Tennessee Valley Authority - Quarter Report: 2007 December (Form 10-Q)
UNITED
STATES
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, 2007
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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 of
Congress
(State
or other jurisdiction of incorporation or organization)
|
62-0474417
(I.R.S.
Employer Identification No.)
|
|
400
W. Summit Hill Drive
Knoxville,
Tennessee
(Address
of principal executive offices)
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37902
(Zip
Code)
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(865) 632-2101
(Registrant’s
telephone number, including area code)
None
(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, 15(d), or 37 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 [ X ]
No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ X ]
(Do
not check if a smaller reporting company)
|
Smaller
reporting
company [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
[ ] No [ X ]
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1
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2
This Quarterly Report on Form 10-Q
(“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;
|
•
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Projections
regarding potential rate actions;
|
•
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Estimates
of costs of certain asset retirement
obligations;
|
•
|
Estimates
regarding power and energy
forecasts;
|
•
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Expectations
about the adequacy of TVA’s funding of its pension plans, nuclear
decommissioning trust, and asset retirement
trust;
|
•
|
Estimates
regarding the reduction of bonds, notes, and other evidences of
indebtedness, lease/leaseback commitments, and power prepayment
obligations;
|
•
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Estimates
of amounts to be reclassified from other comprehensive income to earnings
over the next year;
|
•
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TVA’s
plans to continue using short-term debt to meet current obligations;
and
|
•
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The
anticipated cost and timetable for placing Watts Bar Unit 2 in
service.
|
Although the Tennessee Valley Authority
(“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:
|
–
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TVA’s
protected service area,
|
–
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The
sole authority of the TVA Board to set power
rates,
|
–
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Various
environmental and nuclear matters including laws, regulations, and
administrative orders restricting carbon emissions and preferring certain
fuels over others,
|
–
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TVA’s
management of the Tennessee River
system,
|
–
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TVA’s
credit rating, and
|
–
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TVA’s
debt ceiling;
|
•
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Loss
of customers;
|
•
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Performance
of TVA’s generation and transmission
assets;
|
•
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Availability
of fuel supplies;
|
•
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Purchased
power price volatility;
|
•
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Events
at facilities not owned by TVA that affect the supply of water to TVA’s
generation facilities;
|
•
|
Compliance
with existing environmental laws and
regulations;
|
•
|
Significant
delays or cost overruns in construction of generation and transmission
assets;
|
•
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Significant
changes in demand for electricity;
|
•
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Legal
and administrative proceedings;
|
•
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Weather
conditions, including drought;
|
•
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Failure
of transmission facilities;
|
•
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Events
at any nuclear facility, even one that is not owned by or licensed to
TVA;
|
•
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Catastrophic
events such as fires, earthquakes, floods, tornadoes, pandemics, wars,
terrorist activities, and other similar events, especially if these events
occur in or near TVA’s service
area;
|
•
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Reliability
of purchased power providers, fuel suppliers, and other
counterparties;
|
•
|
Changes
in the market price of commodities such as coal, uranium, natural gas,
fuel oil, electricity, and emission
allowances;
|
•
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Changes
in the prices of equity securities, debt securities, and other
investments;
|
•
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Changes
in interest rates;
|
•
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Creditworthiness
of TVA, its counterparties, or its
customers;
|
•
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Rising
pension costs and health care
expenses;
|
•
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Increases
in TVA’s financial liability for decommissioning its nuclear facilities
and retiring other assets;
|
•
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Limitations
on TVA’s ability to borrow money;
|
•
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Changes
in the economy;
|
•
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Ineffectiveness
of TVA’s disclosure controls and procedures and its internal control over
financial reporting;
|
•
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Changes
in accounting standards;
|
•
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The
loss of TVA’s ability to use regulatory
accounting;
|
•
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Problems
attracting and retaining skilled
workers;
|
•
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Changes
in technology;
|
•
|
Changes
in the market for TVA securities;
and
|
•
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Unforeseeable
events.
|
Additionally, other risks that may cause actual results to differ from the
predicted results are set forth in Part I, Item 2, Management’s Discussion and
Analysis of Financial Condition and Results of Operations in this Quarterly
Report, in Item 1A, Risk Factors and Item 7, Management’s Discussion and
Analysis of Financial Conditions and Results of Operations in TVA’s Annual
Report on Form 10-K, as amended, for the fiscal year ended September 30, 2007
(the “Annual Report”), and in other filings TVA makes from time-to-time with the
Securities and Exchange Commission (“SEC”). 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
TVA’s 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.
Fiscal Year
Unless otherwise indicated, years
(2008, 2007, etc.) in this Quarterly Report refer to TVA’s fiscal years ended
September 30.
Notes
References to “Notes” are to the Notes
to Financial Statements contained in Part I, Item 1, Financial Statements in
this Quarterly Report.
Available Information
TVA's Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments
to those reports are made available on TVA's web site, free of charge, as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC. TVA's web site is
www.tva.gov. Information contained on TVA’s web site shall not be
deemed to be incorporated into, or to be a part of, this Quarterly
Report. In addition, the public may read and copy any reports or
other information that TVA files with the SEC at the SEC’s 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. TVA's SEC reports are also available to the public
without charge from the web site maintained by the SEC at
www.sec.gov.
TENNESSEE
VALLEY AUTHORITY
STATEMENTS OF INCOME (UNAUDITED)
For the
three months ended December 31
(in
millions)
2007
|
2006
|
|||||||
Operating
revenues
|
||||||||
Sales
of electricity
|
||||||||
Municipalities
and cooperatives
|
$ | 1,905 | $ | 1,742 | ||||
Industries
directly served
|
392 | 302 | ||||||
Federal
agencies and other
|
25 | 25 | ||||||
Other
revenue
|
28 | 35 | ||||||
Total
operating revenues
|
2,350 | 2,104 | ||||||
Operating
expenses
|
||||||||
Fuel
and purchased power
|
935 | 739 | ||||||
Operating
and maintenance
|
592 | 563 | ||||||
Depreciation,
amortization, and accretion
|
390 | 356 | ||||||
Tax equivalents
|
121 | 108 | ||||||
Loss
on asset impairment (Note 6)
|
– | 22 | ||||||
Total
operating expenses
|
2,038 | 1,788 | ||||||
Operating
income
|
312 | 316 | ||||||
Other
income
|
2 | 12 | ||||||
Unrealized
gain on derivative contracts, net (Note 1)
|
– | 15 | ||||||
Interest
expense
|
||||||||
Interest
on debt
|
329 | 336 | ||||||
Amortization
of debt discount, issue, and reacquisition costs, net (Note
1)
|
5 | 5 | ||||||
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(3 | ) | (49 | ) | ||||
Net
interest expense
|
331 | 292 | ||||||
Net (loss)
income
|
$ | (17 | ) | $ | 51 |
The
accompanying Notes are an integral part of these financial
statements.
TENNESSEE
VALLEY AUTHORITY
(in
millions)
ASSETS
|
||||||||
December
31
|
September
30
|
|||||||
2007
|
2007
|
|||||||
Current
assets
|
(Unaudited)
|
|||||||
Cash
and cash equivalents
|
$ | 158 | $ | 165 | ||||
Restricted
cash and investments (Note 1)
|
127 | 150 | ||||||
Accounts
receivable, net (Note 1)
|
1,345 | 1,453 | ||||||
Inventories
and other
|
768 | 663 | ||||||
Total
current assets
|
2,398 | 2,431 | ||||||
Property,
plant, and equipment
|
||||||||
Completed
plant
|
38,918 | 38,811 | ||||||
Less
accumulated depreciation
|
(16,204 | ) | (15,937 | ) | ||||
Net
completed plant
|
22,714 | 22,874 | ||||||
Construction
in progress
|
1,487 | 1,282 | ||||||
Nuclear
fuel and capital leases
|
708 | 672 | ||||||
Total
property, plant, and equipment, net
|
24,909 | 24,828 | ||||||
Investment
funds
|
1,132 | 1,169 | ||||||
Regulatory and other long-term
assets (Note 1)
|
||||||||
Deferred
nuclear generating units
|
3,032 | 3,130 | ||||||
Other
regulatory assets
|
1,912 | 1,969 | ||||||
Subtotal
|
4,944 | 5,099 | ||||||
Other
long-term assets
|
404 | 375 | ||||||
Total
regulatory and other long-term assets
|
5,348 | 5,474 | ||||||
Total
assets
|
$ | 33,787 | $ | 33,902 | ||||
LIABILITIES
AND PROPRIETARY CAPITAL
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 784 | $ | 1,000 | ||||
Accrued
liabilities
|
157 | 199 | ||||||
Collateral
funds held
|
144 | 157 | ||||||
Accrued
interest
|
305 | 406 | ||||||
Current
portion of lease/leaseback obligations
|
43 | 43 | ||||||
Current
portion of energy prepayment obligations
|
106 | 106 | ||||||
Short-term
debt, net
|
1,565 | 1,422 | ||||||
Current
maturities of long-term debt (Note 3)
|
2,090 | 90 | ||||||
Total
current liabilities
|
5,194 | 3,423 | ||||||
Other
liabilities
|
||||||||
Other
liabilities
|
2,141 | 2,067 | ||||||
Regulatory
liabilities (Note 1)
|
145 | 83 | ||||||
Asset
retirement obligations
|
2,219 | 2,189 | ||||||
Lease/leaseback
obligations
|
1,028 | 1,029 | ||||||
Energy
prepayment obligations (Note 1)
|
1,006 | 1,032 | ||||||
Total
other liabilities
|
6,539 | 6,400 | ||||||
Long-term debt, net (Note
3)
|
19,105 | 21,099 | ||||||
Total
liabilities
|
30,838 | 30,922 | ||||||
Commitments and
contingencies
|
||||||||
Proprietary
capital
|
||||||||
Appropriation
investment
|
4,738 | 4,743 | ||||||
Retained
earnings
|
1,919 | 1,939 | ||||||
Accumulated
other comprehensive (loss)
|
(23 | ) | (19 | ) | ||||
Accumulated
net expense of nonpower programs
|
(3,685 | ) | (3,683 | ) | ||||
Total
proprietary capital
|
2,949 | 2,980 | ||||||
Total
liabilities and proprietary capital
|
$ | 33,787 | $ | 33,902 |
The
accompanying Notes are an integral part of these financial
statements.
TENNESSEE
VALLEY AUTHORITY
STATEMENTS OF CASH
FLOWS (UNAUDITED)
For the
three months ended December 31
(in
millions)
2007
|
2006
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
(loss) income
|
$ | (17 | ) | $ | 51 | |||
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||
Depreciation,
amortization, and accretion
|
395 | 360 | ||||||
Nuclear
refueling outage amortization
|
25 | 21 | ||||||
Loss
on asset impairment
|
– | 22 | ||||||
Amortization
of nuclear fuel
|
44 | 27 | ||||||
Non-cash
retirement benefit expense
|
35 | 50 | ||||||
Net
unrealized gain on derivative contracts
|
– | (15 | ) | |||||
Prepayment
credits applied to revenue
|
(26 | ) | (26 | ) | ||||
Fuel
cost adjustment deferral
|
47 | – | ||||||
Other,
net
|
1 | (15 | ) | |||||
Changes
in current assets and liabilities
|
||||||||
Accounts
receivable, net
|
256 | 214 | ||||||
Inventories
and other
|
(103 | ) | (78 | ) | ||||
Accounts
payable and accrued liabilities
|
(284 | ) | (120 | ) | ||||
Accrued
interest
|
(100 | ) | (107 | ) | ||||
Pension
contributions
|
(19 | ) | (19 | ) | ||||
Refueling
outage costs
|
(36 | ) | (41 | ) | ||||
Net
cash provided by operating activities
|
218 | 324 | ||||||
Cash
flows from investing activities
|
||||||||
Construction
expenditures
|
(335 | ) | (344 | ) | ||||
Combustion
turbine asset acquisitions
|
– | (98 | ) | |||||
Nuclear
fuel expenditures
|
(83 | ) | (22 | ) | ||||
Change
in restricted cash and investments
|
23 | (8 | ) | |||||
Purchases
of investments, net
|
(2 | ) | (1 | ) | ||||
Loans
and other receivables
|
||||||||
Advances
|
(4 | ) | (1 | ) | ||||
Repayments
|
3 | 4 | ||||||
Proceeds
from sale of receivables/loans
|
– | 2 | ||||||
Other,
net
|
– | (1 | ) | |||||
Net
cash used in investing activities
|
(398 | ) | (469 | ) | ||||
Cash
flows from financing activities
|
||||||||
Long-term
debt
|
||||||||
Issues
|
41 | 9 | ||||||
Redemptions
and repurchases
|
– | (77 | ) | |||||
Short-term
issues, net
|
143 | 190 | ||||||
Payments
on lease/leaseback financing
|
(1 | ) | (1 | ) | ||||
Payments
to U.S. Treasury
|
(10 | ) | (10 | ) | ||||
Net
cash provided by financing activities
|
173 | 111 | ||||||
Net
change in cash and cash equivalents
|
(7 | ) | (34 | ) | ||||
Cash
and cash equivalents at beginning of period
|
165 | 536 | ||||||
Cash
and cash equivalents at end of period
|
$ | 158 | $ | 502 | ||||
The
accompanying Notes are an integral part of these financial
statements.
TENNESSEE
VALLEY AUTHORITY
For the
three months ended December 31
(in
millions)
Appropriation
Investment
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated
Net Expense of Stewardship Programs
|
Total
|
Comprehensive
Income (Loss)
|
|||||||||||||||||||
Balance
at September 30, 2006
|
$ | 4,763 | $ | 1,565 | $ | 43 | $ | (3,672 | ) | $ | 2,699 | |||||||||||||
Net
income (loss)
|
– | 53 | – | (2 | ) | 51 | $ | 51 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (5 | ) | – | – | (5 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss (Note 2)
|
– | – | (15 | ) | – | (15 | ) | (15 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(5 | ) | – | – | – | (5 | ) | – | ||||||||||||||||
Balance
at December 31, 2006 (Unaudited)
|
$ | 4,758 | $ | 1,613 | $ | 28 | $ | (3,674 | ) | $ | 2,725 | $ | 36 | |||||||||||
Balance
at September 30, 2007
|
$ | 4,743 | $ | 1,939 | $ | (19 | ) | $ | (3,683 | ) | $ | 2,980 | ||||||||||||
Net
(loss)
|
– | (15 | ) | – | (2 | ) | (17 | ) | $ | (17 | ) | |||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (5 | ) | – | – | (5 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss (Note 2)
|
– | – | (4 | ) | – | (4 | ) | (4 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(5 | ) | – | – | – | (5 | ) | – | ||||||||||||||||
Balance
at December 31, 2007 (Unaudited)
|
$ | 4,738 | $ | 1,919 | $ | (23 | ) | $ | (3,685 | ) | $ | 2,949 | $ | (21 | ) |
The
accompanying Notes are an integral part of these financial
statements.
