Tennessee Valley Authority - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(MARK
ONE)
x ANNUAL REPORT PURSUANT
TO SECTION 13, 15(d), OR 37 OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended September 30, 2008
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _____ to _____
Commission
file number 000-52313
TENNESSEE
VALLEY AUTHORITY
(Exact
name of registrant as specified in its charter)
A
corporate agency of the United States created by an act of
Congress
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62-0474417
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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400
W. Summit Hill Drive
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37902
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Knoxville,
Tennessee
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(Zip
Code)
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(Address
of principal executive offices)
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(865)
632-2101
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the
Act: None
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13, Section 15(d), or Section 37 of the Securities Exchange
Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer x
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Smaller
reporting company o
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(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act). Yes o No x
Page
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Table of Contents
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Part
I
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Item
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Item
1A.
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Item
1B.
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Item
2.
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Item
3.
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Item
4.
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Part
II
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Item
5.
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Item
6.
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Item
7.
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Item
7A.
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Item
8.
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Item
9.
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Item
9A.
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Item
9B.
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Part
III
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Item
10.
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Item
11.
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Item
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Item
13.
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Item
14.
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Part
IV
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Item
15.
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FORWARD-LOOKING INFORMATION
This
Annual Report on Form 10-K for the fiscal year ended September 30, 2008 (“Annual
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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Forecasts
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 TVA’s funding of its pension plans, nuclear
decommissioning trust, and asset retirement
trust;
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The
anticipated results of TVA’s Extended Power Uprate project at Browns Ferry
Nuclear Plant;
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TVA’s
plan to reduce the growth in peak demand by up to 1,400 megawatts by the
end of 2012;
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TVA’s
plans to borrow under its credit facility with the U.S. Treasury during
2009;
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•
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TVA’s
plans to continue using short-term debt to meet current obligations;
and
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The
anticipated cost and timetable for placing Watts Bar Unit 2 in
service.
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Although
the Tennessee Valley Authority (“TVA”) believes that the assumptions underlying
the forward-looking statements are reasonable, TVA does not guarantee the
accuracy of these statements. Numerous factors could cause actual
results to differ materially from those in the forward-looking
statements. These factors include, among other things:
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New
laws, regulations, and administrative orders, especially those related
to:
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TVA’s
protected service area,
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The
sole authority of the TVA board of directors to set power
rates,
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Various
environmental matters including laws, regulations, and administrative
orders restricting emissions and preferring certain fuels or generation
sources over others,
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The
licensing, operation, and decommissioning of nuclear generating
facilities;
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TVA’s
management of the Tennessee River
system,
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TVA’s
credit rating, and
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TVA’s
debt ceiling;
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Loss
of customers;
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Performance
of TVA’s generation and transmission
assets;
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Disruption
of fuel supplies, which may result from, among other things, weather
conditions, production or transportation difficulties, labor challenges,
or environmental regulations affecting TVA’s fuel
suppliers;
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Purchased
power price volatility;
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Events
at facilities not owned by TVA that affect the supply of water to TVA’s
generation facilities;
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Compliance
with existing or future environmental laws and
regulations;
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Significant
delays or cost overruns in construction of generation and transmission
assets;
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Inability
to obtain regulatory approval for the construction of generation
assets;
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Significant
changes in demand for electricity;
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Legal
and administrative proceedings, including awards of damages and amounts
paid in settlements;
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Weather
conditions, including drought;
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Failure
of TVA’s transmission facilities or the transmission facilities of other
utilities;
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Events
at a nuclear facility, even one that is not operated by or licensed to
TVA;
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Catastrophic
events such as fires, earthquakes, floods, tornadoes, pandemics, wars,
terrorist activities, and other similar events, especially if these events
occur in or near TVA’s service
area;
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Reliability
of purchased power providers, fuel suppliers, and other
counterparties;
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Changes
in the market price of commodities such as coal, uranium, natural gas,
fuel oil, construction materials, electricity, and emission
allowances;
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Changes
in the prices of equity securities, debt securities, and other
investments;
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Changes
in interest rates;
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Creditworthiness
of TVA, its counterparties, and its
customers;
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Rising
pension costs and health care
expenses;
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Increases
in TVA’s financial liability for decommissioning its nuclear facilities
and retiring other assets;
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Unplanned
contributions to TVA’s pension or other postretirement benefit plans or to
TVA’s nuclear decommissioning
trust;
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Limitations
on TVA’s ability to borrow money;
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Changes
in the economy;
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Ineffectiveness
of TVA’s disclosure controls and procedures and its internal control over
financial reporting;
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Changes
in accounting standards;
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The
loss of TVA’s ability to use regulatory
accounting;
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Problems
attracting and retaining skilled
workers;
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Changes
in technology;
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Changes
in TVA’s plans for allocating its financial resources among
projects;
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Differences
between estimates of revenues and expenses and actual revenues and
expenses incurred;
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Volatility
in financial markets;
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Changes
in the market for TVA securities;
and
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Unforeseeable
events.
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Additionally, other risks
that may cause actual results to differ materially from the predicted results
are set forth in Item 1A, Risk Factors, and Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of
Operations. New factors emerge from time to time, and it is
not possible for management to predict all such factors or to assess the extent
to which any factor or combination of factors may impact TVA’s business or cause
results to differ materially from those contained in any forward-looking
statement.
TVA
undertakes no obligation to update any forward-looking statement to reflect
developments that occur after the statement is made.
GENERAL INFORMATION
Fiscal
Year
Unless
otherwise indicated, years (2008, 2007, etc.) in this Annual Report refer to
TVA’s fiscal years ended September 30. References to years in the
biographical information about directors and executive officers in Item 10,
Directors, Executive Officers and Corporate Governance are to calendar
years.
Notes
References
to “Notes” are to the Notes to Financial Statements contained in Item 8,
Financial Statements and Supplementary Data in this Annual Report.
Available
Information
TVA's
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and all amendments to those reports are made available on TVA's web
site, free of charge, as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission
(“SEC”). TVA's web site is www.tva.gov. Information
contained on TVA’s web site shall not be deemed to be incorporated into, or to
be a part of, this Annual Report. In addition, the public may read
and copy any reports or other information that TVA files with the SEC at the
SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C.
20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. TVA's SEC
reports are also available to the public without charge from the web site
maintained by the SEC at www.sec.gov.
PART
I
ITEM 1. BUSINESS
The Corporation
In 1933,
President Franklin D. Roosevelt proposed and the U.S. Congress created the
Tennessee Valley Authority (“TVA”), a government corporation. TVA was
created, among other things, to improve navigation on the Tennessee River,
reduce the damage from destructive flood waters within the Tennessee River
System and downstream on the lower Ohio and Mississippi Rivers, further the
economic development of TVA’s service area in the southeastern United States,
and sell the electricity generated at the facilities TVA operates.
Today,
TVA operates the nation’s largest public power system and supplies power in most
of Tennessee, northern Alabama, northeastern Mississippi, and southwestern
Kentucky and in portions of northern Georgia, western North Carolina, and
southwestern Virginia to a population of nearly nine million
people. In 2008, the revenues from TVA’s power program were $10.4
billion and accounted for virtually all of TVA’s revenues.
TVA also
manages the Tennessee River and its tributaries — the United States’ fifth
largest river system — to provide, among other things, year-round navigation,
flood damage reduction, and affordable and reliable
electricity. Consistent with these primary purposes, TVA also manages
the river system to provide recreational opportunities, adequate water supply,
improved water quality, and economic development. TVA’s management of
the Tennessee River and its tributaries will sometimes be referred to as TVA’s
“stewardship” program in this Annual Report.
Initially,
all TVA operations were funded by federal appropriations. Direct
appropriations for the TVA power program ended in 1959, and appropriations for
TVA’s stewardship, economic development, and multipurpose activities ended in
1999. Since 1999, TVA has funded all of its operations almost
entirely from the sale of electricity and power system financings.
On May
31, 2007, the TVA Board of Directors (“TVA Board”) approved the 2007 Strategic
Plan (“Strategic Plan”). The Strategic Plan focuses on TVA’s
performance in the following five broad areas and establishes general guidelines
for each area:
Customers:
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Maintain
power reliability, provide competitive rates, and build trust with TVA’s
customers;
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People:
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Build
pride in TVA’s performance and
reputation;
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Financial:
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Adhere
to a set of sound financial guiding principles to improve TVA’s fiscal
performance;
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Assets:
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Use
TVA’s assets to meet market demand and deliver public value;
and
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Operations:
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Improve
performance to be recognized as an industry
leader.
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See Item
7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Executive Summary
— 2008 Performance Indicators for a
discussion of the corporate-level metrics that TVA used during 2008 to monitor
its progress toward successful implementation of the Strategic
Plan.
Service Area
The area
in which TVA sells power, its service area, is defined by two pieces of
Congressional legislation: the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§
831-831ee (as amended, the “TVA Act”) and an amendment to the Federal Power Act
(“FPA”) known as the “anti-cherrypicking provision.”
Under the
TVA Act, subject to certain minor exceptions, TVA may not, without specific
authorization from the U.S. Congress, enter into contracts which would have the
effect of making it, or the distributor customers of its power, a source of
power supply outside the area for which TVA or its distributor customers were
the primary source of power supply on July 1, 1957. This provision is
referred to as the “fence” because it bounds TVA’s sales activities, essentially
limiting TVA to power sales within a defined service area.
Correspondingly,
the FPA, primarily through the anti-cherrypicking provision, prevents the
Federal Energy Regulatory Commission (“FERC”) from ordering TVA to provide
access to its transmission lines to others for the purpose of using TVA’s
transmission lines to deliver power to customers within substantially all of
TVA’s defined service area. As a result, the anti-cherrypicking
provision reduces TVA’s exposure to loss of revenue.
Sales of
electricity accounted for substantially all of TVA’s operating revenues in 2008,
2007, and 2006, amounting to $10.3 billion, $9.2 billion, and $8.8 billion,
respectively. TVA’s revenues by state for the last three years are
detailed in the table below.
Electricity
Sales Revenues by State
For the
years ended September 30
(in
millions)
2008
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2007
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2006
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Alabama
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$ | 1,410 | $ | 1,264 | $ | 1,239 | ||||||
Georgia
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238 | 206 | 226 | |||||||||
Kentucky
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1,192 | 1,084 | 902 | |||||||||
Mississippi
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923 | 804 | 798 | |||||||||
North
Carolina
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50 | 58 | 36 | |||||||||
Tennessee
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6,389 | 5,740 | 5,621 | |||||||||
Virginia
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37 | 7 | 5 | |||||||||
Subtotal
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10,239 | 9,163 | 8,827 | |||||||||
Sale
for resale
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13 | 17 | 13 | |||||||||
Subtotal
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10,252 | 9,180 | 8,840 | |||||||||
Other
revenues
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130 | 146 | 143 | |||||||||
Operating
revenues
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$ | 10,382 | $ | 9,326 | $ | 8,983 |
TVA
SERVICE AREA
TVA is
primarily a wholesaler of power. TVA sells power at wholesale to
distributor customers, consisting of municipalities and cooperatives that resell
the power to their customers at a retail rate. TVA also sells power
to (1) directly served customers, consisting primarily of federal agencies and
customers with large or unusual loads, and (2) exchange power customers
(electric systems that border TVA’s service area) with which TVA has entered
into exchange power arrangements.
Operating
revenues by customer type for each of the last three years are set forth in the
table below. In this table, sales to industries directly served are
included in Industries
directly served, and sales to federal agencies directly served and to
exchange power customers are included in Federal agencies and
other.
Operating
Revenues by Customer Type
For
the years ended September 30
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(in
millions)
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2008
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2007
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2006
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Municipalities
and cooperatives
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$ | 8,659 | $ | 7,847 | $ | 7,659 | ||||||
Industries
directly served
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1,472 | 1,221 | 1,065 | |||||||||
Federal
agencies and other
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Federal
agencies directly served
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108 | 95 | 103 | |||||||||
Off-system
sales
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13 | 17 | 13 | |||||||||
Subtotal
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10,252 | 9,180 | 8,840 | |||||||||
Other
revenues
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130 | 146 | 143 | |||||||||
Operating
revenues
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$ | 10,382 | $ | 9,326 | $ | 8,983 |
Municipalities
and Cooperatives
Revenues
from distributor customers accounted for 83.4 percent of TVA’s total operating
revenues in 2008. At September 30, 2008, TVA had wholesale power
contracts with 159 municipalities and cooperatives. All of these
contracts require distributor customers to purchase all of their electric power
and energy requirements from TVA.
All
distributor customers purchase power under one of three basic termination notice
arrangements:
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Contracts
that require five years’ notice to
terminate;
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Contracts
that require 10 years’ notice to terminate;
and
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Contracts
that require 15 years’ notice to
terminate.
