Tennessee Valley Authority
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended March 31, 2007
OR
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o |
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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)
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A corporate agency of the United States created by an act
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62-0474417 |
of Congress
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(I.R.S. Employer Identification No.) |
(State or other jurisdiction of incorporation or organization) |
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400 W. Summit Hill Drive
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37902 |
Knoxville, Tennessee
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(Zip Code) |
(Address of principal executive offices) |
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(865) 632-2101
(Registrants 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 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
TABLE OF CONTENTS
Page 2 of 47
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q (this Quarterly Report) contains forward-looking
statements relating to future events and future performance. All statements other than those that
are purely historical may be forward-looking statements.
In certain cases, forward-looking statements can be identified by the use of words such as
may, will, should, expect, anticipate, believe, intend, project, plan,
predict, assume, forecast, estimate, objective, possible, probably, likely,
potential, or other similar expressions.
Examples of forward-looking statements include, but are not limited to:
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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; |
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Estimates regarding power and energy forecasts; |
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Expectations about the adequacy of Tennessee Valley Authoritys (TVA)
pension plans and nuclear decommissioning trust; |
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The impact of new accounting pronouncements and interpretations, including
Statement of Financial Accounting Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R); |
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Estimates of amounts to be reclassified from
Other Comprehensive
Income to earnings over the next year; |
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TVAs plans to continue using short-term debt to meet current obligations; and |
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The anticipated cost and timetable for returning Browns Ferry Nuclear Plant Unit 1 to service. |
Although 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:
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New laws, regulations, and administrative orders, especially those related to: |
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TVAs protected service area, |
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The sole authority of the TVA Board of Directors to set power rates, |
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Various environmental and nuclear matters, |
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TVAs management of the Tennessee River system, |
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TVAs credit rating, and |
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TVAs debt ceiling; |
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Performance of TVAs generation and transmission assets; |
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Availability of fuel supplies; |
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Changes in the price of purchased power; |
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Reliability of purchased power providers, fuel suppliers, and other counterparties; |
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Compliance with existing environmental laws and regulations; |
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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; |
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Failure of transmission facilities; |
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An accident at any nuclear facility, even one unaffiliated with TVA; |
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Catastrophic events such as fires, earthquakes, floods, pandemics, wars,
terrorist activities, and other similar events, especially if these events occur in
or near TVAs service area; |
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Events at non-TVA facilities that affect the supply of water to TVAs
generation facilities; |
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Changes in the market price of commodities such as coal, uranium, natural gas,
fuel oil, electricity, and emission allowances; |
Page 3 of 47
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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 or its counterparties; |
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Rising pension costs and health care expenses; |
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Increases in TVAs financial liability for decommissioning its nuclear facilities; |
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Limitations on TVAs ability to borrow money; |
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Changes in economic conditions; |
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Ineffectiveness of TVAs disclosure controls and procedures and internal control over financial reporting; |
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Changes in accounting standards; |
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Changes in the applicability of regulatory accounting to TVA; |
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Loss of key personnel; |
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Changes in technology; |
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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 forward-looking statements are set forth in TVAs Annual Report on Form 10-K for the
fiscal year ended September 30,
2006, particularly in Item 1A, Risk Factors, and in this Quarterly Report. New factors emerge from
time to time, and it is not possible for management to predict all such factors or to assess the
extent to which any factor or combination of factors may impact TVAs business or cause results to
differ materially from those contained in any forward-looking statement.
TVA undertakes no obligation to update any forward-looking statement to reflect developments
that occur after the statement is made.
GENERAL INFORMATION
Fiscal Year
Unless otherwise indicated, years (2007, 2006, etc.) in this Quarterly Report refer to
TVAs fiscal years ending September 30.
Notes
References to Notes are to the Notes to Financial Statements contained in Item 1, Financial
Statements in this Quarterly Report.
Available Information
The public may read and copy any reports or other information that TVA files with the
Securities and Exchange Commission (SEC) at the SECs Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. The public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. TVAs SEC reports are also available to the public without
charge from the website maintained by the SEC at www.sec.gov and TVAs website at
www.tva.com/finance. Information contained on TVAs website shall not be deemed to be incorporated
into, or to be a part of, this Quarterly Report.
Page 4 of 47
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TENNESSEE VALLEY AUTHORITY
STATEMENTS OF INCOME (UNAUDITED)
(in millions)
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Three months ended |
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Six months ended |
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March 31 |
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March 31 |
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2007 |
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2006 |
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2007 |
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2006 |
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Operating revenues |
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Sales of electricity |
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Municipalities and cooperatives |
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$ |
1,922 |
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$ |
1,745 |
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$ |
3,664 |
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$ |
3,508 |
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Industries directly served |
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301 |
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245 |
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603 |
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475 |
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Federal agencies and other |
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26 |
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32 |
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51 |
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58 |
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Other revenue |
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28 |
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26 |
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63 |
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59 |
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Total operating revenues |
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2,277 |
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2,048 |
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4,381 |
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4,100 |
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Operating expenses |
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Fuel and purchased power |
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824 |
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717 |
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1,563 |
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1,462 |
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Operating and maintenance |
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576 |
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567 |
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1,161 |
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1,167 |
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Depreciation, amortization, and accretion |
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382 |
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389 |
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738 |
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777 |
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Tax equivalents |
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109 |
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93 |
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217 |
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187 |
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Total operating expenses |
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1,891 |
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1,766 |
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3,679 |
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3,593 |
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Operating income |
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386 |
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282 |
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702 |
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507 |
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Other income |
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18 |
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16 |
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30 |
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28 |
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Unrealized gain on derivative contracts, net |
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16 |
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21 |
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31 |
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35 |
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Interest expense |
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Interest on debt |
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339 |
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339 |
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675 |
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674 |
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Amortization of debt discount, issue, and reacquisition costs, net |
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5 |
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5 |
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10 |
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10 |
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Allowance for funds used during construction and nuclear fuel expenditures |
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(50 |
) |
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(39 |
) |
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(99 |
) |
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(75 |
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Net interest expense |
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294 |
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305 |
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586 |
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609 |
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Net income (loss) |
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$ |
126 |
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$ |
14 |
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$ |
177 |
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$ |
(39 |
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The accompanying Notes are an integral part of these financial statements.
Page 5 of 47
TENNESSEE
VALLEY AUTHORITY
BALANCE SHEETS (UNAUDITED)
(in millions)
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At March 31 |
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At September 30 |
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2007 |
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2006 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
382 |
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$ |
536 |
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Restricted cash and investments (Note 1) |
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194 |
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198 |
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Accounts receivable, net |
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1,171 |
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1,359 |
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Inventories and other |
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690 |
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576 |
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Total current assets |
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2,437 |
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2,669 |
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Property, plant, and equipment |
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Completed plant |
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36,545 |
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35,652 |
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Less accumulated depreciation |
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(15,744 |
) |
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(15,331 |
) |
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Net completed plant |
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20,801 |
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20,321 |
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Construction in progress |
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3,325 |
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3,539 |
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Nuclear fuel and capital leases |
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592 |
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574 |
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Total property, plant, and equipment, net |
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24,718 |
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24,434 |
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Investment funds |
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1,059 |
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972 |
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Regulatory and other long-term assets (Note 1) |
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Deferred nuclear generating units |
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3,325 |
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3,521 |
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Other regulatory assets |
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1,794 |
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1,809 |
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Subtotal |
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5,119 |
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5,330 |
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Other long-term assets |
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834 |
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1,115 |
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Total deferred charges and other assets |
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5,953 |
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6,445 |
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Total assets |
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$ |
34,167 |
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$ |
34,520 |
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LIABILITIES AND PROPRIETARY CAPITAL |
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Current liabilities |
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Accounts payable |
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$ |
774 |
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$ |
890 |
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Accrued liabilities |
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205 |
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211 |
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Collateral funds held |
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191 |
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195 |
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Accrued interest |
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412 |
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|
403 |
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Current portion of lease/leaseback obligations |
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43 |
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37 |
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Current portion of energy prepayment obligations |
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106 |
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|
106 |
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Short-term debt, net |
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2,638 |
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|
2,376 |
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Current maturities of long-term debt (Note 3) |
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50 |
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|
985 |
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Total current liabilities |
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4,419 |
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5,203 |
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Other liabilities |
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Other liabilities |
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2,277 |
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2,305 |
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Regulatory liabilities (Note 1) |
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317 |
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|
575 |
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Asset retirement obligations |
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2,112 |
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|
1,985 |
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Lease/leaseback obligations |
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1,041 |
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|
1,071 |
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Energy prepayment obligations (Note 1) |
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|
1,085 |
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1,138 |
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Total other liabilities |
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6,832 |
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|
7,074 |
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Long-term debt, net (Note 3) |
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20,097 |
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|
19,544 |
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Total liabilities |
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31,348 |
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31,821 |
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Commitments and contingencies |
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Proprietary capital |
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|
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Appropriation investment |
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|
4,753 |
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|
|
4,763 |
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Retained earnings |
|
|
1,736 |
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|
|
1,565 |
|
Accumulated other comprehensive income |
|
|
6 |
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|
43 |
|
Accumulated net expense of nonpower programs |
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|
(3,676 |
) |
|
|
(3,672 |
) |
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|
|
|
|
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Total proprietary capital |
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|
2,819 |
|
|
|
2,699 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total liabilities and proprietary capital |
|
$ |
34,167 |
|
|
$ |
34,520 |
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|
|
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The accompanying Notes are an integral part of these financial statements.
Page 6 of 47
TENNESSEE VALLEY AUTHORITY
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended
March 31
(in millions)
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2007 |
|
|
2006 |
|
Cash flows from operating activities |
|
|
|
|
|
|
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|
Net income (loss) |
|
$ |
177 |
|
|
$ |
(39 |
) |
Adjustments to reconcile net income to net cash
provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation, amortization, and accretion |
|
|
748 |
|
|
|
787 |
|
Nuclear refueling outage amortization |
|
|
39 |
|
|
|
46 |
|
Loss on project write-downs |
|
|
22 |
|
|
|
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|
Amortization of nuclear fuel |
|
|
59 |
|
|
|
67 |
|
Non-cash retirement benefit expense |
|
|
101 |
|
|
|
151 |
|
Net unrealized gain on derivative contracts |
|
|
(31 |
) |
|
|
(35 |
) |
Prepayment credits applied to revenue |
|
|
(53 |
) |
|
|
(53 |
) |
Other, net |
|
|
(40 |
) |
|
|
14 |
|
Changes in current assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
210 |
|
|
|
218 |
|
Inventories and other |
|
|
(110 |
) |
|
|
(163 |
) |
Accounts payable and accrued liabilities |
|
|
(97 |
) |
|
|
(131 |
) |
Accrued interest |
|
|
9 |
|
|
|
15 |
|
Deferred nuclear refueling outage costs |
|
|
(77 |
) |
|
|
(34 |
) |
Other, net |
|
|
(12 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
945 |
|
|
|
793 |
|
|
|
|
|
|
|
|
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Cash flows from investing activities |
|
|
|
|
|
|
|
|
Construction expenditures |
|
|
(712 |
) |
|
|
(627 |
) |
Combustion turbine asset acquisitions |
|
|
(98 |
) |
|
|
|
|
Nuclear fuel expenditures |
|
|
(83 |
) |
|
|
(147 |
) |
Change in restricted cash and investments |
|
|
4 |
|
|
|
(31 |
) |
Purchase of investments |
|
|
2 |
|
|
|
(4 |
) |
Loans and other receivables |
|
|
|
|
|
|
|
|
Advances |
|
|
(4 |
) |
|
|
(2 |
) |
Repayments |
|
|
8 |
|
|
|
6 |
|
Proceeds from sale of receivables/loans |
|
|
2 |
|
|
|
8 |
|
Other, net |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(880 |
) |
|
|
(797 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
Issues |
|
|
28 |
|
|
|
68 |
|
Redemptions and repurchases |
|
|
(464 |
) |
|
|
(155 |
) |
Short-term issues, net |
|
|
262 |
|
|
|
97 |
|
Payments on combustion turbine financing |
|
|
(18 |
) |
|
|
(17 |
) |
Payments on equipment financing |
|
|
(7 |
) |
|
|
(6 |
) |
Financing costs, net |
|
|
|
|
|
|
(2 |
) |
Payments to U.S. Treasury |
|
|
(20 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
(219 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(154 |
) |
|
|
(37 |
) |
Cash and cash equivalents at beginning of period |
|
|
536 |
|
|
|
538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
382 |
|
|
$ |
501 |
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of these financial statements.
Page 7 of 47
TENNESSEE VALLEY AUTHORITY
STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (UNAUDITED)
(in millions)
For the three months ended March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Net Expense |
|
|
|
|
|
|
|
|
|
|
Appropriation |
|
|
Retained |
|
|
Comprehensive |
|
|
of Stewardship |
|
|
|
|
|
|
Comprehensive |
|
|
|
Investment |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Programs |
|
|
Total |
|
|
Income (Loss) |
|
|
|
|
Balance at December 31, 2005 |
|
$ |
4,778 |
|
|
$ |
1,190 |
|
|
$ |
44 |
|
|
$ |
(3,665 |
) |
|
$ |
2,347 |
|
|
$ |
|
|
Net income (loss) |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
(2 |
) |
|
|
14 |
|
|
|
14 |
|
Return on appropriation investment |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
Other comprehensive income (Note 2) |
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
72 |
|
|
|
72 |
|
Return of appropriation investment |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
$ |
4,773 |
|
|
$ |
1,202 |
|
|
$ |
116 |
|
|
$ |
(3,667 |
) |
|
$ |
2,424 |
|
|
$ |
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
4,758 |
|
|
$ |
1,613 |
|
|
$ |
28 |
|
|
$ |
(3,674 |
) |
|
$ |
2,725 |
|
|
$ |
|
|
Net income (loss) |
|
|
|
|
|
|
128 |
|
|
|
|
|
|
|
(2 |
) |
|
|
126 |
|
|
|
126 |
|
Return on appropriation investment |
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
Accumulated other comprehensive loss (Note 2) |
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
(22 |
) |
|
|
(22 |
) |
Return of appropriation investment |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
$ |
4,753 |
|
|
$ |
1,736 |
|
|
$ |
6 |
|
|
$ |
(3,676 |
) |
|
$ |
2,819 |
|
|
$ |
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Net Expense |
|
|
|
|
|
|
|
|
|
|
Appropriation |
|
|
Retained |
|
|
Comprehensive |
|
|
of Stewardship |
|
|
|
|
|
|
Comprehensive |
|
|
|
Investment |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Programs |
|
|
Total |
|
|
(Loss) Income |
|
|
|
|
Balance at September 30, 2005 |
|
$ |
4,783 |
|
|
$ |
1,244 |
|
|
$ |
27 |
|
|
$ |
(3,662 |
) |
|
$ |
2,392 |
|
|
$ |
|
|
Net (loss) |
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
(39 |
) |
|
|
(39 |
) |
Return on appropriation investment |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
Accumulated other comprehensive income (Note 2) |
|
|
|
|
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
89 |
|
|
|
89 |
|
Return of appropriation investment |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
$ |
4,773 |
|
|
$ |
1,202 |
|
|
$ |
116 |
|
|
$ |
(3,667 |
) |
|
$ |
2,424 |
|
|
$ |
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
4,763 |
|
|
$ |
1,565 |
|
|
$ |
43 |
|
|
$ |
(3,672 |
) |
|
$ |
2,699 |
|
|
$ |
|
|
Net income (loss) |
|
|
|
|
|
|
181 |
|
|
|
|
|
|
|
(4 |
) |
|
|
177 |
|
|
|
177 |
|
Return on appropriation investment |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
Accumulated other comprehensive loss (Note 2) |
|
|
|
|
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
(37 |
) |
|
|
(37 |
) |
Return of appropriation investment |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
$ |
4,753 |
|
|
$ |
1,736 |
|
|
$ |
6 |
|
|
$ |
(3,676 |
) |
|
$ |
2,819 |
|
|
$ |
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of these financial statements.
Page 8 of 47
NOTES TO FINANCIAL STATEMENTS (unaudited)
(Dollars in millions except where noted)
1. Summary of Significant Accounting Policies
Organization
The Tennessee Valley Authority (TVA) is a wholly-owned corporate agency and instrumentality
of the United States. TVA was created by the U.S. Congress in 1933 by virtue of the Tennessee
Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee (2000 & Supp. IV 2004) (as
amended, the TVA Act). TVA was created to improve navigation on the Tennessee River, reduce flood
damage, provide agricultural and industrial development, and provide electric power to the
Tennessee Valley region. TVA manages the Tennessee River and its tributaries for multiple
river-system purposes, such as navigation; flood damage reduction; power generation; environmental
stewardship; shoreline use; and water supply for power plant operations, consumer use, recreation,
industry, and other stewardship purposes.