(Dollars
in millions except where noted)
1.
Summary of Significant Accounting Policies
General
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 (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, and
industry.
Substantially all TVA revenues and
assets are attributable to the power program. TVA provides power in
most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern
Kentucky, and in portions of northern Georgia, western North Carolina, and
southwestern Virginia to a population of approximately 8.8 million
people. The power program has historically been separate and distinct
from the stewardship programs. The power program 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”). Although TVA does not currently receive congressional
appropriations, it is required to make annual payments to the U.S. Treasury in
repayment of, and as a return on, the government’s appropriation investment in
TVA power facilities (the “Power Facility Appropriation
Investment”). Until 2000, most of the funding for TVA’s stewardship
programs was provided by congressional appropriations. These programs
are now funded with power revenues, except for certain stewardship activities
that generate 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,
stewardship assets and properties are included as part of the power program,
TVA’s only operating segment.
Power rates are established by the TVA board of directors (“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; payments to
states and counties in lieu of taxes; debt service on outstanding indebtedness;
payments to the U.S. Treasury in repayment of and as a return on the Power
Facility Appropriation Investment; and such additional margin as the TVA Board
may consider desirable for investment in power system assets, retirement of
outstanding Bonds in advance of maturity, additional reduction of the Power
Facility Appropriation Investment, and other purposes connected with TVA’s power
business. In setting TVA’s 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 the prior
approval of or subsequent review 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 for interim financial
information. Accordingly, TVA’s 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, 2007, and the notes thereto, which
are contained in TVA’s Annual Report on Form 10-K, as amended, for the fiscal
year ended September 30, 2007 (the “Annual Report”).
TVA recorded a $3 million expense
during the first quarter of 2008 related to litigation pending during the fourth
quarter of 2007. These charges are included in Operating and
maintenance expense on the Statement of Income for the three months ended
December 31, 2007.
After the fourth quarter of 2006
closed, TVA reviewed projects related to construction work in progress and
identified errors in classification related primarily to 2006 and prior
periods. Based on the results of the review, TVA recorded project
write-downs of $5 million in the first quarter of 2007. Additionally,
TVA recorded a $4 million expense during the first quarter of 2007 related to
litigation pending during the fourth quarter of 2006. These charges
are included in Operating and maintenance expense on the Statement of Income for
the three months ended December 31, 2006.
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 TVA’s 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
TVA’s fiscal year ends September
30. Unless otherwise indicated, years (2008, 2007, etc.) refer to
TVA’s fiscal years.
Reclassifications
Reclassifications have been made to the
2007 financial statements to conform to the 2008
presentation. Certain items previously considered revenue from Sales
of electricity were reclassified as Other revenue. These items
were not directly associated with the sale of electricity and include
delivery point charges, administrative charges, and customer
charges. Previously reported sales of electricity of approximately $7
million for the three months ended December 31, 2006, are now included in Other
revenue. In addition, asset impairment losses of $22 million have
been reclassified from Operating and maintenance to Loss on asset impairment to
more accurately reflect the nature of the expenses. See Note
6.
These reclassifications have no effect
on previously reported results of operations and net cash flows.
Restricted Cash and
Investments
As of December 31, 2007, and September
30, 2007, TVA had $127 million and $150 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. This resulted in the funds being
reported in Restricted cash and investments.
Accounts Receivable
Accounts receivable primarily consist
of amounts due from customers for power sales. The table below
summarizes the types and amounts of receivables:
Accounts
Receivable
|
|||||||||
At
December 31
2007
|
At
September 30
2007
|
||||||||
Power
receivables billed
|
$ | 254 | $ | 316 | |||||
Power
receivables unbilled
|
922 | 1,113 | |||||||
Fuel
cost adjustment unbilled
|
148 | – | |||||||
Total
power receivables
|
1,324 | 1,429 | |||||||
Other
receivables
|
23 | 26 | |||||||
Allowance
for uncollectible accounts
|
(2 | ) | (2 | ) | |||||
Net
accounts receivable
|
$ | 1,345 | $ | 1,453 |
Beginning with the first quarter of
2008, TVA reclassified a portion of the unbilled fuel cost adjustment (“FCA”)
from a long-term regulatory asset to accounts receivable to more accurately
reflect the nature and timing of the collection of these costs from its
customers. See Cost-Based Regulation in this
Note 1.
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 Accounts receivable,
Deferred nuclear generating units, and Other regulatory assets on the December
31, 2007, and the September 30, 2007, 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, deferred capital lease asset costs, deferred losses
relating to TVA’s financial trading program, FCA, unrealized losses on certain
swaps and swaptions contracts, and unfunded benefit costs. All
regulatory assets are probable of recovery in future
revenues. Components of Regulatory liabilities include unrealized
gains on coal purchase contracts, a reserve for future generation, and capital
lease liabilities.
TVA’s regulatory assets and liabilities
are summarized in the table below.
TVA
Regulatory Assets and Liabilities
|
||||||||
At
December 31
2007
|
At
September 30 2007
|
|||||||
Regulatory
Assets:
|
||||||||
Unfunded
benefit costs
|
$ | 951 | $ | 973 | ||||
Nuclear
decommissioning costs
|
482 | 419 | ||||||
Debt
reacquisition costs
|
205 | 210 | ||||||
Deferred
losses relating to TVA’s financial trading program
|
2 | 8 | ||||||
Deferred
outage costs
|
107 | 96 | ||||||
Deferred
capital lease asset costs
|
63 | 66 | ||||||
Unrealized
losses on certain swap and swaption contracts
|
99 | – | ||||||
Fuel
cost adjustments
|
3 | 197 | ||||||
Subtotal
|
1,912 | 1,969 | ||||||
Deferred
nuclear generating units
|
3,032 | 3,130 | ||||||
Subtotal
|
4,944 | 5,099 | ||||||
Fuel
cost adjustment receivable
|
148 | – | ||||||
Total
|
$ | 5,092 | $ | 5,099 | ||||
Regulatory
Liabilities:
|
||||||||
Unrealized
gains on coal purchase contracts
|
$ | 83 | $ | 16 | ||||
Capital
lease liabilities
|
62 | 67 | ||||||
Subtotal
|
145 | 83 | ||||||
Reserve
for future generation
|
73 | 74 | ||||||
Total
|
$ | 218 | $ | 157 |
During
the first quarter of 2008, TVA reclassified a portion of its FCA regulatory
asset from a long-term to short-term asset. The reclassification was
due to TVA’s experience that a substantial portion of deferred FCA costs are
billed within a 12-month period. This reclassification more closely
reflects the cash flows related to collection of the FCA. The current
portion of the FCA of $148 million is included in Accounts receivable at
December 31, 2007. The remaining FCA balance of $3 million continues
to be reported as a Regulatory asset.
In the first quarter of 2008, TVA began
using regulatory accounting treatment to defer the unrealized mark to market
gains and losses on certain swap and swaption contracts to better match the
income statement recognition of gain and loss with the economic reality of when
these transactions actually settle. The value of the swap and
swaptions will still be recorded on TVA’s balance sheet, and any interest
expense impacts will continue to be reflected in TVA’s income
statement. The deferred loss on the value of the swaps and swaptions
was $99 million for the first quarter of 2008 and is included as a Regulatory
asset on the December 31, 2007, Balance Sheet. See Swaps and Swaptions in this
Note 1.
TVA
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, 2007, and September 30, 2007, Balance Sheets. See
Reserve for Future
Generation in this Note 1.
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 to meet future power demand in TVA’s
service area. Because these amounts were intended to fund future
costs, they were originally deferred as a regulatory liability. The
funds were based on a predetermined rate applied to electricity sales approved
as part of TVA’s 2007 budget. Collections for the three months ended
December 31, 2006, amounted to $13 million, and total collections for the year
ended September 30, 2007, amounted to $76 million. These amounts were
recorded as a regulatory liability on the December 31, 2006, and September 30,
2007, Balance Sheets, respectively, as a component of Completed
plant. Following the purchase of two combustion turbine facilities,
these funds are being applied as credits to Completed plant and are reflected on
the September 30, 2007, Balance Sheet. These funds collected for
future generation are being amortized to revenue in order to match revenue with
the corresponding depreciation expense of the facilities on the Statement of
Income. This revenue recognition process began when the facilities
were placed into service. The reserve for future generation was not
extended beyond 2007. The balance of the reserve for future
generation was $73 million at December 31, 2007, and $74 million at September
30, 2007. TVA recognized revenue of $1 million during the first
quarter of 2008 consistent with the manner in which the related assets are being
depreciated.
Energy Prepayment
Obligations
Prior to
2005, TVA entered into sales agreements with 36 customers for 54.5 discounted
energy units totaling $54.5 million. Total credits applied to power
billings on a cumulative basis from these arrangements through December 31,
2007, exceeded $27.2 million. Of this amount, over $1 million was
recognized as revenue for each of the quarterly periods ended December 31, 2007
and 2006.
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
MLGW’s 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, 2007, exceeded $415 million. Of this
amount, $25 million was recognized as revenue for each of the quarterly periods
ended December 31, 2007 and 2006. These amounts were based on the
ratio of kilowatt-hours of electricity delivered to the total kilowatt-hours
under contract.
At December 31, 2007 and September 30,
2007, obligations for these energy prepayments were $1,112 million and $1,138
million, respectively. These amounts are included in Energy
prepayment obligations and Current portion of energy prepayment obligations on
the December 31, 2007, and September 30, 2007, Balance Sheets.
Asset Retirement
Obligations
In accordance with the provisions of
SFAS No. 143, “Accounting for
Asset Retirement Obligations,” TVA recognizes the fair value of legal
obligations associated with the retirement of certain tangible long-lived
assets. The fair value of the liability is added to the book value of
the associated asset. The liability increases due to the passage of
time (accretion expense), based on the time value of money, until the
obligations settle. Subsequent to the initial recognition, the future
liability is adjusted for any periodic revisions to the expected cost of the
retirement obligation (changes in estimates to future cash flows) and for
accretion of the liability due to the passage of time.
During the first quarter of 2008, TVA’s
total asset retirement obligation (“ARO”) increased $30 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 $7 million, related to coal-fired and gas/oil combustion
turbine plants, asbestos, and polychlorinated biphenyls (“PCBs”), was expensed
during the first quarter of 2008. During the first quarter of 2007,
TVA’s 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 PCBs, was expensed during the first
quarter of 2007.
Reconciliation
of Asset Retirement Obligation Liability
Three
Months Ended December 31
|
||||||||
2007
|
2006
|
|||||||
Balance
at beginning of period
|
$ | 2,189 | $ | 1,985 | ||||
Add: ARO
(accretion) expense
|
||||||||
Nuclear
accretion (recorded as a regulatory asset)
|
23 | 15 | ||||||
Non-nuclear
accretion (charged to expense)
|
7 | 7 | ||||||
30 | 22 | |||||||
Balance
at end of period
|
$ | 2,219 | $ | 2,007 |
Allowance for Funds Used During
Construction
TVA capitalizes interest, as an allowance for funds used during construction
("AFUDC"), based on the average interest rate of TVA’s outstanding
debt. The allowance is applicable to construction in progress related
to certain projects and certain nuclear fuel inventories. TVA will
continue to capitalize a portion of current interest costs associated with funds
invested in most nuclear fuel inventories, but interest on funds invested in
construction projects will be capitalized beginning in 2008 only if (1) the
expected total cost of a project is $1 billion or more and (2) the
estimated construction period is at least three years.
Swaps and Swaptions
From time to time TVA has entered into
call monetization transactions using swaptions to hedge the value of call
provisions on certain of its Bond issues. A swaption essentially
grants a third party an option to enter into a swap agreement with TVA under
which TVA receives a floating rate of interest and pays the third party a fixed
rate of interest equal to the interest rate on the Bond issue whose call
provision TVA monetized. Selling such an option creates a liability
for TVA until such time as TVA buys back the option or until the option
matures.
These call monetization transactions
result in long-term liabilities which are marked to market each
quarter. In accordance with the accounting policy that was in effect
on September 30, 2007, the changes in the value of these liabilities were
reported as unrealized gains or losses through TVA’s income statement in
accordance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” The volatility of the valuations
resulted in the recognition of sizable amounts of non-cash expense or income,
which affected net income.
The TVA Board approved, beginning in
2008, the utilization of regulatory accounting treatment for swaps and swaptions
related to call monetization transactions in order to better match the income
statement recognition of gain and loss with the economic reality of when these
transactions actually settle. This treatment removes the non-cash impacts to
TVA’s earnings that result from marking the value of these instruments to market
each quarter. The value of the swaps and swaptions will still be recorded on
TVA’s balance sheet, and any interest expense impacts will continue to be
reflected in TVA’s income statement. The deferred loss on the value
of the swaps and swaptions for the first quarter of 2008 was $99 million and is
included as a Regulatory asset on the December 31, 2007, Balance
Sheet.
Impact of New Accounting Standards and
Interpretations
Accounting for Defined
Benefit Pension and Other Postretirement Plans. On September
30, 2007, TVA adopted the provisions contained within 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 requires employers
to fully recognize within their financial statements the obligations associated
with single-employer defined benefit pension, retiree healthcare, and other
postretirement plans. Specifically, the new standard requires an
employer to recognize in its statement of financial position an asset for a
plan’s overfunded status or a liability for a plan’s underfunded status; measure
a plan’s assets and its obligations that determine its funded status as of the
end of the employer’s 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. Such changes are to be reported
within comprehensive income of a business entity (except that regulated entities
may report such changes as regulatory assets and/or liabilities in accordance
with the provisions of SFAS No. 71), and within changes in net assets of a
not-for-profit organization.
TVA’s 2007 adoption of SFAS No. 158
resulted in the recognition of the following amounts on its Balance Sheet at
September 30, 2007: additional regulatory assets of $475 million (including the
reclassification of $246 million in unamortized prior service cost previously
classified as intangible assets) resulting in post-SFAS No. 158 benefit
regulatory assets of $973 million; and additional pension and postretirement
obligations of $330 million and $143 million, and $2 million classified as
accumulated other comprehensive gain, resulting in post-SFAS No. 158 benefit
obligations of $1,128 million. The net amount of recognizing such
amounts increased total assets and liabilities by $475 million at September 30,
2007.
Fair Value
Measurements. In September 2006, Financial Accounting
Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.”
This standard provides guidance for using fair value to measure assets
and liabilities that currently require fair value measurement. 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, 2008,
and interim periods within those fiscal years. At this time, TVA is
evaluating the requirements of this standard and has not yet determined the
impact of its implementation, which may or may not be material to TVA’s results
of operations or financial position.
Fair Value
Option. In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement No.
115.” This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. The fair value
option established by SFAS No.159 permits all entities to choose to measure
eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. Most of the provisions in this statement are
elective. The provisions of SFAS No. 159 are effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007. Early adoption is permitted as of the beginning of the previous
fiscal year provided that the entity makes that choice in the first 120 days of
that fiscal year and also elects to apply the provisions of SFAS No. 157. At this time, TVA is
evaluating the requirements of this standard and has not yet determined the
potential impact of its implementation, which may or may not be material to
TVA’s results of operations or financial position.
