on TVAs ability to borrow money; | ||
| Changes in economic conditions; | ||
| Ineffectiveness of TVAs disclosure controls and procedures and internal control over financial reporting; | ||
| Changes in accounting standards; | ||
| The loss of TVAs ability to use regulatory accounting; | ||
| Loss of key personnel; | ||
| Changes in technology; and | ||
| Unforeseeable events. |
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Additionally, other risks that may cause actual results to differ from forward-looking
statements are set forth in TVAs Annual Report on Form 10-K for the fiscal year ended September
30, 2006, particularly in Item 1A, Risk Factors, and in this Quarterly Report. New factors emerge
from time to time, and it is not possible for management to predict all such factors or to assess
the extent to which any factor or combination of factors may impact TVAs business or cause results
to differ materially from those contained in any forward-looking statement.
TVA undertakes no obligation to update any forward-looking statement to reflect developments
that occur after the statement is made.
GENERAL INFORMATION
Fiscal Year
Unless otherwise indicated, years (2007, 2006, etc.) in this Quarterly Report refer to TVAs
fiscal years ending September 30.
Notes
References to Notes are to the Notes to Financial Statements contained in Item 1, Financial
Statements in this Quarterly Report.
Available Information
The public may read and copy any reports or other information that TVA files with the
Securities and Exchange Commission (SEC) at the SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. TVAs SEC reports are also available to the
public without charge from the website maintained by the SEC at www.sec.gov and TVAs website at
www.tva.gov. Information contained on TVAs website shall not be deemed to be incorporated into,
or to be a part of, this Quarterly Report.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TENNESSEE VALLEY AUTHORITY
STATEMENTS OF INCOME (UNAUDITED)
For the three months ended December 31
(in millions)
(in millions)
2006 | 2005 | |||||||
Operating revenues |
||||||||
Sales of electricity |
||||||||
Municipalities and cooperatives |
$ | 1,748 | $ | 1,769 | ||||
Industries directly served |
302 | 230 | ||||||
Federal agencies and other |
26 | 26 | ||||||
Other revenue |
28 | 27 | ||||||
Total operating revenues |
2,104 | 2,052 | ||||||
Operating expenses |
||||||||
Fuel and purchased power |
739 | 745 | ||||||
Operating and maintenance |
585 | 600 | ||||||
Depreciation, amortization, and accretion |
356 | 388 | ||||||
Tax equivalents |
108 | 94 | ||||||
Total operating expenses |
1,788 | 1,827 | ||||||
Operating income |
316 | 225 | ||||||
Other income |
12 | 12 | ||||||
Unrealized gain on derivative contracts, net |
15 | 14 | ||||||
Interest expense |
||||||||
Interest on debt |
336 | 335 | ||||||
Amortization of debt discount, issue, and reacquisition costs, net |
5 | 5 | ||||||
Allowance for funds used during construction and nuclear fuel expenditures |
(49 | ) | (36 | ) | ||||
Net interest expense |
292 | 304 | ||||||
Net income (loss) |
$ | 51 | $ | (53 | ) | |||
The accompanying Notes are an integral part of these financial statements.
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TENNESSEE VALLEY AUTHORITY
BALANCE SHEETS (UNAUDITED)
(in millions)
December 31 | September 30 | |||||||
2006 | 2006 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 502 | $ | 536 | ||||
Restricted cash and investments (Note 1) |
206 | 198 | ||||||
Accounts receivable, net |
1,164 | 1,359 | ||||||
Inventories and other |
652 | 576 | ||||||
Total current assets |
2,524 | 2,669 | ||||||
Property, plant, and equipment |
||||||||
Completed plant |
35,849 | 35,652 | ||||||
Less accumulated depreciation |
(15,563 | ) | (15,331 | ) | ||||
Net completed plant |
20,286 | 20,321 | ||||||
Construction in progress |
3,727 | 3,539 | ||||||
Nuclear fuel and capital leases |
566 | 574 | ||||||
Total property, plant, and equipment, net |
24,579 | 24,434 | ||||||
Investment funds |
1,037 | 972 | ||||||
Regulatory and other long-term assets (Note 1) |
||||||||
Deferred nuclear generating units |
3,423 | 3,521 | ||||||
Other regulatory assets |
1,788 | 1,809 | ||||||
Subtotal |
5,211 | 5,330 | ||||||
Other long-term assets |
970 | 1,115 | ||||||
Total deferred charges and other assets |
6,181 | 6,445 | ||||||
Total assets |
$ | 34,321 | $ | 34,520 | ||||
LIABILITIES AND PROPRIETARY CAPITAL |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 800 | $ | 890 | ||||
Accrued liabilities |
194 | 211 | ||||||
Collateral funds held |
206 | 195 | ||||||
Accrued interest |
296 | 403 | ||||||
Current portion of lease/leaseback obligations |
36 | 37 | ||||||
Current portion of energy prepayment obligations |
106 | 106 | ||||||
Short-term debt, net |
2,567 | 2,376 | ||||||
Current maturities of long-term debt (Note 3) |
382 | 985 | ||||||
Total current liabilities |
4,587 | 5,203 | ||||||
Other liabilities |
||||||||
Other liabilities |
2,269 | 2,305 | ||||||
Regulatory liabilities (Note 1) |
423 | 575 | ||||||
Asset retirement obligations |
2,007 | 1,985 | ||||||
Lease/leaseback obligations |
1,071 | 1,071 | ||||||
Energy prepayment obligations (Note 1) |
1,112 | 1,138 | ||||||
Total other liabilities |
6,882 | 7,074 | ||||||
Long-term debt, net (Note 3) |
20,127 | 19,544 | ||||||
Total liabilities |
31,596 | 31,821 | ||||||
Commitments and contingencies |
||||||||
Proprietary capital |
||||||||
Appropriation investment |
4,758 | 4,763 | ||||||
Retained earnings |
1,613 | 1,565 | ||||||
Accumulated other comprehensive income |
28 | 43 | ||||||
Accumulated net expense of nonpower programs |
(3,674 | ) | (3,672 | ) | ||||
Total proprietary capital |
2,725 | 2,699 | ||||||
Total liabilities and proprietary capital |
$ | 34,321 | $ | 34,520 | ||||
The accompanying Notes are an integral part of these financial statements.
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TENNESSEE VALLEY AUTHORITY
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended December 31
(in millions)
(in millions)
2006 | 2005 | |||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | 51 | $ | (53 | ) | |||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation, amortization, and accretion |
360 | 393 | ||||||
Nuclear refueling outage amortization |
21 | 23 | ||||||
Loss on project write-downs |
22 | | ||||||
Amortization of nuclear fuel |
27 | 35 | ||||||
Non-cash retirement benefit expense |
50 | 75 | ||||||
Net unrealized gain on derivative contracts |
(15 | ) | (14 | ) | ||||
Prepayment credits applied to revenue |
(26 | ) | (26 | ) | ||||
Other, net |
(15 | ) | (5 | ) | ||||
Changes in current assets and liabilities |
||||||||
Accounts receivable, net |
214 | 171 | ||||||
Inventories and other |
(78 | ) | (111 | ) | ||||
Accounts payable and accrued liabilities |
(120 | ) | (145 | ) | ||||
Accrued interest |
(107 | ) | (79 | ) | ||||
Deferred nuclear refueling outage costs |
(41 | ) | (3 | ) | ||||
Other, net |
(19 | ) | (26 | ) | ||||
Net cash provided by operating activities |
324 | 235 | ||||||
Cash flows from investing activities |
||||||||
Construction expenditures |
(344 | ) | (282 | ) | ||||
Combustion turbine asset acquisitions |
(98 | ) | | |||||
Nuclear fuel expenditures |
(22 | ) | (116 | ) | ||||
Change in restricted cash and investments |
(8 | ) | (10 | ) | ||||
Purchase of investments |
(1 | ) | (8 | ) | ||||
Loans and other receivables |
||||||||
Advances |
(1 | ) | (2 | ) | ||||
Repayments |
4 | 4 | ||||||
Proceeds from sale of receivables/loans |
2 | | ||||||
Other, net |
(1 | ) | (1 | ) | ||||
Net cash used in investing activities |
(469 | ) | (415 | ) | ||||
Cash flows from financing activities |
||||||||
Long-term debt |
||||||||
Issues |
9 | 49 | ||||||
Redemptions and repurchases |
(77 | ) | (152 | ) | ||||
Short-term issues, net |
190 | 275 | ||||||
Payments on lease/leaseback financing |
(1 | ) | (1 | ) | ||||
Financing costs, net |
| (1 | ) | |||||
Payments to U.S. Treasury |
(10 | ) | (9 | ) | ||||
Net cash provided by financing activities |
111 | 161 | ||||||
Net change in cash and cash equivalents |
(34 | ) | (19 | ) | ||||
Cash and cash equivalents at beginning of period |
536 | 538 | ||||||
Cash and cash equivalents at end of period |
$ | 502 | $ | 519 | ||||
The accompanying Notes are an integral part of these financial statements.
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TENNESSEE VALLEY AUTHORITY
STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (UNAUDITED)
For the three months ended December 31
(in millions)
(in millions)
Accumulated | Accumulated Net | |||||||||||||||||||||||
Other | Expense of | |||||||||||||||||||||||
Appropriation | Retained | Comprehensive | Stewardship | Comprehensive | ||||||||||||||||||||
Investment | Earnings | Income (Loss) | Programs | Total | (Loss) Income | |||||||||||||||||||
Balance at September 30, 2005 |
$ | 4,783 | $ | 1,244 | $ | 27 | $ | (3,662 | ) | $ | 2,392 | $ | | |||||||||||
Net (loss) |
| (50 | ) | | (3 | ) | (53 | ) | (53 | ) | ||||||||||||||
Return on appropriated investment |
| (4 | ) | | | (4 | ) | | ||||||||||||||||
Accumulated other comprehensive income (Note 2) |
| | 17 | | 17 | 17 | ||||||||||||||||||
Return of appropriated investment |
(5 | ) | | | | (5 | ) | | ||||||||||||||||
Balance at December 31, 2005 |
$ | 4,778 | $ | 1,190 | $ | 44 | $ | (3,665 | ) | $ | 2,347 | $ | (36 | ) | ||||||||||
Balance at September 30, 2006 |
$ | 4,763 | $ | 1,565 | $ | 43 | $ | (3,672 | ) | $ | 2,699 | $ | | |||||||||||
Net income (loss) |
| 53 | | (2 | ) | 51 | 51 | |||||||||||||||||
Return on appropriated investment |
| (5 | ) | | | (5 | ) | | ||||||||||||||||
Accumulated other comprehensive loss (Note 2) |
| | (15 | ) | | (15 | ) | (15 | ) | |||||||||||||||
Return of appropriated investment |
(5 | ) | | | | (5 | ) | | ||||||||||||||||
Balance at December 31, 2006 |
$ | 4,758 | $ | 1,613 | $ | 28 | $ | (3,674 | ) | $ | 2,725 | $ | 36 | |||||||||||
The accompanying Notes are an integral part of these financial statements.
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NOTES TO FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except where noted)
1. Summary of Significant Accounting Policies
Organization
The Tennessee Valley Authority (TVA) is a wholly-owned corporate agency and instrumentality
of the United States. TVA was created by the U.S. Congress in 1933 by virtue of the Tennessee
Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee (2000 & Supp. IV 2004) (as
amended, the TVA Act). TVA was created to improve navigation on the Tennessee River, reduce flood
damage, provide agricultural and industrial development, and provide electric power to the
Tennessee Valley region. TVA manages the Tennessee River and its tributaries for multiple
river-system purposes, such as: navigation; flood damage reduction; power generation; environmental
stewardship; shoreline use; and water supply for power plant operations, consumer use, recreation,
industry, and other stewardship purposes.
Substantially all TVA revenues and assets are attributable to the power program. TVAs service
area includes most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern
Kentucky, and portions of northern Georgia, western North Carolina, and southwestern Virginia, and
it has a total population of approximately 8.7 million people. The power program has historically
been separate and distinct from the stewardship programs. It is required to be self-supporting from
power revenues and proceeds from power financings, such as proceeds from the issuance of bonds,
notes, and other evidences of indebtedness (Bonds). Until 2000, most of the funding for TVAs
stewardship programs was provided by congressional appropriations. These programs are now funded
largely with power revenues. Certain stewardship activities are also funded with various revenues
and user fees. These activities related to stewardship properties do not meet the criteria of an
operating segment, pursuant to Statement of Financial Accounting Standard (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related Information. Accordingly, these assets
and properties are included as part of the power program, TVAs only operating segment.