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The
number of distributor customers with the contract arrangements described above,
the revenues derived from such arrangements in 2008, and the percentage of TVA’s
2008 total operating revenues represented by these revenues are summarized in
the table below.
TVA
Distributor Customer Contracts
As
of September 30, 2008
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Contract
Arrangement
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Number
of Distributor Customers
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Sales
to Distributor Customers in 2008
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Percentage
of Total Operating Revenues in 2008
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(in
millions)
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15-Year
termination notice
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5 | $ | 93 | 0.9 | % | |||||||
10-Year
termination notice
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48 | 2,865 | 27.6 | % | ||||||||
5-Year
termination notice *
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103 | 5,645 | 54.4 | % | ||||||||
Notice
given - less than 5 years remaining *
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3 | ** | 56 | 0.5 | % | |||||||
Total
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159 | $ | 8,659 | 83.4 | % |
*
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Ordinarily
the distributor customer and TVA have the same termination notice period;
however, in contracts with six of the distributor customers with five-year
termination notices, TVA has a 10-year termination notice (which becomes a
five-year termination notice if TVA loses its discretionary wholesale
rate-setting authority). Also, under TVA’s contract with
Bristol Virginia Utilities, a five-year termination notice may not be
given until January 2018.
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**
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One
of these contracts, amounting to 0.1% of operating revenues, terminated on
November 20, 2008.
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TVA’s two
largest distributor customers — Memphis Light, Gas and Water Division (“MLGW”)
and Nashville Electric Service (“NES”) — have contracts with five-year and
10-year termination notice periods, respectively. Although no single
customer accounted for 10 percent or more of TVA’s total operating revenues in
2008, sales to MLGW and NES accounted for 8.4 percent and 7.9 percent,
respectively.
On
January 1, 2008, Bristol Virginia Utilities (“BVU”) again became a distributor
customer of TVA power. TVA had provided wholesale power to BVU from
1945 to 1997. The contract has a minimum 15-year term, and a
five-year termination notice may not be given until January 2018. The
rates under this contract are intended to recover the cost of reintegrating BVU
into TVA’s power supply plan and serving its customer load.
The power
contracts between TVA and the distributor customers provide for purchase of
power by the distributor customers at the wholesale rates established by the TVA
Board, which, beginning with 2007, are adjusted quarterly to reflect changing
fuel and purchased power costs. See Item 1, Business — Rate Actions.
TVA has a
role in regulating the distributor customers since most of the power contracts
between TVA and the distributor customers specify the resale rates that
distributor customers charge their power customers. These rates are
revised from time to time, subject to TVA approval, to reflect changes in costs,
including changes in the wholesale cost of power, and are designed to conform to
the TVA Act’s objective of providing an adequate supply of power at the lowest
feasible rates. The distributor customers’ resale rates are divided
into the classifications of residential, general power, and
manufacturing. The general power and manufacturing classifications
are further divided into subclassifications according to their load
size. In addition, TVA seeks to ensure that the electric system
revenues of the distributor customers are used for electric system
purposes.
Other
Customers
Revenues
from industrial customers directly served accounted for 14.2 percent of TVA’s
total operating revenues in 2008. In 2008, contracts for customers
directly served were generally for terms ranging from five to 10
years. These contracts are subject to termination by TVA or the
customer upon a minimum notice period that varies according to the customer’s
contract demand and the period of time service has been provided.
The
United States Enrichment Corporation (“USEC”) is TVA’s largest industrial
customer directly served. Sales to USEC for its Paducah, Kentucky,
facility represented 5.3 percent of TVA’s total operating revenues in
2008. TVA’s current contract with USEC expires on May 31,
2012. See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations — Risk Management Activities
— Credit
Risk. In January 2004, USEC announced its decision to
construct a new commercial centrifuge facility in Piketon, Ohio, which is
outside TVA’s service area. TVA continues to plan for USEC’s
announced intention to reduce its electricity purchases and believes USEC will
reduce its electricity purchases at the Paducah, Kentucky, facility from about
2,000 megawatts at its peak to less than 50 megawatts. Since
TVA’s need to buy purchased power will decrease with USEC’s departure, TVA does
not expect its results of operation or cash flows to be to be adversely
effected.
Rate Authority
TVA is
self-regulated with respect to rates, and the TVA Act gives the TVA Board sole
responsibility for establishing the rates TVA charges for
power. These rates are not subject to judicial review or to review or
approval by any state or federal regulatory body.
Under the
TVA Act, TVA is required to charge rates for power which will produce gross
revenues sufficient to provide funds for:
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•
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Operation,
maintenance, and administration of its power
system;
|
|
•
|
Payments
to states and counties in lieu of taxes (“tax
equivalents”);
|
|
•
|
Debt
service on outstanding
indebtedness;
|
|
•
|
Payments
to the U.S. Treasury in repayment of and as a return on the government’s
appropriation investment in TVA’s power facilities (the “Power Facilities
Appropriation Investment”); and
|
|
•
|
Such
additional margin as the TVA Board may consider desirable for investment
in power system assets, retirement of outstanding bonds, notes, or other
evidences of indebtedness (“Bonds”) in advance of maturity, additional
reduction of the Power Facilities Appropriation Investment, and other
purposes connected with TVA’s power
business.
|
In
setting TVA’s rates, the TVA Board is charged by the TVA Act to have due regard
for the primary objectives of the TVA Act, including the objective that power
shall be sold at rates as low as are feasible. See Note 1 — General.
Revenue
Requirements
In
setting rates to cover the costs set out in the TVA Act, TVA uses a debt-service
coverage (“DSC”) methodology to derive annual revenue requirements in a manner
similar to that used by other public power entities that also use the DSC rate
methodology. The DSC method is essentially a measure of an
organization’s ability to cover its operating costs and to satisfy its
obligations to pay principal and interest on debt. TVA believes this
method is appropriate because of TVA’s debt-intensive capital
structure. This ratemaking approach is particularly suitable for use
by highly leveraged enterprises (i.e., enterprises financed primarily, if not
entirely, by debt capital).
The
revenue requirements (or projected costs) are calculated under the DSC method as
the sum of the following components:
|
•
|
Fuel
and purchased power costs;
|
|
•
|
Operating
and maintenance costs;
|
|
•
|
Tax
equivalents; and
|
|
•
|
Debt
service coverage.
|
Once the
revenue requirements (or projected costs) are determined, this amount is
compared to the projected revenues for the year in question, at existing rates,
to arrive at the shortfall or surplus of revenues as compared to the projected
costs. Subject to TVA Board approval, power rates would be adjusted
to a level sufficient to produce revenues approximately equal to projected
costs. This methodology reflects the cause-and-effect relationship between a
regulated entity’s costs and the corresponding rates the entity charges for its
regulated products and services.
Rate Actions
On August
20, 2008, the TVA Board approved a base rate increase effective October 1,
2008. The increase is related to rising fuel costs that are not
recovered by the fuel cost adjustment (“FCA”), continuing effects from drought
conditions, as well as TVA’s continuing need for investment in generation and
transmission facilities, clean air technology, energy efficiency and peak
reduction initiatives, and information technology systems. It is anticipated
that the increase of the base charges will produce approximately $310 million of
additional accrued revenue in 2009, which is expected to have an estimated $275
million cash impact during 2009. The increase, combined with the FCA
increase that became effective at the same time, results in an average total
increase in wholesale charges of 20 percent from the previously effective
charges. See Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Executive Summary — Challenges
During 2008.
Fuel Cost
Adjustment. As of September 30, 2008, TVA had recognized a
regulatory asset of $4 million and a current receivable of $24 million
representing deferred fuel and purchased power costs to be recovered through the
FCA in future periods. Under TVA’s FCA methodology, adjustments to
rates are based on the difference between forecasted and baseline (budgeted)
costs for the upcoming quarter. Because the FCA adjustments are
forward-looking, there is typically a difference between what is collected in
rates and FCA-eligible expenses that are actually incurred over the course of
the quarter. This difference is added to or deducted
from certain accounts on TVA’s balance sheet. The higher or lower
costs added to or deducted from the balance sheet accounts are then amortized to
expense in the periods in which they are to be collected in revenues. This
methodology allows better matching of the revenues with associated expenses,
although TVA’s cash flow can be negatively impacted by this process due to
timing of collection of revenues and payments related to fuel and purchased
power. The FCA amount implemented in October 2008 was 1.806 cents per
kilowatt-hour and was expected to produce an estimated $669 million in revenue
during the first quarter of 2009. See Note 1 — Cost-Based Regulation
and Accounts
Receivable.
Load and Energy Forecasts
TVA
produces a range of forecasts of future load and energy requirements using
multiple models driven by historical TVA loads and regional economic forecasts
of employment, population, and electricity and gas prices. Numerous
factors, such as weather conditions and the health of the regional economy,
could cause actual results to differ materially from TVA’s
forecasts. See Forward-Looking
Information. TVA believes that new generation sources will be
needed to meet load growth under most likely scenarios. See Item 7 —
Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Executive Summary
— Future Challenges.
Power Supply
General
Power
generating facilities operated by TVA at September 30, 2008, included 29
conventional hydroelectric sites, one pumped storage hydroelectric site, 11
coal-fired sites, three nuclear sites, 11 combustion turbine sites, two diesel
generator sites, one wind energy site, one digester gas site, one biomass
cofiring site, and 15 solar energy sites. In addition, TVA acquires
power under power purchase agreements of varying duration as well as short-term
contracts of less than 24-hour duration (“spot market”).
Generation
Facilities
The
following table summarizes TVA’s net generation in millions of kilowatt-hours by
generating source and the percentage of all electric power generated by TVA for
the years indicated:
Power
Supply from TVA-Operated Generation Facilities
For the
years ended September 30
(millions
of kWh)
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
Coal-fired
|
98,752 | 62 | % | 100,169 | 64 | % | 99,598 | 64 | % | 98,361 | 62 | % | 94,618 | 61 | % | |||||||||||||||||||||||||
Nuclear
|
51,371 | 33 | % | 46,441 | 30 | % | 45,313 | 29 | % | 45,156 | 28 | % | 46,003 | 30 | % | |||||||||||||||||||||||||
Hydroelectric
|
6,685 | 4 | % | 9,047 | 6 | % | 9,961 | 6 | % | 15,723 | 10 | % | 13,916 | 9 | % | |||||||||||||||||||||||||
Combustion
turbine and diesel generators
|
1,386 | 1 | % | 705 |
<1
|
% | 613 |
<1
|
% | 595 |
<1
|
% | 278 |
<1
|
% | |||||||||||||||||||||||||
Renewable
resources *
|
39 |
<1
|
% | 27 |
<1
|
% | 36 |
<1
|
% | 47 |
<1
|
% | 35 |
<1
|
% | |||||||||||||||||||||||||
Total
|
158,233 | 100 | % | 156,389 | 100 | % | 155,521 | 100 | % | 159,882 | 100 | % | 154,850 | 100 | % |
Note:
*
|
Renewable
resources for years 2004 through 2006 have been adjusted to remove
renewable resources amounts that were acquired under purchased power
agreements and included in this table in TVA’s 2006 Annual Report on Forms
10-K as amended. These adjustments resulted in reductions in
the amount of renewable resources by 13 million kWh for 2004, 14 million
kWh for 2005, and 15 million kWh for 2006. Also, for years 2004
through 2006 the following amounts related to TVA’s digester gas cofiring
site have been reclassified from Coal-fired to Renewable resources: 30
million kWh for 2004, 43 million kWh for 2005, and 32 million kWh for
2006. Renewable resource facilities include a digester gas
cofiring site, a biomass cofiring site, a wind energy site, and solar
energy sites.
|
The
following table indicates TVA’s average fuel expense by generation-type for the
years indicated:
Fuel
Expense Per kWh
For the
years ended September 30
(cents/kWh)
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Coal
|
2.29 | 2.13 | 2.02 | 1.65 | 1.48 | |||||||||||||||
Natural
gas and fuel oil
|
6.13 | 7.00 | 10.65 | 11.44 | 9.01 | |||||||||||||||
Nuclear
|
0.50 | 0.41 | 0.38 | 0.39 | 0.39 | |||||||||||||||
Average
fuel cost per kWh net thermal generation from all sources
|
1.72 | 1.61 | 1.54 | 1.30 | 1.14 |
Coal-Fired. TVA
has 11 coal-fired power sites consisting of 59 units. At September
30, 2008, these facilities accounted for 14,469 megawatts of summer net
capability. Net capability is defined as the ability of an electric
system, generating unit, or other system component to carry or generate power
for a specified time period. TVA’s coal-fired units were placed in
service between 1951 and 1973. See Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Executive Summary — Challenges During
2008.