Substantially all TVA revenues and assets are attributable to the power program. TVA provides
power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky,
and portions of northern Georgia, western North Carolina, and southwestern Virginia to a population
of approximately 8.7 million people. The power program has historically been separate and distinct
from the stewardship programs. It is required to be self-supporting from power revenues and
proceeds from power financings, such as proceeds from the issuance of bonds, notes, and other
evidences of indebtedness (Bonds). Although TVA does not currently receive congressional
appropriations, it is required to make payments to the U.S. Treasury in repayment of and as a
return on the appropriation investment the United States provided TVA for its power program. Until
2000, most of the funding for TVAs stewardship programs was provided by congressional
appropriations. These programs are now funded largely with power revenues. Certain stewardship
activities are also funded with various revenues and user fees. TVAs stewardship activities 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, TVAs stewardship assets and properties are included as part of the power program,
TVAs only operating segment.
Power rates are established by the TVA Board of Directors (the TVA Board) as authorized by
the TVA Act. The TVA Act requires TVA to charge rates for power that will produce gross revenues
sufficient to provide funds for operation, maintenance, and administration of its power system; tax
equivalent payments to states and counties; debt service on outstanding indebtedness; payments to
the U.S. Treasury in repayment of and as a return on the outstanding amount TVA is required to
repay the United States for its investment in TVAs power facilities; and such additional margin as
the TVA Board may consider desirable for investment in power system assets, retirement of
outstanding indebtedness, additional reduction of the outstanding amount TVA is required to repay
the United States for its investment in TVAs power facilities, and other purposes connected with
TVAs power business. In setting rates, the TVA Board is charged by the TVA Act to have due regard
for the primary objectives of the TVA Act, including the objective that power shall be sold at
rates as low as are feasible. Rates set by the TVA Board are not subject to review or approval by
any state or federal regulatory body.
Basis of Presentation
TVA prepares its interim financial statements in conformity with generally accepted accounting
principles (GAAP) accepted in the United States of America for interim financial information.
Accordingly, TVAs interim financial statements do not include all of the information and notes
required by GAAP for complete financial statements. Because the accompanying interim financial
statements do not include all of the information and footnotes required by GAAP for complete
financial statements, they should be read in conjunction with the audited financial statements for
the year ended September 30, 2006, and the notes thereto, which are contained in TVAs Annual
Report on Form 10-K for the fiscal year ended September 30, 2006 (the Annual Report).
Subsequent to its fourth quarter of 2006 closing, TVA reviewed projects related to
construction work in progress and identified errors in classification related primarily to 2006 and
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 pending litigation during the fourth quarter of 2006. These charges are
included in Operating and Maintenance expense on the Statement of Income for the six months
ended March 31, 2007. TVA uses cash flows from operating
activities as its primary measure of materiality. As such, TVA determined that these noncash
adjustments were not material to its reported results for prior and current periods on a
quantitative basis, based on TVAs operating cash flows, or on a qualitative basis, and did not
require restatement of those results.
Page 9 of 47
The amounts included in the accompanying interim financial statements are unaudited but, in
the opinion of TVA management, reflect all adjustments, which consist solely of normal recurring
adjustments, necessary to fairly present TVAs financial position and results of operations for the
interim periods. Due to seasonal weather variations and the timing of planned maintenance and
refueling outages of electric generating units, the results of operations for interim periods are
not necessarily indicative of amounts expected for the entire year.
Use of Estimates
In preparing financial statements that conform to GAAP, management must make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the amounts of
revenues and expenses reflected during the reporting period. Actual results could differ from those
estimates.
Fiscal Year
TVAs fiscal year ends September 30. Unless otherwise indicated, years (2007, 2006, etc.)
refer to TVAs fiscal years.
Reclassifications
Certain reclassifications have been made to the 2006 financial statements to conform to the
2007 presentation, including the reclassification of interest income of approximately $6 million
and $11 million for the three and six months ended March 31, 2006, respectively, which was
previously included in Interest on Debt on the Statement of Income. Interest income is now
included in Other
Income.
Beginning with October 2006, certain items previously considered revenue from Sales of
Electricity were reclassified as
Other Revenue. These items are 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 $6 million and $11
million for the three and six months ended March 31, 2006, respectively, are now included in
Other Revenue.
These reclassifications had no effect on previously reported results of operations and net
cash flows.
Revision to Statement of Cash Flows
As of September 30, 2006, TVA began reporting the allowance for funds used during construction
(AFUDC) related to construction expenditures and nuclear fuel expenditures as a noncash component
of investing activities rather than a noncash component of operating activities. The revised
classification is consistent with guidance for the cash flow presentation for capitalized interest.
The previous method of reporting AFUDC was consistent with the industry practice for the combined
reporting of debt and equity AFUDC. The result of this reclassification is an increase in cash from
operating activities of $75 million and an increase in funds used by investing activities of $75
million for the six months ended March 31, 2006.
Restricted Cash and Investments
As of March 31, 2007, and September 30, 2006, TVA had $194 million and $198 million,
respectively, in Restricted
Cash and Investments on its Balance Sheets primarily
related to collateral posted with TVA by a swap counterparty in accordance with certain credit
terms included in the swap agreement, which result in the funds being reported in Restricted
Cash and Investments. The corresponding liability is included in Collateral
Funds Held on the March 31, 2007, and September 30, 2006, Balance Sheets.
Page 10 of 47
Accounts Receivables
Accounts receivable primarily consist of amounts due from power sales. The table below
summarizes the types and amounts of receivables.
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
At March 31 |
|
|
At September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
Power receivables billed |
|
$ |
243 |
|
|
$ |
303 |
|
Power receivables unbilled |
|
|
908 |
|
|
|
1,031 |
|
|
|
|
|
|
|
|
Total power receivables |
|
|
1,151 |
|
|
|
1,334 |
|
|
|
|
|
|
|
|
|
|
Other receivables |
|
|
23 |
|
|
|
35 |
|
Allowance for uncollectible accounts |
|
|
(3 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
Net accounts receivable |
|
$ |
1,171 |
|
|
$ |
1,359 |
|
|
|
|
|
|
|
|
Cost-Based Regulation
Regulatory assets capitalized under the provisions of SFAS No. 71, Accounting for the Effects
of Certain Types of Regulation, are included in Deferred Nuclear Generating
Units and Other Regulatory Assets on the March 31, 2007, and September 30,
2006, Balance Sheets. Components of Other Regulatory Assets include certain charges
related to the closure and removal from service of nuclear generating units, debt reacquisition
costs, deferred outage costs, unrealized losses related to power purchase contracts, deferred
capital lease asset costs, a deferred loss relating to TVAs financial trading program, minimum
pension liability, and, beginning in 2007, an estimated fuel cost adjustment (FCA) related to
rate actions taken during 2006. All regulatory assets are probable of recovery in future revenues.
Components of Regulatory
Liabilities include unrealized gains on coal purchase contracts,
deferred trading program gains, and capital lease liabilities.
TVAs regulatory assets and liabilities are summarized in the table below.
TVA Regulatory Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
At March 31 |
|
|
At September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
Regulatory Assets |
|
|
|
|
|
|
|
|
Minimum pension liability |
|
$ |
914 |
|
|
$ |
914 |
|
Nuclear decommissioning costs |
|
|
420 |
|
|
|
474 |
|
Debt reacquisition costs |
|
|
221 |
|
|
|
232 |
|
Deferred trading program loss |
|
|
|
|
|
|
6 |
|
Deferred outage costs |
|
|
124 |
|
|
|
85 |
|
Deferred capital lease asset costs |
|
|
71 |
|
|
|
76 |
|
Unrealized losses on purchased power contracts |
|
|
8 |
|
|
|
22 |
|
Fuel cost adjustment |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
1,794 |
|
|
|
1,809 |
|
Deferred nuclear generating units |
|
|
3,325 |
|
|
|
3,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,119 |
|
|
$ |
5,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Liabilities |
|
|
|
|
|
|
|
|
Unrealized gain on coal purchase contracts |
|
$ |
237 |
|
|
$ |
487 |
|
Deferred trading program gain |
|
|
2 |
|
|
|
|
|
Capital lease liability |
|
|
78 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
317 |
|
|
$ |
575 |
|
|
|
|
|
|
|
|
Page 11 of 47
TVA has established a reserve for future generation funded by power customers which is
also classified as a regulatory liability. Because of the nature of the reserve, it is considered
as an offset to Property,
Plant and Equipment on the March 31, 2007, Balance Sheet.
See Reserve for Future Generation in this Note 1.
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 second quarter of 2007, TVAs total asset retirement obligations (ARO) liability
increased $105 million. The increase was comprised of $83 million in new AROs plus $22 million in
ARO expense (accretion of the liability). Correspondingly for the second quarter of 2006, the ARO
liability decreased $62 million. The decrease was comprised of a reduction in estimates to future
cash flows of $89 million offset by $27 million in ARO expense.
During the first six months of 2007, TVAs total ARO liability increased $127 million. The
increase was comprised of $83 million in new AROs plus $44 million in ARO expense (accretion of the
liability). Correspondingly for the first six months of 2006, the ARO liability decreased $36
million. The decrease was comprised of a reduction in estimates to future cash flows of $89 million
offset by $53 million in ARO expense.
Reconciliation of Asset Retirement Obligations Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31 |
|
March 31 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
2,007 |
|
|
$ |
1,883 |
|
|
$ |
1,985 |
|
|
$ |
1,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in nuclear estimates to future cash flows |
|
|
82 |
|
|
|
(89 |
) |
|
|
82 |
|
|
|
(89 |
) |
Non-nuclear additional obligations |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83 |
|
|
|
(89 |
) |
|
|
83 |
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: ARO (accretion) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear accretion (recorded as a regulatory asset) |
|
|
15 |
|
|
|
23 |
|
|
|
30 |
|
|
|
46 |
|
Non-nuclear accretion (charged to expense) |
|
|
7 |
|
|
|
4 |
|
|
|
14 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
27 |
|
|
|
44 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
2,112 |
|
|
$ |
1,821 |
|
|
$ |
2,112 |
|
|
$ |
1,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TVA periodically reviews the estimated costs of decommissioning its nuclear plants. Based
on a cost study, TVA reduced the liability $89 million in 2006. Based on a 2007 cost study, which
accounted for biennial changes in labor rates, the liability was increased $82 million.
Energy Prepayment Obligations
As of March 31, 2007, TVA had entered into sales agreements for 54.5 discounted energy units
totaling $54.5 million. Total credits applied to power billings on a cumulative basis during the
life of the program through March 31, 2007, exceeded $23.0 million. Of this amount, over $1 million
was recognized as revenue for each of the quarterly periods ended March 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 MLGWs monthly power bill on a straight-line basis over the same
15-year period. Total credits applied to power billings on a cumulative basis through March 31,
2007, exceeded $340 million. Of this amount, $25 million was recognized as revenue for each of the
quarterly periods ended March 31, 2007, and 2006. These amounts were based on the ratio of
kilowatt-hours of electricity delivered to the total kilowatt-hours under contract.
Page 12 of 47
At March 31, 2007, and September 30, 2006, obligations for these energy prepayments were
$1,191 million and $1,244 million, respectively. These amounts are included in Energy
Prepayment Obligations and Current Portion of Energy
Prepayment Obligations on the March 31, 2007, and September 30, 2006, Balance Sheets.
Impact of New Accounting Pronouncements and Interpretations
Accounting Changes and Error Corrections. In May 2005, the Financial Accounting Standards
Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections a replacement of
APB Opinion No. 20 and FASB Statement No. 3, which replaces Accounting Principles Board (APB)
Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements. This statement applies to all voluntary changes in accounting principles and
also applies to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This statement requires, unless
impracticable, retrospective application to prior periods financial statements of changes in
accounting principles. If it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this statement requires that
the new accounting principle be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of retained earnings for that period rather
than being reported in an income statement. When it is impracticable to determine the cumulative
effect of applying a change in accounting principle to all prior periods, this statement requires
that the new accounting principle be applied as if it were adopted prospectively from the earliest
date practicable. This statement also requires that a change in depreciation, amortization, or
depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. This statement became effective for TVA
beginning in 2007.
Fair Value Measurements. In September 2006, FASB issued SFAS No. 157, Fair Value
Measurements. This standard provides guidance for using fair value to measure assets and
liabilities 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, 2007, and interim periods within
those fiscal years. At this time, TVA is evaluating the requirements of this statement and has not
yet determined the impact of its implementation, which may or may not be material to TVAs results
of operations or financial position.
Accounting for Defined Benefit Pension and Other Postretirement Plans. On September 29, 2006,
FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R). This standard
will require employers to fully recognize the obligations associated with single-employer defined
benefit pension, retiree healthcare, and other postretirement plans in their financial statements.
Specifically, the new standard requires an employer to recognize in its statement of financial
position an asset for a plans overfunded status or a liability for a plans underfunded status;
measure a plans assets and its obligations that determine its funded status as of the end of the
employers fiscal year (with limited exceptions); and recognize changes in the funded status of a
defined benefit postretirement plan in the year in which the changes occur. Those changes will be
reported in comprehensive income of a business entity and in changes in net assets of a
not-for-profit organization.
The requirement to recognize the funded status of a benefit plan and the disclosure
requirements are effective for TVA as of the end of the fiscal year ending after June 15, 2007. TVA
plans to apply the new standard for its 2007 year-end financial statements and recognize on its
2007 Balance Sheet the funded status of its pension and other postretirement benefit plans.
However, had TVA been required to adopt the standard as of its last actuarial valuation date
(September 30, 2006), TVA would have recorded the following amounts on its Balance Sheet for the
year then ended: a regulatory asset of $795 million, additional pension and postretirement
obligations of $368 million and $152 million, respectively, and the reclassification to regulatory
assets of an intangible asset with a balance of $275 million, representing unamortized prior
service cost. The net effect of recognizing such amounts would have been to increase total assets
and liabilities by $520 million at that date.
Page 13 of 47
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 entitys 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 statement and has not yet determined the
potential impact of its implementation, which may or may not be material to TVAs 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, and 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 TVAs financial position.
Accounting for Misstatements. On September 13, 2006, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. This bulletin provides
interpretive guidance on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a current year misstatement. Application of the guidance will
become effective for TVA with its annual report for the year ending September 30, 2007. TVA is not
aware of any potential misstatements at this time.
Reserve for Future Generation
During the first quarter of 2007, TVA began collecting in rates amounts intended to fund
future generation based on the need for additional generating capacity that it believes will be
required to meet future power demand in its service area. Because these amounts are intended to
fund future costs, they were deferred as a regulatory liability. The reserve is funded by power
customers based on a predetermined rate applied to electricity sales approved as part of TVAs 2007
budget. Collections for the six months ended March 31, 2007, amounted to $34 million, and these
amounts are recorded as a regulatory liability on the March 31, 2007, Balance Sheet as a component
of Completed Plant. These and other funds collected for future generation will be amortized
to revenue over the useful lives of the generating assets acquired or constructed in order to match
revenue with the corresponding depreciation expense of these assets on the Statement of Income.
This revenue recognition process will begin when the assets are placed into service.
In December 2006, TVA purchased two combustion turbine facilities for a combined purchase
price of $98 million. One facility is a 742-megawatt winter peaking capacity, dual-fuel combustion
turbine facility and includes certain related transmission facilities. The second facility is a
555-megawatt winter peaking capacity, natural gas-fired combustion turbine facility. The
555-megawatt capacity facility was available for service in January 2007, and the 742-megawatt
facility is scheduled to be available for service during the third quarter of 2007. During the
second quarter of 2007, depreciation related to the 555-megawatt plant was $0.2 million. TVA also
recognized revenue of $0.2 million during the same period consistent with the manner in which the
related asset is being depreciated.
Page 14 of 47
2. Accumulated Other Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires the disclosure of comprehensive
income to reflect changes in capital that result from transactions and economic events from
non-owner sources. The decrease for the three and six months ended March 31, 2007, and the increase
for the three and six months ended March 31, 2006, were due to unrealized gains and losses related
to mark-to-market valuation adjustments for certain derivative instruments.