Offsetting
Amounts. On April 30, 2007, FASB issued FASB Staff Position
(“FSP”) FIN No. 39-1,
“Amendment of FASB Interpretation No. 39,” which addresses certain
modifications to FASB Interpretation No. 39, “Offsetting of Amounts Related to
Certain Contracts.” This FSP replaces the terms “conditional contracts”
and “exchange contracts” with the term “derivative instruments” as defined in
SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” The FSP also permits a
reporting entity to offset fair value amounts recognized for the right to
reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts recognized for derivative
instruments executed with the same counterparty under the same master netting
arrangement. The guidance in the FSP is effective for fiscal years
beginning after November 15, 2007, with early application
permitted. At this time, TVA is evaluating the requirements of this
guidance and has not yet determined the potential impact of its implementation,
which may or may not be material to TVA’s financial position.
2. Accumulated
Other Comprehensive Income (Loss)
SFAS No. 130, “Reporting Comprehensive
Income,” requires the disclosure of other comprehensive income to reflect
changes in capital that result from transactions and economic events from
non-owner sources. The decrease in Other comprehensive income for the
three months ended December 31, 2007, and for the three months ended December
31, 2006, was due to unrealized losses related to mark-to-market valuation
adjustments for certain derivative instruments.
Total
Other Comprehensive (Loss) Income Activity
|
||||||||
Three
Months Ended
December
31
|
||||||||
2007
|
2006
|
|||||||
Accumulated
other comprehensive (loss) income at beginning of period
|
$ | (19 | ) | $ | 43 | |||
Changes
in fair value:
|
||||||||
Foreign
currency swaps
|
(4 | ) | (16 | ) | ||||
Inflation
swap
|
– | 1 | ||||||
Accumulated
other comprehensive (loss) income at end of period
|
$ | (23 | ) | $ | 28 | |||
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 a charge to earnings of $35 million for
the first quarter of 2008 and an increase to earnings of $51 million for
the first quarter of 2007.
|
3.
Debt Securities
Debt Outstanding
The TVA Act authorizes TVA to issue
Bonds in an amount not to exceed $30 billion at any time. Debt outstanding at
December 31, 2007, and September 30, 2007, including translation losses of $264
million and $299 million, respectively, related to long-term debt denominated in
foreign currencies, consisted of the following:
Debt
Outstanding
|
||||||||
At
December 31
2007
|
At
September 30
2007
|
|||||||
Short-term
debt
|
||||||||
Discount
notes (net of discount)
|
$ | 1,565 | $ | 1,422 | ||||
Current
maturities of long-term debt
|
2,090 | 90 | ||||||
Total
short-term debt, net
|
3,655 | 1,512 | ||||||
Long-term
debt
|
||||||||
Long-term
|
19,294 | 21,288 | ||||||
Unamortized
discount
|
(189 | ) | (189 | ) | ||||
Total
long-term debt, net
|
19,105 | 21,099 | ||||||
Total
outstanding debt
|
$ | 22,760 | $ | 22,611 |
Debt Securities Activity
The table below summarizes TVA’s
long-term Bond activity for the period from October 1, 2007, to December 31,
2007.
Long-Term
Bond and Note Activity
|
||||||||||
Date
|
Amount
|
Interest
Rate
|
||||||||
Redemptions/Maturities:
|
||||||||||
electronotes®
|
First
Quarter 2008
|
$ | – |
NA
|
||||||
Issuances:
|
||||||||||
electronotes®
|
First
Quarter 2008
|
$ | 41 | 5.21 | % | |||||
Note:
electronotes®
interest rate is a weighted average rate.
|
4.
Risk Management Activities and Derivative Transactions
TVA is exposed to various market
risks. These market risks include risks related to commodity prices,
investment prices, interest rates, currency exchange rates, inflation, and
counterparty 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 TVA’s policy to enter into derivative transactions
solely for hedging purposes and not for speculative purposes.
TVA has recorded the following amounts
for its derivative financial instruments:
Mark-to-Market
Values of Derivative Instruments
|
||||||||
At
December 31
2007
|
At
September 30
2007
|
|||||||
Interest
rate swap
|
$ | (147 | ) | $ | (115 | ) | ||
Currency
swaps:
|
||||||||
Sterling
|
51 | 63 | ||||||
Sterling
|
130 | 148 | ||||||
Sterling
|
59 | 69 | ||||||
Swaptions:
|
||||||||
$1
billion notional
|
(334 | ) | (269 | ) | ||||
$28
million notional
|
(4 | ) | (3 | ) | ||||
$14
million notional
|
(2 | ) | (1 | ) | ||||
Coal
contracts with volume options
|
83 | 16 | ||||||
Futures
and options on futures:
|
||||||||
Margin
Cash Account*
|
28 | 18 | ||||||
Unrealized
losses
|
3 | 8 | ||||||
Note:
* In
accordance with certain credit terms, TVA used leveraging to trade
financial instruments under the financial trading program. Therefore,
the margin cash account balance does not represent 100 percent of the net
market value of the derivative positions outstanding as shown in
the Financial Trading Program Activity table.
|
TVA has a financial trading program
under which TVA can trade futures, swaps, options on futures, and options on
swaps to hedge TVA’s exposure to natural gas and fuel oil prices. At
December 31, 2007, TVA had derivative positions outstanding under the program
equivalent to about 3,223 contracts, made up of 2,230 futures contracts, 303
swap futures contracts, and 690 option contracts. See Derivative
Positions Outstanding table below. The derivative positions
outstanding under the program had an approximate net market value of $203
million at
December
31, 2007. See Financial Trading Program Activity table
below. For the quarter ended December 31, 2007, TVA recognized
realized losses of $6 million, which were recorded as an increase to purchased
power expense. Unrealized losses at December 31, 2007, were $3
million, representing a decrease of $5 million for the quarter, which TVA
deferred as a regulatory asset in accordance with the 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 are settled.
At December 31, 2006, TVA had
derivative positions outstanding under the program equivalent to about 691
contracts, made up of 691 futures contracts, zero swap futures contracts, and
zero option contracts. See Derivative Positions Outstanding table
below. The derivative positions outstanding under the program had an
approximate net market value of $46 million at December 31, 2006. See
Financial Trading Program Activity table below. For the quarter ended
December 31, 2006, TVA recognized realized losses of $3 million, which were
recorded as an increase to purchased power expense. Unrealized losses
at the end of the quarter were $8 million, representing an increase of $2
million for the quarter, which TVA deferred as a regulatory asset in accordance
with the FCA rate mechanism.
Derivative
Positions Outstanding
For
the Three Months Ended December 31
|
||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Number
of
Contracts
|
Notional
Amount
per
Contract
(in
mmBtu)
|
Total
Notional Amount
(in
mmBtu)
|
Number
of
Contracts
|
Notional
Amount
per
Contract
(in
mmBtu)
|
Total
Notional Amount
(in
mmBtu)
|
|||||||||||||||||||
Futures
|
2,230 | 10,000 | 22,300,000 | 691 | 10,000 | 6,910,000 | ||||||||||||||||||
Swap
Futures
|
||||||||||||||||||||||||
Exchange
traded swaps (daily)
|
208 | 2,500 | 520,000 | – | – | – | ||||||||||||||||||
Bilateral
ISDA swaps (daily)
|
62 | 20,000 | 1,240,000 | – | – | – | ||||||||||||||||||
Bilateral
ISDA swaps (daily)
|
26 | 35,000 | 910,000 | – | – | – | ||||||||||||||||||
Bilateral
ISDA swaps (monthly)
|
7 | 100,000 | 700,000 | – | – | – | ||||||||||||||||||
Subtotal
|
303 | 3,370,000 | – | – | ||||||||||||||||||||
Options
|
690 | 10,000 | 6,900,000 | – | – | – | ||||||||||||||||||
Total
|
3,223 | 32,570,000 | 691 | 6,910,000 |
Financial
Trading Program Activity
For
the Three Months Ended December 31
|
||||||||||||||||
2007
|
2006
|
|||||||||||||||
Notional
Amount
(inmmBtu)
|
Contract
Value
|
Notional
Amount
(in mmBtu)
|
Contract
Value
|
|||||||||||||
Futures
contracts
|
||||||||||||||||
Financial
positions, beginning of period, net
|
16,230,000 | $ | 131 | 4,290,000 | $ | 35 | ||||||||||
Purchased
|
15,540,000 | 125 | 4,260,000 | 32 | ||||||||||||
Settled
|
(9,470,000 | ) | (70 | ) | (1,640,000 | ) | (12 | ) | ||||||||
Realized
(losses)
|
– | (6 | ) | – | (1 | ) | ||||||||||
Net
positions-long
|
22,300,000 | 180 | 6,910,000 | 54 | ||||||||||||
Swap
futures
|
||||||||||||||||
Financial
positions, beginning of period, net
|
1,970,000 | 12 | 1,822,500 | 11 | ||||||||||||
Fixed
portion
|
3,660,000 | 27 | – | – | ||||||||||||
Floating
portion - realized
|
(2,260,000 | ) | (14 | ) | (1,822,500 | ) | (9 | ) | ||||||||
Realized
(losses)
|
– | – | – | (2 | ) | |||||||||||
Net
positions-long
|
3,370,000 | 25 | – | – | ||||||||||||
Option
contracts
|
||||||||||||||||
Financial
positions, beginning of period, net
|
5,600,000 | 1 | – | – | ||||||||||||
Calls
purchased
|
1,750,000 | 1 | – | – | ||||||||||||
Puts
sold
|
1,150,000 | (1 | ) | – | – | |||||||||||
Positions
closed or expired
|
(1,600,000 | ) | – | – | – | |||||||||||
Net
positions-long
|
6,900,000 | 1 | – | – | ||||||||||||
Holding
(losses)/gains
|
||||||||||||||||
Unrealized
(loss) at beginning of period, net
|
– | (8 | ) | – | (6 | ) | ||||||||||
Unrealized
gains/(losses) for the period
|
– | 5 | – | (2 | ) | |||||||||||
Unrealized
(losses) at end of period, net
|
– | (3 | ) | – | (8 | ) | ||||||||||
Financial
positions at end of period, net
|
32,570,000 | $ | 203 | 6,910,000 | $ | 46 |
5. Benefit
Plans
TVA sponsors a defined benefit pension
plan that covers most of its full-time employees, a Supplemental Executive
Retirement Plan (“SERP”) to provide additional benefits to specified individuals
in addition to those available under the qualified pension plan, 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.
The following table provides the
components of net periodic benefit cost for the plans.
TVA
Benefit Plans
|
||||||||||||||||||||||||||||||||
Combined
|
Pension
|
SERP
|
Combined
|
Pension
|
SERP
|
Other
Benefits
|
||||||||||||||||||||||||||
2008
|
2008
|
2008
|
2007
|
2007
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||||
Components
of net periodic benefit cost
|
||||||||||||||||||||||||||||||||
Service
cost
|
$ | 28 | $ | 27 | $ | 1 | $ | 31 | $ | 30 | $ | 1 | $ | 1 | $ | 1 | ||||||||||||||||
Interest
cost
|
131 | 130 | 1 | 124 | 123 | 1 | 7 | 6 | ||||||||||||||||||||||||
Expected
return on plan assets
|
(152 | ) | (152 | ) | – | (143 | ) | (143 | ) | – | – | – | ||||||||||||||||||||
Amortization
of prior service cost
|
9 | 9 | – | 9 | 9 | – | 1 | 1 | ||||||||||||||||||||||||
Recognized
net actuarial loss
|
10 | 10 | – | 20 | 20 | – | 2 | 2 | ||||||||||||||||||||||||
Net
periodic benefit cost
|
$ | 26 | $ | 24 | $ | 2 | $ | 41 | $ | 39 | $ | 2 | $ | 11 | $ | 10 |
During the three months ended December
31, 2007, TVA did not make contributions to its pension
plans. However, the TVA Board approved $81 million in pension
contributions for 2008 with scheduled contributions of $37 million and $44
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 $6 million
during the three months ended December 31, 2007, to fund other benefits
costs.
6.
Asset Impairment
During the first quarter of 2007, TVA
recognized a total of $22 million in asset impairment losses related to its
Property, plant, and equipment. The $22 million Loss on asset impairment
included a $17 million write-off of a scrubber project at TVA’s Colbert Fossil
Plant (“Colbert”), and write-downs of $5 million related to other Construction
in progress assets related to new pollution-control and other technologies that
had not been proven effective and a re-valuation of other projects due to
funding limitations.
7.
Legal Proceedings
TVA is subject to various legal proceedings and claims that have arisen in the
ordinary course of business. These proceedings and claims include the matters
discussed below. In accordance with SFAS No. 5, “Accounting for
Contingencies,” TVA had accrued approximately $27 million with respect to
the proceedings described below as of December 31, 2007, as well as
approximately $8 million with respect to other proceedings that have arisen in
the normal course of TVA’s business. No assurance can be given that TVA will not
be subject to significant additional claims and liabilities. If actual
liabilities significantly exceed the amounts accrued, TVA’s results of
operations, liquidity, and financial condition could be materially adversely
affected.
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
(“CO2”)
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. The
plaintiffs do not seek monetary damages, but instead seek a court order
requiring each defendant to cap its CO2 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 United States Court of Appeals for the Second Circuit
(“Second Circuit”). Oral argument was held before the Second Circuit on June 7,
2006. On June 21, 2007, the Second Circuit directed the parties to submit letter
briefs by July 6, 2007, addressing the impact of the Supreme Court’s decision in
Massachusetts v. EPA,
127 S.Ct. 1438 (2007), on the issues raised by the parties. On July
6, 2007, the defendants jointly submitted their letter brief.
Case Involving Alleged
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
(“CAA”) and implementing regulations at Colbert, a coal-fired electric
generating facility located in Tuscumbia, Alabama. The plaintiffs allege that
TVA made major modifications to 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 the 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 United States Court of
Appeals for the Eleventh Circuit (“Eleventh Circuit”) on January 25,
2006. In an October 4, 2007 decision, the Eleventh Circuit affirmed
dismissal of the lawsuit. In January 2008, the plaintiffs filed a
petition for a writ of certiorari, asking the United States Supreme Court to
hear an appeal of the Eleventh Circuit’s decision.