Nuclear. TVA has
three nuclear sites consisting of six units in operation. At
September 30, 2008, these facilities accounted for 6,671 megawatts of summer net
capability. For a detailed discussion of TVA’s nuclear power program,
see Item 1, Business — Nuclear. For a
discussion of challenges faced by TVA’s nuclear power program during 2008, see
Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Executive
Summary — Challenges During 2008.
Hydroelectric. TVA
has 29 conventional hydroelectric sites consisting of 109 units. In
addition, TVA has one pumped storage facility consisting of four
units. At September 30, 2008, these facilities accounted for 5,503
megawatts of summer net capability. The amount of electricity that
TVA is able to generate from its hydroelectric plants depends on a number of
factors outside TVA’s control, including the amount of precipitation, runoff,
initial water levels, and the need for water for competing water management
objectives. The amount of electricity generation is also dependent
upon the availability of its hydroelectric generation plants, which is in TVA’s
control. When these factors are unfavorable, TVA must increase its
reliance on more expensive generation plants and purchased power. See
Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Executive
Summary — Challenges
During 2008 — Weather Conditions.
Combustion Turbine
Facilities. As of September 30, 2008, TVA operated 93
combustion turbine units, 87 of which are simple cycle and six of which are
combined cycle. The simple cycle units provide a maximum of 5,706
megawatts of summer net capability. The six combined cycle units
provide a maximum of 1,560 megawatts of summer net capability. Eighty
of the simple cycle units are fueled by either natural gas or diesel
fuel. The remaining seven simple cycle units as well as the six
combined cycle units are fueled by natural gas only. Seventy-six of
the simple cycle units are capable of quick-start response allowing full
generation capability in approximately 10 minutes. As of September
30, 2008, 24 of the simple cycle combustion turbine units are owned by private
entities and leased back to TVA under long-term leases.
Caledonia. TVA
entered into an operating lease agreement and various related contracts for the
Caledonia combined cycle facility located near Columbus, Mississippi, with a
commencement date of July 1, 2007. The lease agreement expires on
February 28, 2022. The Caledonia facility consists of three combined
cycle units with a summer net capability of 768 megawatts. TVA
assumed plant operations on December 10, 2007. The lease agreement
also includes an end-of-term purchase option.
Brownsville. In
November 2007, the TVA Board approved the purchase of a four-unit, 474 megawatt
summer net capability simple cycle, gas-fired, combustion turbine facility at a
price of $55 million. TVA agreed to purchase the facility, which is
located in Brownsville, Tennessee, from Brownsville Power I, LLC (“Brownsville
Power”). Brownsville Power is a wholly owned direct subsidiary of
Cinergy Capital & Trading, Inc. The purchase closed April 18,
2008. After the operating systems were evaluated and tested, the
units became available for dispatch in June 2008.
Southaven. TVA
also agreed to purchase, as part of a bankruptcy auction process, a three-unit,
792-megawatt summer net capability combined cycle, combustion turbine facility
located in Southaven, Mississippi, owned by Southaven Power, LLC (“Southaven”)
for a base purchase price of $461 million. In addition to the
purchase price, TVA agreed to pay $5 million to Southaven in connection with the
termination of an operation and maintenance agreement held by a Southaven
affiliate. The purchase closed May 9, 2008, and the plant was
available for immediate operation. On September 30, 2008, Seven
States Southaven LLC (“SSSL”) purchased an undivided 69.69 percent interest in
TVA’s Southaven combined cycle, combustion turbine facility. SSSL and
TVA have entered into an agreement under which TVA leases SSSL’s undivided
interest in the Southaven facility and operates the facility through April 30,
2010. See Note 4 — New Generation and Note 13 —
Leaseback
Obligations.
Capacity
Expansion. TVA is constructing an additional combined cycle facility,
Lagoon Creek Combined Cycle, which is currently scheduled to be in service in
June 2010 and have a summer net capability of 540 megawatts. Also,
engineering and procurement of equipment is underway for the conversion of the
Gleason simple cycle site to a combined cycle site. This conversion
is expected to add approximately 375 megawatts of summer net capability and to
be completed in January 2012. TVA’s Brownsville and Gleason simple
cycle sites do not currently have firm gas transportation or the ability to burn
oil as a back-up fuel; however, TVA has available interruptible gas supply for
these sites through May 2012 which is the norm for simple cycle single fuel
sites. TVA has entered into a firm gas transportation agreement with
a supplier for the periods of June 1, 2012, through May 31, 2022. In
addition, TVA plans to acquire combustion turbine units for installation at the
New Caledonia facility that it acquired in February 2008. The units
are expected to be in simple cycle service in June 2013 and have a summer net
capability of 458 megawatts.
Diesel
Generators. TVA has two diesel generator plants consisting of
nine units. At September 30, 2008, these facilities provided 13
megawatts of summer net capability.
Renewable
Resources. TVA has one wind energy site with three wind
turbines, one biomass cofiring site, one digester gas cofiring site, and 15
solar energy sites. At September 30, 2008, the digester gas cofiring
site provided TVA with about three megawatts of renewable summer net
capability. In addition, the wind energy site, the solar energy
sites, and the biomass cofiring site provided additional megawatts of
capability, but because of the nature of this capability, it is not considered
to be summer net capability.
Purchased
Power and Other Agreements
TVA
acquires power from a variety of power producers through long-term and
short-term power purchase agreements as well as through power spot market
purchases. During 2008, TVA acquired 41 percent of the power that it
purchased on the power spot market, nine percent through short-term power
purchase agreements, and 50 percent through long-term power purchase agreements
that expire more than one year after September 30, 2008.
At
September 30, 2008, TVA’s long-term power purchase agreements provided TVA with
2,789 megawatts of summer net capability. See Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Activities — Credit
Risk.
A portion
of TVA’s capability provided by power purchase agreements is provided under
contracts that expire between 2010 and 2032, and the most significant of these
contracts are discussed below.
|
•
|
Calpine Energy Services,
L.P. TVA has contracted with Calpine Energy
Services, L.P. (“Calpine”) for 720 megawatts of summer net capability from
a natural gas-fired generating plant located at Decatur, Alabama. This
contract expires on August 31, 2012. In addition, TVA has
contracted with Calpine for 500 megawatts of summer net capability from a
natural gas-fired generating plant located in Morgan County,
Alabama. While this contract was executed on August 11, 2008,
it will not go into effect until January 1, 2009. This contract
expires on December 31, 2011.
|
|
•
|
Suez Energy Marketing NA, Inc.
TVA has contracted with Suez Energy Marketing NA, Inc. (“Suez”) for
650 megawatts of summer net capability from a natural gas-fired generating
plant located near Ackerman, Mississippi. TVA’s contract with Suez expires
on December 31, 2012.
|
|
•
|
Choctaw Generation,
L.P. TVA has contracted with Choctaw Generation, L.P.
(“Choctaw”) for 440 megawatts of summer net capability from a
lignite-fired generating plant in Chester, Mississippi. TVA’s
contract with Choctaw expires on March 31, 2032. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations — Risk
Management Activities — Credit
Risk.
|
|
•
|
Alcoa Power Generating,
Inc. Four hydroelectric plants owned by Alcoa Power
Generating, Inc. (“APGI”), formerly known as Tapoco, Inc., are operated in
coordination with the TVA system. Under contractual arrangements with APGI
which terminate on June 20, 2010, TVA dispatches the electric power
generated at these facilities and uses it to partially supply Alcoa’s
energy needs. TVA’s arrangement with APGI provides 347
megawatts of summer net capability.
|
|
•
|
Invenergy TN
LLC. TVA has contracted with Invenergy TN LLC for 27
megawatts of wind energy generation from 15 wind turbine generators
located on Buffalo Mountain near Oak Ridge, Tennessee. Because of
the nature of wind conditions in the TVA service area, these generators
provide energy benefits but are not included in TVA’s summer net
capability total. TVA's contract with Invenergy TN LLC expires
on December 31, 2024.
|
|
•
|
Southeastern Power
Administration. TVA, along with others, contracted with
the Southeastern Power Administration (“SEPA”) to obtain power from eight
U.S. Army Corps of Engineers hydroelectric facilities on the Cumberland
River system. The agreement with SEPA can be terminated upon
three years’ notice, but this notice of termination may not become
effective prior to June 30, 2017. The contract originally
required SEPA to provide TVA an annual minimum of 1,500 hours of power for
each megawatt of TVA’s 405 megawatt allocation, and all surplus power from
the Cumberland River system. Because hydroelectric production
has been reduced at two of the hydroelectric facilities on the Cumberland
River system (Wolf Creek and Center Hill Dams) and because of reductions
in the summer stream flow on the Cumberland River, SEPA declared “force
majeure” on February 25, 2007. SEPA then instituted an
emergency operating plan that:
|
|
–
|
Eliminates
its obligation to provide any affected customer (including TVA) with a
minimum amount of power;
|
|
–
|
Provides
for all affected customers (except TVA) to receive a pro rata share of a
portion of the gross hourly generation from the eight Cumberland River
hydroelectric facilities;
|
|
–
|
Provides
for TVA to receive all of the remaining hourly generation (minus station
service for those facilities);
|
|
–
|
Eliminates
the payment of demand charges by customers (including TVA) since there is
significantly reduced dependable capacity on the Cumberland River system;
and
|
|
–
|
Increases
the rate charged per kilowatt-hour of energy received by SEPA’s customers
(including TVA), because SEPA is legally required to charge rates that
cover its costs.
|
It is
unclear how long the emergency operating plan will remain in
effect.
Under the
Public Utility Regulatory Policies Act of 1978, as amended by the Energy Policy
Act of 1992 and the Energy Policy Act of 2005, TVA is required to purchase
energy from qualifying facilities, cogenerators, and small power producers at
TVA's avoided cost of self-generating or purchasing this energy from another
source.
During
the past five years, TVA supplemented its power generation through power
purchases as follows:
Purchased Power *
For the
years ended September 30
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Millions
of kWh
|
20,887 | 22,141 | 19,019 | 14,892 | 14,025 | |||||||||||||||
Percent
of TVA’s Total Power Supply
|
11.6 | 12.4 | 10.9 | 8.5 | 8.3 |
Note
*
|
Purchased
power amounts for years 2004, 2005, and 2006 have been adjusted to remove
APGI purchases and include them as a credit to power
sales.
|
For more
information regarding TVA’s power purchase obligations, see Note 15 — Commitments — Power Purchase
Obligations.
Purchasing
power from others will likely remain a part of how TVA meets the power needs of
its service area. The Strategic Plan establishes a goal of balancing
production capabilities with power supply requirements by promoting the
conservation and efficient use of electricity and, when necessary, buying,
building, and/or leasing assets or entering into purchased power
agreements. Achieving this goal will allow TVA to reduce its reliance
on purchased power. Although purchased power volume decreased in
2008, TVA purchased significantly more power than planned due to decreased
hydroelectric generation of 26.1 percent as a result of ongoing drought
conditions in 2008. Capacity margins in areas surrounding TVA have
narrowed over the past three years. However, due to current economic
conditions, this trend may flatten or reverse due to lower system
loads. A return to normal weather patterns would likely increase
hydroelectric generation and reduce reliance on purchased power. See
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Challenges
During 2008 — Weather
Conditions.