Power rates are established by the TVA Board of Directors (the TVA Board) as authorized by
the TVA Act. The TVA Act requires TVA to charge rates for power that will produce gross revenues
sufficient to provide funds for operation, maintenance, and administration of its power system; tax
equivalent payments to states and counties; debt service on outstanding indebtedness; payments to
the U.S. Treasury in repayment of and as a return on the outstanding amount TVA is required to
repay the United States for its investment in TVAs power facilities (the appropriation investment
in power facilities); and such additional margin as the TVA Board may consider desirable for
investment in power system assets, retirement of outstanding indebtedness, additional reduction of
the outstanding amount TVA is required to repay the United States for its investment in TVAs power
facilities, and other purposes connected with TVAs power business. In setting rates, the TVA Board
is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including
the objective that power shall be sold at rates as low as are feasible. Rates set by the TVA Board
are not subject to review or approval by any state or federal regulatory body.
Basis of Presentation
TVA prepares its interim financial statements in conformity with generally accepted accounting
principles (GAAP) accepted in the United States of America for interim financial information.
Accordingly, TVAs interim financial statements do not include all of the information and notes
required by GAAP for complete financial statements. Because the accompanying interim financial
statements do not include all of the information and footnotes required by GAAP for complete
financial statements, they should be read in conjunction with the audited financial statements for
the year ended September 30, 2006, and the notes thereto, which are contained in TVAs Annual
Report on Form 10-K for the fiscal year ended September 30, 2006 (the Annual Report).
Subsequent to its fourth quarter of 2006 closing, TVA reviewed projects related to
construction work in progress and identified errors in classification related primarily to 2006 and
also prior periods. Based on the results of the review, TVA recorded
project write-offs of $5
million in the first quarter of 2007. Additionally, TVA recorded a $4 million expense during the
first quarter of 2007 related to pending litigation during the fourth quarter of 2006. These
charges are included in Operating and Maintenance expense on the Income Statement for the
quarter ended December 31, 2006. Since TVA uses cash flows from operating activities as its
primary measure of materiality, it determined that these noncash adjustments were not material to
its reported results for prior and current periods on a quantitative basis based on TVAs operating
cash flows or a qualitative basis and did not require restatement of those results.
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The amounts included in the accompanying interim financial statements are unaudited but, in
the opinion of TVA management, reflect all adjustments, which consist solely of normal recurring
adjustments, necessary to fairly present TVAs financial position and results of operations for the
interim periods. Due to seasonal weather variations and the timing of planned maintenance and
refueling outages of electric generating units, the results of operations for interim periods are
not necessarily indicative of amounts expected for the entire year.
Use of Estimates
In preparing financial statements that conform to GAAP, management must make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the amounts of
revenues and expenses reflected during the reporting period. Actual results could differ from those
estimates.
Fiscal Year
TVAs fiscal year ends September 30. Unless otherwise indicated, years (2007, 2006,
etc.) refer to TVAs fiscal years.
Reclassifications
Certain reclassifications have been made to the 2006 financial statements to conform
to the 2007 presentation, including the reclassification of interest income of $5 million for the
three months ended December 31, 2005, which was previously included in Interest on Debt on
the Statement of Income. Interest income is now included in Other Income.
These reclassifications had no effect on previously reported results of operations and net
cash flows.
Revision to Statement of Cash Flows
As of September 30, 2006, TVA began reporting the allowance for funds used during
construction (AFUDC) related to construction expenditures as a noncash component of investing
activities rather than a noncash component of operating activities. The revised classification is
consistent with guidance for the cash flow presentation for capitalized interest. The previous
method of reporting AFUDC was consistent with the industry practice for the combined reporting of
debt and equity AFUDC. The result of this reclassification is an increase in cash from operating
activities of $36 million and an increase in funds used by investing activities of $36 million for
the period ended December 31, 2005.
Restricted Cash and Investments
As of December 31, 2006, and September 30, 2006, TVA had $206 million and $198
million, respectively, in Restricted Cash and Investments on its Balance Sheets primarily
related to collateral posted with TVA by a swap counterparty in accordance with certain credit
terms included in the swap agreement, which result in the funds being reported in Restricted
Cash and Investments. The corresponding liability is included in Collateral Funds
Held on the December 31, 2006, and September 30, 2006, Balance Sheets.
Accounts Receivables
Accounts receivable primarily consist of amounts due from power sales. The table
below summarizes the types and amounts of receivables.
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Accounts Receivable
At December 31 | At September 30 | |||||||
2006 | 2006 | |||||||
Power receivables billed |
$ | 206 | $ | 303 | ||||
Power receivables unbilled |
918 | 1,031 | ||||||
Total power receivables |
1,124 | 1,334 | ||||||
Other receivables |
47 | 35 | ||||||
Allowance for uncollectible accounts |
(7 | ) | (10 | ) | ||||
Net accounts receivable |
$ | 1,164 | $ | 1,359 | ||||
Cost-Based Regulation
Regulatory assets capitalized under the provisions of SFAS No. 71, Accounting for the Effects
of Certain Types of Regulation, are included in Deferred Nuclear Generating Units and
Other Regulatory Assets on the December 31, 2006, and September 30, 2006, Balance Sheets.
Components of Other Regulatory Assets include certain charges related to the closure and
removal from service of nuclear generating units, debt reacquisition costs, deferred outage costs,
unrealized losses related to power purchase contracts, deferred capital lease asset costs, a
deferred loss relating to TVAs financial trading program, minimum pension liability, and,
beginning in 2007, an estimated fuel cost adjustment (FCA) related to rate actions taken during
2006. All regulatory assets are probable of recovery in future revenues. Components of
Regulatory Liabilities include unrealized gains on coal purchase contracts and capital
lease liabilities.
TVAs regulatory assets and liabilities are summarized in the table below.
TVA Regulatory Assets and Liabilities
At December 31 | At September 30 | |||||||
2006 | 2006 | |||||||
Regulatory Assets |
||||||||
Minimum pension liability |
$ | 914 | $ | 914 | ||||
Nuclear decommissioning costs |
429 | 474 | ||||||
Reacquisition costs |
226 | 232 | ||||||
Deferred purchased power costs |
8 | 6 | ||||||
Deferred outage costs |
106 | 85 | ||||||
Deferred capital lease asset costs |
74 | 76 | ||||||
Unrealized losses on purchased power contracts |
17 | 22 | ||||||
Estimated fuel cost adjustment deferral |
14 | | ||||||
Subtotal |
1,788 | 1,809 | ||||||
Deferred nuclear generating units |
3,423 | 3,521 | ||||||
Total |
$ | 5,211 | $ | 5,330 | ||||
Regulatory Liabilities |
||||||||
Unrealized gain on coal purchase contracts |
$ | 340 | $ | 487 | ||||
Capital lease liability |
83 | 88 | ||||||
Total |
$ | 423 | $ | 575 | ||||
TVA has established a reserve for future generation funded by power customers which is
also classified as a regulatory liability. Because of the nature of the reserve, it is considered
as an offset to Property, Plant and Equipment on the December 31, 2006 Balance Sheet. See
Reserve for Future Generation in this Note 1.
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Asset Retirement Obligations
In accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement
Obligations, TVA recognizes legal obligations associated with the future retirement of certain
tangible long-lived assets. TVA only records estimates of such disposal costs at the time the
legal obligation arises.
On September 30, 2006, TVA began applying Financial Interpretation (FIN) 47, Accounting for
Conditional Asset Retirement Obligations, which resulted in the recognition of additional asset
retirement obligation (ARO) liabilities for asbestos and polychlorinated biphenyls (PCB)
abatement costs.
During the first three months of 2007, TVAs total ARO liability increased $22 million due to
accretion expense. The nuclear accretion expense of $15 million was deferred and charged to a
regulatory asset in accordance with SFAS No. 71. The remaining accretion expense of $7 million,
related to coal-fired and gas/oil combustion turbine plants, asbestos, and PCB, was expensed during
2007. During the first three months of 2006, TVAs total ARO liability increased $26 million due to
accretion expense. The nuclear accretion expense of $23 million was deferred and charged to a
regulatory asset in accordance with SFAS No. 71. The remaining accretion expense of $3 million,
related to coal-fired and gas/oil combustion turbine plants, was expensed during 2006.
Reconciliation of Asset Retirement Obligation Liability
For the Three Months Ended December 31
For the Three Months Ended December 31
2006 | 2005 | |||||||
Balance at beginning of year |
$ | 1,985 | $ | 1,857 | ||||
Liabilities |
| | ||||||
Accretion expense |
22 | 26 | ||||||
Revisions in estimated cash flows |
| | ||||||
Balance at end of year |
$ | 2,007 | $ | 1,883 | ||||
Energy Prepayment Obligations
As
of December 31, 2006, TVA had entered into sales agreements for 54.5 discounted energy
units totaling $54.5 million. Total credits applied to power billings on a cumulative basis during
the life of the program through December 31, 2006, exceeded $21.6 million. Of this amount, over $1
million was recognized as revenue for the quarterly periods ended December 31, 2006, and 2005.
In November 2003, TVA, Memphis Light, Gas, and Water Division (MLGW), and the City of
Memphis entered into agreements whereby MLGW prepaid a portion of its power requirements for 15
years for a fixed amount of kilowatt-hours. The amount of the prepayment was $1.5 billion. The
prepayment credits are being applied to reduce MLGWs monthly power bill on a straight-line basis
over the same 15-year period. Total credits applied to power billings on a cumulative basis through
December 31, 2006, exceeded $315 million. Of this amount, $25 million was recognized as revenue for
the quarterly periods ended December 31, 2006, and 2005. These amounts were based on the ratio of
kilowatt-hours of electricity delivered to the total kilowatt-hours under contract.
At December 31, 2006, and September 30, 2006, obligations for these energy prepayments were
$1,218 million and $1,244 million, respectively. These amounts are included in Energy
Prepayment Obligations and Current Portion of Energy Prepayment Obligations on the
December 31, 2006, and September 30, 2006, Balance Sheets.
Impact of New Accounting Pronouncements and Interpretations
Accounting Changes and Error Corrections. In May 2005, the Financial Accounting
Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3, which replaces Accounting Principles
Board (APB) Opinion No. 20, Accounting Changes, and SFAS Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements. This statement applies to all voluntary changes in
accounting principles and also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition provisions. This
statement requires, unless impracticable, retrospective application to prior periods financial
statements of changes in accounting principles. If it is impracticable to determine the
period-specific effects of an accounting change on one or more individual prior periods presented,
this statement requires that the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which
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retrospective application is practicable and that a corresponding adjustment be made to the opening
balance of retained earnings for that period rather than being reported in an income statement.
When it is impracticable to determine the cumulative effect of applying a change in accounting
principle to all prior periods, this statement requires that the new accounting principle be
applied as if it were adopted prospectively from the earliest date practicable. This statement also
requires that a change in depreciation, amortization, or depletion method for long-lived,
nonfinancial assets be accounted for as a change in accounting estimate effected by a change in
accounting principle. The statement became effective for TVA beginning in 2007.
Fair Value Measurements. In September 2006, FASB issued SFAS No. 157, Fair Value
Measurements. This standard provides guidance for using fair value to measure assets and
liabilities. The standard also responds to investors requests for expanded information about the
extent to which companies measure assets and liabilities at fair value, the information used to
measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies
whenever other standards require (or permit) assets or liabilities to be measured at fair value but
does not expand the use of fair value in any new circumstances. SFAS No. 157 establishes a fair
value hierarchy that prioritizes the information used to develop measurement assumptions. The
provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. At this time, TVA is
evaluating the requirements of this statement and does not yet know the impact of its
implementation, which may or may not be material to TVAs results of operations or financial
position.
Accounting for Defined Benefit Pension and Other Postretirement Plans. On September
29, 2006, FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R). This standard
will require employers to fully recognize the obligations associated with single-employer defined
benefit pension, retiree healthcare, and other postretirement plans in their financial statements.
Specifically, the new standard requires an employer to recognize in its statement of financial
position an asset for a plans overfunded status or a liability for a plans underfunded status;
measure a plans assets and its obligations that determine its funded status as of the end of the
employers fiscal year (with limited exceptions); and recognize changes in the funded status of a
defined benefit postretirement plan in the year in which the changes occur. Those changes will be
reported in comprehensive income of a business entity and in changes in net assets of a
not-for-profit organization.