Total Other Comprehensive Income (Loss) Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31 |
|
March 31 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Accumulated other comprehensive income at beginning of period |
|
$ |
28 |
|
|
$ |
44 |
|
|
$ |
43 |
|
|
$ |
27 |
|
Changes in fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflation swap |
|
|
8 |
|
|
|
5 |
|
|
|
9 |
|
|
|
(5 |
) |
Foreign currency swaps |
|
|
(30 |
) |
|
|
67 |
|
|
|
(46 |
) |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income at end of period |
|
$ |
6 |
|
|
$ |
116 |
|
|
$ |
6 |
|
|
$ |
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
Foreign currency swap changes are shown net of reclassifications from Other Comprehensive Income
to earnings. The amounts reclassified from Other Comprehensive Income resulted in an increase to
earnings of $6 million for the second quarter of 2007 and $57 million for the six months ended
March 31, 2007, and an increase to earnings of $31 million for the second quarter of 2006 and a
charge to earnings of $9 million for the six months ended March 31, 2006.
3. Debt Securities
Debt Outstanding
The TVA Act authorizes TVA to issue Bonds up to a total of $30 billion outstanding at any one
time. Debt outstanding at March 31, 2007, including net translation losses of $252 million related
to long-term debt denominated in foreign currencies, consisted of the following:
Debt Outstanding
|
|
|
|
|
|
|
|
|
|
|
At March 31 |
|
|
At September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
Short-term debt |
|
|
|
|
|
|
|
|
Discount notes (net of discount) |
|
$ |
2,638 |
|
|
$ |
2,376 |
|
Current maturities of long-term debt |
|
|
50 |
|
|
|
985 |
|
|
|
|
|
|
|
|
Total short-term debt, net |
|
|
2,688 |
|
|
|
3,361 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
Long-term |
|
|
20,275 |
|
|
|
19,722 |
|
Unamortized discount |
|
|
(178 |
) |
|
|
(178 |
) |
|
|
|
|
|
|
|
Total long-term debt, net |
|
|
20,097 |
|
|
|
19,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding debt |
|
$ |
22,785 |
|
|
$ |
22,905 |
|
|
|
|
|
|
|
|
Page 15 of 47
Bond Tests
The TVA Act and the Basic Tennessee Valley Authority Power Bond Resolution each contain two
bond tests: the rate test and the bondholder protection test.
Under the rate test, TVA must charge rates for power which 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 (tax equivalent payments), |
|
|
|
|
Debt service on outstanding Bonds, |
|
|
|
|
Payments to the U.S. Treasury as a repayment of and a return on the
outstanding amount TVA is required to repay the United States for its investment in
TVAs power facilities, 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 outstanding amount TVA is required to repay the United
States for its investment in TVAs power facilities, and other purposes connected with
TVAs power business, having 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. |
Under the bondholder protection test, TVA must, in successive five-year periods, use an amount
of net power proceeds at least equal to the sum of:
|
|
|
The depreciation accruals and other charges representing the amortization of
capital expenditures, and |
|
|
|
|
The net proceeds from any disposition of
power facilities, |
|
|
|
|
for either |
|
|
|
|
The reduction of its capital obligations (including Bonds and the outstanding
amount TVA is required to repay the United States for its investment in TVAs power
facilities), or |
|
|
|
|
Investment in power assets. |
TVA must next meet the bondholder protection test for the five-year period ending September
30, 2010.
Debt Securities Activity
The table below summarizes TVAs long-term Bond activity for the period from October 1, 2006,
to March 31, 2007.
Bond Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
Date |
|
Amount |
|
|
Interest Rate |
|
|
|
|
Redemptions/Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
electronotes® |
|
First Quarter 2007 |
|
$ |
2 |
|
|
|
4.65 |
% |
|
|
Second Quarter 2007 |
|
|
5 |
|
|
|
4.78 |
% |
2001 Series D |
|
December 2006 |
|
|
75 |
|
|
|
4.88 |
% |
1997 Series A |
|
January 2007 |
|
|
382 |
|
|
|
6.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances: |
|
|
|
|
|
|
|
|
|
|
electronotes® |
|
First Quarter 2007 |
|
$ |
9 |
|
|
|
5.50 |
% |
|
|
Second Quarter 2007 |
|
|
19 |
|
|
|
5.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
electronotes® interest rate is a weighted average rate.
The 1997 Series A interest rate is the effective swapped interest rate.
Page 16 of 47
4. Risk Management Activities and Derivative Transactions
TVA is exposed to market risks. These market risks include risks related to commodity prices,
investment values, interest rates, currency exchange rates, inflation, and credit risk. To help
manage certain of these risks, TVA has entered into various derivative transactions, principally
commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures.
It is TVAs policy to enter into derivative transactions solely for hedging purposes and not for
speculative purposes.
The recorded amounts of certain of these derivative instruments are summarized in the table
below.
Mark-to-Market Value of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
At March 31 |
|
|
At September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
Inflation Swap |
|
$ |
|
|
|
$ |
22 |
|
Interest Rate Swap |
|
|
(122 |
) |
|
|
(131 |
) |
|
|
|
|
|
|
|
|
|
Currency Swaps: |
|
|
|
|
|
|
|
|
Sterling |
|
|
52 |
|
|
|
47 |
|
Sterling |
|
|
139 |
|
|
|
133 |
|
Sterling |
|
|
67 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
Swaptions: |
|
|
|
|
|
|
|
|
$1 Billion Notional |
|
|
(274 |
) |
|
|
(296 |
) |
$28 Million Notional |
|
|
(3 |
) |
|
|
(3 |
) |
$14 Million Notional |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Coal Contracts with Volume Options |
|
|
237 |
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
Purchase Power Option Contracts |
|
|
(8 |
) |
|
|
(22 |
) |
TVA has a financial trading program under which TVA can purchase swaps, options on swaps,
futures, and options on futures to hedge TVAs exposure to natural gas and fuel oil prices. At
March 31, 2007, TVA had 409 futures contracts outstanding under the program with an approximate
market value of $33 million, as shown in the following table.
Page 17 of 47
Financial Trading Program Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, 2007 |
|
|
March 31, 2007 |
|
|
|
Notional |
|
|
Contract |
|
|
Notional |
|
|
Contract |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
(in mmBtu) |
|
|
(in millions) |
|
|
(in mmBtu) |
|
|
(in millions) |
|
|
|
|
Futures contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial positions, beginning of period, net |
|
|
6,910,000 |
|
|
$ |
54 |
|
|
|
4,290,000 |
|
|
$ |
35 |
|
Purchased |
|
|
2,320,000 |
|
|
|
17 |
|
|
|
6,580,000 |
|
|
|
49 |
|
Settled |
|
|
(5,140,000 |
) |
|
|
(37 |
) |
|
|
(6,780,000 |
) |
|
|
(49 |
) |
Realized (losses) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net positions-long |
|
|
4,090,000 |
|
|
|
31 |
|
|
|
4,090,000 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap Futures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial positions, beginning of period, net |
|
|
|
|
|
|
|
|
|
|
1,822,500 |
|
|
|
11 |
|
Fixed portion |
|
|
387,500 |
|
|
|
3 |
|
|
|
387,500 |
|
|
|
3 |
|
Floating portion realized |
|
|
(387,500 |
) |
|
|
(3 |
) |
|
|
(2,210,000 |
) |
|
|
(12 |
) |
Realized (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net positions-long |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) at beginning of period, net |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(6 |
) |
Unrealized gain for the period |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain at end of period, net |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial positions at end of period, net |
|
|
4,090,000 |
|
|
$ |
33 |
|
|
|
4,090,000 |
|
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended March 31, 2007, TVA recognized realized losses of about
$3 million and $6 million, respectively, which were recorded as an increase to purchased power
expense. Unrealized gains at March 31, 2007, totaled about $2 million, representing an increase of
$10 million for the quarter. TVA deferred the $2 million unrealized gain as a regulatory liability
in accordance with its new FCA rate mechanism. TVA will continue to defer all financial trading
program unrealized gains or losses and record only realized gains or losses as purchased power
costs at the time the derivative instruments are settled.
5. Benefit Plans
TVA sponsors a defined benefit pension plan that covers most of its full-time employees, an
unfunded postretirement medical plan that provides for non-vested contributions toward the cost of
certain retirees medical coverage, and other postemployment benefits such as workers
compensation.
The following table provides the components of net periodic benefit cost for the plans.
TVA Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
Other Benefits |
|
Pension Benefits |
Other Benefits |
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
March 31 |
|
|
March 31 |
|
|
March 31 |
|
|
March 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Service cost |
|
$ |
30 |
|
|
$ |
31 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
60 |
|
|
$ |
63 |
|
|
$ |
3 |
|
|
$ |
4 |
|
Interest cost |
|
|
123 |
|
|
|
110 |
|
|
|
6 |
|
|
|
6 |
|
|
|
246 |
|
|
|
220 |
|
|
|
12 |
|
|
|
14 |
|
Expected return on plan assets |
|
|
(143 |
) |
|
|
(122 |
) |
|
|
|
|
|
|
|
|
|
|
(286 |
) |
|
|
(245 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service costs |
|
|
9 |
|
|
|
9 |
|
|
|
1 |
|
|
|
2 |
|
|
|
18 |
|
|
|
18 |
|
|
|
2 |
|
|
|
3 |
|
Amortization of losses |
|
|
21 |
|
|
|
33 |
|
|
|
2 |
|
|
|
4 |
|
|
|
41 |
|
|
|
66 |
|
|
|
4 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit |
|
$ |
40 |
|
|
$ |
61 |
|
|
$ |
11 |
|
|
$ |
14 |
|
|
$ |
79 |
|
|
$ |
122 |
|
|
$ |
21 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 18 of 47
The Board approved $75 million in pension contributions for 2007 with scheduled
contributions of $38 million and $37 million to be made in March and September, respectively.
During the six months ended March 31, 2007, TVA made $38 million in contributions to its pension
plan. TVA does not separately set aside assets to fund benefit costs other than pensions, but
rather funds such costs on an as-paid basis. TVA provided approximately $10 million during the six
months ended March 31, 2007, to fund these other benefits costs.
6. Project Write-Downs
During the first quarter of 2007, TVA recognized write-downs totaling
$22 million in
Operating and Maintenance expense on TVAs Statement of Income. These write-downs, related
to certain construction work in progress assets, were due to the cancellation and deferral of
certain projects. The largest write-down was $17 million for the deferral of the flue gas
desulphurization (scrubber) project at Unit 5 of TVAs Colbert Fossil Plant (Colbert Unit 5),
originally intended to be built in 2010. The scheduling of certain clean-air projects has shifted,
resulting in the deferral of the Colbert Unit 5 scrubber project until 2014. Because of the
extended deferral period, TVA charged the capitalized costs to earnings based on the uncertainty of
future benefit that would be realized from the work completed thus far once the project is
ultimately completed.
7. Legal Proceedings
TVA is 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.
Economy Surplus Power Case
On August 31, 1999, suit was filed against TVA in the United States District Court for the
Northern District of Alabama by Birmingham Steel Corporation, on behalf of itself and a class of
TVA industrial customers that contracted for economy surplus power. While Birmingham Steel
Corporation was the original class representative, it filed for bankruptcy and was excluded from
the class. Johns Manville Corporation was substituted as the class representative. The lawsuit
alleges that TVA overcharged for economy surplus power during the summer of 1998 by improperly
including some incremental costs when calculating the price of economy surplus power. The class
members seek over $100 million in damages. On April 18, 2006, the district court ruled on motions
for summary judgment filed by both sides. The court held that TVA improperly included charges for
approximately 500 hours of power purchased in advance and breached the contracts. The court
rejected TVAs position that the additional price charged for all hours represented actual
incremental costs incurred by TVA in supplying economy surplus power and thus was an appropriate
part of the economy surplus power contract price. The court granted the plaintiffs motion for
summary judgment on liability, even though it acknowledged that there are disputed factual issues
as to TVAs defenses. On July 31, 2006, the court reconsidered its decision on summary judgment
with respect to TVAs affirmative defenses and held that TVA is entitled to a trial on its
affirmative defenses. The parties engaged in mediation in December 2006. The parties have reached a
settlement agreement under which TVA will pay approximately $18 million to resolve the case. To be
effective, the settlement must be approved by the United States District Court of the Northern
District of Alabama, which has not yet occurred. The previously scheduled trial in this case has
been cancelled.
Case Against TVA and 22 Electric Cooperatives
On December 2, 2004, the United States District Court for the Middle District of Tennessee
dismissed a lawsuit filed by John McCarthy, Stan Cooper, Joe Sliger, Mike Bell, Don Rackley, Terry
Motley, Billy Borchert, Jim Foster, and Ryan Hargis on behalf of themselves and all others
similarly situated against TVA and the Middle Tennessee Electric Membership Cooperative,
Appalachian Electric Cooperative, Caney Fork Electric Corporation, Inc., Chickasaw Electric
Cooperative, Cumberland Electric Membership Corporation, Duck River Electric Membership
Corporation, Fayetteville Public Utilities, Forked Deer Electric Cooperative, Inc., Fort Loudoun
Electric Cooperative, Gibson Electric Membership Corporation, Holston Electric Cooperative, Inc.,
Meriwether Lewis Electric Cooperative, Mountain Electric Cooperative, Inc., Pickwick Electric
Cooperative, Plateau Electric Cooperative, Powell Valley Electric Cooperative, Sequachee Valley
Electric Cooperative, Southwest Tennessee Electric Membership Corporation, Tennessee Valley
Electric Cooperative, Tri-County Electric Membership Corporation, Tri-State Electric Membership
Corporation, Upper Cumberland Electric Membership Corporation, and Volunteer Energy Cooperative.
The lawsuit in part challenged TVAs practice of setting rates for electric power charged by
distributor customers through TVAs contracts with distributor customers. In granting the
defendants motions to dismiss, the court held that the claims alleging violations of state law
failed because the plaintiffs (consisting of Tennessee residents and customers of certain of the
cooperatives) had not completed the steps necessary to bring these claims in court.
Page 19 of 47
With respect to the claim against TVA, the court held that the alleged violations of federal law
failed as a matter of law because Congress had specifically authorized TVA to set the rates charged
by distributor customers through TVAs contracts with distributor customers. The plaintiffs
appealed to the United States Court of Appeals for the Sixth Circuit (Sixth Circuit), and on
October 17, 2006, the Sixth Circuit affirmed the district courts decision, holding, among other
things, that TVAs rates were not subject to judicial review and that TVA is not subject to
antitrust liability when doing so would interfere with TVAs purposes.
Global Warming Cases
On July 21, 2004, two lawsuits were filed against TVA in the United States District Court for
the Southern District of New York alleging that global warming is a public nuisance and that carbon
dioxide emissions from fossil-fuel electric generating facilities should be ordered abated because
they contribute to causing the nuisance. The first case was filed by various states (California,
Connecticut, Iowa, New Jersey, New York, Rhode Island, Vermont, and Wisconsin) and the City of New
York against TVA and other power companies. The second case, which alleges both public and private
nuisance, was filed against the same defendants by Open Space Institute, Inc., Open Space
Conservancy, Inc., and the Audubon Society of New Hampshire. The plaintiffs do not seek monetary
damages, but instead seek a court order requiring each defendant to cap its carbon dioxide
emissions and then reduce these emissions by an unspecified percentage each year for at least a
decade. In September 2005, the district court dismissed both lawsuits because they raised political
questions that should not be decided by the courts. The plaintiffs appealed to the U.S. Court of
Appeals for the Second Circuit (Second Circuit). Oral argument was held before the Second Circuit
on June 7, 2006, and the parties are awaiting a decision.
Case Involving 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 TVAs Colbert Fossil Plant, a coal-fired electric generating facility located in
Tuscumbia, Alabama. The plaintiffs allege that TVA made major modifications to one of the power
generating units, specifically Colbert Unit 5, without obtaining preconstruction permits (in
alleged violation of the Prevention of Significant Deterioration (PSD) program and the
Nonattainment New Source Review (NNSR) program) and without complying with emission standards (in
alleged violation of the New Source Performance Standards (NSPS) program). The plaintiffs seek
injunctive relief; civil penalties of $25,000 per day for each violation on or before January 30,
1997, and $27,500 per day for each violation after that date; an order that TVA pay up to $100,000
for beneficial mitigation projects; and costs of litigation, including attorney and expert witness
fees. On November 29, 2005, the district court held that sovereign immunity precluded the
plaintiffs from recovering civil penalties against TVA. On January 17, 2006, the district court
dismissed the action, on the basis that plaintiffs failed to provide adequate notice of NSPS claims
and that the statute of limitations curtailed the PSD and NNSR claims. The plaintiffs appealed to
the U.S. Court of Appeals for the Eleventh Circuit (Eleventh Circuit) on January 25, 2006.