Net
Capability
The
following table summarizes the summer net capability in megawatts TVA had
available as of September 30, 2008:
SUMMER
NET CAPABILITY 1
As of
September 30, 2008
Source
of Capability
|
Location
|
Number
of Units
|
Summer
Net Capability2
(MW)
|
Date
First Unit Placed in Service
|
Date
Last Unit Placed in Service
|
||||||||||||
TVA GENERATING FACILITIES
|
|||||||||||||||||
Coal-Fired
|
|||||||||||||||||
Allen
|
Tennessee
|
3
|
735
|
1959 | 1959 | ||||||||||||
Bull
Run
|
Tennessee
|
1
|
882
|
1967 | 1967 | ||||||||||||
Colbert
|
Alabama
|
5
|
1,147
|
|
1955 | 1965 | |||||||||||
Cumberland
|
Tennessee
|
2
|
2,466
|
|
1973 | 1973 | |||||||||||
Gallatin
|
Tennessee
|
4
|
964
|
1956 | 1959 | ||||||||||||
John
Sevier
|
Tennessee
|
4
|
704
|
1955 | 1957 | ||||||||||||
Johnsonville
|
Tennessee
|
10
|
1,128
|
1951 | 1959 | ||||||||||||
Kingston
|
Tennessee
|
9
|
1,411
|
1954 | 1955 | ||||||||||||
Paradise
|
Kentucky
|
3
|
2,201
|
1963 | 1970 | ||||||||||||
Shawnee
|
Kentucky
|
10
|
1,323
|
1953 | 1956 | ||||||||||||
Widows
Creek
|
Alabama
|
8
|
1,508
|
1952 | 1965 | ||||||||||||
Total
Coal-Fired
|
59
|
14,469
|
|||||||||||||||
Nuclear
|
|||||||||||||||||
Browns
Ferry
|
Alabama
|
3
|
3,280
|
1974 | 1977 | ||||||||||||
Sequoyah
|
Tennessee
|
2
|
2,282
|
1981 | 1982 | ||||||||||||
Watts
Bar
|
Tennessee
|
1
|
1,109
|
1996 | 1996 | ||||||||||||
Total
Nuclear
|
6
|
6,671
|
|||||||||||||||
Hydroelectric
|
|||||||||||||||||
Conventional
Plants
|
Alabama
|
36
|
1,498
|
1925 | 1962 | ||||||||||||
Georgia
|
2
|
31
|
1931 | 1956 | |||||||||||||
Kentucky
|
5
|
175
|
1944 | 1948 | |||||||||||||
North
Carolina
|
6
|
383
|
1940 | 1956 | |||||||||||||
Tennessee
|
60
|
1,699
|
1912 | 1972 | |||||||||||||
Pumped
Storage
|
Tennessee
|
4
|
1,717
|
1978 | 1979 | ||||||||||||
Total
Hydroelectric
|
113
|
5,503
|
|||||||||||||||
Combustion Turbine 3
|
|||||||||||||||||
Allen
|
Tennessee
|
20
|
478
|
1971 | 1972 | ||||||||||||
Brownsville
|
Tennessee
|
4
|
474
|
2008 | 2008 | ||||||||||||
Caledonia
|
Mississippi
|
3
|
768
|
2007 | 2007 | ||||||||||||
Colbert
|
Alabama
|
8
|
384
|
1972 | 1972 | ||||||||||||
Gallatin
|
Tennessee
|
8
|
636
|
1975 | 2000 | ||||||||||||
Gleason
|
Tennessee
|
3
|
519
|
2007 | 2007 | ||||||||||||
Johnsonville
|
Tennessee
|
20
|
1,218
|
1975 | 2000 | ||||||||||||
Kemper
|
Mississippi
|
4
|
329
|
2001 | 2001 | ||||||||||||
Lagoon
Creek
|
Tennessee
|
12
|
1,009
|
2002 | 2002 | ||||||||||||
Marshall
County
|
Kentucky
|
8
|
659
|
2007 | 2007 | ||||||||||||
Southaven
|
Mississippi
|
3
|
792
|
2008 | 2008 | ||||||||||||
Total
Combustion Turbine
|
93
|
7,266
|
|||||||||||||||
Diesel Generator
|
|||||||||||||||||
Meridian
|
Mississippi
|
5
|
9
|
1998 | 1998 | ||||||||||||
Albertville
|
Alabama
|
4
|
|
4
|
2000 | 2000 | |||||||||||
Total
Diesel Generators
|
9
|
13
|
|||||||||||||||
|
|||||||||||||||||
Renewable Resources
|
3
|
||||||||||||||||
Total
TVA Generating Facilities
|
33,925
|
||||||||||||||||
|
|||||||||||||||||
POWER PURCHASE AND OTHER
AGREEMENTS
|
2,789
|
||||||||||||||||
Total
Summer Net Capability
|
36,714
|
Notes
(1)
|
Net
capability is defined as the ability of an electric system, generating
unit, or other system component to carry or generate power for a specified
time period.
|
(2)
|
TVA
estimated total winter net capability at September 30, 2008, to be
approximately 37,085 megawatts, including hydroelectric capability of
approximately 5,265 megawatts, coal-fired capability of approximately
14,870 megawatts, nuclear power capability of approximately 6,898
megawatts, combustion turbine capability of approximately 7,150 megawatts,
diesel generator capability of approximately 13 megawatts, renewable
assets capability of approximately three megawatts, and capability from
power purchase agreements of approximately 2,886 megawatts. The
difference in winter and summer net capability is primarily due to more
efficient fossil fuel-fired and nuclear generation performance in cold
weather.
|
(3)
|
See
Item 1, Business — Power
Supply —
Generation Facilities — Combustion Turbine Facilities, for a
description of TVA-operated combustion turbine
facilities.
|
Energy Efficiency Initiatives
On May
19, 2008, the TVA Board approved staff recommendations for an Energy Efficiency
and Demand Response Plan. The plan seeks to slow the current rate of
growth in the TVA service area’s power demand by providing opportunities for
residential, business, and industrial consumer groups to use energy more
efficiently. TVA plans to work with the distributor customers to
identify energy efficiency opportunities and to reduce peak
demand. TVA is also expanding the ways it informs consumers about
energy efficiency. In the short term, the plan proposes reducing the
growth in peak demand by up to 1,400 megawatts by the end of the
2012.
Renewable and Clean Energy
In May
2008, the TVA Board adopted an Environmental Policy that establishes objectives
of reducing load growth and meeting remaining load growth through lower carbon
emitting energy sources, including affordable renewables. Clean
energy is defined as coming from low and, effectively, zero-carbon emitting
supply and demand-side options, including renewables, nuclear, combined heat and
power, and energy efficiency.
Renewable
energy comes from generation that is sustainable and includes:
|
•
|
Wind
generation;
|
|
•
|
Solar
generation;
|
|
•
|
Landfill
methane generation;
|
|
•
|
Biomass
cofiring;
|
|
•
|
Dedicated
biomass generation;
|
|
•
|
Existing
hydroelectric generation; and
|
|
•
|
Incremental
and low-impact hydroelectric
generation.
|
In April
2000, TVA launched its Green Power Switch®
program. This program allows residential, commercial, and industrial
customers to voluntarily buy “kwh blocks” of specific renewable generation
(wind, solar, and digester gas). This was the first voluntary
certified green pricing program offered in the southeast United
States
Renewable
and clean energy technologies are often considered
collectively. However, they are largely unrelated technologically,
each having its own developmental challenges such as intermittency and varying
regional availability issues.
Technology
advancements will be needed to address some of the operation issues associated
with renewable energy, such as energy storage to address intermittency and
interconnection technologies to address onsite, non-grid connected renewables
and efficiencies.
Most
renewable energy resources are geographically specific. Some regions
of the Unites States have an abundance of wind and solar resources, whereas
other regions have hydroelectric resources. Regional differences and
limitations play a primary role in the types and amount of renewable and clean
energy developed in areas across the country. Within the area served
by TVA (southeast United States), two of the most abundant renewable sources are
hydroelectric and biomass. Feasible wind energy in this region is
primarily associated with mountain top and ridgeline installations, and the
total potential capacity is limited when compared to other parts of the nation
where wind energy is more abundant.
As of
September 30, 2008, TVA’s zero and near-zero carbon emitting sources
included:
Zero
or Low Carbon Emitting Generation
|
|||||
Source
|
Site/Units
|
Megawatts
|
|||
Nuclear
generation
|
6
units
|
6,671.0
|
|||
Conventional
hydroelectric generation *
|
109
units
|
3,786.0
|
|||
Wind
power purchase agreement *
|
15
units
|
27.0
|
|||
Methane
gas at Allen Fossil Plant *
|
2
units
|
8.0
|
|||
Biomass
cofiring at Colbert Fossil Plant *
|
4
units
|
7.0
|
|||
Landfill
methane gas purchase agreements *
|
2
sites
|
5.9
|
|||
Wind
generation *
|
3
units
|
2.0
|
|||
Solar
photovoltaic *
|
15 sites
|
0.3
|
|||
Total
|
156
units/sites
|
10,507.2
|
|||
*Renewable
generation
|
In May
2008, TVA completed a Renewable and Clean Energy Assessment (“Assessment”) which
estimated that by 2020 there could be 12,700 million kilowatt-hours of potential
renewable resources in the Tennessee Valley. The Assessment
determined that TVA’s lowest-cost options for additional regional renewables
include:
|
•
|
Completion
of the hydroelectric modernization
program;
|
|
•
|
Additional
low level biomass cofiring;
|
|
•
|
Additional
hydroelectric units at existing
dams;
|
|
•
|
Landfill
gas; and
|
|
•
|
Wind.
|
In 2008,
approximately 37 percent of TVA’s generation was from clean energy
sources. See Item 1, Business — Environmental Matters — Renewables and Clean
Energy.
Overview
TVA has
six operating nuclear units and has resumed construction of one nuclear unit
that is scheduled to be placed in service in 2013. Selected
statistics of each of these units are included in the table below.
TVA
Nuclear Power
As of
September 30, 2008
Nuclear
Unit
|
Status
|
Installed
Capacity (MW)
|
Net
Capacity Factor for 2008
|
Date
of Expiration of Operating License
|
Date
of Expiration of Construction Permit
|
||||||||||||
Sequoyah
Unit 1
|
Operating
|
1,221 | 85.9 | 2020 | – | ||||||||||||
Sequoyah
Unit 2
|
Operating
|
1,221 | 89.5 | 2021 | – | ||||||||||||
Browns
Ferry Unit 1
|
Operating
|
1,150 | 92.1 | 2033 | – | ||||||||||||
Browns
Ferry Unit 2
|
Operating
|
1,190 | 96.6 | 2034 | – | ||||||||||||
Browns
Ferry Unit 3
|
Operating
|
1,190 | 71.6 | 2036 | – | ||||||||||||
Watts
Bar Unit 1
|
Operating
|
1,230 | 80.2 | 2035 | – | ||||||||||||
Watts
Bar Unit 2
|
Construction
resumed in December 2007
|
– | – | – | 2013 |
TVA began
a significant nuclear plant construction program in 1966 to meet projected
system load growth. At the height of its construction program, TVA
had 17 units either under construction or in commercial operation at seven plant
sites. In 1982, TVA canceled construction of four units because of
lower than expected load growth, and TVA canceled four more units in 1984 for
similar reasons.
By August
1985, TVA had delayed construction of two units each at Watts Bar and Bellefonte
Nuclear Plants and had shut down its three-unit Browns Ferry Nuclear Plant
(“Browns Ferry”) and two-unit Sequoyah Nuclear Plant (“Sequoyah”) because of an
increasing number of technical and operational problems. The Nuclear
Regulatory Commission (“NRC”) required TVA to address program and management
deficiencies and to provide its corrective actions to the NRC before restarting
any of its licensed nuclear units or requesting a license for Watts Bar Nuclear
Plant Unit 1 (“Watts Bar”). After implementing a comprehensive
recovery plan, TVA restarted Sequoyah Unit 2 in May 1988 and Sequoyah Unit 1 in
November 1988. TVA restarted Browns Ferry Unit 2 in May 1991 and
Browns Ferry Unit 3 in November 1995. Construction of Watts Bar Unit
1 was successfully completed, and the unit commenced full power commercial
operation in May 1996.
TVA is
undertaking an Extended Power Uprate (“EPU”) project at Browns Ferry which is
expected to increase the amount of electrical generation by increasing the
amount of steam produced by the reactors. This project is
expected to result
in approximately 125 megawatts of additional capability per unit as a
result of operating the reactor at 120 percent of the original
licensed thermal power. Additional fuel is added to the
reactor during each refueling outage to support the increased steam
production. The purpose of the EPU project is to complete
modifications to the plant required to accommodate the increased steam
flows and resulting electrical production. The NRC license for
operating the reactor must be modified to allow reactor operation at the
higher power level.
In November 2005, TVA
canceled the construction of Units 1 and 2 at Bellefonte Nuclear Plant
(“Bellefonte”). Two months prior to the cancellation of these units,
the Bellefonte site was selected by NuStart Development LLC (“NuStart”) as one
of two sites for the development of a combined license application for two new
reactors using the Westinghouse Advanced Passive 1000 (“AP1000”) reactor
design. NuStart is an industry consortium composed of 10 utilities
and two reactor vendors whose purpose is to satisfactorily demonstrate the new
NRC licensing process for advanced design nuclear plants. TVA
submitted its combined operating license application (“COLA”) to the NRC for
Bellefonte Units 3 and 4 in October 2007, and it was accepted for
detailed review by the NRC on January 18, 2008. If approved, the license to
build and operate the plant would be issued to TVA. The NRC is expected to
complete an evaluation of its COLA review schedule in December 2008 prior to
making a decision as to the new schedule. The TVA Board has not made a decision
to construct a new plant at the Bellefonte site, and TVA continues to evaluate
all nuclear generation options at the site. As part of this evaluation, TVA
asked the NRC in August 2008 to reinstate the construction permits for its two
unfinished nuclear units also at the Bellefonte site. Reinstating the
construction permits would allow TVA to place the units in a deferred status
again with the NRC and would help TVA clarify the regulatory requirements and
continue to evaluate the feasibility of using Bellefonte Units 1 and 2 to meet
future base-load power demand.