Case Involving Alleged
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 (“NSR”) requirements of the CAA 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 TVA’s motion to dismiss the lawsuit on statute of
limitation grounds. The plaintiffs’ motion for reconsideration was denied, and
they appealed to the United States Court of Appeals for the Sixth Circuit
(“Sixth Circuit”). Friend of the court 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 a friend of the court 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 a panel of three judges
issued a decision reversing the dismissal on March 2, 2007. TVA requested that
the full Sixth Circuit rehear the appeal, but the Sixth Circuit denied this
request. A scheduling order has been entered by the district court on
remand, setting the case for trial on August 11, 2008. TVA is already
installing or has installed the control equipment that the plaintiffs seek to
require TVA to install in this case, and it is unlikely that an adverse decision
will result in substantial additional costs to TVA at Bull Run. An
adverse decision, however, could lead to additional litigation and could cause
TVA to install additional emission control systems, such as scrubbers and
selective catalytic reduction systems, on units where they are not currently
installed, under construction, or planned to be installed. It is
uncertain whether there would be significant increased costs to
TVA.
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 CAA
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 Alabama’s two percent de minimis rule,
which provided a safe harbor if nonexempt opacity monitor readings over 20
percent did not occur more than two percent of the time each quarter), the
plaintiffs appealed the district court’s decision to the Eleventh Circuit. On
November 22, 2005, the Eleventh Circuit affirmed the district court’s 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. On April 5, 2007, the plaintiffs moved for
summary judgment. TVA opposed the motion and moved to stay the
proceedings. On April 12, 2007, EPA proposed to approve Alabama’s de
minimis rule subject to certain changes. This rulemaking proceeding is ongoing.
On July 16, 2007, the district court denied TVA’s motion to stay the proceedings
pending approval of Alabama’s de minimis rule. On August 27, 2007,
the district court granted the plaintiffs’ motion for summary judgment, finding
that TVA had violated the CAA at Colbert. The district court held
that, while TVA had achieved 99 percent compliance on Colbert Units
1-4
and 99.5
percent compliance at Colbert Unit 5, TVA had exceeded the 20 percent opacity
limit (measured in six-minute intervals) more than 3,350 times between January
3, 2000, and September 30, 2002. The district court ordered TVA to
submit a proposed remediation plan, which TVA did on October 26,
2007. The plaintiffs have responded, and TVA’s expects the district
court to decide whether or not to conduct a hearing on the matter. If
EPA approves Alabama’s de minimis rule, the lawsuit will become
moot.
In addition to Colbert, TVA has another
coal-fired power plant in Alabama, Widows Creek Fossil Plant (“Widows Creek”),
which has a winter net dependable generating capacity of 1,628
megawatts. Since the operation of Widows Creek must meet the same
opacity requirements as Colbert, this plant may be affected by the decision in
this case. The proposed de minimis rule change would help reduce or
eliminate the chances of an adverse effect on Widows Creek from the district
court decision.
Case Brought by North
Carolina Alleging Public Nuisance. On January 30, 2006, North
Carolina filed suit against TVA in the United States District Court for the
Western District of North Carolina alleging that TVA’s operation of its
coal-fired power plants in Tennessee, Alabama, and Kentucky constitute public
nuisances. North Carolina is asking the court to impose caps on
emissions of certain pollutants from TVA’s coal-fired plants that North Carolina
considers to be equivalent to caps on emissions imposed by North Carolina law on
North Carolina’s two largest electric utilities. The imposition of such
caps could require TVA to install more pollution controls on a faster schedule
than required by federal law. 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 TVA’s 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 TVA’s 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.
Briefing of the interlocutory appeal to the Fourth Circuit was completed in
January 2007, and oral argument was held on October 31, 2007. On July 2, 2007,
North Carolina filed with the district court a motion for partial summary
judgment addressing certain of TVA’s defenses. On July 31, 2007, and
August 20, 2007, TVA filed two separate motions for summary judgment, seeking
dismissal of the lawsuit. The trial before the district court
previously scheduled for the term of court beginning October 2007 has been
canceled and has not yet been rescheduled. On January 31, 2008, the
Fourth Circuit affirmed the denial of TVA’s motion to dismiss. TVA
has not yet decided whether to seek a rehearing before the full Fourth
Circuit.
Case Involving North
Carolina’s Petition to the EPA. In 2005, the State of North
Carolina petitioned the EPA under Section 126 of the CAA to impose additional
emission reduction requirements for sulfur dioxide (“SO2”) and
nitrogen oxides (“NOx”)
emitted by coal-fired power plants in 13 states, including states where TVA’s
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 EPA’s decision with the United States Court of Appeals for the District of
Columbia Circuit. On October 1, 2007, TVA filed a friend of the court
brief in support of EPA’s decision to deny North Carolina’s Section 126
petition.
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. 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 Katrina’s increased destructive force.
The plaintiffs are seeking monetary damages among other relief. TVA has moved to
dismiss the complaint on grounds that TVA’s operation of its coal-fired plants
is not subject to tort liability due to the discretionary function doctrine. On
August 30, 2007, the district court heard oral arguments on whether the issue of
greenhouse gas emissions is a political matter which should not be decided by
the court. The district court then dismissed the case on the grounds
that the plaintiffs lacked standing. The dismissal has been appealed
to the United States Court of Appeals for the Fifth Circuit.
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, Inc. (“East Kentucky”) under which Warren would
become a member of East Kentucky, and East Kentucky would supply power to Warren
after its power contract with TVA
expires
in 2009. East Kentucky then 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 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 Kentucky’s 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
January 10, 2007, TVA and Warren executed an agreement under which Warren
rescinded its notice of termination. On May 3, 2007, East Kentucky filed a
motion with FERC to terminate the FERC proceeding on grounds of mootness. TVA
has also filed a motion with FERC to vacate all orders issued in the
proceeding. On December 12, 2007, FERC granted the motion to
terminate the proceeding, but denied the motion to vacate its previous
orders.
Case Involving Areva Fuel
Fabrication. On November 9, 2005, TVA received two invoices
totaling $76 million from Framatome ANP Inc., which subsequently changed its
name to AREVA NP Inc. (“AREVA”). AREVA asserted that it was the successor to the
contract between TVA and Babcock and Wilcox Company (“B&W”) under which
B&W would provide fuel fabrication services for TVA’s Bellefonte Nuclear
Plant. AREVA’s invoices were based upon the premise that the contract required
TVA to buy more fuel fabrication services from B&W than TVA actually
purchased. In September 2006, TVA received a formal claim from AREVA which
requested a Contracting Officer’s decision pursuant to the Contract Disputes Act
of 1978 and reduced the amount sought to approximately $25.8 million. On April
13, 2007, the Contracting Officer issued a final decision denying the claim. On
April 19, 2007, AREVA filed suit in the United States District Court for the
Eastern District of Tennessee, reasserting the $25.8 million claim and alleging
that the contract required TVA to purchase certain amounts of fuel and/or to pay
a cancellation fee. TVA filed its answer to the complaint on June 15,
2007. AREVA subsequently raised its claim to $47.9
million. Trial is scheduled to begin September 29, 2008.
Notification of Potential
Liability for Ward Transformer Site. EPA and a working group
of potentially responsible parties (“PRPs”) have provided documentation showing
that TVA sent electrical equipment containing PCBs to the Ward Transformer site
in Raleigh, North Carolina. 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. The working group is cleaning up
on-site contamination in accordance with an agreement with EPA and plans to sue
non-participating PRPs for contribution. The estimated cost of the
cleanup is $20 million. In addition, EPA likely has incurred several
million dollars in response costs, and the working group has reimbursed EPA
approximately $725,000 of those costs. EPA has also proposed a
cleanup plan for off-site contamination. The present worth cost
estimate for performing the proposed plan is about $5 million. In
addition, there may be natural resource damages liability related to this site,
but TVA is not aware of any estimated amount for any such damages.
Completion of Browns Ferry
Unit 1, Team Incentive Fee Pool Claims. Under the contracts
for the restart of TVA’s Browns Ferry Unit 1, the engineering and construction
contractors, Bechtel Power Corporation and Stone & Webster Construction,
Inc., respectively, are to share in a team incentive fee pool funded from cost
savings for the respective workscopes. The contracts provide that
each contractor’s maximum payment from this pool will be as much as $38 million,
for a maximum total payout under both contracts of $76 million. The
contractors have taken the position that they should each receive the maximum
payment. Currently, TVA has calculated each contractor’s share at
$12,371,405, for a total payout under both contracts of
$24,742,810. TVA and the contractors have agreed to nonbinding
mediation of the matter. It is reasonably possible that TVA could
incur some potential liability in excess of the amount previously calculated,
but TVA is unable to estimate any such amount at this time.
Notice of Violation at
Widows Creek Unit 7. On July 16, 2007, TVA received a Notice
of Violation (“NOV”) from EPA as a result of TVA’s failure to properly maintain
ductwork at Widows Creek Unit 7. From 2002 to 2005, the unit’s ducts allowed
SO2
and NOx to escape
into the air. TVA repaired the ductwork in 2005, and the problem has been
resolved. TVA is reviewing the NOV. While the NOV does not set out an
administrative penalty, it is likely that TVA will face a monetary sanction
through giving up emission allowances, paying an administrative penalty, or
both. TVA's estimate of potential monetary sanctions is included in
the accrued amount listed above.
Paradise Fossil Plant Clean
Air Act Permit. On December 21, 2007, the Sierra Club, the
Center for Biological Diversity, Kentucky Heartwood, and Hilary Lambert filed a
petition with the EPA raising objections to the conditions of TVA’s current
Clean Air Act permit at the Paradise Fossil Plant (“Paradise”). Among
other things, the petitioners allege that activities at Paradise triggered the
NSR requirements for NOx and that
the monitoring of opacity at Units 1 and 2 of the plant is
deficient. The current permit continues to remain in
effect. It is unclear whether or how the plant’s permit might be
modified as a result of this proceeding.
Employment
Proceedings. 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 under
the Fair Labor Standards Act. Adverse outcomes in these proceedings would not
normally be material to TVA’s results of operations, liquidity, and financial
condition, although it is possible that some outcomes could require TVA to
change how it handles certain personnel matters or operates its
plants.
Significant Litigation to
Which TVA Is Not a Party. On April 2, 2007, the Supreme Court
issued an opinion in the case of United States v. Duke Energy,
vacating the ruling of the Fourth Circuit in favor of Duke Energy and against
EPA in EPA’s NSR enforcement case against Duke Energy. The NSR regulations apply
primarily to the construction of new plants but can apply to existing plants if
a maintenance project (1) is “non-routine” and (2) increases emissions. The
Supreme Court held that the test for emission increases under the NSR program
does not have to be the same as the test under EPA’s New Source Performance
Standard program. In light of the decision it appears that under
EPA’s PSD regulations, increases in annual emissions should be used for the
test, not hourly emissions as utilities, including TVA, have argued should be
the standard. Annual emissions can increase when a project improves the
reliability of plant operations and, depending on the time period over which
emission changes are calculated, it is possible to argue that almost all
reliability projects increase annual emissions. Neither the Supreme Court nor
the Fourth Circuit addressed what the “routine” project test should be. The
United States District Court for the Middle District of North Carolina had ruled
for Duke on this issue, holding that “routine” must take into account what is
routine in the industry and not just what is routine at a particular plant or
unit as EPA has argued. EPA did not appeal this ruling. On October 5,
2007, EPA filed a motion with the United States District Court for the Middle
District of North Carolina asking that court to vacate its entire prior ruling,
including the portion relating to the test for “routine” projects.
TVA is currently involved in two NSR
cases (one involving Bull Run, the dismissal of which was recently reversed on
appeal) and another at Colbert (the dismissal of which was recently affirmed on
appeal but may be reviewed by the U.S. Supreme Court). These cases are discussed
in more detail above. The Supreme Court’s holding could undermine one of TVA’s
defenses in these cases, although TVA has other available defenses.
Environmental groups and North Carolina have given TVA notice in the past that
they may sue TVA for alleged NSR violations at a number of TVA units. The
Supreme Court’s decision could encourage such suits, which are likely to involve
units where emission control systems such as scrubbers and selective catalytic
reduction systems are not installed, under construction, or planned to be
installed in the relatively near term.
8.
Subsequent Events
Debt
In January 2008, TVA issued a total of
$500 million in power bonds with a coupon of 4.875 percent. The bonds
have a final maturity of January 2048.
In January 2008, TVA announced it will
redeem three of its electronotes® issues
on February 15, 2008. TVA will redeem all $25 million outstanding of
its 2001 six percent electronotes® due
December 15, 2021, all $28 million outstanding of its 2002 5.5 percent
electronotes® due
August 15, 2022, and all $4 million outstanding of its 2006 5.625 percent
electronotes® due
August 15, 2016. Each of these issues will be redeemed at 100 percent
of par value.
In January 2008, TVA issued $36 million
of electronotes® with an
interest rate of 4.75 percent which mature in 2028 and are callable beginning in
2012.
In February 2008, TVA announced it will
redeem two of its electronotes® issues
on March 11, 2008. TVA will redeem all $28 million outstanding of its
2002 6.125 percent electronotes® due
January 15, 2022, and all $13 million outstanding of its 2002 6.125 percent
electronotes® due
April 15, 2022. Each of the issues of electronotes® will be
redeemed at 100 percent of par value.
TVA monetized the call options on two
public bond issues by entering into two swaption transactions (see Note 9,
Risk Management Activities and Derivative Transactions in Part II of the 2007
Form 10-K). In February 2008, the counterparty to the swaption
transactions exercised its options to enter into swaps with TVA, effective March
11, 2008, where TVA will be required to make fixed rate payments to the
counterparty of 6.125 percent and the counterparty will be required to make
floating payments to TVA based on London Interbank Offered Rate (“LIBOR”).
These payments will be based on a combined notional amount of $41.7 million and
will begin on April 15, 2008.
Properties
On
December 14, 2007, TVA entered into an agreement to purchase the Office of
Power Complex (the portion of TVA's Chattanooga Office Complex in Chattanooga,
Tennessee, leased from Chattanooga Valley Associates) upon the expiration
of the existing lease on January 1, 2011. The purchase price is $22
million, payable on January 3, 2011.
Regulation
of Mercury
On February 8, 2008, the United States
Circuit Court for the District of Columbia (the “D.C. Circuit”) vacated EPA’s
Clean Air Mercury Rule (“CAMR”). CAMR established caps for overall
mercury emissions in two phases, with the first phase becoming effective in 2010
and the second in 2018. It allowed the states to regulate mercury
emissions through a market-based cap-and-trade program. All of the
states in which TVA operates potentially affected sources adopted CAMR without
significant change. TVA is currently evaluating the potential impact
of the D.C. Circuit’s decision on its operations. It is possible that
TVA may incur higher costs in the future should a replacement of, or significant
modification to, CAMR impose increased regulatory restrictions and the need for
additional environmental controls or a change in the way TVA operates its
facilities. See Item 1, Business — Environmental Matters in the
Annual Report.
(Dollars
in millions except where noted)
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) explains the results of operations and general financial condition
of TVA. The MD&A should be read in conjunction with the accompanying
financial statements and TVA’s Annual Report on Form 10-K, as amended by Form
10-K/A, for the fiscal year ended September 30, 2007 (the “Annual
Report”).