Briefing of the appeal to the Eleventh Circuit was completed in July 2006. Oral argument of the
appeal was held on January 11, 2007. If the decision is reversed on appeal, there is a reasonable
possibility that TVA will be ordered to install additional controls on Colbert Unit 5.
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 TVAs motion to dismiss the lawsuit on statute of limitation
grounds. The plaintiffs motion for reconsideration was denied, and they appealed to the Sixth
Circuit. Amicus curiae briefs supporting the plaintiffs appeal have been filed by New York,
Connecticut, Illinois, Iowa, Maryland, New Hampshire, New Jersey, New Mexico, Rhode Island,
Kentucky, Massachusetts, and Pennsylvania. Several Ohio utilities filed an amicus curiae brief
supporting TVA. Briefing of the appeal to the Sixth Circuit was completed in May 2006. Oral
argument was held on September 18, 2006, and 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.
However, TVA is already installing or has installed the control equipment that plaintiffs seek to
require of TVA in this case, and it is unlikely that an adverse decision will result in substantial
additional costs to TVA.
Page 20 of 47
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 Alabamas 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 courts
decision to the Eleventh Circuit. On November 22, 2005, the Eleventh Circuit affirmed the district
courts dismissal of the claims for civil penalties, but held that the Alabama de minimis rule was
not applicable because Alabama had not yet obtained Environmental Protection Agency (EPA)
approval of that rule. The case was remanded to the district court for further proceedings, and the
plaintiffs filed a motion for summary judgment. On May 23, 2006, the district court issued orders
staying the matter until a decision is issued in a CAA case accepted by the United States Supreme
Court (the Supreme Court), United States v. Duke Energy; referring the action to mediation to be
completed before the close of business on December 15, 2006, unless the district court extends the
deadline; and denying as moot the plaintiffs motions to hold TVA liable (with leave to file again,
if necessary, after the stay is lifted). On May 26, 2006, the plaintiffs asked the district court
to reconsider its orders and in the alternative to allow an interlocutory appeal, and on July 5,
2006, the district court denied plaintiffs motion. Mediation was unsuccessful. On January 22,
2007, the district court partially lifted the stay on the issue of liability, and on March 5, 2007,
the district court fully lifted the stay. On April 5, 2007, the plaintiffs moved for summary
judgment. No trial date has been set.
Case Brought by North Carolina Alleging Public Nuisance
On January 30, 2006, North Carolinas Attorney General filed suit against TVA in the United
States District Court for the Western District of North Carolina alleging that TVAs operation of
its coal-fired power plants in Tennessee, Alabama, and Kentucky constitute public nuisances. On
April 3, 2006, TVA moved to dismiss the suit on grounds that the case is not suitable for judicial
resolution because of separation of powers principles, including the fact that these matters are
based on policy decisions left to TVAs discretion in its capacity as a government agency and thus
are not subject to tort liability (the discretionary function doctrine), as well as the Supremacy
Clause. In July 2006, the court denied TVAs motion and set the trial for the term of court
beginning October 2007. On August 4, 2006, TVA filed a motion requesting permission to file an
interlocutory appeal with the United States Court of Appeals for the Fourth Circuit (the Fourth
Circuit), which the district court granted on September 7, 2006. On September 21, 2006, TVA
petitioned the Fourth Circuit to allow the interlocutory appeal. The Fourth Circuit granted the
petition, but the district court did not stay the case during the appeal. Briefing of the appeal
to the Fourth Circuit was completed in January 2007, and the case is set for oral argument before
the Fourth Circuit during the term of court beginning in September 2007. Trial remains scheduled
in the district court for the term of the court which begins in October 2007.
Case Involving North Carolinas Petition to the EPA
In 2005, the State of North Carolina petitioned the EPA under Section 126 of the CAA to impose
additional emission reduction requirements for sulfur dioxide and nitrogen oxides emitted by
coal-fired power plants in 13 states, including states where TVAs coal-fired power plants are
located. In March 2006, the EPA denied the North Carolina petition primarily on the basis that the
Clean Air Interstate Rule remedies the problem. In June 2006, North Carolina filed a petition for
review of EPAs decision with the United States Court of Appeals for the District of Columbia
Circuit.
Case Arising out of Hurricane Katrina
In April 2006, TVA was added as a defendant to a class action lawsuit brought in the United
States District Court for the Southern District of Mississippi by 14 residents of Mississippi
allegedly injured by Hurricane Katrina. The plaintiffs sued seven large oil companies and an oil
company trade association, three large chemical companies and a chemical trade association, and 31
large companies involved in the mining and/or burning of coal, including TVA and other utilities.
The plaintiffs allege that the defendants greenhouse gas emissions contributed to global warming
and were a proximate and direct cause of Hurricane Katrinas increased destructive force. The
plaintiffs are seeking monetary damages among other relief. TVA has moved to dismiss the complaint
on grounds that TVAs operation of its coal-fired plants is not subject to tort liability due to
the discretionary function doctrine.
Page 21 of 47
East Kentucky Power Cooperative Transmission Case
In April 2003, Warren Rural Electric Cooperative Corporation (Warren) notified TVA that it
was terminating its TVA power contract. Warren then entered into an arrangement with East Kentucky
Power Cooperative (East Kentucky) under which Warren would become a member of East Kentucky, and
East Kentucky would supply power to Warren after its power contract with TVA expires in 2009. After
agreeing to become Warrens power supplier, East Kentucky asked TVA to provide transmission service
to East Kentucky for its service to Warren. TVA denied the request on the basis that, under the
anti-cherrypicking provision, it was not required to provide the requested transmission service.
(With the exception of wheeling power to Bristol, Virginia, the anti-cherrypicking provision
precludes TVA from being ordered to wheel another suppliers power to a customer if the power would
be consumed within TVAs defined service territory.) East Kentucky then asked to interconnect its
transmission system with the TVA transmission system in three places that are currently delivery
points through which TVA supplies power to Warren. TVA did not agree to provide the
interconnections, and East Kentucky asked the Federal Energy Regulatory Commission (FERC) to
order TVA to provide the interconnections. In January 2006, FERC issued a final order directing TVA
to interconnect its transmission facilities with East Kentuckys system at three locations on the
TVA transmission system. On August 11, 2006, TVA filed an appeal in the U.S. Court of Appeals for
the District of Columbia Circuit seeking review of this order, on the grounds that this order
violated the anti-cherrypicking provision. On December 7, 2006, Warren announced its intention to
withdraw its notice to terminate its existing power contract. On January 10, 2007, TVA and Warren
executed an agreement under which Warren rescinded its notice of termination and the parties
extended the term of the TVA power contract through June 11, 2016. Given this agreement, East
Kentucky no longer needs to establish interconnections to TVAs transmission system. Accordingly,
it is likely that the FERC proceeding and the resulting litigation will eventually be dismissed and
not proceed to a conclusion.
Claim Involving Areva Fuel Fabrication
On November 9, 2005, TVA received two invoices totaling $76 million from 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
provided fuel fabrication services for TVAs Bellefonte Nuclear Plant. AREVAs 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 Officers 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 is reviewing the complaint and preparing its response.
Notification of Potential Liability for Ward Transformer Site
TVA has been notified by one of the parties involved with clean-up of the Ward Transformer
(Ward) Superfund Site, a facility located in Raleigh, North Carolina, that it considers TVA a
potentially responsible party and intends to pursue a claim against TVA. The Ward site is one of
two non-TVA areas identified in TVAs Annual Report for which TVA was unable to estimate its
potential liability. Under the Comprehensive Environmental Response, Compensation, and Liability
Act (CERCLA), any entity which arranges for disposal of a CERCLA hazardous substance at a site
may bear liability for the cost of cleaning up the site. There is evidence that in the summer of
1974 TVA sent transformers to Ward that contained PCBs. Several responsible parties have entered
into a settlement agreement with EPA to clean up on-site contamination at the site, and the cost of
the on-site cleanup is currently estimated to be $20 million. EPA is also investigating off-site
contamination from Ward operations, which may extend to the Neuse River and includes water bodies
in a county and state park. The State of North Carolina has issued fish consumption advisories due
to PCBs in areas up to 20 miles downstream of the Ward site. The expansion of the area believed to
have been contaminated offsite and the potential for assessments of natural resource damages to
liable parties could substantially raise the cleanup costs. As yet there is no formal estimate of
the costs associated with this site or any potential damages. It is unknown at this time what
level of liability, if any, TVA will have in these matters, whether it will be required to
contribute, and, if so, how much such a contribution would be.
Page 22 of 47
TVA is engaged in various administrative and legal proceedings arising from employment
disputes. These matters are governed by federal law and involve issues typical of those encountered
in the ordinary course of business of a utility. They may include allegations of discrimination or
retaliation (including retaliation for raising nuclear safety or environmental concerns), wrongful
termination, and failure to pay overtime. Adverse outcomes in these proceedings would not normally
be material to TVAs 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.
In accordance with SFAS No. 5, Accounting for Contingencies, TVA had accrued approximately
$21 million with respect to the proceedings described above as of March 31, 2007, as well as
approximately $12 million with respect to other proceedings that have arisen in the normal course
of TVAs business. No assurance can be given that TVA will not be subject to significant
additional claims and liabilities. If actual liabilities significantly exceed the estimates made,
TVAs results of operations, liquidity, and financial condition could be materially adversely
affected.
8. Subsequent Events
Significant Litigation to Which TVA Is Not a Party
On April 2, 2007, in Massachusetts v. EPA, a case concerning whether EPA has the authority and
duty to regulate carbon dioxide emissions under the CAA, the Supreme Court found that greenhouse
gases, including carbon dioxide, are pollutants under the CAA and thus EPA does have the authority
to regulate these gases. The Supreme Court also concluded that EPAs refusal to regulate these
pollutants was based on impermissible reasons, and remanded the case to EPA to ground its reasons
for action or inaction in the statute. While this case focused on carbon dioxide emissions from
motor vehicles, it sets a precedent for regulation in other industrial sectors, such as the
electric utility industry.
On April 2, 2007, the Supreme Court also issued an opinion in the case of Unites States v.
Duke Energy, vacating the ruling of the Fourth Circuit in favor of Duke Energy and against EPA in
EPAs 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 under EPAs 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
significantly 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.
TVA is currently involved in two NSR cases (one involving Bull Run and another at Colbert).
See Note 7 in this Quarterly Report for a discussion of these cases. The Supreme Courts rejection
of the hourly standard for emissions testing could undermine one of TVAs 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 Courts decision could encourage such suits, which are likely to involve units where
emission control systems such as scrubbers and selective catalytic reduction (SCR) systems are
not installed, under construction, or planned to be installed in the relatively near term.
At this point, no estimate can be made regarding the impact of any such suits on TVA.
Debt Securities
In April 2007, TVA issued $4 million of electronotes®
with an interest rate of five
percent which mature in 2014 and are callable beginning in 2008.
Page 23 of 47
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions except where noted)
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
explains the results of operations and general financial condition of the Tennessee Valley
Authority (TVA). The MD&A should be read in conjunction with the accompanying financial
statements and TVAs Annual Report on Form 10-K for the fiscal year ended September 30, 2006 (the
Annual Report).
Business Overview
Financial Outlook
As of March 31, 2007, TVAs net income for 2007 is forecasted to be about $60 million, or 13.9
percent, less than budgeted, primarily because of mild winter weather and dry conditions in the
Tennessee Valley during the first half of 2007. Power sales are 2.8 percent below budgeted amounts
for the six months ended March 31, 2007, as a result of decreased demand primarily due to
unseasonable weather. Hydro generation, TVAs cheapest source of power, is 27.8 percent below
budget for the six months ended March 31, 2007, primarily due to the dry conditions. The
three-month period of January through March was the driest on record in the eastern Tennessee
Valley in 118 years. Rainfall was 67 percent of normal and runoff was 62 percent of normal for the
eastern Tennessee Valley. It is assumed that the dry conditions will continue throughout the
remainder of the year. Because of the lack of rainfall and runoff, TVA is operating its reservoir
system to help ensure there is sufficient water for navigation, industrial process cooling, and
other purposes.
The effects of the weather on sales, additional purchased power due to more outage days, and
lower rated electrical capabilities of generating equipment (deratings), along with higher fuel
prices have increased TVAs delivered cost of power in 2007. Additionally, these factors
contributed to a lower balance of cash and cash equivalents on hand as of March 31, 2007. In
response, management has identified cost reductions in operating and maintenance activities to be
implemented over the remainder of the year.
Strategic Plan
On March 30, 2007, President and Chief Executive Officer (CEO) Tom Kilgore presented a
report to the TVA Board of Directors (the TVA Board) on the development of the 2007 Strategic
Plan which would provide strategic direction for TVA in light of the significant changes in the
electric utility industry landscape during the past several years. Retail competition in the
country has stalled and wholesale competition is evolving slowly. Several new issues have emerged
including escalating fuel prices, a growing need to learn how to use energy more efficiently, and
an increasing desire for a cleaner environment. The Strategic Plan will focus on leveraging TVAs
strengths and addressing customer, financial, operational, and organizational actions necessary for
TVA to support the regions future growth and success in a rapidly changing business environment.
The proposed policy-level plan would provide strategic direction for the next ten years. The plan
is out for public comment. The TVA Board will consider adoption of the plan thereafter. See Item
7, Managements Discussion and Analysis of Financial Condition and Results of Operations Business
Overview in TVAs Annual Report for more information regarding TVAs strategy and the challenges
that TVA may face.
New Generation
In order to help balance the use of purchased power and its own generation to meet growing
power supply needs in its service area, TVA purchased two additional combustion turbine facilities
in December 2006. The Gleason facility was available for service in January 2007, and the Marshall
County facility is scheduled to be available for service during the third quarter of 2007.
TVA expects that Browns Ferry Nuclear Plant Unit 1 (Browns Ferry Unit 1) will return to
service in the spring of 2007. A major project milestone in achieving that goal was realized when
fuel loading was completed in December 2006. The cost of the project may be slightly more than
TVAs original estimate because of steam dryer modifications, the selection of Browns Ferry Unit 1
as the lead plant for extended power up-rate, and schedule adjustments that optimize timing with
the Browns Ferry Nuclear Plant Unit 2 refueling outage. Even with the possible increase over the
projects budget, restart costs are still projected to be about $1.8 billion (exclusive of
allowance for funds used during construction (AFUDC) and asset retirement obligation costs).
Browns Ferry Unit 1 is expected initially to provide additional generating capacity of
approximately 1,150 megawatts and eventually to provide
Page 24 of 47
1,280 megawatts of capacity. At March 31, 2007, the restart work at Browns Ferry Unit 1 was
approximately 99.5 percent complete. The cost of the project as of March 31, 2007, was $1,785
million excluding AFUDC of $233 million.
Another option being evaluated by TVA for additional generating capacity is the completion of
Watts Bar Nuclear Plant Unit 2 (Watts Bar Unit 2) upon which construction was halted in 1985.
TVA continues to consider whether to complete the Watts Bar Unit 2 reactor and is in the process of
conducting a detailed scoping, estimating and planning study to determine the projects cost and
scheduling. Separately, TVA has prepared a draft report evaluating potential environmental impacts
under the requirements of the National Environmental Policy Act. The draft environmental report
states that completing construction of the unit is TVAs preferred course of action, although TVA
will make no decision on whether to complete Watts Bar Unit 2 until the scoping study is complete.
During the second quarter of 2007, the TVA Board authorized the purchase of the Tenaska
Brownsville site in southwest Tennessee. The Tenaska site formerly housed three combustion
turbines. Although the combustion turbines are no longer on the site, some of the plant equipment
and buildings remain, and the site can be converted to a natural gas combined-cycle facility
capable of generating about 600 to 900 megawatts of electricity in the summer. TVA is currently
evaluating alternatives for the completion of the site.
In addition, during the second quarter of 2007, the TVA Board approved leasing the Caledonia
combined-cycle facility located near Columbus, Mississippi, subject to the negotiation of a lease
agreement. The Caledonia combined-cycle facility consists of three combined-cycle units with a
nominal capacity of 813 megawatts and a capacity of 750 megawatts in the summer. Although TVA is
still negotiating the lease for the Caledonia facility, TVA has already begun receiving power from
the facility under a conversion services agreement.