On June
7, 2008, a joint petition in connection with TVA’s COLA for Bellefonte Units 3
and 4 for intervention and a request for a hearing was submitted to the NRC by
the Bellefonte Efficiency and Sustainability Team, the Blue Ridge Environmental
Defense League, and the Southern Alliance for Clean Energy. The
petitioners raised 19 contentions and subsequently added another with respect to
TVA’s COLA. Following TVA’s and NRC’s responses opposing the proposed
contentions, the Atomic Safety and Licensing Board (“ASLB”), which is presiding
over the proceeding, accepted four contentions submitted by two of the
petitioners. A hearing on these admitted contentions will be
conducted in the future. The admitted contentions involve questions
about the estimated costs of the new nuclear plant, the storage of low-level
radioactive waste, and the impact of the facility’s operations, in particular
the plant intake, on aquatic species.
On August
1, 2007, the TVA Board approved completing the construction of Watts Bar Unit
2. Prior to the approval, TVA conducted a detailed scoping,
estimating, and planning study to estimate the project’s cost, schedule, and
risks. Separately, TVA prepared a report evaluating potential
environmental impacts as required by the National Environmental Policy
Act. TVA has an NRC construction permit for Watts Bar Unit 2 that
expires in 2013. TVA will seek an operating license under NRC
regulations, and this process will include an opportunity for a public
hearing. Completing Watts Bar Unit 2 is expected to take
approximately 60 months and cost approximately $2.5 billion, excluding an
allowance for funds used during construction (“AFUDC”) and the cost of the first
core of fuel. When completed, Watts Bar Unit 2 is expected to provide
1,180 megawatts of summer net capability.
Spent
Nuclear Fuel
Under the
Nuclear Waste Policy Act of 1982, TVA (and other domestic nuclear utility
licensees) entered into a contract with the U.S. Department of Energy (“DOE”)
for the disposal of spent nuclear fuel. Payments to DOE are based
upon TVA’s nuclear generation and charged to nuclear fuel
expense. Although the contracts called for DOE to begin accepting
spent nuclear fuel from the utilities by January 31, 1998, DOE announced
that it would not begin receiving spent nuclear fuel from any domestic nuclear
utility until 2010 at the earliest. TVA, like other nuclear
utilities, stores spent nuclear fuel in pools of borated water at its nuclear
sites. TVA would have had sufficient space to continue to store spent
nuclear fuel in those storage pools at its Sequoyah and Browns Ferry Nuclear
Plants indefinitely had DOE begun accepting spent nuclear fuel. DOE’s
failure to do so in a timely manner required TVA to construct dry cask storage
facilities at its Sequoyah and Browns Ferry Nuclear Plants and to purchase
special storage containers for the spent nuclear fuel. The Sequoyah
and Browns Ferry dry cask storage facilities have been constructed and approved
by the NRC and have been in use since 2004 and 2005, respectively, providing
storage capacity through 2030 at Sequoyah and 2019 at Browns
Ferry. Watts Bar has sufficient storage capacity in its spent fuel
pool to last until approximately 2015.
To
recover the cost of providing long-term, on-site storage for spent nuclear fuel,
TVA filed a breach of contract suit against the United States in the Court of
Federal Claims in 2001. In August 2006, the United States paid TVA
almost $35 million in damages awarded by the Court of Federal Claims, which
partially offset the construction costs of the dry cask storage facilities that
TVA incurred through 2004. In September 2008, the United States paid
TVA about $10.4 million for on-site spent nuclear fuel storage costs incurred
during 2005. Additional claims will be reviewed from
time-to-time.
Low-Level
Radioactive Waste
Low-level
radioactive waste (“radwaste”) results from the normal operation of nuclear
units and includes such materials as disposable protective clothing, mops, and
filters. TVA contracted to dispose of such waste at a Barnwell, South
Carolina, disposal facility through June 2008, when that facility closed to
radwaste generators located in states that are not members of the Atlantic
Interstate Low-Level Radioactive Waste Management Compact (“Atlantic
Compact”). None of TVA’s nuclear units are located in states that are
members of the Atlantic Compact. Since June 2008, TVA has continued
its practice of having certain types of radwaste processed and shipped to a
disposal facility in Clive, Utah, and TVA is also storing some radwaste at its
own facilities. TVA is capable of storing radwaste at its facilities
for an extended period of time and has done so in the past.
Nuclear
Decommissioning Trust
TVA
maintains a nuclear decommissioning trust to provide funding for the ultimate
decommissioning of its nuclear power plants. The trust is invested in
securities generally designed to achieve a return in line with overall equity
market performance. The assets of the trust as of September 30, 2008,
totaled $845 million, which is less than the present value of TVA’s estimated
future nuclear decommissioning costs as computed under the NRC funding
requirements and less than the present value of these costs as computed under
Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement
Obligations.” See Note 15 — Contingencies — Decommissioning
Costs and Note 18 —
Impact of Recent Financial Market Conditions on Investment
Portfolios. If market conditions do not improve, additional
funding may be required.
Nuclear
Insurance
The
Price-Anderson Act provides a layered framework of protection to compensate for
losses arising from a nuclear event. For the first layer, all NRC
nuclear plant licensees, including TVA, purchase $300 million of nuclear
liability insurance from American Nuclear Insurers for each plant with an
operating license. Funds for the second layer, the Secondary
Financial Program, would come from an assessment of up to $112 million from the
licensees of each of the 104 NRC licensed reactors in the United
States. The assessment for any nuclear accident would be limited to
$18 million per year per unit. American Nuclear Insurers, under a
contract with the NRC, administers the Secondary Financial
Program. With its six licensed units, TVA could be required to pay a
maximum of $671 million per nuclear incident, but it would have to pay no more
than $105 million per incident in any one year. When the
contributions of the nuclear plant licensees are added to the insurance proceeds
of $300 million, over $12 billion, including a five percent surcharge for legal
expenses, would be available. Under the Price-Anderson Act, if the
first two layers are exhausted, the U.S. Congress is required to take action to
provide additional funds to cover the additional losses.
TVA
carries property, decommissioning, and decontamination insurance of $4.6 billion
for its licensed nuclear plants, with up to $2.1 billion available for a loss at
any one site, to cover the cost of stabilizing or shutting down a reactor after
an accident. Some of this insurance, which is purchased from Nuclear
Electric Insurance Limited (“NEIL”), may require the payment of retrospective
premiums up to a maximum of approximately $72 million.
TVA
purchases accidental outage (business interruption) insurance for TVA’s nuclear
sites from NEIL. In the event that an accident covered by this policy
takes a nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA,
after a waiting period, an indemnity (a set dollar amount per week) up to a
maximum indemnity of $490 million per unit. This insurance policy may
require the payment of retrospective premiums up to a maximum of approximately
$30 million. See Note 15 — Contingencies — Nuclear
Insurance.
Fuel Supply
General
TVA’s
consumption of various types of fuel depends largely on the demand for
electricity by TVA’s customers, the availability of various generating units,
and the availability and cost of fuel. The following table indicates
TVA’s costs for various fuels for the years indicated:
Fuel
Purchases for TVA-Owned Facilities
For the
years ended September 30
(in
millions)
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Coal
|
$ | 2,110 | $ | 1,922 | $ | 1,835 | $ | 1,495 | $ | 1,254 | ||||||||||
Natural
gas
|
131 | 62 | 60 | 63 | 22 | |||||||||||||||
Fuel
oil
|
61 | 22 | 46 | 28 | 17 | |||||||||||||||
Uranium
|
71 | 121 | 71 | 44 | 16 | |||||||||||||||
Total
|
$ | 2,373 | $ | 2,127 | $ | 2,012 | $ | 1,630 | $ | 1,309 |
TVA also
has tolling agreements under which it buys power production from outside
suppliers. Under these tolling agreements, TVA supplies the fuel to
the outside supplier, and the outsider supplier converts the fuel into
electricity. The following table indicates the cost of fuel supplied
by TVA under these agreements and also the average fuel expense per
kilowatt-hour for the years indicated:
Natural
Gas Purchases for Tolling Plants
For the
years ended September 30
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Cost
of Fuel (in millions)
|
$ | 457 | $ | 430 | $ | 288 | $ | 159 | $ | 10 | ||||||||||
Average
Fuel Expense (cents/kWh)
|
12.26 | 5.51 | 6.07 | 6.21 | 4.71 |
Due to
rising commodity prices across domestic and international markets, TVA
experienced increased costs in short-term markets for natural gas, fuel oil,
coal, and electricity during 2008. Market prices for these
commodities at September 30, 2008, and 2007, are shown below.
Commodity
Pricing Table
As of
September 30
Commodity
|
2008
|
2007
|
Percent
Increase
|
|||||||||
Natural
Gas (Henry Hub, $/mmBtu)
|
$ | 9.01 | $ | 6.87 | 31 | % | ||||||
Fuel
Oil (Gulf Coast, $/mmBtu)
|
21.38 | 12.97 | 65 | % | ||||||||
Coal
(FOB mine, $/ton)
|
48.13 | 29.65 | 62 | % | ||||||||
Electricity
(Into-TVA, $/MWh)
|
70.95 | 58.03 | 22 | % |
Since
September 30, 2008, the market prices for all of these commodities except for
coal have fallen. Market prices for these commodities at November 30,
2008, and September 30, 2008, are shown below.
Commodity
Pricing Table
|
||||||||||||
Commodity
|
Prices
As of November 30, 2008
|
Prices
As of
September
30, 2008
|
Percent
Change
|
|||||||||
Natural
Gas (Henry Hub, $/mmBtu)
|
$ | 6.71 | $ | 9.01 | (26 | )% | ||||||
Fuel
Oil (Gulf Coast, $/mmBtu)
|
12.20 | 21.38 | (43 | )% | ||||||||
Coal
(FOB mine $/ton)
|
58.76 | 48.13 | 22 | % | ||||||||
Electricity
(Into-TVA, $/MWh)
|
||||||||||||
On-Peak
(5 days x 16 hours)
|
38.00 | 70.95 | (46 | )% | ||||||||
Off-Peak
(5 days x 8 hours)
|
34.75 | 38.40 | (10 | )% |
Although
the FCA provides a mechanism to modify rates on a quarterly basis to recover
changing fuel and purchased power costs, there is a lag between the occurrence
of a change in fuel and purchased power costs and the reflection of the change
in rates. As a result, TVA’s cash flows can be negatively affected by
the FCA. As of September 30, 2008, TVA had approximately $28 million
in deferred fuel and purchased power costs that are expected to be recovered
through the FCA in future periods. See Item 1, Business — Rate Actions.
Coal
Coal
consumption at TVA’s coal-fired generating facilities during 2008 was 46.3
million tons. As of September 30, 2008, and 2007, TVA had 26 days and
23 days of system-wide coal supply at full burn, respectively, with a net book
value of coal inventory of $303 million and $264 million,
respectively.
TVA
utilizes both short-term and long-term coal contracts. Long-term coal
contracts generally last longer than one year, while short-term contracts are
usually for one year or less. During 2008, long-term contracts made
up 93 percent of coal purchases and short-term contracts accounted for the
remaining seven percent. TVA plans to continue signing contracts of
various lengths, terms, and coal quality to meet its expected burn and inventory
requirements. During 2008, TVA purchased coal by basin as
follows:
•
|
35
percent from the Illinois
Basin;
|
•
|
27
percent from the Powder River Basin in
Wyoming;
|
•
|
21
percent from the Uinta Basin of Utah and Colorado;
and
|
•
|
17
percent from the Appalachian Basin of Kentucky, Pennsylvania, Tennessee,
Virginia, and West Virginia.
|
Total
system coal inventories were at or above target levels for most of 2008. During
2008, 42 percent of TVA’s coal supply was delivered by rail, 19 percent was
delivered by barge, and 33 percent was delivered by a combination of barge and
rail. The remainder was delivered by truck.
Natural
Gas and Fuel Oil
During
2008, TVA purchased substantially all of its natural gas requirements from a
variety of suppliers under contracts with terms of one year or
less. TVA purchases substantially all of its natural gas to operate
combustion turbine peaking units and to supply fuel under power purchase
agreements in which TVA is the fuel supplier. At September 30, 2008,
all but two of TVA’s combustion turbine plants were dual fuel capable, and TVA
has fuel oil stored on each site for its dual fuel combustion turbines as a
backup to natural gas.
During
2008, TVA purchased substantially all of its fuel oil on the spot
market. At September 30, 2008, and 2007, the net book value of TVA’s
natural gas in inventory was $12 million and $3 million, respectively, and the
net book value of TVA’s fuel oil in inventory was $66 million and $50 million,
respectively.