The requirement to recognize the funded status of a benefit plan and the disclosure
requirements are effective for TVA as of the end of the fiscal year ending after June 15, 2007. The
requirement to measure plan assets and benefit obligations as of the date of the employers fiscal
year-end statement of financial position is effective for fiscal years ending after December 15,
2008. TVA plans to apply the new standard for its 2007 year-end financial statements and recognize
on its 2007 Balance Sheets the funded status of its pension and other postretirement benefit plans.
However, had TVA been required to adopt the standard as of its last actuarial valuation date
(September 30, 2006), TVA would have recorded the following amounts on its Balance Sheet for the
year then ended: a regulatory asset of $795 million, additional pension and postretirement
obligations of $368 million and $152 million, respectively, and the reclassification to regulatory
assets of an intangible asset with a balance of $275 million, representing unamortized prior
service cost. The net effect of recognizing such amounts would have been to increase total assets
and liabilities by $520 million at that date.
Accounting for Misstatements. On September 13, 2006, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements. This bulletin
provides interpretive guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement. Application of the
guidance will become effective for TVA with its annual report for the year ending September 30,
2007.
Reserve for Future Generation
During the first quarter of 2007, TVA began collecting in rates amounts intended to fund
future generation based on the need for additional generating capacity that it believes will be
required to meet future power demand in its service area. Because these amounts are intended to
fund future costs, they were deferred as a regulatory liability. The reserve is funded by power
customers based on a predetermined rate applied to electricity sales approved as part of TVAs 2007
budget. Collections for the three months ended December 31, 2006, amounted to $13 million which are
recorded as a regulatory liability on the December 31, 2006, Balance Sheet as a component of
Completed Plant. These and other funds collected for future generation will be recognized
as revenue based on the useful lives of assets acquired or constructed and will offset the
depreciation expense of these assets on the Statement of Income. This revenue recognition process
will begin when the assets are placed into service.
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In December 2006, TVA purchased two combustion turbine facilities for a combined purchase
price of $98 million. One facility is a 742-megawatt winter peaking capacity, dual-fuel combustion
turbine facility and includes certain related transmission facilities. The second facility is a
555-megawatt winter peaking capacity, natural gas-fired combustion turbine facility. Once
collections from power customers reach $98 million or the acquisition price of the combustion
turbines, additional funds collected, if any, will be reported on the Balance Sheet as a regulatory
liability until as such time another generating asset is built or acquired. The 555-megawatt
capacity facility was released for dispatch during January 2007 and the 742-megawatt facility is
scheduled for dispatch during the third quarter of 2007.
2. Accumulated Other Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires the disclosure of comprehensive
income to reflect changes in capital that result from transactions and economic events from
non-owner sources. The decrease of $15 million for the three months ended December 31, 2006, and
the increase of $17 million for the three months ended December 31, 2005, are due to unrealized
gains and losses related to mark-to-market valuation adjustments for certain derivative
instruments.
Total Other Comprehensive Income (Loss) Activity
For the Three Months Ended December 31
For the Three Months Ended December 31
2006 | 2005 | |||||||
Accumulated other comprehensive income at beginning of period |
$ | 43 | $ | 27 | ||||
Changes in fair value: |
||||||||
Inflation swap |
1 | (10 | ) | |||||
Foreign currency swaps |
(16 | ) | 27 | |||||
Accumulated other comprehensive income at end of period |
$ | 28 | $ | 44 | ||||
Note:
Foreign currency swap changes are shown net of reclassifications from
Other Comprehensive Income to earnings. The amounts reclassified from
Other Comprehensive Income resulted in an increase to earnings of $51
million for the first quarter of 2007 and a charge to earnings of $40
million for the first quarter of 2006.
3. Debt Securities
Debt Outstanding
Debt outstanding at December 31, 2006, including net translation losses of $246 million
related to long-term debt denominated in foreign currencies, consisted of the following:
Debt Outstanding
At December 31 | At September 30 | |||||||
2006 | 2006 | |||||||
Short-term debt |
||||||||
Discount notes (net of discount) |
$ | 2,567 | $ | 2,376 | ||||
Current maturities of long-term debt |
382 | 985 | ||||||
Total short-term debt, net |
2,949 | 3,361 | ||||||
Long-term debt |
||||||||
Long-term |
20,305 | 19,722 | ||||||
Unamortized discount |
(178 | ) | (178 | ) | ||||
Total long-term debt, net |
20,127 | 19,544 | ||||||
Total outstanding debt |
$ | 23,076 | $ | 22,905 | ||||
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Bondholder Protection Test
The TVA Act and the Basic Tennessee Valley Authority Power Bond Resolution each contain a
bondholder protection test. Under the test, TVA must, in each successive five-year period use a
certain amount of net power proceeds for either the reduction of its capital obligations (including
Bonds and the outstanding amount TVA is required to repay the United States for its investment in
TVAs power facilities), or investment in power assets. TVA must next meet this test for the
five-year period ending on September 30, 2010.
Debt Securities Activity
The TVA Act authorizes TVA to issue Bonds up to a total of $30 billion outstanding
at any one time. The table below summarizes TVAs Bond activity for the period from October 1,
2006, to December 31, 2006.
Bond Activity
Date | Amount | Interest Rate | ||||||||||
Redemptions/Maturities: |
||||||||||||
electronotes® |
First Quarter 2007 | $ | 2 | 4.65 | % | |||||||
2001 Series D |
December 2006 | 75 | 4.88 | % | ||||||||
Total |
$ | 77 | ||||||||||
Issues: |
||||||||||||
electronotes® |
First Quarter 2007 | $ | 9 | 5.50 | % | |||||||
Note
electronotes® interest rate is a weighted average rate.
4. Risk Management Activities and Derivative Transactions
TVA is exposed to market risks. These market risks include risks related to commodity prices,
investment prices, interest rates, currency exchange rates, inflation, and credit risk. To help
manage certain of these risks, TVA has entered into various derivative transactions, principally
commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures.
It is TVAs policy to enter into derivative transactions solely for hedging purposes and not for
speculative purposes.
The table below summarizes the recorded amounts of these derivative instruments.
Mark-to-Market Value of Derivative Instruments
At December 31 | At September 30 | |||||||
2006 | 2006 | |||||||
Inflation Swap |
$ | 19 | $ | 22 | ||||
Interest Rate Swap |
(121 | ) | (131 | ) | ||||
Currency Swaps: |
||||||||
Sterling |
57 | 47 | ||||||
Sterling |
150 | 133 | ||||||
Sterling |
75 | 66 | ||||||
Swaptions: |
||||||||
$1 Billion Notional |
(290 | ) | (296 | ) | ||||
$28 Million Notional |
(3 | ) | (3 | ) | ||||
$14 Million Notional |
(1 | ) | (2 | ) | ||||
Coal Contracts with Volume Options |
340 | 487 | ||||||
Purchase Power Option Contracts |
(17 | ) | (22 | ) |
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TVA has a financial trading program under which TVA can purchase swaps, options on swaps,
futures, and options on futures to hedge TVAs exposure to natural gas and fuel oil prices. At
December 31, 2006, TVA had derivative instruments outstanding under the program equivalent to 691
contracts, made up of 691 futures contracts, zero swap contracts, and zero option contracts, with
an approximate market value of $46 million as shown in the following table.
Financial Trading Program Activity
For the Three Months Ended December 31
For the Three Months Ended December 31
2006 | 2005 | |||||||||||||||
Notional | Contract | Notional | Contract | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
(in mmBtu) | (in millions) | (in mmBtu) | (in millions) | |||||||||||||
Futures contracts |
||||||||||||||||
Financial positions, beginning of period, net |
4,290,000 | $ | 35 | 880,000 | $ | 10 | ||||||||||
Purchased |
4,260,000 | 32 | 2,420,000 | 26 | ||||||||||||
Settled |
(1,640,000 | ) | (12 | ) | (140,000 | ) | (2 | ) | ||||||||
Realized (losses) |
| (1 | ) | | | |||||||||||
Net positions-long |
6,910,000 | 54 | 3,160,000 | 34 | ||||||||||||
Swap Futures |
||||||||||||||||
Financial positions, beginning of period, net |
1,822,500 | 11 | | | ||||||||||||
Fixed portion |
| | | | ||||||||||||
Floating portion realized |
(1,822,500 | ) | (9 | ) | | | ||||||||||
Realized (losses) |
| (2 | ) | | | |||||||||||
Net positions-long |
| | | | ||||||||||||
Options contracts |
||||||||||||||||
Financial positions, beginning of period, net |
| | 240,000 | | ||||||||||||
Calls purchased |
| | | | ||||||||||||
Calls and puts sold |
| | | | ||||||||||||
Positions closed or expired |
| | (120,000 | ) | | |||||||||||
Net positions-long |
| | 120,000 | | ||||||||||||
Holding (losses) |
||||||||||||||||
Unrealized (loss) at beginning of period, net |
| (6 | ) | | | |||||||||||
Unrealized (loss) for the period |
| (2 | ) | | (1 | ) | ||||||||||
Unrealized (losses) at end of period, net |
| (8 | ) | | (1 | ) | ||||||||||
Financial positions at end of period, net |
6,910,000 | $ | 46 | 3,280,000 | $ | 33 | ||||||||||
For the three months ended December 31, 2006, TVA recognized realized losses of about $3
million which were recorded as an increase to purchased power expense. Unrealized losses at the
end of the quarter totaled about $8 million, representing an increase of $2 million for the
quarter, which TVA deferred as a regulatory asset in accordance with its new FCA rate mechanism.
TVA will continue to defer all financial trading program unrealized gains or losses and record only
realized gains or losses as purchased power costs at the time the derivative instruments actually
financially unwind.
At December 31, 2005, TVA had derivative instruments outstanding under the program equivalent
to 328 contracts, comprised of 316 futures contracts, zero swap contracts, and 12 option contracts,
with an approximate market value of $33 million as shown in the preceding table. For the three
months ended December 31, 2005, TVA recognized zero realized losses. Unrealized losses at the end
of the quarter totaled about $1 million, representing an increase of $1 million for the quarter,
which TVA did not defer since such amounts preceded the implementation of the FCA.
5. Benefit Plans
TVA sponsors a defined benefit pension plan that covers most of its full-time employees, an
unfunded postretirement medical plan that provides for non-vested contributions toward the cost of
certain retirees medical coverage, and other postemployment benefits such as workers
compensation.
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The following table provides the components of net periodic benefit cost for the plans.
TVA Benefit Plans
Pension Benefits | Other Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Service cost |
$ | 30 | $ | 32 | $ | 1 | $ | 2 | ||||||||
Interest cost |
123 | 110 | 6 | 8 | ||||||||||||
Expected return on plan assets |
(143 | ) | (123 | ) | | | ||||||||||
Amortization of prior service costs |
9 | 9 | 1 | 1 | ||||||||||||
Amortization of losses |
20 | 33 | 2 | 4 | ||||||||||||
Net periodic benefit |
$ | 39 | $ | 61 | $ | 10 | $ | 15 | ||||||||
During the three months ended December 31, 2006, TVA did not make contributions to its
pension plan. However, the Board approved $75 million in pension contributions for 2007 with
scheduled contributions of $37 million and $38 million to be made in March and September,
respectively. TVA does not separately set aside assets to fund other benefit costs, but rather
funds such costs on an as-paid basis. TVA provided approximately $5 million during the three months
ended December 31, 2006, to fund other benefits costs.
6. Project Write-Downs
During the first quarter of 2007, TVA recognized write-downs totaling $22 million in
Operating and Maintenance expense on TVAs Statement of Income. These write-downs, related
to certain construction work in progress assets, were due to the cancellation and deferral of
certain projects. The largest write-down is $17 million for the deferral of the scrubber project at
Unit 5 of TVAs Colbert Fossil Plant (Colbert), originally intended to be built in 2010. The
scheduling of certain clean-air projects has shifted, resulting in the deferral of the Colbert Unit
5 scrubber project to be completed in 2014. Due to the extended deferral period, TVA has decided
to charge the capitalized costs to earnings due to the uncertainty of future benefit that would be
realized from the work completed thus far once the project is ultimately completed.
7. Legal Proceedings
TVA is involved in various claims amounting to approximately $58 million incidental to the
conduct of its business for which it has assessed the likelihood of gain or loss. TVA has recorded
$32 million of these claims, and it is unable to make a determination of loss at this time with
respect to $26 million of these claims.