TVA is also working with distributor customers to explore distributor ownership and
development opportunities that may exist related to new power generation facilities. Such
agreements may potentially provide new sources of power for use in meeting power demand in the
areas served by TVA and distributors of TVA power in addition to the actions reported above.
Service Reliability
On January 31, 2007, TVA met an all-time winter peak of 30,320 megawatts with no connection
point interruptions on TVAs system.
Continuing dry conditions may have further impact on TVAs operations for the remainder of the
fiscal year in several areas. There may be a loss of hydro generation due to balancing water for
generation with potential summer reliability thermal issues related to the temperature of cooling
water discharged from fossil plants. To a lesser degree, low water levels may result in disruption
of fuel delivery by barge. TVA management is currently reviewing these issues and expects to have
plans in place before the anticipated increased electricity demand during the summer months.
In addition, TVA has participated in meetings to address deficiencies in hydro production on
the Cumberland River due to safety issues resulting from increased seepage rates at the U.S. Army
Corps of Engineers Wolf Creek Dam. In light of these safety issues, the Southeastern Power
Administration (SEPA) has not been able to provide TVA and other customers with all of the power
that it is required to provide under its contractual arrangements with these parties. SEPAs
performance under these arrangements will continue to be monitored to assess how the deficiencies
in hydro production will affect TVA and other customers with an interest in the output of the
Cumberland River system.
The scheduled outage of Unit 3 at TVAs Paradise Fossil Plant (which began on March 17, 2007,
and was to end on April 29, 2007) has been extended through May 30, 2007, to correct an issue with
a turbine rotor. During this additional period, TVA expects that the plants output will be
reduced by 1,026 megawatts. TVA is using other generating assets to replace the lost power, and it
is not yet known if TVA will have to purchase additional power to replace the output from Paradise
Unit 3 or what the ultimate financial impact of the extended outage will be.
The Federal Energy Policy Act of 2005 authorized the establishment of an Electric Reliability
Organization (ERO) with oversight powers granted by the Federal Energy Regulatory Commission
(FERC). This legislation makes compliance with ERO reliability standards mandatory and
enforceable. All users, owners, and operators of the bulk electric system, including TVA, are
subject to these standards. Effective July 2006, FERC selected the North American Electric
Reliability Corporation to serve as the ERO. Beginning June 4, 2007, fines may be imposed for
non-compliance with ERO reliability standards.
Page 25 of 47
Increased Fuel and Purchased Power Costs
In July 2006, the TVA Board approved the implementation of a fuel cost adjustment (FCA) to
be applied quarterly, beginning on October 1, 2006, as a mechanism to adjust TVAs rates to reflect
changing fuel and purchased power costs from the amounts included in TVAs base rates. Due to the
revised forecasts for the second quarter of 2007, the adjustment implemented on April 1, 2007, was
an increase of 0.84 cents per kilowatt-hour and is expected to produce an estimated $29 million in
revenue during the third quarter of 2007. The FCA had no effect on rates prior to January 1, 2007.
The FCA was initially set to zero and had its first impact on rates beginning January 1, 2007, at
which time rates increased 0.01 cents per kilowatt-hour. As of March 31, 2007, TVA had recognized
a regulatory asset of $36 million representing deferred power costs to be recovered through the FCA
adjustments in future periods.
Liquidity and Capital Resources
Sources of Liquidity
TVAs current liabilities exceed current assets because of the continued use of short-term
debt as a funding source to fund cash needs as well as scheduled maturities of long-term debt. To
meet short-term cash needs and contingencies, TVA depends on various sources of liquidity. TVAs
primary sources of liquidity are cash on hand and cash from operations, proceeds from the issuance
of short-term and long-term debt, and proceeds from borrowings under TVAs $150 million note with
the U.S. Treasury. Other sources of liquidity include two $1.25 billion credit facilities with a
national bank as well as occasional proceeds from other financing arrangements including call
monetization transactions and sales of receivables and loans.
Summary Cash Flows. A major source of TVAs liquidity is operating cash flows resulting from
the generation and sales of electricity. A summary of cash flow components for the six months ended
March 31, 2007, and 2006, follows:
Summary Cash Flows
For the Six Months Ended March 31
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
|
Cash provided by (used in) |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
945 |
|
|
$ |
793 |
|
Investing activities |
|
|
(880 |
) |
|
|
(797 |
) |
Financing activities |
|
|
(219 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents |
|
$ |
(154 |
) |
|
$ |
(37 |
) |
|
|
|
|
|
|
|
Issuance of Debt. TVA issued power bonds of $28 million during the six months ended March
31, 2007, while redeeming power bonds of $464 million. In April 2007, TVA issued $4 million of
electronotes® with an interest rate of five percent which mature in 2014 and are
callable beginning in 2008. For more information regarding TVAs debt activities, see Notes 3 and
8.
Credit Facilities. In the event of shortfalls in cash resources, TVA has short-term funding
available in the form of two $1.25 billion short-term revolving credit facilities. In November
2006, TVA renewed the credit facility with the November 12, 2006, maturity date. The new maturity
date for this credit facility is November 11, 2007. In May 2006, TVA renewed the credit facility
with the May 16, 2007, maturity date. The new maturity date for this credit facility is May 14,
2008. The interest rate on any borrowing under either of these facilities is variable and based on
market factors and the rating of TVAs senior unsecured long-term non-credit enhanced debt. TVA is
required to pay an unused facility fee on the portion of the total $2.5 billion against which TVA
has not borrowed. The fee may fluctuate depending on the non-enhanced credit ratings on TVAs
senior unsecured long-term debt. There were no outstanding borrowings under the facilities at March
31, 2007. TVA anticipates renewing each credit facility from time to time.
Page 26 of 47
Comparative Cash Flow Analysis
2007 Compared to 2006
Net cash provided by operating activities increased $152 million from $793 million to $945
million for the six months ended March 31, 2006, and 2007, respectively. This increase resulted
from:
|
|
|
An increase in cash provided by operating revenues of $261 million resulting
primarily from higher average rates and increased demand for industries directly served
in the first six months of 2007; |
|
|
|
|
Less cash paid for interest of $27 million in the first six months of 2007; and |
|
|
|
|
Proceeds from customers of $34 million in the first six months of 2007 related to a future generation reserve. |
These items were partially offset by:
|
|
|
An increase in cash paid for fuel and purchased power of $145 million due to
higher volume of fuel and purchased power as well as increased market prices for fuel; |
|
|
|
|
An increase in tax equivalent payments of $30 million; and |
|
|
|
|
An increase in expenditures for nuclear refueling outages of $43 million due to
two planned outages in the first six months of the current year compared to one planned
outage in the prior year. |
Changes in components of working capital resulted in a $12 million source of cash for the
first six months of 2007 compared to a $61 million use of cash for the same period in 2006. This
change resulted primarily from:
|
|
|
A smaller increase in inventories and other of $53 million in the first six
months of 2007 due to higher beginning fuel inventories in the current year resulting
in decreased purchases of coal; and |
|
|
|
|
A smaller decrease in accounts payable and accrued liabilities of $34 million
in the first six months of 2007 due to timing of accruals and an increase in
distributor revenues collected in advance. |
These items were partially offset by:
|
|
|
An $8 million reduction in accounts receivable collections; and |
|
|
|
|
A smaller increase in accrued interest of $6 million. |
Cash used in investing activities increased $83 million from the first six months of 2006 to
the first six months of 2007. The increase was primarily due to:
|
|
|
An increase in expenditures for capital projects of $85 million primarily due
to increased expenditures of $84 million related to the Watts Bar Steam Generator
Replacement project and a corresponding increase in AFUDC of $20 million, partially
offset by a decrease in expenditures for the Browns Ferry Unit 1 restart of $30
million; and |
|
|
|
|
An increase in expenditures of $98 million to acquire the Gleason and Marshall County combustion turbine facilities. |
These items were partially offset by:
|
|
|
A decrease in expenditures for the enrichment and fabrication of nuclear fuel
of $64 million related to the restart of Browns Ferry Unit 1; and |
|
|
|
|
A larger source from collateral deposits in the first six months of 2007 of $35
million as compared to the first six months of 2006. See Note 1 Summary of
Significant Accounting Policies Restricted Cash and Investments. |
Page 27 of 47
Net cash used in financing activities increased $186 million from the first six months of 2006
to the first six months of 2007 primarily due to:
|
|
|
A decrease of $40 million in long-term debt issues; and |
|
|
|
|
An increase in redemptions and repurchases of long-term debt of $309 million. |
These items were partially offset by an increase in net issuances of short-term debt of $165
million in the first six months of 2007 compared to the same period in the prior year.
Cash Requirements and Contractual Obligations
The estimated cash requirements and contractual obligations for TVA as of March 31, 2007, are
detailed in the following table.
Commitments & Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2007 (1) |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
Thereafter |
|
|
|
|
Debt (2) |
|
$ |
22,711 |
|
|
$ |
2,638 |
|
|
$ |
90 |
|
|
$ |
2,030 |
|
|
$ |
63 |
|
|
$ |
1,015 |
|
|
$ |
16,875 |
|
Interest payments relating to debt |
|
|
21,099 |
|
|
|
600 |
|
|
|
1,173 |
|
|
|
1,117 |
|
|
|
1,063 |
|
|
|
1,032 |
|
|
|
16,114 |
|
Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating |
|
|
114 |
|
|
|
22 |
|
|
|
40 |
|
|
|
26 |
|
|
|
13 |
|
|
|
5 |
|
|
|
8 |
|
Capital |
|
|
240 |
|
|
|
31 |
|
|
|
59 |
|
|
|
58 |
|
|
|
57 |
|
|
|
29 |
|
|
|
6 |
|
Power purchase obligations |
|
|
4,596 |
|
|
|
117 |
|
|
|
162 |
|
|
|
171 |
|
|
|
173 |
|
|
|
174 |
|
|
|
3,799 |
|
Purchase obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel purchase obligations |
|
|
3,342 |
|
|
|
1,029 |
|
|
|
543 |
|
|
|
504 |
|
|
|
482 |
|
|
|
223 |
|
|
|
561 |
|
Other obligations |
|
|
454 |
|
|
|
107 |
|
|
|
205 |
|
|
|
125 |
|
|
|
8 |
|
|
|
2 |
|
|
|
7 |
|
Payments on other financings |
|
|
1,507 |
|
|
|
35 |
|
|
|
89 |
|
|
|
85 |
|
|
|
89 |
|
|
|
95 |
|
|
|
1,114 |
|
Payment to the U.S. Treasury (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of appropriation investment |
|
|
150 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
50 |
|
Return on appropriation investment |
|
|
282 |
|
|
|
20 |
|
|
|
23 |
|
|
|
22 |
|
|
|
21 |
|
|
|
20 |
|
|
|
176 |
|
Retirement plans |
|
|
44 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
54,539 |
|
|
$ |
4,663 |
|
|
$ |
2,404 |
|
|
$ |
4,158 |
|
|
$ |
1,989 |
|
|
$ |
2,615 |
|
|
$ |
38,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
(1) |
|
Period April 1 September 30, 2007. |
|
(2) |
|
Does not include noncash items of foreign currency valuation loss of $252 million and
unamortized discount of $178 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. Interest is accrued daily at a rate determined by the United States Secretary
of the Treasury each month based on the average rate on outstanding marketable obligations of the
United States with maturities of one year or less. During 2006, the daily average outstanding
balance was $131 million. TVAs 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 March 31, 2007. Accordingly, the Commitments and Contingencies table
does not include any outstanding payment obligations to the U.S. Treasury for this note at March
31, 2007. |
In addition to the cash requirements above, TVA has contractual obligations to provide
power related to energy prepayments. See Note 1 Energy Prepayment Obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2007* |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
Thereafter |
|
|
|
|
Energy prepayment obligations |
|
$ |
1,191 |
|
|
$ |
53 |
|
|
$ |
106 |
|
|
$ |
105 |
|
|
$ |
105 |
|
|
$ |
105 |
|
|
$ |
717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
* |
|
Period April 1 September 30, 2007. |
Bear Creek Dam is experiencing foundation problems as evidenced by seepage through the
foundation of the dam. A Draft Environmental Impact Statement is scheduled for publication in May
2007. Preliminary cost estimates of alternative solutions identified range from $20 million to $40
million, and these amounts are not included in the table above. Additional detailed engineering
and site work is needed to finalize the estimates. Additional reviews will also be required by the
U. S. Fish and Wildlife Service, the U.S. Army Corps of Engineers, and stakeholders/focus groups.
Page 28 of 47
Results of Operations
Financial Results
The following table compares operating results and selected statistics for the three and six
months ended March 31, 2007, and 2006.
Summary Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31 |
|
|
March 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
Operating revenues |
|
$ |
2,277 |
|
|
$ |
2,048 |
|
|
$ |
4,381 |
|
|
$ |
4,100 |
|
Operating expenses |
|
|
(1,891 |
) |
|
|
(1,766 |
) |
|
|
(3,679 |
) |
|
|
(3,593 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
386 |
|
|
|
282 |
|
|
|
702 |
|
|
|
507 |
|
Other income |
|
|
18 |
|
|
|
16 |
|
|
|
30 |
|
|
|
28 |
|
Unrealized gain on derivative contracts, net |
|
|
16 |
|
|
|
21 |
|
|
|
31 |
|
|
|
35 |
|
Interest expense, net |
|
|
(294 |
) |
|
|
(305 |
) |
|
|
(586 |
) |
|
|
(609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
126 |
|
|
$ |
14 |
|
|
$ |
177 |
|
|
$ |
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales (millions of kWh) |
|
|
43,760 |
|
|
|
41,585 |
|
|
|
83,275 |
|
|
|
83,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating degree days (normal 1,874 and 3,194, respectively) |
|
|
1,632 |
|
|
|
1,609 |
|
|
|
2,859 |
|
|
|
2,962 |
|
Cooling degree days (normal 9 and 68, respectively) |
|
|
63 |
|
|
|
20 |
|
|
|
126 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined degree days (normal 1,883 and 3,262, respectively) |
|
|
1,695 |
|
|
|
1,629 |
|
|
|
2,985 |
|
|
|
3,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the second quarter of 2007 was $126 million compared to net income of $14
million for the same period in 2006. Significant items contributing to the $112 million increase
in net income for the three months ended March 31, 2007, as compared to the three months ended
March 31, 2006, included a $229 million increase in operating revenues, an $11 million decrease in
net interest expense, and a $2 million increase in other income. These items were partially offset
by a $125 million increase in operating expenses and a $5 million decrease in unrealized gain on
derivative contracts, net.
Net income through the first two quarters of 2007 was $177 million compared to a net loss of
$39 million for the same period in 2006. Significant items contributing to the $216 million change
in net income for the six months ended March 31, 2007, as compared to the six months ended March
31, 2006, included a $281 million increase in operating revenues, a $23 million decrease in net
interest expense, and a $2 million increase in other income. These items were partially offset by
an $86 million increase in operating expenses and a $4 million decrease in unrealized gain on
derivative contracts, net.
Operating Revenues. Below is a detailed table of operating revenues for the three and six
months ended March 31, 2007, and 2006.
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31 |
|
March 31 |
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
Sales of Electricity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipalities and cooperatives |
|
$ |
1,922 |
|
|
$ |
1,745 |
|
|
|
10.1 |
% |
|
$ |
3,664 |
|
|
$ |
3,508 |
|
|
|
4.4 |
% |
Industries directly served |
|
|
301 |
|
|
|
245 |
|
|
|
22.9 |
% |
|
|
603 |
|
|
|
475 |
|
|
|
26.9 |
% |
Federal agencies and other |
|
|
26 |
|
|
|
32 |
|
|
|
(18.8 |
%) |
|
|
51 |
|
|
|
58 |
|
|
|
(12.1 |
%) |
Other revenue |
|
|
28 |
|
|
|
26 |
|
|
|
7.7 |
% |
|
|
63 |
|
|
|
59 |
|
|
|
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
$ |
2,277 |
|
|
$ |
2,048 |
|
|
|
11.2 |
% |
|
$ |
4,381 |
|
|
$ |
4,100 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 29 of 47
Significant items contributing to the $229 million increase in operating revenues for the
three months ended March 31, 2007, as compared to the three months ended March 31, 2006, include:
|
|
|
A $177 million increase in revenues from municipalities and cooperatives
attributable to increased sales of 6.9 percent and an increase in average rates of 4.1
percent; and |
|
|
|
|
A $56 million increase in revenues from industries directly served attributable
to increased sales of 0.1 percent and an increase in average rates of 23.4 percent. |
Average rates increased primarily due to the 10.0 percent increase in firm wholesale electric
rates effective April 1, 2006, partially offset by the 4.5 percent decrease in firm wholesale
electric rates effective October 1, 2006.