Financial Outlook
Net loss for the three months ended
December 31, 2007, was $17 million compared to net income of $51 million for the
same period of 2006. This change was primarily due to changes in
ratemaking methodology related to capitalized interest on construction projects
(“AFUDC”) resulting in additional expense of $46
million. Additionally, TVA changed its ratemaking methodology for
gains and losses on certain derivative instruments used in call monetization
transactions which increased income by $15 million in the first quarter of
2007. See Results
of Operations.
TVA still faces challenges related to
fuel, purchased power, hydroelectric generation, and capacity during the
remainder of the year. Long-term demand projections indicate upward
pressure on capacity and the need for additional capacity to be built or
purchased over TVA's planning horizon. TVA is discussing the possibility
of a rate increase with the Tennessee Valley Public Power Association, Inc.
(“TVPPA”), a group that represents most of TVA’s distributor customers, and with
other groups. The increase could be between six and nine percent and is expected
to be implemented in April 2008 if approved by the TVA Board of Directors (“TVA
Board”). In addition to funding additional capacity and other capital
projects, the adjustment would help ensure that TVA collects revenues needed
to meet the requirements of the TVA Act and the tests and provisions
of its bond resolutions, and do so in accordance with the financial
objectives set forth in the Strategic Plan adopted by the TVA Board on May 31,
2007 (the “Strategic Plan”). It is anticipated that the rate increase
will generate an additional $265 million to $400 million of revenue during 2008
depending on the percentage increase approved by the TVA Board.
Fuel-Cost Adjustment
As of December 31, 2007, TVA had
recognized a regulatory asset of $151 million representing deferred fuel and
purchased power costs to be recovered through the fuel cost adjustments (“FCA”)
in future periods. Under TVA’s FCA methodology, adjustments to rates
are based on the difference between forecasted and baseline (budgeted) costs for
the upcoming quarter. Because the FCA adjustments are forward-looking,
there is typically a difference between what is collected in rates and what
actual expense is realized over the course of the quarter. This
difference is added to or deducted from certain accounts on TVA’s
balance sheet. The higher or lower costs added to or taken away from the
balance sheet accounts are then amortized to expense in the periods in which
they are to be collected in revenues. This methodology
allows better matching of the revenues with associated
expenses. The FCA amount to be implemented January 1, 2008, is 0.267
cents per kilowatt-hour and is expected to produce an estimated $105 million in
revenue during the second quarter of 2008. See Note 1 — Accounts Receivables and Cost-Based
Regulation.
Weather Conditions
The amount of electricity that TVA is
able to generate from its hydroelectric plants depends on a number of factors
outside TVA's control, including the amount of precipitation, runoff, initial
water levels, the need for water for competing water-management objectives, and
the availability of its hydroelectric generation plants. When these
factors are unfavorable, TVA must increase its reliance on more expensive
generation plants and purchased power. TVA continued to be impacted
by drought conditions during the first quarter of 2008. Although
rainfall totals from October 1, 2007, through January 31, 2008, were 72 percent
of normal, runoff totals were far less at 33 percent of
normal. Reduced hydroelectric generation has driven up
purchased-power costs, which were about $40 million higher than projected for
the first quarter of 2008.
Performance of TVA Assets
Unscheduled Outage. Browns
Ferry Nuclear Plant Unit 3 had an automatic shutdown of its nuclear reactor on
December 31, 2007. The shutdown was determined to be caused when the
main turbine generator received a load reject signal. A load reject signal
causes the system to “think” that the generator has lost the attached load.
All safety systems responded properly to the signal. The unit
was returned to service on January 21, 2008. The net cost of the
repair is estimated to be less than $3 million and the cost of replacement
power during this period was $33 million. The cost of this
replacement power will be recovered through the FCA.
Extended
Outage. The duration of a planned outage scheduled from
October 3, 2007, to November 2, 2007, at Sequoyah Nuclear Plant Unit 1 was
extended 16 days due to the identification of damage in the main generator
during the outage work. The cost of additional work related to
the generator was $7 million and the net cost of replacement power during this
extended period was $22 million. The cost of this replacement power
will be recovered through the FCA.
Challenges Related to Water Supply and
Water Temperature
TVA faces challenges related to water
supply and water temperature on the Cumberland River where the U. S. Army Corps
of Engineers (“Corps”) operates hydroelectric facilities and TVA operates fossil
plants and on the Tennessee River System where TVA operates hydroelectric
facilities, fossil plants, and nuclear plants.
Cumberland River Challenges.
The Corps operates eight hydroelectric facilities on the Cumberland
River. Of these facilities, Wolf Creek Dam and Center Hill Dam are in
need of emergency repairs. The need to repair the dams and the
drought in the southeast has resulted in less water flow and high water
temperature. There have been two effects on TVA.
The first
is a reduction in the amount of power TVA receives from the Southeastern Power
Administration (“SEPA”). TVA, along with others, has contracted with
SEPA for the power produced from the Corps’s Cumberland River hydroelectric
facilities. Under the contract, SEPA was to provide TVA an annual
minimum of 1,500 hours of power for each megawatt of TVA's 405 megawatt
allocation, and all surplus power from the Corps’s hydroelectric facilities on
the Cumberland River. As a result of the need the repair to Wolf
Creek and Center Hill dams and as a result of the drought, SEPA has instituted
an emergency operation plan that:
•
|
Eliminates
its obligation to provide TVA (and any affected customer) with a minimum
amount of power;
|
•
|
Provides
for all affected customers (except TVA) to receive a specified share of a
portion of the gross hourly generation from the eight Cumberland River
hydroelectric facilities, with TVA receiving the
remainder;
|
•
|
Eliminates
the payment of demand charges by customers (including TVA) since there is
significantly reduced dependable capacity on the Cumberland River system;
and
|
•
|
Increases
the rate charged per kilowatt-hour of energy received by SEPA's customers
(including TVA).
|
It is
likely that the end of the drought will not eliminate the need for the emergency
operating plan. It is unclear how long it will take the Corps to
repair these facilities and how long the emergency operating plan will remain in
effect.
The
second is the likelihood that TVA will have to reduce power output (“derate”)
its Cumberland and Gallatin Fossil Plants at times during the
summer. During the summer of 2007, the temperature of the Cumberland
River reached the point where TVA had to derate these plants in order not to
exceed thermal limits. Future summer derates remain a possibility
until the Wolf Creek and Center Hill dams are repaired and normal water flow is
restored on the Cumberland River.
Tennessee River System Challenges.
The drought in the southeast has resulted in less rainfall in the area
drained by the Tennessee River and its tributaries and less runoff into the
system. This results in there being less water available for cooling
purposes and the available water having a higher temperature. In
order not to exceed thermal limits, during the summer of 2007 TVA derated two
fossil plants and at Browns Ferry Nuclear Plant, temporarily took one unit
offline and reduced the output at the other two units. Additionally,
TVA used its cooling towers at Browns Ferry and Sequoyah Nuclear
Plants. Using the cooling towers takes a substantial amount of power
that TVA would have otherwise sold. If the drought continues, TVA may
have to take similar actions in the summer of 2008.
Meeting the Power Needs in TVA’s
Service Area
Combined Cycle Facility. TVA
completed the acquisition of a combined cycle facility located in southwest
Tennessee in October 2007. Now known as Lagoon Creek 3, the
unfinished site contains turbine foundations and substantial ancillary
equipment. With an anticipated commercial operation date of June
2010, the facility is expected to have a planned winter net dependable capacity
of approximately 600 megawatts.
New Nuclear
Generation. TVA submitted its combined license application to
the Nuclear Regulatory Commission ("NRC") for Bellefonte Nuclear Plant Units 3
and 4 in October 2007. If approved, the license to build and operate
the plant would be issued to TVA. Obtaining the necessary license
would give TVA more certainty about the cost and schedule of a nuclear option
for future decisions. The combined license application for two AP1000
reactors at Bellefonte was officially docketed by the NRC on January 18, 2008,
indicating the NRC found it complete and technically sufficient to support their
more detailed reviews. The TVA Board has not made a decision to
construct a new plant at the Bellefonte site, and TVA continues to evaluate all
nuclear generation options at the site.
Preliminary project activities began at
Watts Bar Nuclear Plant Unit 2 in October 2007. TVA began to engage
in unrestricted construction activities at the end of December 2007, having
previously notified the NRC that such activities may begin after December 3,
2007. When completed, Watts Bar Unit 2 is expected to provide 1,180
megawatts of capacity.
Purchased
Power. Purchasing power from others will likely remain a part
of how TVA meets the power needs of its service area. The Strategic
Plan establishes a goal of balancing production capabilities with power supply
requirements within five percent. Achieving this goal will allow TVA
to reduce its reliance on purchased power, which constituted over 14 percent of
the power that TVA sold to its customers in the first quarter of
2008. The purchases during the first quarter of 2008 represent a 41
percent increase over the amount of power purchased during the first quarter of
2007. However, TVA forecasts that purchased power volume as a
percentage of total system requirements will likely be less in 2008 than
2007. See Performance of TVA
Assets.
TVA intends to consider other
opportunities to add new generation from time to time. Market
conditions, like the volatility of the price of construction materials and the
potential shortage of skilled craft labor, may add uncertainties to the cost and
schedule of new construction.
Customers
On January 1, 2008, Bristol Virginia
Utilities (“BVU”) became the 159th municipal supplier or electric cooperative to
connect with TVA’s power grid. The new contract has a minimum 15-year
term, and a five-year termination notice may not be given until January
2018. The rates under this contract are intended to recover the cost
of reintegrating BVU into TVA’s power-supply plan and serving its customer
load. BVU is a 16,000-customer distributor that was previously served
by TVA from 1945 to 1997, and sales to BVU accounted for approximately 0.4
percent of TVA’s annual operating revenues in 1997. Sales to BVU are
forecasted to remain approximately 0.4 percent of TVA’s total
sales.
Service
Reliability
TVA met a monthly peak demand record on
October 8, 2007, of 28,601 megawatts, which was 12.3 percent higher than the
prior record set in October 2006. A record peak was also set for the month
of November 2007 with 25,280 megawatts, exceeding the 25,169 megawatt record set
in November 2006. This was the fourth consecutive monthly record peak
load.
On January 25, 2008, TVA met a
record winter demand of 32,027 megawatts without any customer
interruptions. During the hour of peak supply, purchased power constituted
approximately 12 percent of TVA's load.
TVA hosted a formative meeting of
regional transmission planning stakeholders for the Central Region Public Power
Partners, which includes Associated Electric Cooperative, Inc., Big Rivers EC,
East Kentucky Power Cooperative, and TVA. Stakeholders participating
included TVPPA, as well as representatives of independent power producers,
utility marketing organizations, peer transmission planners, and the Kentucky
Public Service Commission. This new planning and stakeholder process
is another step in TVA's efforts to better coordinate TVA transmission
operations with neighboring systems and to involve stakeholder groups in the
planning of TVA's bulk transmission facilities. The stakeholder
process is being voluntarily implemented by TVA as part of TVA's effort to
comply with Federal Energy Regulatory Commission's (“FERC”) Order 890, which
revises the FERC pro-forma tariff applicable to jurisdictional public
utilities.
Sources of Liquidity
TVA’s current liabilities exceed
current assets because of the continued use of short-term debt 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. TVA’s
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 borrowings
under TVA’s $150 million note with the U.S. Treasury. Other
sources of liquidity include two $1.25 billion credit facilities with a
national bank and occasional proceeds from other financing arrangements
including call monetization transactions and sales of receivables and
loans.
The majority of TVA’s balance of cash
on hand is typically invested in short-term investments. During 2007,
TVA’s average daily balance of cash and cash equivalents on hand was $389
million. The daily balance of cash and cash equivalents maintained is
based on near-term expectations for cash expenditures and funding
needs. TVA’s cash and cash equivalents at December 31, 2007, was $158
million, a decrease of $7 million from the cash balance at September 30,
2007.
Summary Cash Flows. A major
source of TVA’s 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, 2007, and 2006, follows:
Summary
Cash Flows
For
the Three Months Ended December 31
|
||||||||
2007
|
2006
|
|||||||
Cash
provided by (used in)
|
||||||||
Operating
activities
|
$ | 218 | $ | 324 | ||||
Investing
activities
|
(398 | ) | (469 | ) | ||||
Financing
activities
|
173 | 111 | ||||||
Net
decrease in cash and cash equivalents
|
$ | (7 | ) | $ | (34 | ) |
Issuance of
Debt. TVA issued $41 million of power bonds during the three
months ended December 31, 2007. Subsequent to December 31, 2007, TVA
issued $500 million of power bonds and $36 million of electronotes®. No
long-term debt was retired or redeemed during this period. For more
information about TVA's 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, one of which matures on May 14, 2008, and the other
of which matures on November 10, 2008. The interest rate on any borrowing under
either of these facilities is variable and based on market factors and the
rating of TVA’s 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 TVA’s senior unsecured long-term debt. There were
no outstanding borrowings under the facilities at December 31, 2007. TVA
anticipates renewing each credit facility from time to time.
Comparative Cash Flow
Analysis
2008 Compared to
2007
Net cash provided by operating
activities decreased $106 million from $324 million to $218 million for the
three months ended December 31, 2006, and 2007, respectively. This decrease
resulted from:
|
•
|
An
increase in cash used by changes in working capital of $140 million
resulting primarily from a larger increase in inventories and other of $25
million and a $164 million greater reduction in accounts payable and
accrued liabilities, partially offset by a $42 million greater decrease in
accounts receivable and a $7 million smaller reduction in interest
payable;
|
|
•
|
An
increase in cash paid for fuel and purchased power of $118 million due to
higher volume and increased market prices for purchased
power;
|
|
•
|
An
increase in cash paid for interest of $39
million;
|
|
•
|
An
increase in cash outlays for routine and recurring operating costs of $35
million; and
|
|
•
|
An
increase in tax equivalent payments of $13
million.
|
These items were partially offset by an
increase in operating revenues of $245 million resulting primarily from
increases in revenue from municipalities and cooperatives and industries
directly served, in both cases, from higher average rates and the FCA and, in
the case of industries directly served, higher volume.
Cash used in investing activities
decreased $71 million from the first quarter of 2007 to the first quarter of
2008. The decrease is primarily due to:
|
•
|
The
inclusion in the first quarter of 2007 of a $98 million use of funds to
acquire two combustion turbine
facilities;
|
|
•
|
A
$23 million reduction in the amount of restricted cash and investments
held by TVA during the first quarter of 2008 compared to an $8 million
increase in the amount of restricted cash and investments held by TVA
during the same period of 2007; and
|
|
•
|
A
decrease in expenditures for capital projects of $9
million.
|
These items were partially offset by an
increase in expenditures for the enrichment and fabrication of nuclear fuel of
$61 million related to a buildup of fuel for strategic inventory, fuel for
identified upcoming Browns Ferry Nuclear Unit 3 and Watts Bar Nuclear Unit 1
outages, and blended low enriched uranium fuel and uranium purchases that are
not identified to a specific outage. The effect of these increases was somewhat
offset by reductions of fuel inventory for fuel loaded into the reactor at
Browns Ferry.