Economy Surplus Power Case
On August 31, 1999, suit was filed against TVA in the United States District Court
for the Northern District of Alabama by Birmingham Steel Corporation, on behalf of itself and a
class of TVA industrial customers who contracted for economy surplus power. While Birmingham Steel
Corporation was the original class representative, it filed for bankruptcy and was excluded from
the class. Johns Manville Corporation was substituted as the class representative. The lawsuit
alleges that TVA overcharged for economy surplus power during the summer of 1998 by improperly
including some incremental costs when calculating the price of economy surplus power. The class
members seek over $100 million in damages. On April 18, 2006, the district court ruled on motions
for summary judgment filed by both sides. The court held that TVA improperly included charges for
approximately 500 hours of power purchased in advance and breached the contracts. The court
rejected TVAs position that the additional price charged for all hours represented actual
incremental costs incurred by TVA in supplying economy surplus power and thus was an appropriate
part of the economy surplus power contract price. The court granted the plaintiffs motion for
summary judgment on liability, even though it acknowledged that there are disputed factual issues
as to TVAs defenses. On July 31, 2006, the court reconsidered its decision on summary judgment
with respect to TVAs affirmative defenses and held that TVA is entitled to a trial on its
affirmative defenses. The parties engaged in mediation in December 2006. The parties have reached
a settlement agreement under which TVA will pay
Page 17 of 38
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approximately $18 million to resolve the case. To be effective, the settlement must be approved by
the United States District Court of the Northern District of Alabama. The previously scheduled
trial in this case has been cancelled.
Case against TVA and 22 Electric Cooperatives
On December 2, 2004, the United States District Court for the Middle District of Tennessee,
dismissed a lawsuit filed by John McCarthy, Stan Cooper, Joe Sliger, Mike Bell, Don Rackley, Terry
Motley, Billy Borchert, Jim Foster, and Ryan Hargis on behalf of themselves and all others
similarly situated against TVA and the Middle Tennessee Electric Membership Cooperative,
Appalachian Electric Cooperative, Caney Fork Electric Corporation, Inc., Chickasaw Electric
Cooperative, Cumberland Electric Membership Corporation, Duck River Electric Membership
Corporation, Fayetteville Public Utilities, Forked Deer Electric Cooperative, Inc., Fort Loudoun
Electric Cooperative, Gibson Electric Membership Corporation, Holston Electric Cooperative, Inc.,
Meriwether Lewis Electric Cooperative, Mountain Electric Cooperative, Inc., Pickwick Electric
Cooperative, Plateau Electric Cooperative, Powell Valley Electric Cooperative, Sequachee Valley
Electric Cooperative, Southwest Tennessee Electric Membership Corporation, Tennessee Valley
Electric Cooperative, Tri-County Electric Membership Corporation, Tri-State Electric Membership
Corporation, Upper Cumberland Electric Membership Corporation, and Volunteer Energy Cooperative.
The lawsuit in part challenged TVAs practice of setting rates for electric power charged by
distributor customers through TVAs contracts with distributor customers. In granting the
defendants motions to dismiss, the court held that the claims alleging violations of state law
failed because the plaintiffs (consisting of Tennessee residents and customers of certain of the
cooperatives) had not completed the steps necessary to bring these claims in court. With respect
to the claim against TVA, the court held that the alleged violations of federal law failed as a
matter of law because Congress had specifically authorized TVA to set the rates charged by
distributor customers through TVAs contracts with distributor customers. The plaintiffs appealed
to the United States Court of Appeals for the Sixth Circuit (Sixth Circuit), and on October 17,
2006, the Sixth Circuit affirmed the district courts decision, and held, among other things, that
TVAs rates were not subject to judicial review and that TVA is not subject to antitrust liability
when doing so would interfere with TVAs purposes.
Global Warming Cases
On July 21, 2004, two lawsuits were filed against TVA in the United States District
Court for the Southern District of New York alleging that global warming is a public nuisance and
that carbon dioxide emissions from fossil-fuel electric generating facilities should be ordered
abated because they contribute to causing the nuisance. The first case was filed by various states
(California, Connecticut, Iowa, New Jersey, New York, Rhode Island, Vermont, and Wisconsin) and the
City of New York against TVA and other power companies. The second case, which alleges both public
and private nuisance, was filed against the same defendants by Open Space Institute, Inc., Open
Space Conservancy, Inc., and the Audubon Society of New Hampshire. There are no Clean Air Act
requirements limiting carbon dioxide emissions, and, accordingly, the suits do not involve
allegations of regulatory noncompliance. The plaintiffs do not seek monetary damages, but instead
seek a court order requiring each defendant to cap its carbon dioxide emissions and then reduce
these emissions by an unspecified percentage each year for at least a decade. In September 2005,
the district court dismissed both lawsuits because they raised political questions that should not
be decided by the courts. The plaintiffs appealed to the U.S. Court of Appeals for the Second
Circuit (Second Circuit). Oral argument was held before the Second Circuit on June 7, 2006, and
the parties are awaiting a decision.
Case Involving Modifications to the Colbert Fossil Plant
The National Parks Conservation Association, Inc. (NPCA), and Sierra Club, Inc.
(Sierra Club), filed suit on February 13, 2001, in the United States District Court for the
Northern District of Alabama, alleging that TVA violated the Clean Air Act and implementing
regulations at TVAs Colbert, a coal-fired electric generating facility located in Tuscumbia,
Alabama. The plaintiffs allege that TVA made major modifications to one of the power generating
units, specifically Colbert Unit 5, without obtaining preconstruction permits (in alleged violation
of the Prevention of Significant Deterioration (PSD) program and the Nonattainment New Source
Review (NNSR) program) and without complying with emission standards (in alleged violation of the
New Source Performance Standards (NSPS) program). The plaintiffs seek injunctive relief; civil
penalties of $25,000 per day for each violation on or before January 30, 1997, and $27,500 per day
for each violation after that date; an order that TVA pay up to $100,000 for beneficial mitigation
projects; and costs of litigation, including attorney and expert witness fees. On November 29,
2005, the district court held that sovereign immunity precluded the plaintiffs from recovering
civil penalties against TVA. On January 17, 2006, the district court dismissed the action, on the
basis that plaintiffs failed to provide adequate notice of NSPS claims and that the statute of
limitations curtailed the PSD and NNSR claims. The plaintiffs appealed to the U.S. Court of
Appeals for the Eleventh Circuit (Eleventh Circuit) on January 25, 2006. Briefing of the appeal
to the Eleventh Circuit was completed in July 2006. Oral argument of the appeal was held on
January 11, 2007. If the decision is reversed on appeal, there is a reasonable possibility that
TVA will be ordered to install additional controls on Colbert Unit 5.
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Case Involving Modifications to Bull Run Fossil Plant
The NPCA and the Sierra Club filed suit against TVA on February 13, 2001, in the United States
District Court for the Eastern District of Tennessee, alleging that TVA did not comply with the New
Source Review requirements of the Clean Air Act when TVA repaired its Bull Run Fossil Plant (Bull
Run), a coal-fired electric generating facility located in Anderson County, Tennessee. In March
2005, the district court granted TVAs motion to dismiss the lawsuit on statute of limitation
grounds. The plaintiffs motion for reconsideration was denied, and they appealed to the Sixth
Circuit. Amicus curiae briefs supporting the plaintiffs appeal have been filed by New York,
Connecticut, Illinois, Iowa, Maryland, New Hampshire, New Jersey, New Mexico, Rhode Island,
Kentucky, Massachusetts, and Pennsylvania. Several Ohio utilities filed an amicus curiae brief
supporting TVA. Briefing of the appeal to the Sixth Circuit was completed in May 2006. Oral
argument was held on September 18, 2006, and the parties are awaiting a decision.
Case Involving Opacity at Colbert
On September 16, 2002, the Sierra Club and the Alabama Environmental Council filed a lawsuit
in the United States District Court for the Northern District of Alabama alleging that TVA violated
Clean Air Act opacity limits applicable to Colbert between July 1, 1997, and June 30, 2002. The
plaintiffs seek a court order that could require TVA to incur substantial additional costs for
environmental controls, and pay civil penalties of up to approximately $250 million. After the
court dismissed the complaint (finding that the challenged emissions were within Alabamas two
percent de minimis rule, which provided a safe harbor if emissions did not exceed allowable opacity
limits by more than two percent each quarter), the plaintiffs appealed the district courts
decision to the Eleventh Circuit. On November 22, 2005, the Eleventh Circuit affirmed the district
courts dismissal of the claims for civil penalties, but held that the Alabama de minimis rule was
not applicable because Alabama had not yet obtained Environmental Protection Agency (EPA)
approval of that rule. The case was remanded to the district court for further proceedings, and the
plaintiffs filed a motion for summary judgment. On May 23, 2006, the district court issued orders
staying the matter until a decision is issued in a Clean Air Act case accepted by the Supreme
Court, United States v. Duke Energy; referring the action to mediation to be completed before the
close of business on December 15, 2006, unless the district court extends the deadline; and denying
as moot the plaintiffs motions to hold TVA liable (with leave to file again, if necessary, after
the stay is lifted). On May 26, 2006, the plaintiffs asked the district court to reconsider its
orders, and in the alternative to allow an interlocutory appeal, and on July 5, 2006, the district
court denied plaintiffs motion. Mediation was unsuccessful. On January 22, 2007, the district
court partially lifted the stay on the issue of liability and the case will proceed on that issue.
The stay remains in effect on the issue of remedies.
Case Brought by North Carolina Alleging Public Nuisance
On January 30, 2006, North Carolinas Attorney General filed suit against TVA in the
United States District Court for the Western District of North Carolina alleging that TVAs
operation of its coal-fired power plants in Tennessee, Alabama, and Kentucky constitute public
nuisances. On April 3, 2006, TVA moved to dismiss the suit on grounds that the case is not
suitable for judicial resolution because of separation of powers principles, including the fact
that these matters are based on policy decisions left to TVAs discretion in its capacity as a
government agency and thus are not subject to tort liability (the discretionary function
doctrine), as well as the Supremacy Clause. In July 2006, the court denied TVAs motion, and set
the trial for the term of court beginning October 2007. On August 4, 2006, TVA filed a motion
requesting permission to file an interlocutory appeal with the United States Court of Appeals for
the Fourth Circuit (the Fourth Circuit) which the district court granted on September 7, 2006.
On September 21, 2006, TVA petitioned the Fourth Circuit to allow the interlocutory appeal. The
Fourth Circuit granted the petition, but the district court did not stay the case during the
appeal. Trial remains scheduled for October 2007.
Case Involving North Carolinas Petition to the EPA
In 2005, the State of North Carolina petitioned the EPA under Section 126 of the Clean Air Act
to impose additional emission reduction requirements for sulfur dioxide and nitrogen oxides emitted
by coal-fired power plants in 13 states, including states where TVAs coal-fired power plants are
located. In March 2006, the EPA denied the North Carolina petition primarily on the basis that the
Clean Air Interstate Rule remedies the problem. In June 2006, North Carolina filed a petition for
review of EPAs decision with the United States Court of Appeals for the District of Columbia
Circuit.
Case Arising out of Hurricane Katrina
In April 2006, TVA was added as a defendant to a class action lawsuit brought in the United
States District Court for the Southern District of Mississippi by 14 residents of Mississippi
allegedly injured by Hurricane Katrina.
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The plaintiffs sued seven large oil companies and an oil company trade association, three large
chemical companies and a chemical trade association, and 31 large companies involved in the mining
and/or burning of coal, including TVA and other utilities. The plaintiffs allege that the
defendants greenhouse gas emissions contributed to global warming and were a proximate and direct
cause of Hurricane Katrinas increased destructive force. The plaintiffs are seeking monetary
damages among other relief. TVA has moved to dismiss the complaint on grounds that TVAs operation
of its coal-fired plants is not subject to tort liability due to the discretionary function
doctrine.
East Kentucky Power Cooperative Transmission Case
In April 2003, Warren Rural Electric Cooperative Corporation (Warren) notified TVA that it
was terminating its TVA power contract. Warren then entered into an arrangement with East Kentucky
Power Cooperative (East Kentucky) under which Warren would become a member of East Kentucky, and
East Kentucky would supply Warren after its power contract with TVA expires in 2009. After agreeing
to become Warrens power supplier, East Kentucky asked TVA to provide transmission service to East
Kentucky for its service to Warren. TVA denied the request on the basis that, under the
anti-cherrypicking provision, it was not required to provide the requested transmission service.