These items were partially offset by a $5 million decrease in revenues from off-system sales
(included in Federal Agencies and Other) due to decreased sales of 58.4
percent and a decrease in average rates of 20.8 percent, reflecting unfavorable market conditions.
Significant items contributing to the $281 million increase in operating revenues for the six
months ended March 31, 2007, as compared to the six months ended March 31, 2006, include:
|
|
|
A $156 million increase in revenues from municipalities and cooperatives
attributable to increased sales of 0.1 percent and an increase in average rates of 5.2
percent; and |
|
|
|
|
A $128 million increase in revenues from industries directly served
attributable to increased sales of 1.3 percent and an increase in average rates of 26.0
percent. |
Average rates increased mainly due to the 10.0 percent increase in firm wholesale electric
rates effective April 1, 2006, partially offset by the 4.5 percent decrease in firm wholesale
electric rates effective October 1, 2006.
These items were partially offset by a $5 million decrease in revenues from federal agencies
directly served (included in Federal Agencies and Other) reflecting a
decrease in average rates of 2.0 percent and decreased sales of 8.1 percent, primarily as a result
of a decrease in demand by one of TVAs largest directly served federal agencies due to a change in
the nature and scope of its test programs.
A detailed table of electricity sales for the three and six months ended March 31, 2007, and
2006 is below.
Electricity Sales
(Millions of kWh)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31 |
|
March 31 |
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
Sales of electricity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipalities and cooperatives |
|
|
35,102 |
|
|
|
32,828 |
|
|
|
6.9 |
% |
|
|
66,009 |
|
|
|
65,932 |
|
|
|
0.1 |
% |
Industries directly served |
|
|
8,175 |
|
|
|
8,166 |
|
|
|
0.1 |
% |
|
|
16,283 |
|
|
|
16,078 |
|
|
|
1.3 |
% |
Federal agencies and other |
|
|
483 |
|
|
|
591 |
|
|
|
(18.3 |
%) |
|
|
983 |
|
|
|
1,050 |
|
|
|
(6.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales of electricity |
|
|
43,760 |
|
|
|
41,585 |
|
|
|
5.2 |
% |
|
|
83,275 |
|
|
|
83,060 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 30 of 47
A significant item contributing to the 2,175 million kilowatt-hour increase in
electricity sales for the three months ended March 31, 2007, as compared to the three months ended
March 31, 2006, was the 2,274 million kilowatt-hour increase in sales to municipalities and
cooperatives. The primary reason for the increase in sales was an increase in combined degree days
of 4.1 percent. Sales to municipalities and cooperatives react more to weather than other
categories of sales because residential power demand is more weather sensitive. During the three
months ended March 31, 2007, there were 23, or 1.4 percent, more heating degree days and 43, or
215.0 percent, more cooling degree days than during the three months ended March 31, 2006.
Note:
TVA uses weather degree days to measure the impact of weather on TVAs power operations. TVA
calculates weather degree days for each of the five largest cities in TVAs service area. If the
average temperature for a given day in one of these cities exceeds 65 degrees Fahrenheit, that city
will have cooling degree days for that day equal to the amount by which the average temperature for
that day exceeds 65 degrees Fahrenheit. Similarly, if the average temperature for a given day in
one of these cities is lower than 65 degrees Fahrenheit, that city will have heating degree days
for that day equal to the amount by which 65 degrees Fahrenheit exceeds the average temperature for
that day.
This increase was partially offset by:
|
|
|
A 28 million kilowatt-hour decrease in sales to federal agencies directly
served (included in Federal
Agencies and Other) primarily as a
result of a decrease in demand by one of TVAs largest directly served federal
agencies due to a change in the nature and scope of its test programs; and |
|
|
|
|
An 80 million kilowatt-hour decrease in off-system sales (included in
Federal Agencies and
Other) attributable to decreased
generation available for sale primarily as a result of the record-setting dry period. |
Significant items contributing to the 215 million kilowatt-hour increase in electricity sales
for the six months ended March 31, 2007, as compared to the six months ended March 31, 2006,
include:
|
|
|
A 77 million kilowatt-hour increase in sales to municipalities and
cooperatives due to favorable economic growth in the service area, partially offset by
a decrease in combined weather degree days of 3.7 percent; and |
|
|
|
|
A 205 million kilowatt-hour increase in sales to industries directly served
mainly as a result of increased sales to TVAs largest directly served industrial
customer to accommodate higher production levels at its facility, partially offset by
decreased sales to other large directly served industrial customers reflecting reduced
demand due to more unplanned outages at those facilities compared to the prior
period. |
These items were partially offset by a 72 million kilowatt-hour decrease in sales to
federal agencies directly served (included in
Federal Agencies and
Other)
primarily as a result of a decrease in demand by one of TVAs largest directly served federal
agencies due to a change in the nature and scope of its test programs.
Operating Expenses. Below is a detailed table of operating expenses for the three and six
months ended March 31, 2007, and 2006.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31 |
|
|
March 31 |
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel and purchased power |
|
$ |
824 |
|
|
$ |
717 |
|
|
|
14.9 |
% |
|
$ |
1,563 |
|
|
$ |
1,462 |
|
|
|
6.9 |
% |
Operating and maintenance |
|
|
576 |
|
|
|
567 |
|
|
|
1.6 |
% |
|
|
1,161 |
|
|
|
1,167 |
|
|
|
(0.5 |
%) |
Depreciation, amortization, and accretion |
|
|
382 |
|
|
|
389 |
|
|
|
(1.8 |
%) |
|
|
738 |
|
|
|
777 |
|
|
|
(5.0 |
%) |
Tax equivalents |
|
|
109 |
|
|
|
93 |
|
|
|
17.2 |
% |
|
|
217 |
|
|
|
187 |
|
|
|
16.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
1,891 |
|
|
$ |
1,766 |
|
|
|
7.1 |
% |
|
$ |
3,679 |
|
|
$ |
3,593 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 31 of 47
Significant drivers contributing to the $125 million increase in operating expenses for
the three months ended March 31, 2007, as compared to the three months ended March 31, 2006,
include:
|
|
|
A $10 million increase in fuel expense reflecting higher aggregate fuel cost per
kilowatt-hour net thermal generation of 0.2 percent, increased generation of 1.1 percent
and 159.1 percent at the coal-fired and combustion turbine plants, respectively, in part
because of lower hydroelectric generation, and a FCA deferral for fuel expense of $6
million. In accordance with the FCA methodology, TVA has deferred the amount of fuel costs
that were lower than the amount included in power rates for the first quarter of 2007.
This $6 million deferred amount will be refunded to customers in future FCA adjustments; |
|
|
|
|
A $97 million increase in purchased power expense due to higher volume acquired of
66.2 percent to accommodate for decreased total generation of 1.4 percent, partially
offset by a decreased average purchase price of 6.2 percent and a FCA deferral for
purchased power expense of $30 million. In accordance with the FCA methodology, TVA has
deferred the amount of purchased power costs that were higher than the amount included in
power rates for the first quarter of 2007. This $30 million deferred amount will be
charged to customers in future FCA adjustments; |
|
|
|
|
A $9 million increase in operating and maintenance expense mainly as a result of
increased outage and routine operating and maintenance costs at fossil-fired plants of $32
million due to more planned outages during the second quarter of 2007 and the significant
planned recovery work on the three Paradise coal-fired units, partially offset by
decreased pension financing costs of $22 million attributable to a 0.52 percent higher
discount rate and a 0.50 percent higher than expected long-term rate of return on pension
plan assets; and |
|
|
|
|
A $16 million increase in tax equivalent payments reflecting increased gross
revenues from the sale of power during 2006 as compared to 2005. |
These items were partially offset by a $7 million decrease in depreciation, amortization, and
accretion expense largely due to a $9 million decrease in depreciation expense primarily
attributable to the depreciation rate reduction for Browns Ferry Nuclear Plant reflecting the
20-year license extension approved on May 4, 2006, partially offset by a $2 million increase in
accretion expense mainly reflecting the adoption of FASB Interpretation (FIN) No. 47 and the
updated incremental accretion for Statement of Financial Accounting Standards (SFAS) No. 143.
Significant drivers contributing to the $86 million increase in operating expenses for the six
months ended March 31, 2007, as compared to the six months ended March 31, 2006, include:
|
|
|
A $36 million increase in fuel expense as a result of higher aggregate fuel cost per
kilowatt-hour net thermal generation of 9.2 percent and increased generation of 2.6
percent and 42.0 percent at the coal-fired and combustion turbine plants, respectively,
partially offset by a FCA deferral for fuel expense of $33 million. In accordance with the
FCA methodology, TVA has deferred the amount of fuel costs that were higher than the
amount included in power rates for the first two quarters of 2007. This $33 million
deferred amount will be charged to customers in future FCA adjustments; |
|
|
|
|
A $65 million increase in purchased power expense attributable to higher volume
acquired of 38.2 percent to accommodate for decreased total generation of 2.1 percent,
partially offset by a decreased average purchase price of 16.5 percent and a FCA deferral
for purchased power expense of $7 million. In accordance with the FCA methodology, TVA has
deferred the amount of purchased power costs that were higher than the amount included in
power rates for the first two quarters of 2007. This $7 million deferred amount will be
charged to customers in future FCA adjustments; and |
|
|
|
|
A $30 million increase in tax equivalent payments reflecting increased gross
revenues from the sale of power during 2006 as compared to 2005. |
Page 32 of 47
These items were partially offset by:
|
|
|
A $6 million decrease in operating and maintenance expense primarily due to
decreased pension financing costs of $45 million as a result of a 0.52 percent higher
discount rate and a 0.50 percent higher than expected long-term rate of return on pension
plan assets, partially offset by increased outage and routine operating and maintenance
costs at fossil-fired plants of $15 million due to more outages during the first six
months of 2007 and the significant planned recovery work on the three Paradise Fossil
Plant coal-fired units, a $17 million write-down of a scrubber project at TVAs Colbert
Fossil Plant (Colbert), and write-downs of $5 million relating to other construction
work-in-progress; and |
|
|
|
|
A $39 million decrease in depreciation, amortization, and accretion expense largely
due to a $45 million decrease in depreciation expense primarily attributable to the
depreciation rate reduction for Browns Ferry Nuclear Plant reflecting the 20-year license
extension approved on May 4, 2006, partially offset by a $6 million increase in accretion
expense mainly reflecting the adoption of FIN No. 47 and the updated incremental accretion
for SFAS No. 143. |
Other Income. Other income was $2 million higher for the three and six months ended March 31,
2007, as compared to the same periods in 2006, reflecting increased interest earnings on the
collateral deposit funds held by TVA. See note 1 Restricted Cash and Investments.
Unrealized Gain on Derivative Contracts, Net. Significant items contributing to the $5 million
decrease in net unrealized gain on derivative contracts for the three months ended March 31, 2007,
as compared to the three months ended March 31, 2006, include:
|
|
|
A $42 million smaller gain related to the mark-to-market valuation of swaption
contracts, from a $59 million gain in the second quarter of 2006 to a $17 million gain in
the second quarter of 2007; and |
|
|
|
|
A $30 million net change related to the mark-to-market valuation adjustment of an
interest rate swap contract, from a $30 million gain in the second quarter of 2006 to no
gain or loss in the second quarter of 2007. |
These items were partially offset by a $67 million smaller loss related to the mark-to-market
valuation adjustment of an embedded call option, from a $68 million loss in the second quarter of
2006 to a $1 million loss in the second quarter of 2007.
Significant items contributing to the $4 million decrease in net unrealized gain on derivative
contracts for the six months ended March 31, 2007, as compared to the same period in 2006 include:
|
|
|
A $29 million smaller gain related to the mark-to-market valuation of swaption
contracts, from a $51 million gain in the first two quarters of 2006 to a $22 million gain
in the first two quarters of 2007; and |
|
|
|
A $33 million smaller gain related to the mark-to-market valuation adjustment of an
interest rate swap contract, from a $43 million gain in the first two quarters of 2006 to
a $10 million gain in the first two quarters of 2007. |
These items were partially offset by a $58 million smaller loss related to the mark-to-market
valuation adjustment of an embedded call option, from a $60 million loss in the first two quarters
of 2006 to a $2 million loss in the first two quarters of 2007.
Page 33 of 47
Interest Expense. A detailed table of interest expense and interest rates for the three
and six months ended March 31, 2007, and 2006, is below.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31 |
|
|
March 31 |
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on debt |
|
$ |
339 |
|
|
$ |
339 |
|
|
|
0.0 |
% |
|
$ |
675 |
|
|
$ |
674 |
|
|
|
0.1 |
% |
Amortization of debt discount, issue,
and reacquisition costs, net |
|
|
5 |
|
|
|
5 |
|
|
|
0.0 |
% |
|
|
10 |
|
|
|
10 |
|
|
|
0.0 |
% |
AFUDC and nuclear fuel
expenditures |
|
|
(50 |
) |
|
|
(39 |
) |
|
|
28.2 |
% |
|
|
(99 |
) |
|
|
(75 |
) |
|
|
32.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
$ |
294 |
|
|
$ |
305 |
|
|
|
(3.6 |
%) |
|
$ |
586 |
|
|
$ |
609 |
|
|
|
(3.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
Percent |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
Interest rates (average) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term |
|
|
5.98 |
|
|
|
6.07 |
|
|
|
(1.5 |
%) |
|
|
6.02 |
|
|
|
6.06 |
|
|
|
(0.7 |
%) |
Discount notes |
|
|
5.16 |
|
|
|
4.33 |
|
|
|
19.2 |
% |
|
|
5.20 |
|
|
|
4.13 |
|
|
|
25.9 |
% |
Blended |
|
|
5.89 |
|
|
|
5.88 |
|
|
|
0.2 |
% |
|
|
5.93 |
|
|
|
5.85 |
|
|
|
1.4 |
% |
Significant items contributing to the $11 million decrease in interest expense for the
three months ended March 31, 2007, as compared to the three months ended March 31, 2006, include:
|
|
|
A decrease in the average long-term interest rate from 6.07 percent to 5.98 percent; |
|
|
|
|
A decrease of $151 million in the average balance of long-term outstanding debt; and |
|
|
|
|
An $11 million increase in AFUDC due to a 24.4 percent increase in the construction
work in progress base. |
These items were partially offset by:
|
|
|
An increase in the average discount notes interest rate from 4.33 percent to 5.16 percent; and |
|
|
|
|
An increase of $88 million in the average balance of discount notes outstanding. |
Significant items contributing to the $23 million decrease in interest expense for the six
months ended March 31, 2007, as compared to the six months ended March 31, 2006, include:
|
|
|
A decrease in the average long-term interest rate from 6.06 percent to 6.02 percent; |
|
|
|
|
A decrease of $286 million in the average balance of long-term outstanding debt; |
|
|
|
|
A decrease of $99 million in the average balance of discount notes outstanding; and |
|
|
|
|
A $24 million increase in AFUDC due to a 26.0 percent increase in the construction
work in progress base. |
These items were partially offset by an increase in the average discount notes interest rate
from 4.13 percent to 5.20 percent.
Page 34 of 47
Off-Balance Sheet Arrangements
TVA has entered into one transaction that might constitute an off-balance sheet arrangement.
In February 1997, TVA entered into a purchase power agreement with Choctaw Generation, Inc.
(subsequently assigned to Choctaw Generation Limited Partnership) to purchase all the power
generated from its facility located in Choctaw County, Mississippi. The facility has a committed
capacity of 440 megawatts, and the term of the agreement is 30 years. Under the accounting guidance
provided by Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of
Variable Interest Entities, as revised by FIN No. 46R (46R), TVA may be deemed to be the primary
beneficiary under the contract; however, TVA does not have access to the financial records of
Choctaw Generation Limited Partnership. As a result, TVA was unable to determine whether FIN 46R
would require TVA to consolidate Choctaw Generation Limited Partnerships balance sheet, results of
operations, and cash flows for the year ended September 30, 2006. Power purchases for the three and
six months ended March 31, 2007, under the agreement amounted to $27 million and $60 million,
respectively, and the remaining financial commitment under this agreement is $4 billion. TVA has no
additional financial commitments beyond the purchase power agreement with respect to the facility.