Nuclear
Fuel
Converting
uranium to nuclear fuel generally involves four stages: the mining
and milling of uranium ore to produce uranium concentrates; the conversion of
uranium concentrates to uranium hexafluoride gas; enrichment of uranium
hexafluoride; and the fabrication of the enriched uranium hexafluoride into
usable fuel assemblies. TVA currently has 100 percent of its forward
three-year (2009 through 2011) uranium mining and milling requirements either in
inventory or under contract for its boiling water reactor units at Browns Ferry
Nuclear Plant and has 100 percent of its forward three-year (2009 through 2011)
uranium requirements under contract for its pressurized water reactor units at
Sequoyah and Watts Bar Nuclear Plants. In addition, TVA has 100
percent of its conversion, enrichment, and fabrication needs under contract
through 2011. Beyond 2011, TVA anticipates being able to fill its
needs by normal bidding processes for fuel cycle components as market forecasts
indicate that the fuel cycle components will be readily available.
TVA, DOE,
and some nuclear fuel contractors have entered into agreements that provide for
the blending down of surplus DOE highly enriched uranium (uranium that is too
highly enriched for use in a nuclear power plant) with other
uranium. Under these agreements, the enriched uranium that results
from this blending process, which is called blended low enriched uranium
(“BLEU”), is fabricated into fuel that can be used in a nuclear power
plant. This blended nuclear fuel was first loaded in a Browns Ferry
reactor in 2005 and is expected to continue to be used to reload the Browns
Ferry reactors through 2014. BLEU fuel was first loaded into Sequoyah
Unit 2 in May 2008 and will be loaded again in 2009 and 2011.
Under the
terms of an interagency agreement between DOE and TVA, in exchange for supplying
highly enriched uranium materials for processing into usable BLEU fuel for TVA,
DOE will participate to a degree in the savings generated by TVA’s use of this
blended nuclear fuel. TVA anticipates these future payments could
begin in 2010 and last until 2014. See Note 1 — Blended Low Enriched Uranium Program
for a more detailed discussion of the BLEU project.
TVA owns
all nuclear fuel held for its nuclear plants. As of September 30,
2008, and 2007, the net book value of this nuclear fuel was $722 million and
$602 million, respectively.
For a
discussion of TVA’s plans with respect to spent nuclear fuel storage, see Item
1, Business — Nuclear — Spent
Nuclear Fuel.
The TVA
transmission system is one of the largest in North America. TVA’s
transmission system has interconnections with 13 neighboring electric systems,
and delivered more than 176 billion kilowatt-hours of electricity to Tennessee
Valley customers in 2008. The TVA Act gives TVA overall
responsibility for grid reliability in the TVA service area. To that
end, TVA has operated with 99.999 percent reliability over the last nine years
in delivering electricity to customers. Any changes to the TVA Act
which alter TVA’s authority to operate and control the transmission system could
negatively impact reliability in the region. See Item
1A, Risk Factors —
Strategic Risks.
To the
extent federal law allows access to the TVA transmission system, the TVA
transmission organization offers transmission services to others to transmit
power at wholesale in a manner that is comparable to TVA's own use of the
transmission system. TVA has also adopted and operates in accordance with a
published Standards of Conduct for Transmission Providers and appropriately
separates its transmission functions from its marketing functions.
Weather and Seasonality
Weather
affects both the demand for and the market prices of
electricity. TVA’s power system generally peaks in the summer, with a
slightly lower peak in the winter. TVA met its highest winter peak
demand of 32,027 megawatts on January 25, 2008. See Item 1A, Risk
Factors, for a discussion of the potential impact of weather on
TVA.
TVA uses
weather degree days to measure the impact of weather on TVA’s power
operations. Weather degree days measure the extent to which average
temperatures in the five largest cities in TVA's service area vary from 65
degrees Fahrenheit. TVA calculates weather degree days for Memphis,
Nashville, Knoxville, and Chattanooga, Tennessee, and Huntsville, Alabama — the
five largest cities in TVA’s service area.
During
2008, TVA had 14 less heating degree days and 371 less cooling degree days than
in 2007. The graph below shows the number of heating and cooling
degree days for 2008, 2007, and 2006 as compared to the normal number of heating
and cooling degree days. See Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Executive Summary — Challenges
During 2008 — Weather Conditions.
2008 was
the ninth driest year in the eastern Tennessee Valley in 119 years of
record-keeping with rainfall 76 percent of normal for the year and runoff 47
percent of normal. Largely as a result of this low rainfall and
runoff, TVA’s hydroelectric production for 2008 was slightly less than 6.7
billion kilowatt-hours, which was 26 percent, 33 percent, and 57 percent lower
than 2007, 2006, and 2005, respectively.
The hot
weather and low rainfall were also significant factors in causing TVA to reduce
output at several generating plants during the period of mid-June through
mid-September of 2008. During this period, temperatures on the
Tennessee and Cumberland Rivers reached levels at which discharging cooling
water from some of TVA’s plants into the rivers could have caused the permitted
thermal limits for the rivers to be exceeded. While every effort was
made to reduce (derate) electrical output during low load periods to reduce
financial and operational impacts, some derates were required during higher load
daytime hours to meet the permitted temperature limits. These
conditions caused TVA to rely more heavily on purchased power and more expensive
generation sources such as combustion turbines during 2008. See Item
7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Executive Summary
—Challenges During 2008 — Weather Conditions.
TVA sells
electricity in a service area that is largely free of competition from other
electric power providers. This service area is defined primarily by
two provisions of law: one called the “fence” and one called the
“anti-cherrypicking” provision. The fence limits the region in which
TVA or distributors of TVA power may provide power. The
anti-cherrypicking provision limits the ability of others to use the TVA
transmission system for the purpose of serving customers within TVA’s service
area. Bristol, Virginia, was exempted from the anti-cherrypicking
provision.
There
have been efforts to erode the protection of the anti-cherrypicking
provision. FERC issued an order that would have required TVA to
interconnect its transmission system with the transmission system of East
Kentucky Power Cooperative, Inc. (“East Kentucky”) in what TVA believed was a
violation of the anti-cherrypicking provision. See Item 3, Legal
Proceedings. Additionally, Senators Jim Bunning and Mitch McConnell
introduced the Access to Competitive Power Act of 2007 in the Senate that would,
among other things, provide that 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. See Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Legislative and Regulatory
Matters. While the FERC action involving East Kentucky is moot
and the proposed legislation has not made it to the Senate floor, the events
illustrate how the protection to TVA’s service area provided by the
anti-cherrypicking provision could be called into question and perhaps
eliminated at some time in the future.
Research and Development
TVA
invests in science and technological innovation to inform decision making and
improve operational and environmental performance. TVA’s research and
development activities are leveraged through partnerships with the Electric
Power Research Institute, Department of Energy, Oak Ridge National Laboratory,
other utilities, and universities. Examples of ongoing work include
projects for energy efficiency, renewables, and clean energy, as well as
projects to increase efficiency and reliability of existing generation and
transmission assets, reduce fossil fuel plant emissions, reduce energy
consumption, and evaluate new and proposed generation options. During
2008, TVA spent $21 million on research and development
activities. See Note 1 — Research and Development
Costs.
TVA is
governed by the TVA Board. The Consolidated Appropriations Act, 2005,
amended the TVA Act by restructuring the TVA Board from three full-time members
to nine part-time members, at least seven of whom must be legal residents of the
TVA service area. TVA Board members are appointed by the President of
the United States with the advice and consent of the U.S.
Senate. After an initial phase-in period, TVA Board members serve
five-year terms, and at least one member’s term ends each year. The
TVA Board, among other things, establishes broad goals, objectives, and policies
for TVA; establishes long-range plans to carry out these goals, objectives, and
policies; approves annual budgets; and establishes a compensation plan for
employees. To allow TVA to operate more flexibly than a traditional
government agency, Congress exempted TVA from some general federal laws that
govern other agencies, such as the federal labor relations laws and
the civil service laws related to the hiring of federal employees, the
procurement of supplies and services, and the acquisition of
land. Other federal laws enacted since the creation of TVA have been
made applicable to TVA including those related to paying employees
overtime, the protection of the environment, cultural resources, and civil
rights laws. Information about members of the TVA Board and TVA’s
executive officers is discussed in Item 10, Directors, Executive Officers and
Corporate Governance.
Congress
TVA
exists pursuant to legislation enacted by Congress and carries on its operations
in accordance with this legislation. Congress can enact legislation
expanding or reducing TVA’s activities, change TVA’s structure, and even
eliminate TVA. Congress can also enact legislation requiring the sale
of some or all of the assets TVA operates or reduce the United States’ ownership
in TVA. To allow TVA to operate more flexibly than a traditional
government agency, Congress exempted TVA from some general federal laws that
govern other agencies, such as federal labor relations laws and the civil
service laws related to the hiring of federal employees, the procurement of
supplies and services, and the acquisition of land. Other federal
laws enacted since the creation of TVA have been made applicable to TVA,
including those related to paying employees overtime, the protection of the
environment, cultural resources, and civil rights.
Securities
and Exchange Commission
Section
37 was added to the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), as part of the Consolidated Appropriations Act, 2005. Section
37 requires TVA to file with the SEC such periodic, current, and supplementary
information, documents, and reports as would be required pursuant to section 13
of the Exchange Act if TVA were an issuer of a security registered pursuant to
section 12 of the Exchange Act. Section 37 of the Exchange Act
exempts TVA from complying with section 10A(m)(3) of the Exchange Act, which
requires each member of a listed issuer’s audit committee to be an independent
member of the board of directors of the issuer. Since TVA is an
agency and instrumentality of the United States, securities issued or guaranteed
by TVA are “exempted securities” under the Securities Act of 1933, as amended
(the “Securities Act”), and may be offered and sold without registration under
the Securities Act.
In
addition, securities issued or guaranteed by TVA are “exempted securities” and
“government securities” under the Exchange Act. TVA is also exempt
from sections 14(a)-(d) and 14(f)-(h) of the Exchange Act (which address proxy
solicitations) insofar as those sections relate to securities issued by TVA, and
transactions in TVA securities are exempt from rules governing tender offers
under Regulation 14E of the Exchange Act. Also, since TVA securities
are exempted securities under the Securities Act, TVA is exempt from the Trust
Indenture Act of 1939 insofar as it relates to securities issued by TVA, and no
independent trustee is required for these securities.
Federal
Energy Regulatory Commission
Under the
FPA, TVA is not a “public utility,” a term which generally includes
investor-owned utilities. Therefore, TVA is not subject to the full
jurisdiction that FERC exercises over public utilities under the
FPA. TVA is, however, an “electric utility” as defined in the FPA
and, thus, is directly subject to certain aspects of FERC’s
jurisdiction.
•
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Under
section 210 of the FPA, TVA can be ordered to interconnect its
transmission facilities with the electrical facilities of qualified
generators and other electric utilities that meet certain
requirements. It must be found that the requested
interconnection is in the public interest and would encourage conservation
of energy or capital, optimize efficiency of facilities or resources, or
improve reliability. The requirements of section 212
concerning the terms and conditions of interconnection, including
reimbursement of costs, must also be
met.
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Under
section 211 of the FPA, TVA can be ordered to transmit power at
wholesale provided that the order does not impair the reliability of the
TVA or surrounding systems and likewise meets the applicable requirements
of section 212 concerning terms, conditions, and rates for
service. Under section 211A of the FPA, TVA is subject to FERC
review of the transmission rates and the terms and conditions of service
that TVA provides others to ensure comparability of treatment of such
service with TVA’s own use of its transmission system. With the
exception of wheeling power to Bristol, Virginia, the anti-cherrypicking
provision of the FPA precludes TVA from being ordered to wheel another
supplier’s power to a customer if the power would be consumed within TVA’s
defined service territory.
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Sections
221 and 222 of the FPA, applicable to all market participants, including
TVA, prohibit (i) using manipulative or deceptive devices or
contrivances in connection with the purchase or sale of power or
transmission services subject to FERC’s jurisdiction and (ii) reporting
false information on the price of electricity sold at wholesale or the
availability of transmission capacity to a federal agency with intent to
fraudulently affect the data being compiled by the
agency.
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Section
206(e) of the FPA provides FERC with authority to order refunds of
excessive prices on short-term sales (transactions lasting 31 days or
less) by all market participants, including TVA, in market manipulation
and price gouging situations if such sales are under a FERC-approved
tariff.
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Section
220 of the FPA provides FERC with authority to issue regulations requiring
the reporting, on a timely basis, of information about the availability
and prices of wholesale power and transmission service by all market
participants, including TVA.
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Under
sections 306 and 307 of the FPA, FERC may investigate electric
industry practices, including TVA’s operations previously mentioned that
are subject to FERC’s
jurisdiction.