East Kentucky then asked to interconnect its transmission system with the TVA transmission system
in three places that are currently delivery points through which TVA supplies power to Warren. TVA
did not agree to provide the interconnections, and East Kentucky asked the Federal Energy
Regulatory Commission (FERC) to order TVA to provide the interconnections. In January 2006, FERC
issued a final order directing TVA to interconnect its transmission facilities with East Kentuckys
system at three locations on the TVA transmission system. On August 11, 2006, TVA filed an appeal
in the U.S. Court of Appeals for the District of Columbia Circuit seeking review of this order, on
the grounds that this order violated the anti-cherrypicking provision. On December 7, 2006, Warren
announced its intention to withdraw its notice to terminate its existing power contract. On
January 10, 2007, TVA and Warren executed an agreement under which Warren rescinded its notice of
termination and the parties extended the term of the TVA power contract through June 11, 2016.
Given this agreement, East Kentucky no longer needs to establish interconnections to TVAs
transmission system. Accordingly, it is likely that the FERC proceeding and the resulting
litigation will eventually be dismissed and not proceed to a conclusion.
Claim Involving Areva Fuel Fabrication
On November 9, 2005, TVA received two invoices totaling $76 million from Areva (Areva) and
an affiliated company, the successor of Babcock and Wilcox Company (B&W). In 1970, TVA and B&W
entered into a contract for fuel fabrication services for its Bellefonte Nuclear Plant. Arevas
invoices are based upon its belief that the 1970 contract required TVA to buy more fuel fabrication
services from B&W than TVA actually purchased. A meeting was held between TVA and Areva on May 31,
2006, to discuss the issue. TVA subsequently received a letter from Areva which reasserted its
claim, but reduced the value of the claim to $26 million. Areva has not provided any further
information concerning the claim nor has it explained the reason for the reduction in the claim
amount. Areva is currently seeking a review of its claim under the provisions of the contract
between TVA and B&W.
Notification of Potential Liability for Ward Transformer Site
TVA has been notified by one of the parties involved with clean-up of the Ward Transformer
(Ward) Superfund Site, a facility located in Raleigh, North Carolina, that it considers TVA a
potentially responsible party and intends to pursue a claim against TVA. Under the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA), any entity which arranges for
disposal of a CERCLA hazardous substance at a site may bear liability for the cost of cleaning up
the site. There is evidence that TVA sent transformers to Ward that contained Polychlorinated
Biphenyls. Several responsible parties have entered into a settlement agreement with EPA to clean
up on-site contamination at the site, and the cost of the on-site cleanup is currently estimated to
be $20 million. EPA is also investigating off-site contamination from Ward operations, but TVA has
no information as to the estimated costs, if any, of cleaning up off-site contamination. It is
unknown at this time what level of liability, if any, TVA will have in these matters, whether it
will be required to contribute, and, if so, how much such a contribution would be.
TVA is engaged in various administrative and legal proceedings arising from employment
disputes. These matters are governed by federal law and involve issues typical of those encountered
in the ordinary course of business of a utility. They may include allegations of discrimination or
retaliation (including retaliation for raising nuclear safety or environmental concerns), wrongful
termination, and failure to pay overtime. Adverse outcomes in these proceedings would not normally
be material to TVAs business, although it is possible that some outcomes could require TVA to
change how it handles certain personnel matters or operates its plants.
It is not possible to predict with certainty whether TVA will incur any liability or to
estimate the damages, if any, that TVA might incur in connection with the lawsuits and claims
described above except as specifically noted.
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TVA has recognized charges to earnings and actual costs, including legal fees and expenses, related
to litigation. No assurance can be given that TVA will not be subject to significant additional
claims and material additional liabilities.
If actual liabilities significantly exceed the estimates made, the results of operations,
liquidity, and financial condition could be materially adversely affected. In accordance with SFAS
No. 5, Accounting for Contingencies, TVA has
accrued approximately $32 million as of December 31,
2006, related to the cases described above.
8. Subsequent Events
Debt Securities
In January 2007, TVA issued $6 million of electronotes® with an interest rate of
5.25 percent which mature in 2017 and are callable in 2008.
Clean Water Developments
In the second phase of a three-part rulemaking to minimize the adverse impacts from cooling
water intake structures on fish and shellfish, as required under Section 316(b) of the Clean Water
Act, the EPA promulgated a final rule for existing power producing facilities that became effective
on September 7, 2004. The new rule required existing facilities to select among several different
compliance options for reducing the number of organisms pinned against and/or drawn into the
cooling systems. These included development of a site-specific compliance option based on
application of cost/cost or cost/benefit tests. The site specific tests were designed to ensure
that a facilitys costs are not significantly greater than cost projections in the rule or the
benefits derived from taking mitigation actions. Actions taken to compensate for any impacts by
restoring habitat, or pursuing other options such as building hatcheries for fish/shellfish
production, would have counted towards compliance.
On January 25, 2007, the United States Court of Appeals for the Second Circuit (the Second
Circuit) issued a decision in a proceeding brought by environmental groups, industry groups and
certain northeastern states challenging the EPAs final rule. The Second Circuit held that costs
cannot be compared to benefits in picking the best technology available (BTA) to minimize the
adverse environmental impacts of intake structures. Instead, the court held that the EPA is allowed
to consider costs in two ways: (1) to determine what technology can reasonably be borne by
industry, and (2) to engage in cost-effectiveness analysis in determining BTA. Finding the
rulemaking record to be unclear on whether the EPA had relied on a cost-benefit analysis or a
cost-effectiveness analysis, the Second Circuit remanded the
EPAs BTA determination, giving the EPA the
option to provide a reasonable explanation of its determination or make a new determination based
on the permissible cost considerations set out in the Second Circuits opinion. The Second Circuit also
remanded provisions of the EPA rule that allowed the use of a site-specific cost-benefit test and
restoration measures (such as building hatcheries) to demonstrate compliance, holding that these
rule provisions were based on an impermissible construction of the statute. Several other
provisions of the rule such as the one that sets the performance standards as a range rather than
one national standard were also remanded.
All of the intakes at TVAs existing coal-fired and nuclear generating facilities are subject
to the EPAs rule and, potentially, to the Second Circuits decision. TVA had been in the process
of determining what was needed to comply with the EPA rule, and had believed that some expenditures
might have been required. TVA is currently assessing the Second Circuits decision and its
potential impacts on TVA. Given the uncertainty over whether the EPA will appeal this decision and
what the changes in the final rule as ultimately issued and applied will be, TVA cannot assess what
the potential impacts are at this time.
Presidents Budget
On February 5, 2007, the Office of Management and Budget transmitted the Presidents proposed
2008 federal budget to Congress. In the portions specifically relating to TVA, the proposed budget
recommends:
| Expanding the types of financial arrangements that count towards TVAs $30 billion debt ceiling; | ||
| Requiring TVA to register its debt securities with the Securities and Exchange Commission; and | ||
| Allowing Congress to establish the amount of TVAs Office of Inspector Generals budget and directing TVA to fund the amount with power revenues beginning in 2008. Funding for TVAs Office of the Inspector General is currently paid directly by TVA. |
These recommendations have not been introduced in any draft legislation nor are they currently
included in any draft bill.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions except where noted)
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
explains the results of operations and general financial condition of the Tennessee Valley
Authority (TVA). The MD&A should be read in conjunction with the accompanying Financial
Statements and the Annual Report.
Business Overview
During the quarter ended December 31, 2006, TVA took several actions that relate to items of
strategic importance or that pertain to matters that may present future challenges. See Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations Business
Overview in TVAs Annual Report on Form 10-K for the fiscal year ended September 30, 2006 (the
Annual Report) for more information regarding TVAs strategy and the challenges that TVA may
face.
New Generation
Aware that TVA must balance the use of purchased power and its own generation to meet the TVA
service areas growing power supply needs, during the first quarter of 2007, the TVA Board of
Directors (the TVA Board) authorized the purchase of two additional combustion turbine
facilities.
| In October 2006, the TVA Board approved the acquisition of a 742-megawatt winter peaking capacity, dual-fuel combustion turbine facility and certain related transmission facilities located in Marshall County, Kentucky from KGen Marshall County LLC. | ||
| In November 2006, the TVA Board approved the acquisition of a natural gas-fired combustion turbine facility located in Weakley County, Tennessee, from Allegheny Energy Supply Gleason Generating Facility, LLC. This facility has a 555-megawatt winter peaking capacity. |
TVA completed the acquisition of both facilities in December 2006, and initial operational
testing is underway. The Gleason facility was released for system dispatch in January 2007, and
the Marshall County facility is scheduled to be released during the third quarter of 2007. The
combined purchase price of these facilities was $98 million.
TVA expects that Browns Ferry Nuclear Plant Unit 1 will return to service in the spring of
2007. A major project milestone in achieving that goal was realized when fuel loading was completed
in December 2006. The cost of the project may be slightly over TVAs original estimates because of
steam dryer modifications, licensing issues, cooling tower construction scope growth, choosing
Browns Ferry Unit 1 as the lead plant for extended power up-rate, and schedule adjustments that
optimize timing with the Browns Ferry Unit 2 refueling outage. Even with the possible increase over
the projects budget, restart costs are still projected to be about $1.8 billion (exclusive of
allowance for funds used during construction and assets recovery obligation costs). Browns Ferry
Unit 1 is expected initially to provide additional generating capacity of approximately 1,150
megawatts and eventually to provide 1,280 megawatts of capacity. At December 31, 2006, the restart
work at Browns Ferry Unit 1 was approximately 98 percent complete. The cost of the project as of
December 31, 2006, was $1,744 million excluding allowance for funds used during construction
(AFUDC) of $206 million.
Other actions TVA has undertaken related to its growing power needs include:
| Contracting for a detailed scoping, estimating, and planning study during 2007 and 2008 for the completion of Watts Bar Nuclear Plant Unit 2; and | ||
| Becoming a full member in NuStart Energy in December 2006. |
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The NuStart Energy consortium was organized and formed to respond to a Department of Energy
(DOE) solicitation to demonstrate the Nuclear Regulatory Commissions new combined license
process and complete the engineering for two selected nuclear technologies.
During the first quarter of 2007, TVA also established a reserve for future generation. These
funds will be spent by TVA as construction is begun or a generating asset acquisition is made. The
reserve is funded by power customers based on a predetermined rate applied to electricity sales
approved as part of TVAs 2007 budget. Funds collected for future generation will be recognized as
revenue based on the useful lives of assets acquired or constructed. This revenue recognition
process will begin when the assets are placed into service. See Note 1Reserve for Future
Generation.
Retention of Customers
In November 2006, TVA offered distributors that have given notices to terminate their power
contracts with TVA a 60-day window to rescind their termination notices without being subject to
reintegration charges. Three of the six distributor customers who had given notice accepted TVAs
offer: Warren Rural Electric Cooperative Corporation, Duck River Electric Membership Corporation,
and Glasgow Electric Plant Board.
These distributors accounted for approximately 2.3 percent of TVAs operating revenues in
2006. The three power customers who chose not to accept TVAs offer to rescind their notices of
contract termination without reintegration charges are all located in Kentucky and collectively
accounted for approximately 0.6 percent of TVAs operating revenues in 2006.
As TVA is in the process of reviewing its strategic plan, management believed it was in the
best interests of consumers in the Tennessee Valley for TVA to make this offer when it did and
allow its distributor customers to be part of any future baseload generating capacity plans that
may result from this review.
Service Reliability
Continuing TVAs effort to ensure reliable operation of the bulk power system in the eastern
United States, TVA executed an Adjacent Reliability Coordinator Coordination Agreement with
Southern Company Services, Inc. on August 28, 2006. With the execution of this agreement, TVA now
has executed coordination agreements with all neighboring transmission providers and Reliability
Coordinators helping to ensure coordinated analyses and operational processes throughout much of
the Eastern Interconnection. See Item 1, Business Transmission Operations in the Annual Report.
On December 8, 2006, TVA met an all-time winter peak of 30,173 megawatts with no connection
point interruptions on TVAs system. One nuclear unit was in a planned refueling outage during this
winter peak, and TVA supplemented its available generation with purchases from facilities under
contract, the next day market, and the real time markets to supply power at lower cost than some of
TVAs more expensive generation assets. Subsequently, on January 31, 2007, TVA surpassed this
previous record, when the demand for power reached 30,320 megawatts with no connection point
interruptions on TVAs system.