Net cash provided by financing
activities was $62 million higher for the three months ended December 31, 2007,
compared to the same quarter of the prior year. The increase was primarily due
to:
|
•
|
A
decrease in redemptions and repurchases of long-term debt of $77 million,
with no long-term debt retired in the first quarter of 2008;
and
|
|
•
|
An
increase in long-term debt issues of $32 million as a result of the
issuance of $41 million of long-term
debt.
|
These
items were partially offset by a decrease in net issuances of short-term debt of
$47 million in the first quarter of 2008 compared to the same quarter of the
prior year.
Cash Requirements and Contractual
Obligations
The estimated cash requirements and
contractual obligations for TVA as of December 31, 2007, are detailed in the
following table.
Commitments
and Contingencies
|
Total
|
2008
(1)
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||||||||
Debt
|
$ | 22,685 | (2) | $ | 1,655 | $ | 2,031 | $ | 62 | $ | 1,015 | $ | 1,525 | $ | 16,397 | |||||||||||||
Interest
payments relating to debt
|
20,724 | 838 | 1,228 | 1,120 | 1,089 | 1,060 | 15,389 | |||||||||||||||||||||
Lease
obligations
|
||||||||||||||||||||||||||||
Capital
|
180 | 30 | 58 | 57 | 29 | 3 | 3 | |||||||||||||||||||||
Non-cancelable
operating
|
411 | 47 | 50 | 39 | 29 | 27 | 219 | |||||||||||||||||||||
Purchase
obligations
|
||||||||||||||||||||||||||||
Power
|
5,929 | 175 | 221 | 237 | 242 | 248 | 4,806 | |||||||||||||||||||||
Fuel
|
3,136 | 982 | 557 | 528 | 220 | 258 | 591 | |||||||||||||||||||||
Other
|
658 | 239 | 212 | 32 | 28 | 27 | 120 | |||||||||||||||||||||
Payments
on other financings
|
1,467 | 83 | 85 | 89 | 95 | 97 | 1,018 | |||||||||||||||||||||
Payment
to U.S. Treasury (3)
|
||||||||||||||||||||||||||||
Return
of Power Facilities
Appropriation
Investment
|
130 | 20 | 20 | 20 | 20 | 20 | 30 | |||||||||||||||||||||
Return
on Power Facilities
Appropriation
Investment
|
258 | 19 | 22 | 21 | 20 | 18 | 158 | |||||||||||||||||||||
Retirement
plans (4)
|
81 | 81 | – | – | – | – | – | |||||||||||||||||||||
Total
|
$ | 55,659 | $ | 4,169 | $ | 4,484 | $ | 2,205 | $ | 2,787 | $ | 3,283 | $ | 38,731 |
Notes
|
(1)
|
Period
January 1 - September 30, 2008.
|
|
(2)
|
Does
not include noncash items of foreign currency valuation loss of $264
million and net discount on sale of Bonds of $189
million.
|
|
(3)
|
TVA
has access to financing arrangements with the U.S. Treasury whereby the
U.S. Treasury is authorized to accept from TVA a short-term note with the
maturity of one year or less in an amount not to exceed $150
million. TVA may draw any portion of the authorized $150
million during the year. TVA’s practice is to repay on a
quarterly basis the outstanding balance of the note and related
interest. Because of this practice, there was no outstanding
balance on the note as of December 31, 2007. Accordingly, the
Commitments and Contingencies table does not include any outstanding
payment obligations to the U.S. Treasury for this note at December 31,
2007.
|
|
(4)
|
TVA’s
Board plans to evaluate the need for future funding on an annual basis
through the ratemaking process.
|
In addition to the cash requirements
above, TVA has contractual obligations in the form of revenue discounts related
to energy prepayments. See Note 1 — Energy Prepayment
Obligations.
Energy
Prepayment Obligations
Total
|
2008
(1)
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||||||||
Energy
Prepayment Obligations
|
$ | 1,112 | $ | 79 | $ | 105 | $ | 105 | $ | 105 | $ | 105 | $ | 613 |
Note
|
(1)
|
Period
January 1 - September 30, 2008.
|
During the first quarter of 2008, TVA
executed certain contracts related to the resumption of construction activities
at Watts Bar Nuclear Plant Unit 2. As of December 31, 2007,
expenditures against these contracts are forecasted to be approximately $1.2
billion.
Financial Results
The following table compares operating
results and selected statistics for the three months ended December 31, 2007,
and 2006:
Summary
Statements of Income
For the
Three Months Ended December 31
2007
|
2006
|
|||||||
Operating
revenues
|
$ | 2,350 | $ | 2,104 | ||||
Operating
expenses
|
(2,038 | ) | (1,788 | ) | ||||
Operating
income
|
312 | 316 | ||||||
Other
income
|
2 | 12 | ||||||
Unrealized
gain on derivative contracts, net
|
– | 15 | ||||||
Interest
expense, net
|
(331 | ) | (292 | ) | ||||
Net
(loss) income
|
$ | (17 | ) | $ | 51 | |||
Sales
(millions of kWh)
|
40,441 | 39,515 | ||||||
Heating
degree days (normal 1,311)
|
1,058 | 1,227 | ||||||
Cooling
degree days (normal 64)
|
150 | 63 | ||||||
Combined
degree days (normal 1,375)
|
1,208 | 1,290 | ||||||
Net loss for the three months ended
December 31, 2007, was $17 million compared to net income of $51 million for the
same period in 2006. The $68 million change in net income was
primarily attributable to:
•
|
A
$250 million increase in operating
expenses;
|
•
|
A
$39 million increase in net interest expense resulting primarily from a
change in ratemaking methodology relating to
AFUDC;
|
•
|
A
$15 million decrease in net unrealized gain on derivative contracts
resulting primarily from a change in ratemaking methodology for gains and
losses on certain derivative instruments used in call monetization
transactions; and
|
•
|
A
$10 million decrease in other
income.
|
These items were partially offset by a
$246 million increase in operating revenues.
Operating
Revenues. Operating revenues and sales of electricity for the
three months ended December 31, 2007, and 2006, consisted of the
following:
Operating
Revenues and Sales of Electricity
For
the Three Months Ended December 31
|
||||||||||||||||||||||||
Operating
Revenues
|
Sales
of Electricity
|
|||||||||||||||||||||||
(millions
of dollars)
|
(millions
of kWh)
|
|||||||||||||||||||||||
2007
|
2006
|
Percent
Change
|
2007
|
2006
|
Percent
Change
|
|||||||||||||||||||
Sales
of Electricity
|
||||||||||||||||||||||||
Municipalities
and cooperatives
|
$ | 1,905 | $ | 1,742 | 9.4 | % | 30,182 | 30,907 | (2.3 | %) | ||||||||||||||
Industries
directly served
|
392 | 302 | 29.8 | % | 9,818 | 8,108 | 21.1 | % | ||||||||||||||||
Federal
agencies and other
|
25 | 25 | 0.0 | % | 441 | 500 | (11.8 | %) | ||||||||||||||||
Other
revenue
|
28 | 35 | (20.0 | %) | – | – | – | |||||||||||||||||
Total
|
$ | 2,350 | $ | 2,104 | 11.7 | % | 40,441 | 39,515 | 2.3 | % |
Significant items contributing to the
$246 million increase in operating revenues included:
•
|
A
$163 million increase in revenue from municipalities and cooperatives
primarily due to the FCA. The FCA provided $140 million in
additional revenues with another $64 million primarily provided by
fluctuations in rates related to certain types of energy programs and
credits. This increase was partially offset by decreased sales
of 2.3 percent, which reduced revenue by $41 million;
and
|
•
|
A
$90 million increase in revenue from industries directly served primarily
attributable to increased sales of 21.1 percent, the FCA and fluctuations
in rates related to certain types of energy programs and
credits. Increased sales, the FCA, and fluctuations in rates
related to certain types of energy programs and credits yielded $61
million, $18 million, and $11 million, respectively, in additional
revenue.
|
These items were partially offset by a
$7 million decrease in other revenue primarily due to decreased revenue from
salvage sales and a gain on the sale of sulfur dioxide (“SO2”) emission
allowances during the first quarter of 2007 not present in the first quarter of
2008.
A significant item contributing to the
926 million kilowatt-hour increase in electricity sales included a 1,710 million
kilowatt-hour increase in sales to industries directly served. This
was mainly attributable to increased demand from TVA’s largest and second
largest directly served industrial customers of 24.2 percent and 82.2 percent,
respectively, to accommodate higher production levels at their
facilities. In addition, aggregate demand from a few other large
directly served industrial customers increased 26.0 percent as a result of
changes in product mix and higher production levels at their
facilities.
This increase in sales to industries
directly served was partially offset by:
•
|
A
725 million kilowatt-hour decrease in sales to municipalities and
cooperatives largely due to a significant decrease in unbilled sales,
which consist primarily of residential sales, firm sales, and distribution
losses. Sales to municipalities and cooperatives react more to
weather than other categories of sales because residential demand is more
weather sensitive. For the first quarter of 2008, there was a
decrease in combined degree days of 82 days, or 6.4
percent.
|
•
|
A
59 million kilowatt-hour decrease in sales to Federal agencies and
other.
|
|
°
|
This
decrease was due to an 86 million kilowatt-hour decrease in off-system
sales mainly reflecting decreased generation available for
sale.
|
|
°
|
The
decrease in off-system sales was partially offset by a 27 million
kilowatt-hour increase in sales to directly served federal agencies
largely attributable to an increase in demand by several directly served
federal agencies as a result of a change in the nature and scope of their
loads.
|
Operating Expenses. Operating
expenses for the three months ended December 31, 2007, and 2006, consisted of
the following:
Operating
Expenses
For
the Three Months Ended December 31
|
||||||||||||
2007
|
2006
|
Percent
Change
|
||||||||||
Fuel
and purchased power
|
$ | 935 | $ | 739 | 26.5 | % | ||||||
Operating
and maintenance
|
592 | 563 | 5.2 | % | ||||||||
Depreciation,
amortization, and accretion
|
390 | 356 | 9.6 | % | ||||||||
Tax
equivalents
|
121 | 108 | 12.0 | % | ||||||||
Loss
on asset impairment
|
– | 22 | (100.0 | %) | ||||||||
Total
operating expenses
|
$ | 2,038 | $ | 1,788 | 14.0 | % |
Significant drivers contributing to the
$250 million increase in total operating expenses included:
|
•
|
A
$196 million increase in Fuel and purchased power
expense.
|
|
°
|
This
increase was due to a $153 million increase in purchased power expense and
a $43 million increase in fuel
expense.
|
|
–
|
The
increase in purchased power expense resulted
from:
|
•
|
An
increase in the average purchase price of 20.4 percent, which resulted in
$77 million in additional expense;
|
•
|
An
increase in the volume of purchased power of 40.7 percent, which resulted
in $55 million in additional expense;
and
|
•
|
An
increase in the FCA net deferral and amortization for purchased power
expense of $21 million.
|
–
|
The
increase in fuel expense resulted
from:
|
•
|
An
increase in the net commercial generation of 7.7 percent, which resulted
in $43 million in additional expense;
and
|
•
|
An
increase in the FCA net deferral and amortization for fuel expense of $43
million.
|
–
|
The
increase in fuel expense was partially offset by a 7.0 percent lower
aggregate fuel cost per kilowatt-hour net thermal generation, which
reduced fuel expense by $43
million.
|
•
|
A
$34 million increase in Depreciation, amortization, and accretion
expense.
|
|
°
|
This
increase was a result of a $34 million increase in depreciation
expense.
|
|
–
|
An
increase in depreciation rates at several of TVA’s facilities;
and
|
|
–
|
An
increase in completed plant accounts due to net plant
additions.
|
|
•
|
A
$29 million increase in Operating and maintenance
expense.
|
|
°
|
This
increase was mainly a result of:
|
–
|
Increased
outage and routine operating and maintenance costs at coal-fired plants of
$36 million largely due to:
|
•
|
An
increase in outage days of 173 days as a result of one more planned outage
and a change in the nature and scope of the outages during the first
quarter of 2008,
|
•
|
Significant
repair work on Unit 3 at Paradise Fossil Plant not present in the first
quarter of 2007, and
|
•
|
The
operation of two additional combustion turbine units not operated during
the first quarter of 2007; and
|
–
|
Increased
routine operating and maintenance costs at nuclear plants of $19 million
primarily attributable to:
|
•
|
The
operation of an additional nuclear unit not operated in the first quarter
of 2007,
|
•
|
Timing
of contractor work and materials purchased,
and
|
•
|
Timing
of mid-cycle and forced outages.
|
|
°
|
These
items were partially offset by:
|
–
|
Decreased
pension costs of $15 million mainly as a result of a 0.35 percent higher
discount rate used during the first quarter of 2008;
and
|
–
|
A
decrease in the FCA net deferral and amortization for operating and
maintenance expense of $3
million.
|
|
•
|
A
$13 million increase in Tax equivalent payments reflecting increased gross
revenues from the sale of power (excluding sales or deliveries to other
federal agencies and off-system sales with other utilities) during 2007
compared to 2006.
|
The increases in Fuel and purchased
power expense, Depreciation, amortization, and accretion expense, Operating and
maintenance expense, and Tax equivalent payments were partially offset by a $22
million decrease in Loss on asset impairment. There was no Loss on
asset impairment during the first quarter of 2008. During the first
quarter of 2007, a $22 million Loss on asset impairment was recorded as a result
of a $17 million write-down of a scrubber project at TVA’s Colbert Fossil Plant
(“Colbert”) and write-downs of $5 million related to other Construction in
progress assets. See Note 6.
Other Income. The
$10 million decrease in Other income was largely due to decreased interest
income from short-term investments and decreased interest earnings on the
collateral deposit funds held by TVA. These items were partially
offset by a payment received by TVA in connection with a False Claims Act
suit.
Unrealized Gain on Derivative
Contracts, Net. The $15 million decrease in Unrealized gain on
derivative contracts, net was attributable to a change in ratemaking
methodology. Beginning in 2008, TVA began using regulatory accounting
treatment for swaps and swaptions related to call monetization transactions to
better match the income statement recognition of gain and loss with the economic
reality of when these transactions actually settle. This treatment
removes the non-cash impacts to TVA’s earnings that result from marking the
value of these instruments to market each quarter. The values of the
swaps and swaptions for the first quarter of 2008 were recorded on TVA’s balance
sheet and no income was recognized. However, TVA recognized $15
million as Unrealized gain on derivative contracts, net for the first quarter of
2007.