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Under
sections 316 and 316A of the FPA, FERC has authority to impose
criminal penalties and civil penalties of up to $1 million a day for
each violation on entities subject to the provisions of Part II of
the FPA, which includes the above provisions applicable to
TVA.
|
Finally,
while not required to do so, TVA has elected to implement various FERC orders
and regulations pertaining to public utilities on a voluntary basis to the
extent that these are consistent with TVA’s obligations under the TVA
Act.
For a
discussion of legislation that could change FERC’s ability to regulate TVA, see
Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Legislative
and Regulatory Matters.
Nuclear
Regulatory Commission
TVA
operates its nuclear facilities in a highly regulated environment and is subject
to the oversight of the NRC, an independent agency which sets the rules that
users of radioactive materials must follow. The NRC has broad
authority to impose requirements relating to the licensing, operation, and
decommissioning of nuclear generating facilities. In addition, if TVA fails to
comply with requirements promulgated by the NRC, the NRC has the authority to
impose fines, shut down units, or modify, suspend, or revoke TVA’s operating
licenses.
Environmental
Protection Agency
TVA is
subject to regulation by the Environmental Protection Agency (“EPA”) in a
variety of areas, including air quality control, water quality control, and
management and disposal of hazardous wastes. See Item 1, Business —
Environmental
Matters.
States
The
Supremacy Clause of the U.S. Constitution prohibits states, without
congressional consent, from regulating the manner in which the federal
government conducts its activities. As a federal agency, TVA is
exempt from regulation, control, and taxation by states except in certain areas
such as air and water quality where Congress has given the states limited powers
to regulate federal activities.
Other
Federal Entities
TVA’s
activities and records are also subject to review to varying degrees by other
federal entities, including TVA’s Office of Inspector General and the following
agencies: the Government Accountability Office, the Congressional
Budget Office, and the Office of Management and Budget.
Payments in Lieu of Taxes
TVA is
not subject to federal income taxes, and neither TVA nor its property,
franchises, or income is subject to taxation by states or their
subdivisions. However, the TVA Act requires TVA to make tax
equivalent payments to states and counties in which TVA conducts power
operations and in which TVA has acquired properties previously subject to state
and local taxation. The total amount of these payments is five
percent of gross revenues from the sale of power during the preceding year
excluding sales or deliveries to other federal agencies and off-system sales
with other utilities, with a provision for minimum payments under certain
circumstances. Except for certain direct payments TVA is required to
make to counties, distribution of tax equivalent payments within a state is
determined by individual state legislation.
Environmental Matters
TVA’s
power generation activities, like those across the utility industry and in other
industrial sectors, are subject to federal, state, and local environmental laws
and regulations. Major areas of regulation affecting TVA’s activities
include air quality control, water quality control, and management and disposal
of solid and hazardous wastes. Looking to the future, regulations in
all of these areas are expected to become more stringent along with increased
emphasis on dealing with climate change, expanding renewable generation
alternatives, and encouraging efficient use of electricity.
Due to
the increasing level and complexity of environmental requirements and
expectations, TVA completed a new high-level environmental policy to align with
and execute the direction in the Strategic Plan. The Environmental
Policy (“Environmental Policy”) was approved by the TVA Board on May 19, 2008,
and is intended to be an integrated framework which provides policy-level
guidance to carry out TVA's mission of providing cleaner, affordable energy,
sustainable economic development, and proactive environmental
stewardship. The TVA Environmental Policy sets out environmental objectives
and critical success factors in six environmental dimensions: climate change
mitigation, air quality improvement, water resource protection and improvement,
waste minimization, sustainable land use, and natural resource
management.
TVA has
incurred, and expects to continue to incur, substantial capital and operating
and maintenance costs to comply with evolving environmental requirements
primarily associated with, but not limited to, the operation of TVA’s 59
coal-fired generating units. It is virtually certain that environmental
requirements placed on the operation of TVA’s coal-fired and other 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.
Air
Quality Control Developments
Air
quality in the United States and in the Tennessee Valley has significantly
improved since the enactment of the Clean Air Act (“CAA”) in
1970. These air quality improvements are expected to continue as the
CAA continues to be implemented and evolve as a result of legislative and
regulatory changes. Three substances emitted from coal-fired units —
sulfur dioxide (“SO2”), oxides
of nitrogen (“NOx”), and
particulates — have historically been the focus of CAA emission reduction
regulatory programs, and these are discussed in more detail
below.
Expenditures
related to clean air projects aimed at controlling emissions of these substances
during 2008 and 2007 were approximately $274 million and $239 million,
respectively. These figures include expenditures in 2008 of $9 million to
continue to reduce NOx emissions
through the installation of selective non-catalytic reduction (“SNCR”) systems,
and $240 million for the installation of flue gas desulfurization systems
(“scrubbers”) to continue to reduce SO2
emissions. TVA had previously estimated its total capital cost for
reducing emissions from its power plants from 1977 through 2010 would reach $5.5
billion, $5.1 billion of which had already been spent as of September 30,
2008. TVA estimates that compliance with future CAA requirements and
potential mercury regulations, but not including carbon dioxide (“CO2”), as
discussed below could lead to additional costs of $3.0 billion to $3.7 billion
in the decade beginning in 2011. There could be additional material
costs if reductions of greenhouse gases, including CO2, are
mandated under the CAA or via legislation, or if future legislative, regulatory,
or judicial actions lead to more stringent emission reduction requirements for
conventional pollutants. These costs cannot reasonably be predicted
at this time.
On July
11, 2008, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) issued
a decision in State of North
Carolina vs. EPA that vacated the Clean Air Interstate Rule (“CAIR”) in
its entirety and directed the EPA to promulgate a new rule that is consistent
with the D.C. Circuit opinion. EPA promulgated CAIR in 2005 and the rule
required significant additional utility SO2 and
NOx
emission reductions to address ozone and fine particulate matter attainment
issues in 28 eastern states, including all of TVA’s operating area, and the
District of Columbia. The requirements of CAIR formed the basis for
TVA’s (and much of the utility industry’s) planning with regard to air emission
controls beginning in 2009 and continuing well into the next
decade. In the absence of CAIR, the uncertainty regarding compliance
requirements, methods, and timelines may result in increased capital
expenditures and operating expenses. In addition, it is unclear whether the
petitions for a re-hearing or review of this decision will be granted by the
D.C. Circuit, which could prolong the uncertainty of the regulatory
landscape.
In the
absence of CAIR, other requirements of the CAA, such as achievement of ozone and
fine particulate ambient air quality standards, requirements relating to
regional haze, and control of interstate transport of air pollution (Section 126
petitions), will continue to drive installation of additional controls on
electric generating units across the industry, including at TVA. As discussed in
more detail below, TVA will continue its previously announced emissions
reduction program, including completion of scrubber installations for SO2 control at
Bull Run, Kingston, and John Sevier Fossil Plants, and annual operation of the
21 selective catalytic reduction (“SCR”) and other NOx controls
beginning in October 2008.
On
February 8, 2008, the D.C. Circuit vacated the EPA’s decision to remove coal and
oil-fired Electric Generating Units from the list of stationary sources whose
hazardous air pollutant (“HAP”) emissions are subject to Maximum Achievable
Control Technology (“MACT”) standards under section 112 of the CAA.
The D.C. Circuit also vacated and remanded the Clean Air Mercury Rule (“CAMR”)
which set mercury limits via a cap-and-trade program. Unless the D.C.
Circuit’s ruling is reversed, or EPA is able to determine that mercury emissions
are adequately controlled in accordance with the D.C. Circuit’s remand
instructions, EPA will have to regulate mercury emissions from utilities under
section 112(d) of the CAA, setting MACT standards for emissions based on command
and control type requirements. The cost to comply with the MACT standards is not
known, but is expected to be higher than the cost would have been to comply with
CAMR. Regardless of the status of the EPA’s regulatory program for mercury, TVA
will continue to reduce mercury emissions from its coal-fired power
plants. Over the next five years, mercury emissions from its
coal-fired plants are expected to continue to decline, primarily as a result of
the co-benefits received from the controls TVA is installing to reduce SO2 and
NOx emissions.
The D.C.
Circuit’s recent decisions with regard to CAIR and CAMR may also have the effect
of reviving interest in Congress in adopting multi-pollutant control legislation
focused on the electric power sector. Among other things, such an approach could
seek to establish coordinated caps for power plant emissions of mercury, SO2, NOx, and
CO2.
The legislative and regulatory landscape is continuing to change for these and
other issues and the outcome cannot be predicted accurately at this
time.
Sulfur Dioxide. Utility
SO2
emissions are currently regulated under the Federal Acid Rain Program and state
programs designed to meet the National Ambient Air Quality Standards (“NAAQS”)
for SO2 and fine
particulate matter. Looking forward, these programs, as well as implementation
of the regional haze program, will result in additional regulation of SO2
emissions.
Through
calendar year 2007, TVA had reduced its SO2 emissions
by 84 percent from the peak 1977 level by switching to lower-sulfur coals,
continuing to operate an Atmospheric Fluidized Bed Combustion (“AFBC”) unit at
its Shawnee Fossil Plant, operating existing scrubbers on six larger units, and
installing and operating a scrubber on an additional large unit at Paradise
Fossil Plant. TVA is constructing a scrubber at Bull Run Fossil
Plant, which is scheduled to begin operation in 2009, and two scrubbers at its
Kingston Fossil Plant, which are scheduled to begin operation in
2010. In April 2008, the TVA Board approved construction of
additional flue gas desulfurization equipment at the four-unit John Sevier
Fossil Plant in east Tennessee (“John Sevier”), which is expected to begin
operation in 2012. Additionally, TVA has switched, or plans to switch, to
lower-sulfur coal at several additional units in the next few
years. It is likely that additional emission reduction measures will
have to be undertaken in addition to these announced actions to achieve
compliance with requirements yet to be adopted. Such measures will
also help to meet the goal identified in TVA’s Environmental Policy to reduce
emissions by continuing to install emission reduction equipment and new
technology with the aim of controlling over 80 percent of fossil generation in
the next 10 years.
Nitrogen
Oxides. Utility NOx emissions
continue to be regulated under state programs to achieve and maintain EPA’s
NAAQS for ozone and fine particles, the Federal Acid Rain Program, and the
regional haze program. On March 12, 2008, EPA issued final rules adopting
new, more stringent NAAQS for ozone. EPA lowered the primary
standard, created to protect public health with an adequate margin of safety,
from 0.084 parts per million (“ppm”) to 0.075 ppm. EPA also
promulgated a new secondary standard, mainly created to protect vegetation. The
form and level of the secondary standard are the same as the primary
standard.
In 2009,
states will have to recommend to EPA those counties proposed to be designated as
“non-attainment” counties under the new standards, and in 2010, EPA is expected
to finalize attainment designations using 2006 to 2008 monitoring
data. States must submit plans to EPA no later than 2013 that
demonstrate attainment with the standard. Areas must reach attainment
by deadlines that vary (2013 to 2030) depending on the severity of the ozone
problem.
Based on
2005-2007 monitoring data, virtually all of the larger cities in the Tennessee
Valley area and their associated Metropolitan Statistical Areas, as well as
those rural counties where ozone monitors are present, will likely be designated
as non-attainment areas under the new standard.
Non-attainment
designation can impact industrial development and expansion since new businesses
tend to avoid non-attainment areas, and expansion of existing businesses becomes
more difficult. Non-attainment can have serious repercussions for
counties by increasing costs to industry, delaying the air permitting process,
and restricting expansion of existing sources. Consumers are also
likely to be affected as a result of the institution of vehicle inspection and
fuel restriction programs. Non-attainment can also impact
transportation planning since loss of federal highway funds can occur unless
projects demonstrate “conformity” with the new standards.
TVA
contributes to ambient ozone levels primarily as a result of NOx emissions
from fossil-fired power plants. As a result of its emission reduction program,
TVA’s summertime NOx emissions
have declined substantially. Since 1995, TVA has reduced its NOx emissions
during the summer (when ozone levels increase) by 82 percent by installing
various controls, including low-NOx burners
and/or combustion controls, on 58 of its 59 coal-fired units and installing SCRs
on 21 of the largest units. (The AFBC unit at Shawnee Fossil Plant is inherently
low NOx
emitting.)
In 2005,
TVA installed SNCR systems, which generally have lower NOx removal
capabilities than SCRs, on two units, Johnsonville Unit 1 and Shawnee Unit 1, to
demonstrate long-term technology capability, and continues to operate the SNCR
at Johnsonville Unit 1 in West Tennessee. In 2007, TVA began
operating the High Energy Reagent Technology (“HERT”) system on Unit 1 at John
Sevier, and on Unit 4 at Johnsonville Fossil Plant (“Johnsonville”). HERT
is similar to SNCR technology but has higher removal capabilities. Similar
HERT equipment is planned for installation on the other three John Sevier units
and Johnsonville Units 2 and 3 by May 2009, and TVA has announced plans to
install SCRs at John Sevier by 2015.