Increased Fuel and Purchased Power Costs
In July 2006, the TVA Board approved the implementation of a fuel cost adjustment (FCA) to
be applied quarterly, beginning on October 1, 2006, as a mechanism to adjust TVAs rates to reflect
changing fuel and purchased power costs from the amounts included in TVAs base rates. Due to the
revised forecasts for the first quarter of 2007, the adjustment implemented on January 1, 2007, was
an increase of 0.01 cents per kilowatt-hour and is expected to produce an estimated $4 million in
revenue. The FCA had no effect on rates prior to January 1, 2007. The FCA was initially set to
zero and had its first impact on rates beginning January 1, 2007. As of December 31, 2006, TVA had
recognized a regulatory asset of $14 million representing deferred power costs to be recovered
through the FCA adjustments in future periods.
Liquidity and Capital Resources
Sources of Liquidity
TVAs current liabilities continue to exceed current assets because of the continued use of
short-term debt as a funding source to fund cash needs as well as scheduled maturities of long-term
debt. To meet short-term cash needs and contingencies, TVA depends on various sources of liquidity.
TVAs primary sources of liquidity are cash on hand and cash from operations, proceeds from the
issuance of short-term and long-term debt, and proceeds from
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borrowings under TVAs $150 million note with the U.S. Treasury. Other sources of liquidity include
two $1.25 billion credit facilities with a national bank as well as occasional proceeds from other
financing arrangements including call monetization transactions and sales of receivables and loans.
Summary Cash Flows. A major source of TVAs liquidity is operating cash flows resulting from
the generation and sales of electricity. A summary of cash flow components for the quarters ended
December 31, 2006, and 2005, follows:
Summary Cash Flows
For the Three Months Ended December 31
For the Three Months Ended December 31
2006 | 2005 | |||||||
Cash provided by (used in) |
||||||||
Operating activities |
$ | 324 | $ | 235 | ||||
Investing activities |
(469 | ) | (415 | ) | ||||
Financing activities |
111 | 161 | ||||||
Net decrease in cash and cash
equivalents |
$ | (34 | ) | $ | (19 | ) | ||
Issuance of Debt. TVA issued power bonds of $9 million during the quarter ended December
31, 2006, while redeeming power bonds of $77 million. In January 2007, TVA issued $6 million of
electronotes® with an interest rate of 5.25 percent which mature in 2017 and are
callable in 2008. For more information regarding TVAs debt activities, see Notes 3 and 8.
Credit Facilities. In the event of shortfalls in cash resources, TVA has short-term funding
available in the form of two $1.25 billion short-term revolving credit facilities. In November
2006, TVA renewed the credit facility with the November 12, 2006, maturity date. The new maturity
date for this credit facility is November 11, 2007. The other credit facility has a maturity date
of May 16, 2007. The interest rate on any borrowing under either of these facilities is variable
and based on market factors and the rating of TVAs senior unsecured long-term non-credit enhanced
debt. TVA is required to pay an unused facility fee on the portion of the total $2.5 billion
against which TVA has not borrowed. The fee may fluctuate depending on the non-enhanced credit
ratings on TVAs senior unsecured long-term debt. There were no outstanding borrowings under the
facilities at December 31, 2006. TVA anticipates renewing each credit facility from time to time.
Sales of Receivables/Loans. From time to time TVA obtains proceeds from selling receivables
and loans. In November 2006, TVA sold $2 million of receivables from power customers at cost such
that TVA did not recognize a gain or loss on the sale.
Comparative Cash Flow Analysis
2007 Compared to 2006
Net cash provided by operating activities increased $89 million from $235 million to $324
million for the three months ended December 31, 2005, and 2006, respectively. This increase
resulted from:
| An increase in cash provided by operating revenues of $52 million resulting primarily from higher average rates and increased sales for industries directly served; and | ||
| A decrease in cash paid for interest of $12 million in the first quarter of 2007; and | ||
| Proceeds from customers of $13 million related to the future generation reserve. |
These items were partially offset by:
| An increase in cash paid for fuel and purchased power of $16 million due to higher volume and increased market prices; | ||
| An increase in tax equivalent payments of $14 million; and | ||
| An increase in expenditures for nuclear refueling outages of $38 million due to two planned outages in the first quarter of the current year in comparison with no planned outages in the prior year. |
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Net cash used by changes in components of working capital decreased $73 million from the first
quarter of 2006 to the first quarter of 2007 primarily from:
| A larger source from the collections of accounts receivable of $43 million resulting from higher rates implemented in 2006; | ||
| A smaller increase in inventories and other of $33 million due to higher beginning fuel inventories in the first quarter of 2007 resulting in decreased purchases of coal; and | ||
| A $25 million smaller decrease in accounts payable and accrued liabilities in the first quarter of 2007 primarily related to distributor revenues collected in advance. |
These items were partially offset by:
| A $28 million increase in cash used by changes in accrued interest in the first quarter of 2007 due to timing of payments related to long-term outstanding debt. |
Cash used in investing activities increased $54 million from the first quarter of 2006 to the
first quarter of 2007. The increase is primarily due to:
| An increase in expenditures for capital projects of $62 million primarily due to increased expenditures for nuclear projects of $53 million related to the Watts Bar steam generator replacement project and a corresponding increase in AFUDC of $10 million; and | ||
| An increase in expenditures of $98 million related to the purchase of two additional combustion turbine facilities. TVA completed the acquisition of both facilities in December 2006. |
These items were partially offset by:
| A decrease in expenditures for the enrichment and fabrication of nuclear fuel of $94 million during the three months ended December 31, 2006, compared to expenditures in the same quarter of the prior year related to the restart of Browns Ferry Unit 1; and | ||
| An increase in proceeds received from the sale of certain receivables of $2 million compared to the three months ended December 31, 2005. |
Net cash provided by financing activities was $50 million lower for the three months ended
December 31, 2006, as compared to the same quarter of the prior year. The decrease was primarily
due to:
| A decrease in net issuances of short-term debt of $85 million in the first quarter of 2007 compared to the same quarter of the prior year; and | ||
| A decrease of $40 million in long-term debt issues. |
These items were partially offset by:
| A decrease in redemptions and repurchases of long-term debt of $75 million. |
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Cash Requirements and Contractual Obligations
The estimated cash requirements and contractual obligations for TVA as of December
31, 2006, are detailed in the following table.
Commitments & Contingencies
Total | 2007* | 2008 | 2009 | 2010 | 2011 | Thereafter | ||||||||||||||||||||||
Debt** |
$ | 23,007 | $ | 2,949 | $ | 90 | $ | 2,030 | $ | 63 | $ | 1,015 | $ | 16,860 | ||||||||||||||
Interest payments relating to debt |
21,274 | 783 | 1,172 | 1,116 | 1,062 | 1,031 | 16,110 | |||||||||||||||||||||
Leases |
||||||||||||||||||||||||||||
Non-cancelable operating |
119 | 32 | 38 | 24 | 13 | 5 | 7 | |||||||||||||||||||||
Capital |
243 | 34 | 59 | 58 | 57 | 29 | 6 | |||||||||||||||||||||
Power purchase obligations |
4,301 | 152 | 146 | 148 | 152 | 154 | 3,549 | |||||||||||||||||||||
Purchase obligations |
||||||||||||||||||||||||||||
Fuel purchase obligations |
3,376 | 1,196 | 491 | 478 | 428 | 277 | 506 | |||||||||||||||||||||
Other obligations |
555 | 202 | 205 | 125 | 13 | 3 | 7 | |||||||||||||||||||||
Payments on other financings |
1,551 | 79 | 89 | 85 | 89 | 95 | 1,114 | |||||||||||||||||||||
Payment to the U.S. Treasury |
432 | 40 | 43 | 42 | 41 | 40 | 226 | |||||||||||||||||||||
Retirement plans |
90 | 90 | | | | | | |||||||||||||||||||||
Total |
$ | 54,948 | $ | 5,557 | $ | 2,333 | $ | 4,106 | $ | 1,918 | $ | 2,649 | $ | 38,385 | ||||||||||||||
Note:
* Period January 1 September 30, 2007.
** Does not include noncash items of foreign currency valuation loss of $246 million and
unamortized discount of $178 million.
In addition to the cash requirements above, TVA has contractual obligations to provide
power related to energy prepayments. See Note 1 Energy Prepayment Obligations.
Total | 2007* | 2008 | 2009 | 2010 | 2011 | Thereafter | ||||||||||||||||||||||
Energy prepayment obligations |
$ | 1,218 | $ | 80 | $ | 106 | $ | 105 | $ | 105 | $ | 105 | $ | 717 | ||||||||||||||
Note:
* Period January 1 September 30, 2007.
* Period January 1 September 30, 2007.
Results of Operations
Financial Results
The following table compares operating results and selected statistics for the three months
ended December 31, 2006, and 2005.
Summary Statements of Income
For the Three Months Ended December 31
For the Three Months Ended December 31
2006 | 2005 | |||||||
Operating revenues |
$ | 2,104 | $ | 2,052 | ||||
Operating expenses |
(1,788 | ) | (1,827 | ) | ||||
Operating income |
316 | 225 | ||||||
Other income |
12 | 12 | ||||||
Unrealized gain on derivative contracts, net |
15 | 14 | ||||||
Interest expense, net |
(292 | ) | (304 | ) | ||||
Net income (loss) |
$ | 51 | $ | (53 | ) | |||
Sales (millions of kWh) |
39,515 | 41,475 | ||||||
Heating degree days (normal 1,320) |
1,227 | 1,353 | ||||||
Cooling degree days (normal 59) |
63 | 119 |
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Net income for the three months ended December 31, 2006, was $51 million compared with a
net loss of $53 million for the three months ended December 31, 2005. Significant items
contributing to the $104 million change in net income include a $52 million increase in operating
revenues, a $39 million decrease in operating expenses, a $1 million increase in unrealized gains
on derivative contracts, net, and lower net interest expense of $12 million.
Operating Revenues. Below is a detailed table of operating revenues for the three months
ended December 31, 2006, and 2005.
Operating Revenues
For the three Months Ended December 31
For the three Months Ended December 31
Percent | ||||||||||||
2006 | 2005 | Change | ||||||||||
Operating revenues |
||||||||||||
Municipalities and cooperatives |
$ | 1,748 | $ | 1,769 | (1.2 | %) | ||||||
Industries directly served |
302 | 230 | 31.3 | % | ||||||||
Federal agencies and other |
26 | 26 | 0.0 | % | ||||||||
Other revenue |
28 | 27 | 3.7 | % | ||||||||
Total operating revenues |
$ | 2,104 | $ | 2,052 | 2.5 | % | ||||||
Significant items contributing to the $52 million increase in operating revenues include:
| A $72 million increase in revenues from industries directly served reflecting increased sales of 2.5 percent and an increase in average rates of 28.6 percent; and | ||
| A $4 million increase in revenues from off-system sales (included in Federal Agencies and Other) due to increased sales of 291.7 percent partially offset by average rates declining 41.5 percent. |
These items were partially offset by:
| A $21 million decrease in revenues from municipalities and cooperatives as a result of decreased sales of 6.6 percent partially offset by average rates rising 6.6 percent; and | ||
| A $4 million decrease in revenues from federal agencies directly served (included in Federal Agencies and Other) attributable to decreased sales of 10.2 percent and average rates decreasing 5.1 percent. |
A detailed table of electricity sales for the three months ended December 31, 2006, is below.
Sales of Electricity
For the Three Months Ended December 31
(millions of kWh)
For the Three Months Ended December 31
(millions of kWh)
Percent | ||||||||||||
2006 | 2005 | Change | ||||||||||
Sales of electricity |
||||||||||||
Municipalities and cooperatives |
30,907 | 33,104 | (6.6 | %) | ||||||||
Industries directly served |
8,108 | 7,912 | 2.5 | % | ||||||||
Federal agencies and other |
500 | 459 | 8.9 | % | ||||||||
Total sales of electricity |
39,515 | 41,475 | (4.7 | %) | ||||||||
The 1,960 million kilowatt-hour decrease in electricity sales was primarily a result of
the 2,197 million kilowatt-hour decrease in sales to municipalities and cooperatives reflecting
decreased residential and variable priced interruptible demand of 4.3 percent and 55.7 percent,
respectively, as well as fewer combined degree days of 12.4 percent. Sales to municipalities and
cooperatives are more reactive to weather than other categories of sales due to the weather
sensitive residential power demand. During the three months ended December 31, 2006, there were
126, or 9.3 percent, fewer heating degree days and 56, or 47.1 percent, fewer cooling degree days
than during the three months ended December 31, 2005.