Critical Accounting Policies and Estimates
The preparation of financial statements requires TVA to estimate the effects of various
matters that are inherently uncertain as of the date of the financial statements. Although the
financial statements are prepared in conformity with generally accepted accounting principles
(GAAP), management is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of
revenues and expenses reported during the reporting period. Each of these estimates varies in
regards to the level of judgment involved and its potential impact on TVAs financial results.
Estimates are deemed critical either when a different estimate could have reasonably been used, or
where changes in the estimate are reasonably likely to occur from period to period, and such use or
change would materially impact TVAs financial condition, changes in financial position, or results
of operations. TVAs critical accounting policies are discussed in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and
Estimates and Note 1 Summary of Significant Accounting Policies in the Annual Report.
TVAs power rates are not subject to regulation through a public service commission or other
similar entity. The TVA Board is authorized by the TVA Act to set rates for power sold to its
customers. This rate-setting authority meets the self-regulated provisions of SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation, and TVA meets the remaining criteria
of SFAS No. 71 because (1) TVAs regulated rates are designed to recover its costs of providing
electricity and (2) in view of demand for electricity and the level of competition it is reasonable
to assume that the rates, set at levels that will recover TVAs costs, can be charged and
collected. Accordingly, TVA records certain assets and liabilities that result from the regulated
ratemaking process that would not be recorded under GAAP for non-regulated entities. Regulatory
assets generally represent incurred costs that have been deferred because such costs are probable
of future recovery in customer rates. Regulatory liabilities generally represent obligations to
make refunds to customers for previous collections for costs that are not likely to be incurred.
Management assesses whether the regulatory assets are probable of future recovery by considering
factors such as applicable regulatory changes, potential legislation, and changes in technology.
Based on this assessment, management believes the existing regulatory assets are probable of
recovery. This determination reflects the current regulatory and political environment and is
subject to change in the future. If future recovery of regulatory assets ceases to be probable, TVA
could be required to write-off the cost of these assets under the provisions of SFAS No. 101,
Regulated EnterprisesAccounting for the Discontinuation of Application of FASB Statement No. 71.
Any asset write-offs would be required to be recognized in earnings in the period in which
regulatory accounting under SFAS No. 71 ceased to apply.
New Accounting Standards and Interpretations
Accounting Changes and Error Corrections. In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement
No. 3, which replaces Accounting Principles Board (APB) Opinion No. 20, Accounting Changes,
and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. This statement
applies to all voluntary changes in accounting principles and also applies to changes required by
an accounting pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. This statement requires, unless impracticable, retrospective
application to prior periods financial statements of changes in accounting principles. If it is
impracticable to determine the period-specific effects of an accounting change on one or more
individual prior periods
Page 35 of 47
presented, this statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to the opening balance of
retained earnings for that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in accounting principle to
all prior periods, this statement requires that the new accounting principle be applied as if it
were adopted prospectively from the earliest date practicable. This statement also requires that a
change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be
accounted for as a change in accounting estimate effected by a change in accounting principle. This
statement became effective for TVA beginning in 2007.
Fair Value Measurements. In September 2006, FASB issued SFAS No. 157, Fair Value
Measurements. This standard provides guidance for using fair value to measure assets and
liabilities 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, 2007, and interim periods within
those fiscal years. At this time, TVA is evaluating the requirements of this statement and has not
yet determined the impact of its implementation, which may or may not be material to TVAs results
of operations or financial position.
Accounting for Defined Benefit Pension and Other Postretirement Plans. On September 29, 2006,
FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R). This standard
will require employers to fully recognize the obligations associated with single-employer defined
benefit pension, retiree healthcare, and other postretirement plans in their financial statements.
Specifically, the new standard requires an employer to recognize in its statement of financial
position an asset for a plans overfunded status or a liability for a plans underfunded status;
measure a plans assets and its obligations that determine its funded status as of the end of the
employers fiscal year (with limited exceptions); and recognize changes in the funded status of a
defined benefit postretirement plan in the year in which the changes occur. Those changes will be
reported in comprehensive income of a business entity and in changes in net assets of a
not-for-profit organization.
The requirement to recognize the funded status of a benefit plan and the disclosure
requirements are effective for TVA as of the end of the fiscal year ending after June 15, 2007. TVA
plans to apply the new standard for its 2007 year-end financial statements and recognize on its
2007 Balance Sheet the funded status of its pension and other postretirement benefit plans.
However, had TVA been required to adopt the standard as of its last actuarial valuation date
(September 30, 2006), TVA would have recorded the following amounts on its Balance Sheet for the
year then ended: a regulatory asset of $795 million, additional pension and postretirement
obligations of $368 million and $152 million, respectively, and the reclassification to regulatory
assets of an intangible asset with a balance of $275 million, representing unamortized prior
service cost. The net effect of recognizing such amounts would have been to increase total assets
and liabilities by $520 million at that date.
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 entitys 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 statement and has not yet determined the
potential impact of its implementation, which may or may not be material to TVAs results of
operations or financial position.
Page 36 of 47
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, and 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 TVAs financial position.
Accounting for Misstatements. On September 13, 2006, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. This bulletin provides
interpretive guidance on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a current year misstatement. Application of the guidance will
become effective for TVA with its annual report for the year ending September 30, 2007. TVA is not
aware of any potential misstatements at this time.
Legislative
TVA was created by the TVA Act, and legislation is introduced from time to time that if
enacted would directly or indirectly affect TVAs operations. See Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations Legislative and Regulatory Matters
in the Annual Report for a discussion of legislative initiatives that may affect TVA.
Presidents Budget
On February 5, 2007, the Office of Management and Budget (OMB) transmitted the Presidents
proposed 2008 federal budget to Congress. In the portions specifically relating to TVA, the
proposed budget recommends:
|
|
|
Expanding the types of financial arrangements that count towards TVAs $30 billion debt ceiling; |
|
|
|
|
Requiring TVA to register its debt securities with the Securities and Exchange Commission; and |
|
|
|
|
Allowing Congress to establish the amount of TVAs Office of Inspector Generals
budget and directing TVA to fund the amount with power revenues beginning in 2008. Funding
for TVAs Office of the Inspector General is currently paid directly by TVA. |
The first recommendation has been included in a draft bill prepared by OMB, but it has not yet
been introduced in Congress. The other recommendations have not been introduced in any legislation
or included in any draft bill.
Draft Legislation
On March 13, 2007, Senators Jim Bunning and Mitch McConnell, both Republicans from
Kentucky, introduced the Access to Competitive Power Act of 2007 (the Bill) in the Senate. The
Bill would provide as follows:
FERC Jurisdiction TVA and federal power marketing agencies would be subject to greater FERC
jurisdiction with respect to transmission, including rates, terms, and conditions of service.
Anti-Cherrypicking Provision 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. (With the exception of wheeling power to
Bristol, Virginia, the anti-cherrypicking provision precludes TVA from being ordered to wheel
another suppliers power to a customer if the power would be consumed within TVAs defined service
territory.)
Stranded Costs If TVA provides transmission service to any distributor pursuant to a FERC
wheeling order, TVA may not recover any stranded cost from that distributor.
Page 37 of 47
Noticing Distributors Distributors that have given termination notices to TVA on or
before December 31, 2006, would have express authority under federal law to:
|
(1) |
|
Construct, own, and operate any generation facility, individually or jointly with other
distributors; |
|
|
(2) |
|
Receive partial requirements services from TVA; |
|
|
(3) |
|
Receive transmission
services from TVA that are sufficient to meet all electric energy requirements of the
distributors; and |
|
|
(4) |
|
Elect, not later than 180 days after enactment, to rescind the
termination notice without the imposition of a reintegration fee or any similar fee. |
Non-Noticing Distributors Distributors that have not given termination notices to TVA on or
before December 31, 2006, would have express authority under federal law to:
|
(1) |
|
Construct, own, and operate any generation facility, individually or jointly with another
distributor; and |
|
|
(2) |
|
Receive partial requirements from TVA within a ratable limit, which
cumulatively stays within a three-percent compounded annual growth rate on the TVA system. |
SEPA Power Any distributor which 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.
|
(1) |
|
TVA would have to provide transmission to enable such distributor to receive its share of
SEPA power at one or more of the distributors delivery points specified by that distributor;
and |
|
|
(2) |
|
The price that such distributor would pay for its SEPA power would be the same rate
that TVA pays for the SEPA power that it receives for the remaining distributors. |
Privatization Within 180 days of enactment, the Government Accountability Office (GAO)
would be required to conduct a study of the costs, benefits, and other effects of
privatizing TVA and report the results to Congress.
TVA Debt Within 180 days of enactment, GAO would be required to conduct a study of the
financial structure of, and the amount of debt held by, TVA.
The status of this bill is unclear and the likelihood of the bills requirements becoming law
remains unknown.
Environmental
As is the case across the utility industry and in other sectors, TVAs activities are subject
to certain federal, state, and local environmental statutes and regulations. Major areas of
regulation affecting TVAs activities include air quality control, water quality control, and
management and disposal of solid and hazardous wastes. These activities are described in further
detail under Item 1, Business Environmental Matters and Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations Environmental Matters in the Annual
Report.
TVA has incurred and continues to incur substantial capital and operating and maintenance
costs in order to comply with evolving environmental requirements. Many of these costs are
associated with the operation of TVAs 59 coal-fired generating units. While it is not possible to
predict with any precision how these evolving requirements will impact the operation of existing
and new coal-fired and other fossil-fuel generating units, it is virtually certain that
environmental requirements placed on the operation of these generating units will continue to
become more restrictive. Litigation over emissions from coal-fired generating units is also
occurring, including litigation against TVA. See Item 3, Legal Proceedings in the Annual Report.
Page 38 of 47
Several existing regulatory programs have been and are being made more stringent in their
application to fossil-fuel units and additional regulatory programs affecting fossil-fuel units
were promulgated in 2005, including the Clean Air Interstate Rule (CAIR), which requires
significant utility reductions of emissions of sulfur dioxide and nitrogen oxides in the eastern
half of the United States (including all of TVAs operating areas), and the Clean Air Mercury Rule
(CAMR). TVA had previously estimated its total capital cost for reducing emissions from its power
plants from 1977 through 2010 to reach $5.8 billion, $4.6 billion of which had already been spent
as of September 30, 2006. TVA estimates that compliance with CAIR and CAMR could lead to additional
costs of $3.0 billion to $3.5 billion in the next decade if TVA should continue to operate all of
its present coal plants. There could be additional material costs if reductions of carbon dioxide
are mandated, or if future legislative, regulatory, or judicial actions lead to more stringent
emission reduction requirements, but these costs cannot be predicted at this time. TVA will
continue to monitor these developments and will assess any potential financial impacts as
information becomes available.
In October 2006, TVA began operating its seventh flue gas desulphurization system (scrubber)
on Unit 3 at its Paradise Fossil Plant (Paradise Unit 3) in Drakesboro, Kentucky. A scrubber
removes sulfur dioxide emissions by routing gases produced from burning coal through a limestone
and water mixture, which removes the sulfur dioxide and allows cleaner gases to be released through
the plant stack. The Paradise Unit 3 scrubber is the largest single module in the United States. It
is removing more than 95 percent of the sulfur dioxide from Paradise Unit 3. All three units at
Paradise are now equipped with scrubbers. Paradise is one of TVAs largest generating plants and
provides approximately 14 billion kilowatt-hours of electricity a year.
In February 2007 TVA announced plans to install additional emissions control equipment at the
John Sevier Fossil Plant located near Rogersville, Tennessee. TVA plans to add selective
non-catalytic reduction (SNCR) systems to reduce nitrogen oxide emissions and a scrubber to
reduce sulfur dioxide emissions from the four unit 712-megawatt plant. The first SNCR on Unit 1 is
expected to begin operation in the summer of 2007, with similar equipment installed on the other
three units by 2010. Construction of the planned scrubber is scheduled to begin in 2008 with
completion scheduled for 2012.
As a part of the 2006 tri-ennial review of State Water Quality Standards in Tennessee, the
Tennessee Department of Environment and Conservation (TDEC) is adopting the Environmental
Protection Agency (EPA) recommended threshold of 0.3 parts per million (ppm) of mercury in fish
as its criterion for issuing a Precautionary Fish Consumption Advisory (Precautionary
Advisory). The previously used thresholds were 0.5 ppm for a Precautionary Advisory and 1.0 ppm
for a Do Not Consume Advisory. In Tennessee a Precautionary Advisory recommends that sensitive
populations such as children and women of child-bearing age should not consume the fish species
named, and that all other persons should limit consumption of the named species to one meal per
month. A Do Not Consume Advisory recommends that certain fish species should not be consumed by
anyone in any amount.
As a result of lowering the threshold, Precautionary Advisories have been recommended for
several additional stream and reservoir segments within the State of Tennessee, including some
streams and reservoir segments in the Tennessee Valley Watershed. TDECs announcement of additional
Precautionary Advisories for several Tennessee water bodies does not mean that mercury levels in
fish are increasing. TVA has been monitoring mercury levels in fish and sediments in TVA reservoirs
for the last 35 years, and TVAs data was provided to TDEC as a part of its review process. TVAs
data show significant reductions in mercury concentrations in fish from the reservoirs with known
industrial discharges that have now ceased operation. Other than those areas historically impacted
by industrial discharges, mercury concentrations in fish have tended to fluctuate through time with
no discernable trend in fish from most reservoirs. Despite greatly increased burning of coal for
electricity generation, current and historic data records indicate that mercury concentrations in
reservoir sediments have remained stable or declined.
In November 2006, TVA received a letter from the attorneys for one of the parties conducting
the removal action at the Ward Transformer Superfund Site in North Carolina that put TVA on notice
that it was identified as a Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA) liable party, and that one or more of the parties intends to pursue a contribution claim
against TVA. The Ward Transformer site was one of two non-TVA areas identified in TVAs Annual
Report for which TVA was unable to estimate its potential liability. At TVAs request, the
attorneys provided information showing that TVA sent additional equipment that had not been
previously identified by TVA, and in one or more transactions with Ward, transformers containing
PCBs which were sent to the Ward Transformer site were either repaired, rebuilt and sold, or
scrapped. For a further discussion of the Ward Transformer contamination claim, see Legal
Proceedings Notification of Potential Liability for Ward Transformer Site in Note 7 of this
Quarterly Report.
Page 39 of 47
In addition to the on-site cleanup activities, off-site contamination has been discovered
which is believed to extend to the Neuse River and includes water bodies in a county and state
park. The State of North Carolina has issued fish consumption advisories due to PCBs in areas up to
20 miles downstream of the Ward Transformer site. The expansion of the area believed to have been
contaminated offsite and the potential for assessments of natural resource damages to liable
parties could substantially raise the cleanup costs. As yet there is no formal estimate of the
costs associated with cleanup or resource damages, nor has TVAs potential share of those costs
been determined.
Legal
Legal Proceedings to Which TVA Is a Party
As discussed in Note 7, TVA is involved in a number of lawsuits and claims relating to a
variety of issues. In accordance with SFAS No. 5, Accounting for Contingencies, TVA had accrued
approximately $33 million as of March 31, 2007, related to pending litigation and other claims. If
actual liabilities significantly exceed this estimate, TVAs results of operations, liquidity, and
financial condition could be materially adversely affected. See Note 7.
Legal Proceedings to Which TVA Is Not a Party
The United States Supreme Court (the Supreme Court) recently issued decisions which (1)
classify carbon dioxide as a pollutant for purposes of the Clean Air Act (CAA) and (2) require
annual testing of power plant emissions under the new source review (NSR) regulations. Although
TVA is not a party to these cases, the decisions may impact TVA operations in the future.
Clean Air Developments. On April 2, 2007, in Massachusetts v. EPA, a case concerning whether
EPA has the authority and duty to regulate carbon dioxide emissions under the CAA, the Supreme
Court found that greenhouse gases, including carbon dioxide, are pollutants under the CAA and thus
EPA does have the authority to regulate these gases. The Supreme Court also concluded that EPAs
refusal to regulate these pollutants was based on impermissible reasons and remanded the case to
EPA to ground its reasons for action or inaction in the statute. While this case focused on
carbon dioxide emissions from motor vehicles, it sets a precedent for regulation in other
industrial sectors, such as the electric utility industry.