Interest
Expense. Interest expense, outstanding debt, and interest
rates for the three months ended December 31, 2007, and 2006, consisted of the
following:
Interest
Expense
For
the Three Months Ended December 31
|
||||||||||||
2007
|
2006
|
Percent
Change
|
||||||||||
Interest
on debt
|
$ | 329 | $ | 336 | (2.1 | %) | ||||||
Amortization
of debt discount, issue, and reacquisition costs, net
|
5 | 5 | 0.0 | % | ||||||||
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(3 | ) | (49 | ) | (93.9 | %) | ||||||
Net
interest expense
|
$ | 331 | $ | 292 | 13.4 | % | ||||||
(percent)
|
||||||||||||
2007
|
2006
|
Percent
Change
|
||||||||||
Interest
rates (average)
|
||||||||||||
Long-term
|
5.96 | 5.94 | 0.3 | % | ||||||||
Discount
notes
|
4.59 | 5.25 | (12.6 | %) | ||||||||
Blended
|
5.87 | 5.87 | 0.0 | % |
Significant items contributing to the
$39 million increase in net interest expense included:
•
|
A
$46 million decrease in AFUDC and nuclear fuel expenditures primarily due
to a change in ratemaking methodology. TVA continues to
capitalize a portion of current interest costs associated with funds
invested in most nuclear fuel inventories, but beginning in 2008, interest
on funds invested in construction projects will be capitalized only if
(1) the expected total cost of a project is $1 billion or more
and (2) the estimated construction period is at least three
years. Capitalized interest continues to be a component of the
asset cost and will be recovered in future periods through depreciation
expense. In addition, AFUDC continues to be a reduction to
interest expense as costs are incurred. The interest costs
associated with funds invested in construction projects that do not
satisfy the $1 billion and three-year criteria are no longer capitalized
as AFUDC, remain in the Statement of Income, and will be recovered in
current year rates as a component of interest
expense;
|
•
|
An
increase in the average long-term interest rate from 5.94 percent during
the first quarter of 2007 to 5.96 percent during the same period in 2008;
and
|
•
|
An
increase of $499 million in the average balance of long-term outstanding
debt in 2008.
|
These items were partially offset
by:
•
|
A
decrease in the average discount notes interest rate from 5.25 percent
during the first quarter of 2007 to 4.59 percent during the same period in
2008; and
|
•
|
A
decrease of $852 million in the average balance of discount notes
outstanding in 2008.
|
TVA has entered into one transaction
that could 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 had a committed capacity of 440 megawatts
and the term of the agreement was 30 years. Under the accounting
guidance provided by Financial Accounting Standards Board (“FASB”)
Interpretation No. 46, “Consolidation of Variable Interest
Entities,” as amended by FASB Interpretation No. 46R (as amended, “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
Partnership’s balance sheet, results of operations, and cash flows for the
quarter ended December 31, 2007. Power purchases for the first
quarter of 2008 under the agreement amounted to $27 million, and the remaining
financial commitment under this agreement is $5.2 billion. TVA has no
additional financial commitments beyond the purchase power agreement with
respect to the facility.
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, 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 regard to the level of
judgment involved and its potential impact on TVA’s 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 TVA’s financial condition, changes in financial position, or
results of operations. See Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and
Estimates in the Annual Report for a discussion of TVA’s critical
accounting policies. TVA’s critical accounting policies are also
discussed in Note 1 of the Notes to the Annual Report and in Note 1 of the Notes
to this Quarterly Report.
TVA’s power rates are not subject to
regulation through a public service commission or other similar
entity. TVA’s 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 SFAS No. 71, “Accounting for the Effects of
Certain Types of Regulation,” and TVA meets the remaining criteria of
SFAS No. 71 because (1) TVA’s 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 TVA’s 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 generally accepted
accounting principles for non-regulated entities. Regulatory assets
generally represent incurred costs that have been deferred because such costs
are likely to be recovered 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 likely to be recovered by considering
factors such as applicable regulatory changes, potential legislation, and
changes in technology. Based on these assessments, management
believes the existing regulatory assets are likely to be
recovered. This determination reflects the current regulatory,
commercial, and political environment and is subject to change in the
future. If future recovery of regulatory assets ceases to be
probable, TVA would be required to write-off these costs under the provisions of
SFAS No. 101, “Regulated
Enterprises–Accounting 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 future recoveries cease to be
probable.
TVA continues to capitalize a portion
of current interest costs associated with funds invested in most nuclear fuel
inventories, but beginning on October 1, 2007, interest on funds invested in
construction projects will be capitalized only if (1) the expected total
cost of a project is $1 billion or more and (2) the estimated construction
period is at least three years. Capitalized interest continues to be
a component of the asset cost and will be recovered in future periods through
depreciation expense. In addition, AFUDC continues to be a reduction
to interest expense as costs are incurred. The interest cost
associated with funds invested in construction projects that do not satisfy the
$1 billion and three-year criteria is no longer capitalized as AFUDC, remains in
the Statement of Income, and will be recovered in current year rates as a
component of interest expense. As a result of the new policy, TVA
recorded a total of $3 million in AFUDC in the first quarter of 2008 compared to
$49 million for the first quarter of 2007.
The TVA Board approved, beginning in
2008, using regulatory accounting treatment for swaps and swaptions related to
call monetization transactions to better match the income statement recognition
of gain and loss with the economic reality of when these transactions actually
settle. This treatment removes the non-cash impacts to TVA’s earnings
that result from marking the value of these instruments to market each quarter.
The value of the swaps and swaptions will still be recorded on TVA’s balance
sheet, and any interest expense impacts will continue to be reflected in TVA’s
income statement. Had TVA not adopted this new accounting treatment,
its net loss for the first quarter of 2008 would have decreased by $99
million.
New
Accounting Standards and Interpretations
Accounting for Defined
Benefit Pension and Other Postretirement Plans. On September
30, 2007, TVA adopted the provisions contained within 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 requires employers
to fully recognize within their financial statements the obligations associated
with single-employer defined benefit pension, retiree healthcare, and other
postretirement plans. Specifically, the new standard requires an
employer to recognize in its statement of financial position an asset for a
plan’s overfunded status or a liability for a plan’s underfunded status; measure
a plan’s assets and its obligations that determine its funded status as of the
end of the employer’s 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. Such changes are to be reported
within comprehensive income of a business entity (except that regulated entities
may report such changes as regulatory assets and/or liabilities in accordance
with the provisions of SFAS No. 71), and within changes in net assets of a
not-for-profit organization.
TVA’s 2007 adoption of SFAS No. 158
resulted in the recognition of the following amounts on its Balance Sheet at
September 30, 2007: additional regulatory assets of $475 million (including the
reclassification of $246 million in unamortized prior service cost previously
classified as intangible assets) resulting in post-SFAS No. 158 benefit
regulatory assets of $973 million; and additional pension and postretirement
obligations of $330 million and $143 million, and $2 million classified as
accumulated other comprehensive gain, resulting in post-SFAS No. 158 benefit
obligations of $1,128 million. The net amount of recognizing such
amounts increased total assets and liabilities by $475 million at September 30,
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 that currently require fair value measurement. 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, 2008,
and interim periods within those fiscal years. At this time, TVA is
evaluating the requirements of this standard and has not yet determined the
impact of its implementation, which may or may not be material to TVA’s results
of operations or financial position.
Fair Value
Option. In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement No.
115.” This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. The fair value
option established by SFAS No.159 permits all entities to choose to measure
eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. Most of the provisions in this statement are
elective. The provisions of SFAS No. 159 are effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007. Early adoption is permitted as of the beginning of the previous
fiscal year provided that the entity makes that choice in the first 120 days of
that fiscal year and also elects to apply the provisions of SFAS No. 157, “Fair Value Measurements.” At
this time, TVA is evaluating the requirements of this standard and has not yet
determined the potential impact of its implementation, which may or may not be
material to TVA’s results of operations or financial position.
Offsetting
Amounts. On April 30, 2007, FASB issued FASB Staff Position
(“FSP”) FIN No. 39-1,
“Amendment of FASB Interpretation No. 39,” which addresses certain
modifications to FASB Interpretation No. 39, “Offsetting of Amounts Related to
Certain Contracts.” This FSP replaces the terms “conditional contracts”
and “exchange contracts” with the term “derivative instruments” as defined in
SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” The FSP also permits a
reporting entity to offset fair value amounts recognized for the right to
reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts recognized for derivative
instruments executed with the same counterparty under the same master netting
arrangement. The guidance in the FSP is effective for fiscal years
beginning after November 15, 2007, with early application
permitted. At this time, TVA is evaluating the requirements of this
guidance and has not yet determined the potential impact of its implementation,
which may or may not be material to TVA’s financial position.
President’s
Budget
On February 4, 2008, the Office of
Management and Budget (“OMB”) transmitted the President’s proposed 2009 federal
budget to Congress. The proposed budget recommends allowing Congress
to establish the amount of TVA’s Office of Inspector General’s budget and
directing TVA to fund the amount with power revenues beginning in
2009. Funding for TVA’s Office of the Inspector General is currently
established by TVA.
Proposed
Legislation
On March 13, 2007, Senators Jim Bunning
and Mitch McConnell of Kentucky introduced the Access to Competitive Power Act
of 2007 in the Senate. Under this bill, TVA and federal power
marketing agencies would be subject to greater FERC jurisdiction with respect to
transmission, including rates, terms, and conditions of service. With
regard to TVA, the bill would generally provide, among other things,
that:
(1)
|
The
anti-cherrypicking provision would not apply with respect to any
distributor which provided a termination notice to TVA before December 31,
2006, regardless of whether the notice was later withdrawn or
rescinded;
|
(2)
|
Distributors
that have given termination notices to TVA on or before December 31, 2006,
would have express authority under federal law to receive partial
requirements from TVA and elect, not later than 180 days after enactment,
to rescind the termination notice “without the imposition of a
reintegration fee or any similar
fee;”
|
(3)
|
Distributors
that have not given termination notices to TVA on or before December 31,
2006, would have express authority under federal law to receive partial
requirements from TVA within a ratable limit, which cumulatively stays
within a three percent compounded annual growth rate on the TVA system;
and
|
(4)
|
Any
distributor that terminates its power supply contract with TVA in whole or
in part would have the federal statutory right to directly receive its
share of SEPA power that is otherwise being delivered to TVA for the
benefit of all distributors.
|
In May
2007, the TVA Board approved a Strategic Plan which addresses the changing
business environment and sets a new direction for TVA to remain economically
viable and fulfill its stated mission. This Strategic Plan focuses on
TVA’s performance in five broad areas and establishes general guidelines for
each area. Due to the increasing environmental requirements and
expectations coupled with challenges and opportunities related to natural
resources, TVA is re-evaluating its high-level environmental policy to align
with and execute the direction in the 2007 TVA Strategic Plan. TVA
has contracted the services of a consulting firm to assist TVA in updating its
environmental policy and developing TVA’s renewable strategy.
As is the
case across the utility industry and in other sectors, TVA’s activities are
subject to certain federal, state, and local environmental statutes and
regulations. Major areas of regulation affecting TVA’s activities include air
quality control, water quality control, and management and disposal of solid and
hazardous wastes. These activities are described in further detail under Item 1,
Business — Environmental
Matters and Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Environmental Matters in the
Annual Report.
The Tennessee Department of Environment
and Conservation (“TDEC”) has placed a portion of Barkley Reservoir downstream
of TVA's Cumberland Fossil Plant on its draft 2008 list of impaired
streams. This list is known as the 303d List after the section in the
Clean Water Act that established these requirements. Section 303d of
the Clean Water Act requires states to develop and report to the EPA on a
two-year cycle a list of waters that are "water quality limited" or are expected
to not meet water quality standards in the next two years and need additional
pollution controls. This section of Barkley Reservoir had not been
listed previously. The reservoir conditions in 2007, especially for
temperature and dissolved oxygen, changed significantly due primarily to reduced
flows in the Cumberland River resulting from emergency dam repairs on the U. S.
Army Corps of Engineers' (“Corps”) Wolf Creek and Center Hill dams coupled with
the most severe drought on record in the region. The prospect of
continued reduced flows through the Cumberland River system during the period
required to complete the necessary repairs to Wolf Creek and Center Hill dams
may impact the generation of electricity from TVA's Cumberland and Gallatin
fossil plants. TVA is working with the Corps and TDEC to minimize the impacts to
TVA's generating plants and improve the conditions observed in the river in
2007.
TVA is subject to various legal
proceedings and claims that have arisen in the ordinary course of business.
These proceedings and claims include the matters discussed below. In accordance
with SFAS No. 5, “Accounting
for Contingencies,” TVA had accrued approximately $27 million with
respect to the proceedings described below as of December 31, 2007, as well as
approximately $8 million with respect to other proceedings that have arisen in
the normal course of TVA’s business. No assurance can be given that TVA will not
be subject to significant additional claims and liabilities. If actual
liabilities significantly exceed the amounts accrued, TVA’s results of
operations, liquidity, and financial condition could be materially adversely
affected.
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
(“CO2”)
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. The
plaintiffs do not seek monetary damages, but instead seek a court order
requiring each defendant to cap its CO2 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 United States Court of Appeals for the
Second Circuit (“Second Circuit”). Oral argument was held before the Second
Circuit on June 7, 2006. On June 21, 2007, the Second Circuit directed the
parties to submit letter briefs by July 6, 2007, addressing the impact of the
Supreme Court’s decision in Massachusetts v. EPA, 127
S.Ct. 1438 (2007), on the issues raised by the parties. On July 6,
2007, the defendants jointly submitted their letter brief.
Case Involving Alleged
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
(“CAA”) and implementing regulations at TVA’s Colbert Fossil Plant (“Colbert”),
a coal-fired electric generating facility located in Tuscumbia, Alabama. The
plaintiffs allege that TVA made major modifications to 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 the 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 United States
Court of Appeals for the Eleventh Circuit (“Eleventh Circuit”) on January 25,
2006. In an October 4, 2007 decision, the Eleventh Circuit affirmed
dismissal of the lawsuit. In January 2008, the plaintiffs filed a
petition for a writ of certiorari, asking the United States Supreme Court to
hear an appeal of the Eleventh Circuit’s decision.
Case Involving Alleged
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 (“NSR”) requirements of the CAA 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 TVA’s motion to dismiss the lawsuit on statute of
limitation grounds. The plaintiffs’ motion for reconsideration was denied, and
they appealed to the United States Court of Appeals for the Sixth Circuit
(“Sixth Circuit”). Friend of the court 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 a friend of the court 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 a panel of three judges
issued a decision reversing the dismissal on March 2, 2007. TVA requested that
the full Sixth Circuit rehear the appeal, but the Sixth Circuit denied this
request. A scheduling order has been entered by the district court on
remand, setting the case for trial on August 11, 2008. TVA is already
installing or has installed the control equipment that the plaintiffs seek to
require TVA to install in this case, and it is unlikely that an adverse decision
will result in substantial additional costs to TVA at Bull Run. An
adverse decision, however, could lead to additional litigation and could cause
TVA to install additional emission control systems, such as scrubbers and
selective catalytic reduction systems, on units where they are not currently
installed, under construction, or planned to be installed. It is
uncertain whether there would be significant increased costs to
TVA.