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Note
TVA uses weather degree days to measure the impact of weather on TVAs power operations. TVA
calculates weather degree days for each of the five largest cities in TVAs service area. If the
average temperature for a given day in one of these cities exceeds 65 degrees Fahrenheit, that
city will have cooling degree days for that day equal to the amount by which the average
temperature for that day exceeds 65 degrees Fahrenheit. Similarly, if the average temperature
for a given day in one of these cities is lower than 65 degrees Fahrenheit, that city will have
heating degree days for that day equal to the amount by which 65 degrees Fahrenheit exceeds the
average temperature for that day.
This decrease was partially offset by:
| A 196 million kilowatt-hour increase in sales to directly served industries due to increased firm and flat price interruptible demand of 53.1 percent and 32.1 percent, respectively, partially offset by decreased economy surplus power/variable price interruptible and preferred interruptible power/firm and interruptible power demand of 33.2 percent and 24.6 percent, respectively; and | ||
| An 85 million kilowatt-hour increase in off-system sales (included in Federal Agencies and Other) attributable to decreased average rates of 41.5 percent. |
Operating Expenses. Below is a detailed table of operating expenses for the three
months ended December 31, 2006.
Operating Expenses
For the Three Months Ended December 31
For the Three Months Ended December 31
Percent | ||||||||||||
2006 | 2005 | Change | ||||||||||
Operating expenses |
||||||||||||
Fuel and purchased power |
$ | 739 | $ | 745 | (0.8 | %) | ||||||
Operating and maintenance |
585 | 600 | (2.5 | %) | ||||||||
Depreciation, amortization, and accretion |
356 | 388 | (8.2 | %) | ||||||||
Tax equivalents |
108 | 94 | 14.9 | % | ||||||||
Total operating expenses |
$ | 1,788 | $ | 1,827 | (2.1 | %) | ||||||
Significant drivers contributing to the $39 million decrease in total operating expenses
included:
| A $32 million decrease in purchased power expense reflecting a decreased average purchase price of 22.7 percent, partially offset by higher volume acquired of 12.3 percent and a FCA deferral for purchased power expense of $23 million. In accordance with the FCA methodology, TVA has deferred the amount of purchased power costs that were lower than the amount included in power rates for the quarter. This $23 million deferred amount will be refunded to customers in future FCA adjustments; | ||
| A $36 million decrease in depreciation largely due to the depreciation rate reduction for Browns Ferry Nuclear Plant reflecting the 20-year license extension approved on May 4, 2006; and | ||
| A $15 million decrease in operating and maintenance expense mainly as a result of decreased pension financing costs of $23 million reflecting a 0.52 percent higher discount rate and a 0.50 percent higher than expected long-term rate of return on pension plan assets, as well as lower fossil outage costs of $14 million due to fewer scheduled outages during the first quarter of 2007, partially offset by a $17 million write-down of a scrubber project at TVAs Colbert Fossil Plant (Colbert), and write-downs of $5 million relating to other construction work-in-progress. |
These items were partially offset by:
| A $26 million increase in fuel expense attributable to higher aggregate fuel cost per kilowatt-hour net thermal generation of 19.3 percent and increased generation of 4.2 percent at the fossil plants partially offset by a FCA deferral for fuel expense of $39 million. In accordance with the FCA methodology, TVA has deferred the amount of fuel costs that were higher than the amount included in power rates for the quarter. This $39 million deferred amount will be charged to customers in future FCA adjustments; and | ||
| A $14 million increase in tax equivalent payments due to increased gross revenues from the sale of power during 2006 as compared to 2005. |
Unrealized Gain on Derivative Contracts, Net. The $1 million increase in net unrealized gain
on derivative contracts for the three months ended December 31, 2006, as compared to the three
months ended December 31,
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2005, is a result of a $13 million net change related to the mark-to-market valuation of swaption
contracts, from an $8 million loss in the first quarter of 2006 to a $5 million gain in the first
quarter of 2007, partially offset by:
| A $9 million net change related to the mark-to-market valuation adjustment of an embedded call option, from an $8 million gain in the first quarter of 2006 to a $1 million loss in the first quarter of 2007; and | ||
| $3 million less gain than in the prior year on the mark-to-market valuation adjustment of an interest rate swap contract. |
Interest Expense. A detailed table of interest expense and interest rates for the three
months ended December 31, 2006, and 2005, is below.
Interest Expense
For the Three Months Ended December 31
For the Three Months Ended December 31
Percent | ||||||||||||
2006 | 2005 | Change | ||||||||||
Interest expense |
||||||||||||
Interest on debt |
$ | 336 | $ | 335 | 0.3 | % | ||||||
Amortization of debt discount, issue, and reacquisition costs, net |
5 | 5 | 0.0 | % | ||||||||
AFUDC and nuclear fuel expenditures |
(49 | ) | (36 | ) | 36.1 | % | ||||||
Net interest expense |
$ | 292 | $ | 304 | (3.9 | %) | ||||||
Percent | ||||||||||||
2006 | 2005 | Change | ||||||||||
Interest rates (average) |
||||||||||||
Long-term |
5.94 | % | 6.06 | % | (2.0 | %) | ||||||
Discount notes |
5.25 | % | 3.94 | % | 33.2 | % | ||||||
Blended |
5.87 | % | 5.83 | % | 0.7 | % |
Significant items contributing to the $12 million decrease in net interest expense include:
| A decrease in the average long-term interest rate from 6.06 percent to 5.94 percent; | ||
| A decrease of $286 million in the average balance of discount notes outstanding; and | ||
| A $13 million increase in AFUDC due to a 27.3 percent increase in the construction work in progress base for the three months ended December 31, 2006. |
These items were partially offset by:
| An increase in the average discount notes interest rate from 3.94 percent to 5.25 percent; and | ||
| An increase of $29 million in the average balance of long-term outstanding debt. |
Off-Balance Sheet Arrangements
TVA has entered into one transaction that might constitute an off-balance sheet arrangement.
In February 1997, TVA entered into a purchase power agreement with Choctaw Generation, Inc.
(subsequently assigned to Choctaw Generation Limited Partnership) to purchase all the power
generated from its facility located in Choctaw County, Mississippi. The facility has a committed
capacity of 440 megawatts and the term of the agreement is 30 years. Under the accounting guidance
provided by Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of
Variable Interest Entities, as revised by FASB Interpretation No. 46R (FIN 46R), TVA may be
deemed to be the primary beneficiary under the contract; however, TVA does not have access to the
financial records of Choctaw Generation Limited Partnership. As a result, TVA was unable to
determine whether FIN 46R would require TVA to consolidate Choctaw Generation Limited Partnerships
balance sheet, results of operations, and cash flows for the year ended September 30, 2006. Power
purchases for the quarter ended December 31, 2006, under the agreement amounted to $33 million, and
the remaining financial commitment under this agreement is $4.1 billion. TVA has no additional
financial commitments beyond the purchase power agreement with respect to the facility.
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Critical Accounting Policies and Estimates
The preparation of financial statements requires TVA to estimate the effects of various
matters that are inherently uncertain as of the date of the financial statements. Although the
financial statements are prepared in conformity with generally accepted accounting principles
(GAAP), management is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of
revenues and expenses reported during the reporting period. Each of these estimates varies in
regards to the level of judgment involved and its potential impact on TVAs financial results.
Estimates are deemed critical either when a different estimate could have reasonably been used, or
where changes in the estimate are reasonably likely to occur from period to period, and such use or
change would materially impact TVAs financial condition, changes in financial position, or results
of operations. TVAs critical accounting policies are discussed in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and
Estimates and Note 1 Summary of Significant Accounting Policies in the Annual Report.
TVAs power rates are not subject to regulation through a public service commission or other
similar entity. The TVA Board is authorized by the TVA Act to set rates for power sold to its
customers. This rate-setting authority meets the self-regulated provisions of Statement of
Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of
Regulation, and TVA meets the remaining criteria of SFAS No. 71 because (1) TVAs regulated rates
are designed to recover its costs of providing electricity and (2) in view of demand for
electricity and the level of competition it is reasonable to assume that the rates, set at levels
that will recover TVAs costs, can be charged and collected. Accordingly, TVA records certain
assets and liabilities that result from the regulated ratemaking process that would not be recorded
under GAAP for non-regulated entities. Regulatory assets generally represent incurred costs that
have been deferred because such costs are probable of future recovery in customer rates. Regulatory
liabilities generally represent obligations to make refunds to customers for previous collections
for costs that are not likely to be incurred. Management assesses whether the regulatory assets are
probable of future recovery by considering factors such as applicable regulatory changes, potential
legislation, and changes in technology. Based on this assessment, management believes the existing
regulatory assets are probable of recovery. This determination reflects the current regulatory and
political environment and is subject to change in the future. If future recovery of regulatory
assets ceases to be probable, TVA could be required to write-off these costs under the provisions
of SFAS No. 101, Regulated EnterprisesAccounting for the Discontinuation of Application of FASB
Statement No. 71. Any asset write-offs would be required to be recognized in earnings in the
period in which regulatory accounting under SFAS No. 71 ceased to apply.
New Accounting Standards and Interpretations
Accounting Changes and Error Corrections. In May 2005, the Financial Accounting
Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3, which replaces Accounting Principles
Board (APB) Opinion No. 20, Accounting Changes, and SFAS Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements. This statement applies to all voluntary changes in
accounting principles and also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition provisions. This
statement requires, unless impracticable, retrospective application to prior periods financial
statements of changes in accounting principles. If it is impracticable to determine the
period-specific effects of an accounting change on one or more individual prior periods presented,
this statement requires that the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening balance of retained earnings
for that period rather than being reported in an income statement. When it is impracticable to
determine the cumulative effect of applying a change in accounting principle to all prior periods,
this statement requires that the new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. This statement also requires that a change in
depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted
for as a change in accounting estimate effected by a change in accounting principle. The statement
became effective for TVA beginning in 2007.
Fair Value Measurements. In September 2006, FASB issued SFAS No. 157, Fair Value
Measurements. This standard provides guidance for using fair value to measure assets and
liabilities. The standard also responds to investors requests for expanded information about the
extent to which companies measure assets and liabilities at fair value, the information used to
measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies
whenever other standards require (or permit) assets or liabilities to be measured at fair value but
does not expand the use of fair value in any new circumstances. SFAS No. 157 establishes a fair
value hierarchy that prioritizes the information used to develop measurement assumptions. The
provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those
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fiscal years. At this time, TVA is evaluating the requirements of this statement and does not yet
know the impact of its implementation, which may or may not be material to TVAs results of
operations or financial position.
Accounting for Defined Benefit Pension and Other Postretirement Plans. On September
29, 2006, FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R). This standard
will require employers to fully recognize the obligations associated with single-employer defined
benefit pension, retiree healthcare, and other postretirement plans in their financial statements.
Specifically, the new standard requires an employer to recognize in its statement of financial
position an asset for a plans overfunded status or a liability for a plans underfunded status;
measure a plans assets and its obligations that determine its funded status as of the end of the
employers fiscal year (with limited exceptions); and recognize changes in the funded status of a
defined benefit postretirement plan in the year in which the changes occur. Those changes will be
reported in comprehensive income of a business entity and in changes in net assets of a
not-for-profit organization.
The requirement to recognize the funded status of a benefit plan and the disclosure
requirements are effective for TVA as of the end of the fiscal year ending after June 15, 2007. The
requirement to measure plan assets and benefit obligations as of the date of the employers fiscal
year-end statement of financial position is effective for fiscal years ending after December 15,
2008. TVA plans to apply the new standard for its 2007 year-end financial statements and recognize
on its 2007 Balance Sheets the funded status of its pension and other postretirement benefit plans.
However, had TVA been required to adopt the standard as of its last actuarial valuation date
(September 30, 2006), TVA would have recorded the following amounts on its Balance Sheet for the
year then ended: a regulatory asset of $795 million, additional pension and postretirement
obligations of $368 million and $152 million, respectively, and the reclassification to regulatory
assets of an intangible asset with a balance of $275 million, representing unamortized prior
service cost. The net effect of recognizing such amounts would have been to increase total assets
and liabilities by $520 million at that date.
Accounting for Misstatements. On September 13, 2006, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements. This bulletin
provides interpretive guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement. Application of the
guidance will become effective for TVA with its annual report for the year ending September 30,
2007.