New Source Review. On April 2, 2007, the Supreme Court also issued an opinion in the case of
United States v. Duke Energy, vacating the ruling of the United States Court of Appeals for the
Fourth Circuit (the Fourth Circuit) in favor of Duke Energy and against EPA in EPAs 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 under EPAs Prevention of Significant
Deterioration (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 significantly 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.
TVA is currently involved in two NSR cases (one involving Bull Run Fossil Plant and another at
Colbert Fossil Plant). See Note 7 in this Quarterly Report for a discussion of these cases. The
Supreme Courts rejection of the hourly standard for emissions testing could undermine one of TVAs
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 Courts decision could encourage such suits, which are likely to
involve units where emission control systems such as scrubbers and selective catalytic reduction
(SCR) systems are not installed, under construction, or planned to be installed in the relatively
near term.
At this point, no estimate can be made regarding the impact of any such suits on TVA.
Page 40 of 47
Clean Water Developments
In the second phase of a three-part rulemaking to minimize the adverse impacts from cooling
water intake structures on fish and shellfish, as required under Section 316(b) of the Clean Water
Act, the EPA promulgated a final rule for existing power producing facilities that became effective
on September 7, 2004. The new rule required existing facilities to select among several different
compliance options for reducing the number of organisms pinned against and/or drawn into the
cooling systems. These included development of a site-specific compliance option based on
application of cost/cost or cost/benefit tests. The site specific tests were designed to ensure
that a facilitys costs are not significantly greater than cost projections in the rule or the
benefits derived from taking mitigation actions. Actions taken to compensate for any impacts by
restoring habitat, or pursuing other options such as building hatcheries for fish/shellfish
production, would have counted towards compliance.
On January 25, 2007, the United States Court of Appeals for the Second Circuit (the Second
Circuit) issued a decision in a proceeding brought by environmental groups, industry groups, and
certain northeastern states challenging the EPAs final rule. The Second Circuit held that costs
cannot be compared to benefits in picking the best technology available (BTA) to minimize the
adverse environmental impacts of intake structures. Instead, the court held that the EPA is allowed
to consider costs in two ways: (1) to determine what technology can reasonably be borne by
industry, and (2) to engage in cost-effectiveness analysis in determining BTA. Finding the
rulemaking record to be unclear on whether the EPA had relied on a cost-benefit analysis or a
cost-effectiveness analysis, the Second Circuit remanded the EPAs BTA determination, giving the
EPA the option to provide a reasonable explanation of its determination or make a new determination
based on the permissible cost considerations set out in the Second Circuit opinion. The Second
Circuit also remanded provisions of the EPA rule that allowed the use of a site-specific
cost-benefit test and restoration measures (such as building hatcheries) to demonstrate compliance,
holding that these rule provisions were based on an impermissible construction of the statute.
Several other provisions of the rule such as the one that sets the performance standards as a range
rather than one national standard were also remanded.
All of the intakes at TVAs existing coal-fired and nuclear generating facilities are subject
to the EPAs rule and, potentially, to the Second Circuits decision. TVA had been in the process
of determining what was needed to comply with the EPA rule, and had believed that some expenditures
might have been required. TVA is currently assessing the Second Circuits decision and its
potential impacts on TVA. Given the uncertainty over whether the EPA will appeal this decision and
what the changes in the final rule as ultimately issued and applied will be, TVA cannot assess what
the potential impacts are at this time. EPAs official responses to the remand have been to (1)
petition the Second Circuit Court for more time to consider an appeal, and (2) issue a guidance
letter to the EPA Regions announcing its intention to suspend the rule and instructing regulators
to develop permit conditions on a Best Professional Judgment basis.
Management Changes
New Chief Operating Officer Named
On March 12, 2007, TVA announced the appointment of William R. (Bill) McCollum, Jr.,
who has more than 30 years of experience in the energy services industry, as chief operating
officer of TVA, effective May 1, 2007. As TVAs chief
operating officer, Mr. McCollum is responsible for directing and managing the operations of the Fossil Power Group, TVA Nuclear, River
Operations, and Commercial Operations and Fuels. Later, he will also
assume responsibility for Power Systems Operations. Mr. McCollum
reports to TVAs president and
chief executive officer.
Mr. McCollum
came to TVA from Duke Energy Corp., where he most recently was the group
executive and chief regulated generation officer. He has held a variety of positions in
engineering, nuclear and fossil operations, safety, and project management. He served as vice
president of Catawba and Oconee nuclear stations and managed nuclear support functions for all
three nuclear plants at Duke, including nuclear fuels management, nuclear supply chain services,
regulatory/self-assessment functions, and engineering and scientific services.
Mr. McCollum graduated from the Georgia Institute of Technology with a Bachelor of Electrical
Engineering degree and a Master of Science degree in nuclear engineering. He also received a Master
of Business Administration degree from the University of North Carolina at Charlotte.
Page 41 of 47
Retirement of Chief Nuclear Officer Announced
On March 30, 2007, TVA announced the pending retirement of Karl W. Singer, chief nuclear
officer and executive vice president, TVA Nuclear. Mr. Singer will remain with TVA until September
30, 2007, and will assist in the transition as TVAs new chief nuclear officer assumes his
position.
New Chief Nuclear Officer Named
On April 10, 2007, TVA announced the appointment of William R. (Bill) Campbell, who has more
than 33 years of experience in the commercial nuclear power industry, as chief nuclear officer
effective May 14, 2007. As TVAs chief nuclear officer,
Mr. Campbell is responsible for
planning and directing all organizational activities related to nuclear power production, nuclear
power plant operations, maintenance, modifications, and all nuclear support services and
engineering activities. He reports directly to the chief operating officer.
Mr. Campbells experience in the commercial nuclear power industry has been with several
highly regarded utility companies including Entergy Nuclear Generation Company, where he served as
the chief operating officer for Entergy Nuclears South Region, Duke Energy, Carolina Power and
Light, and Union Electric Company. In his most recent position at
Entergy, he was responsible for the
operating results of the companys regulated nuclear assets in Mississippi, Texas, Louisiana, and
Arkansas.
Mr. Campbell graduated from North Carolina State University with a Bachelor of Science degree
in nuclear engineering. He also has a Master of Science degree in mechanical engineering from
Clemson University.
New Senior Vice President of TVA Nuclear Generation and Development Appointed
On April 30, 2007, Ashok Bhatnagar became the senior vice president of TVAs Nuclear
Generation and Development organization. Mr. Bhatnagar is responsible for TVA Nuclear
plant-licensing functions, the Watts Bar Nuclear Plant Unit 2 completion studies, and all NuStart
Development LLC (NuStart) activities at the Bellefonte site. See Note 2 in the Annual Report for
more information on TVAs nuclear licensing activities and NuStart. Mr. Bhatnagar reports to TVAs
chief operating officer, William McCollum.
New Vice President of Watts Bar Unit 2 Named
On April 30, 2007, Masoud Bajestani became the new vice president of Watts Bar Unit 2. In that
capacity, Mr. Bajestani reports to Ashok Bhatnagar, senior vice president of Nuclear Generation and
Development, and is responsible for overseeing the Watts Bar Nuclear Plant Unit 2 completion
studies and potential construction activities.
Restructuring of River System Operations & Environment Organization
On
May 10, 2007, TVA announced that effective immediately, the
River System Operations & Environment (RSO&E) organization was being
restructured into two separate organizations. The River Operations group, under Janet Herrin,
senior vice president, will remain within the Chief Operating Officer organization with Ms. Herrin
reporting directly to the chief operating officer. All other organizations formerly within RSO&E
will become the new Office of Environment & Research, headed by Bridgette Ellis, senior vice
president. Ms. Ellis will report directly to the chief executive officer.
New Officer for Energy Efficiency, Load-Shaping, and Renewable Resources
On May 10, 2007, TVA announced that Kate Jackson, formerly executive vice president of RSO&E,
was being given responsibility for TVAs plans to effectively address energy efficiency,
load-shaping, and renewable resources, areas identified within the draft Strategic Plan as key
programs for TVA going forward. Ms. Jackson will report directly to the chief executive officer.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes related to market risks from the market risks disclosed under
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations
Risk Management Activities in the Annual Report.
Page 42 of 47
ITEM 4. CONTROLS AND PROCEDURES
TVA maintains disclosure controls and procedures that are designed to ensure that information
required to be disclosed in reports it files or submits under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms. This includes controls and procedures designed
to ensure that such information is accumulated and communicated to TVA management, including the
president and chief executive officer, the Disclosure Control Committee, and the chief financial
officer, as appropriate, to allow timely decisions regarding required disclosure.
An evaluation has been performed under the supervision of TVA management (including the
president and chief executive officer) and members of the Disclosure Control Committee (including
the interim chief financial officer and the vice president and controller) of the effectiveness of
TVAs disclosure controls and procedures as of March 31, 2007. Based on that evaluation, the
president and chief executive officer and members of the Disclosure Control Committee (including
the interim chief financial officer and the vice president and controller) concluded that, as a
result of two material weaknesses identified (described below), TVAs disclosure controls and
procedures were not effective as of March 31, 2007. However, to assess the financial statement
impact of these internal control deficiencies, TVA performed additional analyses, interim
supplemental procedures, and monitoring activities subsequent to quarter end. As a result of these
supplemental procedures, the president and chief executive officer, the interim chief financial
officer, and the vice president and controller have determined that there is reasonable assurance
that the financial statements included in this Quarterly Report fairly present, in all material
respects, TVAs financial condition, results of operations, and cash flows as of, and for, the
periods presented.
TVA management has identified a material weakness in internal controls related to TVAs end
use billing arrangements with wholesale power customers. Under these arrangements, TVA relies on
the distributor customers to calculate major components of their own power bills. In fiscal year
2006, TVA requested annual Statement on Auditing Standards (SAS) 70 Type II internal control
reports on 12 specific control objectives from distributor customers and their third party billing
processors. Based on the evaluation of these SAS 70 Type II reports, TVA determined that
distributor customers who represent a material amount of TVAs 2007 revenue either had qualified
opinions and/or internal control test results that negatively impact their ability to meet TVAs
control objectives. However, subsequent to quarter end TVA has also performed additional revenue
analysis by comparing various metrics from billing data for distributor customers with similar
characteristics and benchmarking those with control weaknesses against those with strong controls.
As a result of this analysis, TVA has determined that reported revenues are not materially
misstated.
TVA management has also identified a material weakness related to controls over the
completeness, accuracy, and authorization of TVAs property, plant, and equipment transactions and
balances; the calculation of AFUDC; and the review of construction work in progress accounts for
proper closure to completed plant. To remediate this control weakness, TVA has developed a new
process for project approval to include the determination of proper project cost classification and
has made changes in staffing for fixed asset accounting. TVA is also formalizing the accounting
review of account balances and transactions and improving the documentation of management review
and approval. Additional analysis has been performed to ensure that property, plant, and equipment
is not materially misstated.
During the most recent fiscal quarter, there were no changes in TVAs internal control over
financial reporting that materially affected, or are reasonably likely to materially affect, TVAs
internal control over financial reporting. TVA is continuing to take steps to address the
identified material weaknesses in internal controls as described in the preceding two paragraphs
TVA management believes that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are met, and no
evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a company can be detected.
TVAs controls and procedures are designed to provide reasonable, but not absolute, assurance
that the objectives will be met. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
Page 43 of 47
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 in this Quarterly Report for a discussion of legal proceedings affecting TVA.
ITEM 1A. RISK FACTORS
The discussion below supplements the disclosure contained in Item 1A, Risk Factors in the
Annual Report. The factors described in Item 1A, Risk Factors in the Annual Report, together with
the risk factors discussed below and the other information contained in the Quarterly Report, could
materially affect TVAs business, financial condition, and operating results and should be
carefully considered. Further, the risks described in this Quarterly Report and in the Annual
Report are not the only risks facing TVA. Additional risks and uncertainties not currently known to
TVA management or that TVA management currently deems to be immaterial also may materially
adversely affect TVAs business, financial condition, and operating results.
Events at non-TVA facilities which affect the supply of water to TVAs generation facilities
could interfere with TVAs ability to generate power.
TVAs fossil and nuclear generation facilities depend on water from the river systems upon
which they are located for cooling water and for water to convert into steam to drive turbines.
While TVA manages the Tennessee River and large portions of its tributary system in order to
provide much of this necessary water, entities such as the U.S. Army Corps of Engineers operate and
manage other bodies of water upon which some TVA facilities rely. If events at these non-TVA bodies
of water or their associated hydroelectric facilities were to interfere with the flow of water, TVA
might have insufficient water to meet the needs of its plants. TVA might thus be required to reduce
generation at its affected facilities to levels compatible with the available supply of water.
Purchased power prices may be highly volatile, and providers of purchased power may fail to
perform under their contracts with TVA.
TVA acquires a portion of its electricity needs through purchased power arrangements. The
price for purchased power has been quite volatile in recent years, so the price that TVA pays for
purchased power may increase significantly in the future. In addition, if one of TVAs purchased
power suppliers fails to perform under the terms of its contract with TVA, TVA might have to
purchase replacement power on the spot market, perhaps at a significantly higher price than TVA was
entitled to pay under the contract. In some circumstances, TVA may not be able to recover this
difference from the supplier. Moreover, if TVA is unable to acquire replacement power on the spot
market and does not have enough reserve generation capacity available to offset the loss of power
from the purchased power supplier, TVA might be unable to satisfy its own obligations to deliver
power. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations Business Overview Challenges During 2006 Increased Fuel and Purchased Power Costs
and Risk Management Activities Credit Risk Credit of Other Counterparties in the Annual Report.
Payment of principal and interest on TVA securities is not guaranteed by the United States.
Although TVA is a corporate agency and instrumentality of the United States government, TVA
securities are not backed by the full faith and credit of the United States. Principal and interest
on TVA securities is payable solely from TVAs net power proceeds. Net power proceeds are defined
as the remainder of TVAs gross power revenues after deducting the costs of operating, maintaining,
and administering its power properties and tax equivalent payments to states and counties, but
before deducting depreciation accruals or other charges representing the amortization of capital
expenditures, plus the net proceeds from the sale or other disposition of any power facility or
interest therein.
Page 44 of 47
The trading market for TVA securities might be limited.
All of TVAs Bonds are listed on the New York Stock Exchange except for TVAs discount notes,
which have maturities of less than one year, and power bonds issued under TVAs
electronotes® program, which is a medium-term note program. In addition, some of TVAs
Bonds are listed on foreign stock exchanges. Although many of TVAs Bonds are listed on stock
exchanges, there can be no assurances that any market that will develop or continue to exist for
any Bonds. Additionally, no assurances can be made as to the ability of holders to sell their Bonds
or as to the price at which holders will be able to sell their Bonds. Future trading prices of
Bonds will depend on many factors, including prevailing interest rates, the then-current ratings
assigned to the Bonds, the amount of Bonds outstanding, the time remaining until the maturity of
the Bonds, the redemption features of the Bonds, the market for similar securities, and the level,
direction, and volatility of interest rates generally.
If a particular offering of Bonds is sold to or through underwriters, the underwriters may
attempt to make a market in the Bonds. The underwriters would not be obligated to do so, however,
and could terminate any market-making activity at any time without notice.
In addition, legal limitations may affect the ability of banks and others to invest in Bonds.
For example, national banks may purchase TVA Bonds for their own accounts in an amount not to
exceed ten percent of unimpaired capital and surplus. Also, TVA Bonds are obligations of a
corporation which is an instrumentality of the United States within the meaning of Section
7701(a)(19)(C)(ii) of the Internal Revenue Code for purposes of the 60 percent of assets limitation
applicable to U.S. building and loan associations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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Exhibit No. |
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Description |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer |
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32.1 |
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Section 1350 Certification Executed by the Chief Executive Officer |
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32.2 |
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Section 1350 Certification Executed by the Chief Financial Officer |
Page 45 of 47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
May 15, 2007
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TENNESSEE VALLEY AUTHORITY
(Registrant)
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By: |
/s/ Tom D. Kilgore
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Tom D. Kilgore |
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President and Chief Executive Officer (Principal Executive Officer) |
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By: |
/s/ John M. Hoskins
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John M. Hoskins |
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Interim Chief Financial Officer and Executive Vice President, Financial Services
(Principal
Financial Officer) |
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Page 46 of 47
EXHIBIT INDEX
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Exhibit No. |
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Description |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer |
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32.1 |
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Section 1350 Certification Executed by the Chief Executive Officer |
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32.2 |
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Section 1350 Certification Executed by the Chief Financial Officer |
Page 47 of 47