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 CAA
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 Alabama’s two percent de minimis rule,
which provided a safe harbor if nonexempt opacity monitor readings over 20
percent did not occur more than two percent of the time each quarter), the
plaintiffs appealed the district court’s decision to the Eleventh Circuit. On
November 22, 2005, the Eleventh Circuit affirmed the district court’s 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. On April 5, 2007, the plaintiffs moved for
summary judgment. TVA opposed the motion and moved to stay the
proceedings. On April 12, 2007, EPA proposed to approve Alabama’s de
minimis rule subject to certain changes. This rulemaking proceeding is ongoing.
On July 16, 2007, the district court denied TVA’s motion to stay the proceedings
pending approval of Alabama’s de minimis rule. On August 27, 2007,
the district court granted the plaintiffs’ motion for summary judgment, finding
that TVA had violated the CAA at Colbert. The district court held
that, while TVA had achieved 99 percent compliance on Colbert Units 1-4 and 99.5
percent compliance at Colbert Unit 5, TVA had exceeded the 20 percent opacity
limit (measured in six-minute intervals) more than 3,350 times between January
3, 2000, and September 30, 2002. The district court ordered TVA to
submit a proposed remediation plan, which TVA did on October 26,
2007. The plaintiffs have responded, and TVA’s expects the district
court to decide whether or not to conduct a hearing on the matter. If
EPA approves Alabama’s de minimis rule, the lawsuit will become
moot.
In addition to Colbert, TVA has another
coal-fired power plant in Alabama, Widows Creek Fossil Plant (“Widows Creek”),
which has a winter net dependable generating capacity of 1,628
megawatts. Since the operation of Widows Creek must meet the same
opacity requirements as Colbert, this plant may be affected by the decision in
this case. The proposed de minimis rule change would help reduce or
eliminate the chances of an adverse effect on Widows Creek from the district
court decision.
Case Brought by North
Carolina Alleging Public Nuisance. On January 30, 2006, North
Carolina filed suit against TVA in the United States District Court for the
Western District of North Carolina alleging that TVA’s operation of its
coal-fired power plants in Tennessee, Alabama, and Kentucky constitute public
nuisances. North Carolina is asking the court to impose caps on
emissions of certain pollutants from TVA’s coal-fired plants that North Carolina
considers to be equivalent to caps on emissions imposed by North Carolina law on
North Carolina’s two largest electric utilities. The imposition of such
caps could require TVA to install more pollution controls on a faster schedule
than required by federal law. 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 TVA’s 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 TVA’s 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.
Briefing of the interlocutory appeal to the Fourth Circuit was completed in
January 2007, and oral argument was held on October 31, 2007. On July 2, 2007,
North Carolina filed with the district court a motion for partial summary
judgment addressing certain of TVA’s defenses. On July 31, 2007, and
August 20, 2007, TVA filed two separate motions for summary judgment, seeking
dismissal of the lawsuit. The trial before the district court
previously scheduled for the term of court beginning October 2007 has been
canceled and has not yet been rescheduled. On January 31, 2008, the
Fourth Circuit affirmed the denial of TVA’s motion to dismiss. TVA
has not yet decided whether to seek a rehearing before the full Fourth
Circuit.
Case Involving North
Carolina’s Petition to the EPA. In 2005, the State of North
Carolina petitioned the EPA under Section 126 of the CAA to impose additional
emission reduction requirements for sulfur dioxide (“SO2”) and
nitrogen oxides (“NOx”)
emitted by coal-fired power plants in 13 states, including states where TVA’s
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 EPA’s decision with the United States Court of Appeals for the District of
Columbia Circuit. On October 1, 2007, TVA filed a friend of the court
brief in support of EPA’s decision to deny North Carolina’s Section 126
petition.
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. 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 Katrina’s increased destructive force.
The plaintiffs are seeking monetary damages among other relief. TVA has moved to
dismiss the complaint on grounds that TVA’s operation of its coal-fired plants
is not subject to tort liability due to the discretionary function doctrine. On
August 30, 2007, the district court heard oral arguments on whether the issue of
greenhouse gas emissions is a political matter which should not be decided by
the court. The district court then dismissed the case on the grounds
that the plaintiffs lacked standing. The dismissal has been appealed
to the United States Court of Appeals for the Fifth Circuit.
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, Inc. (“East Kentucky”) under which Warren would
become a member of East Kentucky, and East Kentucky would supply power to Warren
after its power contract with TVA expires in 2009. East Kentucky then
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
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 Kentucky’s 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
January 10, 2007, TVA and Warren executed an agreement under which Warren
rescinded its notice of termination. On May 3, 2007, East Kentucky filed a
motion with FERC to terminate the FERC proceeding on grounds of mootness. TVA
has also filed a motion with FERC to vacate all orders issued in the
proceeding. On December 12, 2007, FERC granted the motion to
terminate the proceeding, but denied the motion to vacate its previous
orders.
Case Involving Areva Fuel
Fabrication. On November 9, 2005, TVA received two invoices
totaling $76 million from Framatome ANP Inc., which subsequently changed its
name to AREVA NP Inc. (“AREVA”). AREVA asserted that it was the successor to the
contract between TVA and Babcock and Wilcox Company (“B&W”) under which
B&W would provide fuel fabrication services for TVA’s Bellefonte Nuclear
Plant. AREVA’s invoices were based upon the premise that the contract required
TVA to buy more fuel fabrication services from B&W than TVA actually
purchased. In September 2006, TVA received a formal claim from AREVA which
requested a Contracting Officer’s decision pursuant to the Contract Disputes Act
of 1978 and reduced the amount sought to approximately $25.8 million. On April
13, 2007, the Contracting Officer issued a final decision denying the claim. On
April 19, 2007, AREVA filed suit in the United States District Court for the
Eastern District of Tennessee, reasserting the $25.8 million claim and alleging
that the contract required TVA to purchase certain amounts of fuel and/or to pay
a cancellation fee. TVA filed its answer to the complaint on June 15,
2007. AREVA subsequently raised its claim to $47.9
million. Trial is scheduled to begin September 29, 2008.
Notification of Potential
Liability for Ward Transformer Site. EPA and a working group
of potentially responsible parties (“PRPs”) have provided documentation showing
that TVA sent electrical equipment containing polychlorinated biphenyls (“PCBs”)
to the Ward Transformer site in Raleigh, North Carolina. 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. The working group is cleaning up on-site contamination in
accordance with an agreement with EPA and plans to sue non-participating PRPs
for contribution. The estimated cost of the cleanup is $20
million. In addition, EPA likely has incurred several million dollars
in response costs, and the working group has reimbursed EPA approximately
$725,000 of those costs. EPA has also proposed a cleanup plan for
off-site contamination. The present worth cost estimate for
performing the proposed plan is about $5 million. In addition, there
may be natural resource damages liability related to this site, but TVA is not
aware of any estimated amount for any such damages.
Completion of Browns Ferry
Unit 1, Team Incentive Fee Pool Claims. Under the contracts
for the restart of TVA’s Browns Ferry Unit 1, the engineering and construction
contractors, Bechtel Power Corporation and Stone & Webster Construction,
Inc., respectively, are to share in a team incentive fee pool funded from cost
savings for the respective workscopes. The contracts provide that
each contractor’s maximum payment from this pool will be as much as $38 million,
for a maximum total payout under both contracts of $76 million. The
contractors have taken the position that they should each receive the maximum
payment. Currently, TVA has calculated each contractor’s share at
$12,371,405, for a total payout under both contracts of
$24,742,810. TVA and the contractors have agreed to nonbinding
mediation of the matter. It is reasonably possible that TVA could
incur some potential liability in excess of the amount previously calculated,
but TVA is unable to estimate any such amount at this time.
Notice of Violation at
Widows Creek Unit 7. On July 16, 2007, TVA received a Notice
of Violation (“NOV”) from EPA as a result of TVA’s failure to properly maintain
ductwork at Widows Creek Unit 7. From 2002 to 2005, the unit’s ducts allowed
SO2
and NOx to escape
into the air. TVA repaired the ductwork in 2005, and the problem has been
resolved. TVA is reviewing the NOV. While the NOV does not set out an
administrative penalty, it is likely that TVA will face a monetary sanction
through giving up emission allowances, paying an administrative penalty, or
both. TVA's estimate of potential monetary sanctions is included in
the accrued amount listed above.
Paradise Fossil Plant Clean
Air Act Permit. On December 21, 2007, the Sierra Club, the
Center for Biological Diversity, Kentucky Heartwood, and Hilary Lambert filed a
petition with the EPA raising objections to the conditions of TVA’s current
Clean Air Act permit at the Paradise Fossil Plant (“Paradise”). Among
other things, the petitioners allege that activities at Paradise triggered the
NSR requirements for NOx and that
the monitoring of opacity at Units 1 and 2 of the plant is
deficient. The current permit continues to remain in
effect. It is unclear whether or how the plant’s permit might be
modified as a result of this proceeding.
Employment
Proceedings. 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
under the
Fair Labor Standards Act. Adverse outcomes in these proceedings would not
normally be material to TVA’s results of operations, liquidity, and financial
condition, although it is possible that some outcomes could require TVA to
change how it handles certain personnel matters or operates its
plants.
Significant Litigation to
Which TVA Is Not a Party. On April 2, 2007, the Supreme Court
issued an opinion in the case of United States v. Duke Energy,
vacating the ruling of the Fourth Circuit in favor of Duke Energy and against
EPA in EPA’s NSR enforcement case against Duke Energy. The NSR regulations apply
primarily to the construction of new plants but can apply to existing plants if
a maintenance project (1) is “non-routine” and (2) increases emissions. The
Supreme Court held that the test for emission increases under the NSR program
does not have to be the same as the test under EPA’s New Source Performance
Standard program. In light of the decision it appears that under
EPA’s PSD regulations, increases in annual emissions should be used for the
test, not hourly emissions as utilities, including TVA, have argued should be
the standard. Annual emissions can increase when a project improves the
reliability of plant operations and, depending on the time period over which
emission changes are calculated, it is possible to argue that almost all
reliability projects increase annual emissions. Neither the Supreme Court nor
the Fourth Circuit addressed what the “routine” project test should be. The
United States District Court for the Middle District of North Carolina had ruled
for Duke on this issue, holding that “routine” must take into account what is
routine in the industry and not just what is routine at a particular plant or
unit as EPA has argued. EPA did not appeal this ruling. On October 5,
2007, EPA filed a motion with the United States District Court for the Middle
District of North Carolina asking that court to vacate its entire prior ruling,
including the portion relating to the test for “routine” projects.
TVA is currently involved in two NSR
cases (one involving Bull Run, the dismissal of which was recently reversed on
appeal) and another at Colbert (the dismissal of which was recently affirmed on
appeal but may be reviewed by the U.S. Supreme Court). These cases are discussed
in more detail above. The Supreme Court’s holding could undermine one of TVA’s
defenses in these cases, although TVA has other available defenses.
Environmental groups and North Carolina have given TVA notice in the past that
they may sue TVA for alleged NSR violations at a number of TVA units. The
Supreme Court’s decision could encourage such suits, which are likely to involve
units where emission control systems such as scrubbers and selective catalytic
reduction systems are not installed, under construction, or planned to be
installed in the relatively near term.
TVA Board Nominations
On December 31, 2007, Congress
adjourned without the Senate having voted upon President George W. Bush’s
nominations of Susan Richardson Williams, Thomas C. Gilliland, and Bishop
William Graves to the TVA Board. Because Congress adjourned and their
nominations were not approved, Ms. Williams and Bishop Graves are no longer
directors of TVA. As a result of these vacancies and a previous
vacancy which Mr. Gilliland had been nominated to fill, there are currently six
directors on the Board. Under the TVA Act, while the TVA Board may
have up to nine directors, a quorum for transacting business is five
directors.
New Vice President and Controller
Named
On December 4, 2007, TVA announced the
appointment of John M. Thomas III as Vice President and Controller and its Chief
Accounting Officer, effective January 7, 2008. He succeeded Randall
P. Trusley, who retired from TVA effective January 4, 2008.
Mr. Thomas is responsible for the
development and maintenance of TVA accounting policies and practices, compliance
with SEC reporting requirements including disclosures, internal controls, and
financial reports, development of policy and methods for business planning,
budgeting and financial management, and ensuring consistency with TVA financial
policy. In addition, he provides oversight and analysis of financial
and performance reporting and serves as the primary management point of contact
for the Audit and Ethics Committee.
Executive Vice President, Power System
Operations Retirement
W. Terry Boston, TVA’s Executive Vice
President, Power System Operations, retired from TVA on February 1,
2008. Mr. Boston had worked at TVA for almost 36 years. He
left TVA to become the president and chief executive officer of PJM
Interconnection, which operates a large centrally dispatched electric grid in
the eastern United States.
There are no material changes related
to market risk from the market risks disclosed under Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Activities in
the Annual Report.
Disclosure
Controls and Procedures
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 chief
financial officer and the vice president and controller) of the effectiveness
and the design of TVA’s disclosure controls and procedures as of December 31,
2007. Based on that evaluation, the president and chief executive
officer and members of the disclosure control committee (including the chief
financial officer and the vice president and controller) concluded that TVA’s
disclosure controls and procedures were effective as of December 31, 2007 to
ensure that information required to be disclosed in reports TVA 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 about required disclosure.
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 that no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company can be detected.
TVA’s 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. There can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
Changes
in Internal Control over Financial Reporting
During the most recent fiscal quarter,
there were no changes in TVA’s internal control over financial reporting that
materially affected, or are reasonably likely to materially affect, TVA’s
internal control over financial reporting.
See Note 7 in this Quarterly Report for
a discussion of legal proceedings affecting TVA.
ITEM
1A. RISK FACTORS
There are no material changes related
to risk factors from the risk factors disclosed under Item 1A in the Annual
Report.
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
In accordance with the Board’s
September 27, 2007 approval of its Audit and Ethics Committee’s recommendation,
Ernst & Young LLP became TVA’s independent registered public accounting firm
beginning December 12, 2007.
Exhibit
No.
|
Description
|
|
3.1
|
Tennessee
Valley Authority Act of 1933, as amended, 16 U.S.C.
§§ 831-831ee
|
|
10.1
|
TVA
Discount Notes Selling Group Agreement
|
|
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
|
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 12, 2008
TENNESSEE VALLEY AUTHORITY
(Registrant)
By: /s/ Tom
D.
Kilgore
Tom D. Kilgore
President and Chief Executive Officer
(Principal Executive Officer)
By:
/s/ Kimberly S.
Greene
Kimberly
S. Greene
Chief Financial Officer and Executive
Vice President, Financial Services
(Principal Financial Officer)
Exhibit
No.
|
Description
|
|
3.1
|
Tennessee
Valley Authority Act of 1933, as amended, 16 U.S.C.
§§ 831-831ee
|
|
10.1
|
TVA
Discount Notes Selling Group Agreement
|
|
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
|