Legislative
TVA was created by the TVA Act, and legislation is introduced from time to time that if
enacted would directly or indirectly affect TVAs operations. See Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations Legislative and Regulatory Matters
in the Annual Report for a discussion of legislative initiatives that may affect TVA.
Presidents Budget
On February 5, 2007, the Office of Management and Budget transmitted the Presidents proposed
2008 federal budget to Congress. In the portions specifically relating to TVA, the proposed budget
recommends:
| Expanding the types of financial arrangements that count towards TVAs $30 billion debt ceiling; | ||
| Requiring TVA to register its debt securities with the Securities and Exchange Commission; and | ||
| Allowing Congress to establish the amount of TVAs Office of Inspector Generals budget and directing TVA to fund the amount with power revenues beginning in 2008. Funding for TVAs Office of the Inspector General is currently paid directly by TVA. |
These recommendations have not been introduced in any draft legislation nor are they currently
included in any draft bill.
Environmental
As is the case across the utility industry and in other sectors, TVAs activities are subject
to certain federal, state, and local environmental statutes and regulations. Major areas of
regulation affecting TVAs activities include air quality control, water quality control, and
management and disposal of solid and hazardous wastes. These are described in further detail under
Item 1, BusinessEnvironmental Matters and Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations Environmental Matters in the Annual Report.
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TVA has incurred and continues to incur substantial capital and operating and maintenance
costs in order to comply with evolving environmental requirements. Many of these costs are
associated with the operation of TVAs 59 coal-fired generating units. While it is not possible to
predict with any precision how these evolving requirements will impact the operation of existing
and new coal-fired and other fossil-fuel generating units, it is virtually certain that
environmental requirements placed on the operation of these generating units will continue to
become more restrictive. Litigation over emissions from coal-fired generating units is also
occurring, including litigation against TVA. See Item 3, Legal Proceedings in the Annual Report.
Several existing regulatory programs have been and are being made more stringent in their
application to fossil-fuel units and additional regulatory programs affecting fossil-fuel units
were promulgated in 2005, including the Clean Air Interstate Rule (CAIR), which requires
significant utility reductions of emissions of sulfur dioxide and nitrogen oxides in the eastern
half of the United States (including all of TVAs operating areas), and the Clean Air Mercury Rule
(CAMR). TVA had previously estimated its total capital cost for reducing emissions from its
power plants from 1977 through 2010 to reach $5.8 billion, $4.6 billion of which had already been
spent as of September 30, 2006. TVA estimates that compliance with CAIR and CAMR could lead to
additional costs of $3.0 billion to $3.5 billion in the next decade if TVA should continue to
operate all of its present coal plants. There could be additional material costs if reductions of
carbon dioxide are mandated, or if future legislative, regulatory, or judicial actions lead to more
stringent emission reduction requirements, but these costs cannot reasonably be predicted at this
time. TVA will continue to monitor these developments and will assess any potential financial
impacts as information becomes available.
In October 2006, TVA began operating its seventh scrubber on Unit 3 at its Paradise Fossil
Plant (Paradise) in Drakesboro, Kentucky. A scrubber removes sulfur dioxide emissions by routing
gases produced from burning coal through a limestone and water mixture, which removes the sulfur
dioxide and allows cleaner gases to be released through the plant stack. The Unit 3 scrubber is
the largest single module in the United States. It is removing more than 95 percent of the sulfur
dioxide from Unit 3. All three units at Paradise are now equipped with scrubbers. Paradise is one
of TVAs largest generating plants and provides 14 billion kilowatt-hours of electricity a year.
Legal
As discussed in Note 7, TVA is involved in a number of lawsuits and claims relating to a
variety of issues. In accordance with SFAS No. 5, Accounting for Contingencies, TVA had accrued
approximately $32 million as of December 31, 2006, related to pending litigation and other claims.
If actual liabilities significantly exceed this estimate, TVAs results of operations, liquidity,
and financial condition could be materially adversely affected.
Clean Water Developments
In the second phase of a three-part rulemaking to minimize the adverse impacts from cooling
water intake structures on fish and shellfish, as required under Section 316(b) of the Clean Water
Act, the EPA promulgated a final rule for existing power producing facilities that became effective
on September 7, 2004. The new rule required existing facilities to select among several different
compliance options for reducing the number of organisms pinned against and/or drawn into the
cooling systems. These included development of a site-specific compliance option based on
application of cost/cost or cost/benefit tests. The site specific tests were designed to ensure
that a facilitys costs are not significantly greater than cost projections in the rule or the
benefits derived from taking mitigation actions. Actions taken to compensate for any impacts by
restoring habitat, or pursuing other options such as building hatcheries for fish/shellfish
production, would have counted towards compliance.
On January 25, 2007, the United States Court of Appeals for the Second Circuit (the Second
Circuit) issued a decision in a proceeding brought by environmental groups, industry groups and
certain northeastern states challenging the EPAs final rule. The Second Circuit held that costs
cannot be compared to benefits in picking the best technology available (BTA) to minimize the
adverse environmental impacts of intake structures. Instead, the court held that the EPA is allowed
to consider costs in two ways: (1) to determine what technology can reasonably be borne by
industry, and (2) to engage in cost-effectiveness analysis in determining BTA. Finding the
rulemaking record to be unclear on whether the EPA had relied on a cost-benefit analysis or a
cost-effectiveness analysis, the Second Circuit remanded the EPAs BTA determination, giving the
EPA the option to provide a reasonable explanation of its determination or make a new determination
based on the permissible cost considerations set out in the Second Circuit opinion. The Second
Circuit also remanded provisions of the EPA rule that allowed the use of a site-specific
cost-benefit test and restoration measures (such as building hatcheries) to demonstrate compliance,
holding that these rule provisions were based on an impermissible construction of the statute.
Several other provisions of the rule such as the one that sets the performance standards as a range
rather than one national standard were also remanded.
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All of the intakes at TVAs existing coal-fired and nuclear generating facilities are subject
to the EPAs rule and, potentially, to the Second Circuits decision. TVA had been in the process
of determining what was needed to comply with the EPA rule, and had believed that some expenditures
might have been required. TVA is currently assessing the Second Circuits decision and its
potential impacts on TVA. Given the uncertainty over whether the EPA will appeal this decision and
what the changes in the final rule as ultimately issued and applied will be, TVA cannot assess what
the potential impacts are at this time.
Management Changes
Director Resignation
On January 19, 2007, William W. Baxter informed the Honorable George W. Bush, President of the
United States, that he was resigning his position as a director of TVA, effective immediately, to
return full-time to the private sector.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes related to market risk from the market risks disclosed under
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations
Risk Management Activities in the Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
TVA maintains disclosure controls and procedures that are designed to ensure that information
required to be disclosed in reports it files or submits under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms. This includes controls and procedures designed
to ensure that such information is accumulated and communicated to TVA management, including the
President and Chief Executive Officer, the Disclosure Control Committee, and the Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.
An evaluation has been performed under the supervision of TVA management (including the
President and Chief Executive Officer) and members of the Disclosure Control Committee (including
the Interim Chief Financial Officer and the Vice President and Controller) of the effectiveness of
TVAs disclosure controls and procedures as of December 31, 2006. Based on that evaluation, the
President and Chief Executive Officer and members of the Disclosure Control Committee (including
the Interim Chief Financial Officer and the Vice President and Controller) concluded that, as a
result of two material weaknesses identified (described below), TVAs disclosure controls and
procedures were not effective as of December 31, 2006. However, to assess the financial statement
impact of these internal control deficiencies, TVA performed additional analyses, interim
supplemental procedures, and monitoring activities subsequent to quarter end. As a result of these
supplemental procedures, the President and Chief Executive Officer, the Interim Chief Financial
Officer, and the Vice President and Controller have determined that there is reasonable assurance
that the financial statements included in this Quarterly Report fairly present, in all material
respects, TVAs financial condition, results of operations, and cash flows as of, and for, the
periods presented.
TVA management has identified a material weakness in internal controls related to TVAs end
use billing arrangements with wholesale power customers. Under these arrangements, TVA relies on
the distributor customers to calculate major components of their own power bills. In fiscal year
2006, TVA requested annual Statement on Auditing Standards (SAS) 70 Type II internal control
reports on 12 specific control objectives from distributor customers and their third party billing
processors. Based on the evaluation of these SAS 70 Type II reports, TVA determined that
distributor customers who represent a material amount of TVAs 2007 revenue either had qualified
opinions and/or internal control test results that negatively impact their ability to meet TVAs
control objectives. However, subsequent to quarter end TVA has also performed additional revenue
analysis by comparing various metrics from billing data for distributor customers with similar
characteristics and benchmarking those with control weaknesses against those with strong controls.
As a result of this analysis, TVA has determined that reported revenues are not materially
misstated.
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TVA management has also identified a material weakness related to controls over the
completeness, accuracy, and authorization of TVAs property, plant, and equipment transactions and
balances; the calculation of AFUDC; and the review of construction work in progress accounts for
proper closure to completed plant. To remediate this control weakness, TVA has developed a new
process for project approval to include the determination of proper project cost classification and
has made changes in staffing for fixed asset accounting. TVA is also formalizing the accounting
review of account balances and transactions and improving the documentation of management review
and approval. Additional analysis has been performed to ensure that property, plant, and equipment
is not materially misstated.
Except for the efforts taken and currently underway as described above, there have been no
changes in TVAs internal control over financial reporting during the most recently completed
fiscal quarter that have materially affected, or are reasonably likely to materially affect, TVAs
internal control over financial reporting.
TVA management believes that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are met, and no
evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a company can be detected.
TVAs controls and procedures are designed to provide reasonable, but not absolute, assurance
that the objectives will be met. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 in this Quarterly Report for a discussion of legal proceedings affecting TVA.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report, careful consideration
should be given to the risk factors discussed in Item 1A, Risk Factors in the Annual Report, which
could materially affect TVAs business, financial condition, and operating results. The risks
described in this Quarterly Report and in the Annual Report are not the only risks facing TVA.
Additional risks and uncertainties not currently known to TVA management or that TVA management
currently deems to be immaterial also may materially adversely affect TVAs business, financial
condition, and operating results. Other than as discussed below, there have been no material
changes to the risk factors disclosed in the Annual Report.
Events at non-TVA facilities which affect the supply of water to TVAs generation facilities
could interfere with TVAs ability to generate power.
TVAs fossil and nuclear generation facilities depend on water from the river systems upon
which they are located for cooling water and for water to convert into steam to drive turbines.
While TVA manages the Tennessee River and large portions of its tributary system in order to
provide much of this necessary water, entities such as the United States Army Corps of Engineers
operate and manage other bodies of water upon which some TVA facilities rely. If events at these
non-TVA bodies of water or their associated hydroelectric facilities were to interfere with the
flow of water, TVA might have insufficient water to meet the needs of its plants. TVA might thus be
required to reduce generation at its affected facilities to levels compatible with the available
supply of water.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibit No. | Description | |||
10.1 | Amendment Dated as of November 2, 2006, to $1,250,000,000 Fall Maturity
Credit Agreement Dated as of May 17, 2006, Among TVA, Bank of America, N.A.,
as Administrative Agent, Bank of America, N.A., as a Lender, and the Other
Lenders Party Thereto |
|||
31.1 | Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer |
|||
31.2 | Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer |
|||
32.1 | Section 1350 Certification Executed by the Chief Executive Officer |
|||
32.2 | Section 1350 Certification Executed by the Chief Financial Officer |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
February 14, 2007
TENNESSEE VALLEY AUTHORITY (Registrant) |
||||
By: | /s/ Tom D. Kilgore | |||
Tom D. Kilgore | ||||
President and Chief Executive Officer (Chief Executive Officer) |
||||
By: | /s/ John M. Hoskins | |||
John M. Hoskins | ||||
Interim Chief Financial Officer and Executive Vice President, Financial Services (Principal Financial Officer) |
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EXHIBIT INDEX
Exhibit No. | Description | |||
10.1 | Amendment Dated as of November 2, 2006, to $1,250,000,000 Fall Maturity
Credit Agreement Dated as of May 17, 2006, Among TVA, Bank of America, N.A.,
as Administrative Agent, Bank of America, N.A., as a Lender, and the Other
Lenders Party Thereto |
|||
31.1 | Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer |
|||
31.2 | Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer |
|||
32.1 | Section 1350 Certification Executed by the Chief Executive Officer |
|||
32.2 | Section 1350 Certification Executed by the Chief Financial Officer |
Page 38 of 38