TVA’s
NOx
emission reduction program is expected to continue to depend primarily on SCRs,
but will also incorporate some mix of SNCRs and/or HERTs as TVA gains more
experience with these technologies. These plans may change depending
on the timing and severity of future regulatory developments affecting power
plant emissions. In October 2008, TVA began operating this NOx control
equipment year round (except for maintenance outages).
An
increase in the number of counties in the Tennessee Valley designated as
non-attainment areas is likely to focus additional regulatory attention on all
NOx
emission sources, including TVA sources.
Particulates/Opacity. Coarse
particulates (defined as particles of 10 micrometers or larger), which include
fly ash, have long been regulated by states to meet EPA’s NAAQS for particulate
matter. All of TVA’s coal-fired units have been equipped with
mechanical collectors, electrostatic precipitators, scrubbers, or baghouses,
which have reduced particulate emissions from the TVA system by more than 99
percent compared to uncontrolled units. In 1997, EPA issued separate
NAAQS for even smaller particles with a size of up to 2.5 micrometers (“fine
particles” or “PM2.5”). Counties
and parts of counties in the Knoxville and Chattanooga, Tennessee, metropolitan
areas have been designated as non-attainment areas under the 1997
standard.
In
September 2006, EPA revised the 1997 standards. The 2006 revisions
tighten the 24-hour fine particle standard and retain the 1997 annual fine
particle standard. EPA also decided to retain the existing 24-hour
standard for coarse particles, but revoked the related annual standard. On
August 19, 2008, EPA sent letters to state and tribal representatives responding
to their initial recommendations for areas meeting and not meeting the 24-hour
national ambient air quality standards for PM2.5. States
and tribes now have the opportunity to comment on EPA’s modifications to their
recommendations and to provide new information and analyses to EPA if
appropriate. Several counties and parts of counties in the Tennessee Valley that
include or are close to TVA coal-fired generating plants are included in this
preliminary designation. Particular areas of concern to TVA are the Kentucky
counties of Muhlenberg and McCracken, the Tennessee counties of Humphreys,
Montgomery, and Stewart, and the counties in the Knoxville area. EPA
has announced plans to make final designations in December 2008 using air
quality monitoring data from 2005, 2006, and 2007. TVA will continue
efforts to reduce emissions and engage regional and national stakeholders to
further understand and improve regional air quality. TVA’s continued
installations of scrubbers for SO2 control
and SCRs and other technologies for NOx control as
described above are expected to continue to reduce fine particle
levels.
Issues
regarding utility compliance with state opacity requirements are also
increasing. Opacity measures the denseness (or color) of power plant
plumes and has traditionally been used by states as a means of monitoring good
maintenance and operation of particulate control equipment. Under
some conditions, retrofitting a unit with additional equipment to better control
SO2
and NOx emissions
can adversely affect opacity performance, and TVA and other utilities are
addressing this issue. There are also disputes and lawsuits over the
role of continuous opacity monitors in determining compliance with opacity
limitations, and TVA has received an adverse decision in one such
lawsuit. See Item 3, Legal Proceedings.
Climate Change. In 1995, TVA
was the first utility in the nation to participate in “Climate Challenge,” a
DOE-sponsored voluntary greenhouse gas reduction program. Over the
past decade, TVA has reduced, avoided, or sequestered over 305 million tons of
CO2
under this program. TVA also participates in the President’s Climate
VISION program which calls on the electric utility sector, along with other
industry sectors, to help meet a national goal of reducing the greenhouse
intensity of the U.S. economy by 18 percent from 2002 to 2012.
TVA has
taken and is continuing to take significant voluntary steps that will reduce the
carbon intensity of its electric generation, including the recovery of Browns
Ferry Unit 1, planned power up-rates of Browns Ferry Units 1, 2 and 3 (which
will increase the generating capability of the units resulting in additional
avoided emissions of CO2), the
completion of Watts Bar Unit 2, and the completion of the hydroelectric
modernization program. TVA has also filed with the NRC a combined
operating license application for two advanced nuclear reactors at the
Bellefonte Nuclear Plant near Hollywood, Alabama, and requested that the NRC
reinstate the construction permit for Bellefonte Nuclear Units 1 and 2, although
no decision has been made to complete those units or to build the new
reactors. TVA is also committed to increasing its renewable energy by
adding regional renewable energy sources to its generation
portfolio.
In addition, TVA is a member of the
Southeast Regional Carbon Sequestration Partnership and is working with the
Electric Power Research Institute and other electric utilities on projects
investigating technologies for CO2 capture
and geologic storage, as well as carbon sequestration via reforestation.
Legislation was introduced in the last Congress to require reductions of CO2 that, if
enacted, could have resulted in significant additional costs for TVA and other
utilities with coal-fired generation. In general, any carbon
legislation will result in some level of increase in the price of electricity to
consumers, regardless of form, severity, and timing of the legislation, and
TVA's analyses of previous versions of several proposed climate bills indicate
that the price increases could be substantial. These analyses also show
that TVA's existing coal-fired generating assets will continue to play an
important role in meeting the energy needs of the Tennessee
Valley. TVA expects that the next Congress and Administration will
again take up the issue of climate change and is incorporating the possibility
of mandatory carbon reductions and a renewable portfolio standard into its long
range planning. TVA will continue to monitor legislative and regulatory
developments related to CO2 and a
renewable portfolio standard to assess any potential financial and
operational impacts as information becomes available. Looking ahead,
TVA’s Environmental Policy contains a Climate Change Mitigation objective to
stop the growth in volume of emissions and reduce the rate of carbon emissions
by 2020.
In
addition to legislative activity, climate change issues are the subject of a
number of lawsuits, including lawsuits against TVA. See Item 3, Legal
Proceedings. On November 29, 2006, the U.S. Supreme Court heard the
case of Massachusetts v.
EPA, concerning whether EPA has the authority and duty to regulate
CO2
emissions under the CAA. On April 2, 2007, the Supreme Court found
that greenhouse gases, including CO2, are
pollutants under the CAA, and that EPA thus does have the authority to
regulate these gases. The Supreme Court also concluded that EPA's refusal
to regulate these pollutants was based on impermissible reasons, and remanded
the case to EPA to make a judgment regarding endangerment (either that
greenhouse gases do, or do not, pose a threat to health and welfare) with
respect to certain mobile sources. While this case focused on CO2 emissions
from motor vehicles, it sets a precedent for regulation in other industrial
sectors, such as the electric utility industry.
In July
2008, EPA issued an Advance Notice of Proposed Rulemaking (“ANPR”) that
addressed essentially all regulatory proceedings before EPA in which greenhouse
gas emissions and climate change are issues, including consideration of
greenhouse gas emissions in establishing new source performance standards and
resolving pending appeals of new source review permit applications. The ANPR
sought comments on the framework and direction of EPA’s actions to regulate
greenhouse gas emissions from a wide range of facilities, including electric
generating facilities. The ANPR outlines issues to be addressed in
new legislation that may be required in order to regulate greenhouse gas
emissions. Regulatory options that may be considered in such
legislation include, but are not limited to, the enactment of a cap-and-trade
policy and development and deployment of alternative fuels, renewable energy
resources, and energy conservation. Whether climate change legislation will be
enacted during the 2009 to 2010 legislative session, and if so its potential
impacts, cannot be assessed at this time. Any such legislation, or
similar regulatory action by EPA under the CAA or otherwise, would probably have
a significant impact on fossil-fueled generation facilities.
States
are also becoming more active in the regulation of emissions that are believed
to be contributing to global climate change. Several northeastern
states have formed the Regional Greenhouse Gas Initiative, which is in the
process of being implemented, and California passed a bill capping greenhouse
gas emissions in the state. Other states are considering a variety of
actions. North Carolina is studying initiatives aimed at climate
change under the provisions of the state’s Clean Smokestacks Act of
2002. This act required the State Division of Air Quality to study
potential control of CO2 emissions
from coal-fired utility plants and other stationary sources. This has
also prompted efforts to develop a climate action plan for North
Carolina.
Renewables
and Clean Energy
In light
of increasing national focus on renewable and clean energy and TVA's desire to
reduce its environmental footprint, on May 19, 2008, the TVA Board approved
guiding principles for an Energy Efficiency and Demand Response Plan and a
Renewable and Clean Energy Assessment.
The
Energy Efficiency and Demand Response Plan seeks to slow the current rate of
growth in the region’s power demand by providing opportunities for residential,
business, and industrial consumer groups to use energy more
efficiently. In the short term, the plan proposes reducing the growth
in peak demand by up to 1,400 megawatts by the end of the 2012 fiscal
year.
The
Renewable and Clean Energy Assessment strives to add clean energy resources to
TVA’s generating mix to help reduce carbon emissions while minimizing costs and
maintaining a reliable power supply. The assessment proposes to review TVA’s
generation mix and identify a road map for pursuing additional renewable and
clean energy supply in the region, and recommends consideration of different
sources of renewable energy and a reduction in carbon intensity in TVA’s
generation mix, along with additional energy conservation by everyone who uses
electricity.
Water
Quality Control 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 (“CWA”), EPA promulgated a final rule for existing
power producing facilities (“Phase II Rule”) that became effective on September
7, 2004. On January 25, 2007, the U.S. Court of Appeals for the
Second Circuit (the “Second Circuit”) remanded the Phase II Rule, holding, among
other things, that costs cannot be compared to benefits in picking the best
technology available (“BTA”) to minimize the adverse environmental impacts of
intake structures. The Utility Water Act Group, Entergy Corporation,
and PSEG Fossil LLC filed a petition seeking review of the decision by the U.S.
Supreme Court. TVA and the attorneys general of several states,
including Alabama, Kentucky, and Tennessee, supported this
petition. On April 14, 2008, the U.S. Supreme Court granted the
petition, limiting its review to one issue: "Whether Section 316(b)
of the CWA authorizes EPA to compare costs with benefits in determining the
'best technology available for minimizing adverse environmental impact' at
cooling water intake structures.” The Department of Justice and industry
petitioners will defend the EPA rule supporting the concept that costs under the
rule should be limited to those that are “not significantly greater than” the
benefits to be derived. The case has been argued before the U.S.
Supreme Court. TVA is unable to predict the outcome.
On July
9, 2007, EPA suspended all but one provision of the Phase II Rule until the
agency resolves the issues raised by the Second Circuit's remand. The
provision that was retained requires permitting authorities to apply, in the
interim, Best Professional Judgment (“BPJ”) controls for existing
facilities. BPJ controls are those that reflect the best technology
available for minimizing the adverse environmental impacts of intake
structures. The use of BPJ controls reflects a return to the
regulatory process that was used by permitting authorities to regulate the
impact of intake structures prior to the promulgation of the Phase II
Rule.
All of
the intakes at TVA's existing coal and nuclear generating facilities were
subject to the Phase II Rule. Given the uncertainty over the ultimate
outcome of the appellate process and what the changes in the final rule as
ultimately issued by EPA will be, the impacts of the eventual rulemaking are
uncertain at this time.
Section
303d of the CWA requires states to develop and report to EPA on a two-year cycle
a list of waters that are “impaired” or are expected to not meet water quality
standards in the next two years and need additional pollution controls. The
Tennessee Department of Environment and Conservation (“TDEC”) placed a portion
of Barkley Reservoir downstream of TVA's Cumberland Fossil Plant on its 2008
list of impaired streams (the “303d List”). This section of Barkley
Reservoir had not been listed previously. The reservoir conditions in 2007,
especially for temperature and dissolved oxygen, changed significantly due
primarily to reduced flows in the Cumberland River resulting from emergency dam
repairs on the Wolf Creek and Center Hill Dams coupled with the most severe
drought on record in the region. The lower flows made less water available to
dissipate the heated discharge from Cumberland Fossil Plant and resulted in
increased river temperatures. The prospect of continued reduced flows through
the Cumberland River system during the period required to complete the necessary
repairs to Wolf Creek and Center Hill Dams may impact the generation of
electricity from TVA's Cumberland and Gallatin Fossil Plants. Placing this
section of Barkley reservoir on the 303d List could also impact the thermal
limits imposed by the State of Tennessee when the discharge permit for
Cumberland Fossil Plant is renewed in 2010, or earlier if the state or EPA
determines that additional actions are required to protect the aquatic
environment below the plant. TVA is working with the U.S. Army Corps
of Engineers and TDEC to minimize the impacts to TVA's generating plants and
improve the conditions observed in the river in 2007. TVA began
operating temporary cooling towers at Cumberland Fossil Plant to reduce the
temperature of the water discharged to the river.
EPA, and
many states, are taking increased interest in evaluating the potential effects
of thermal discharges from steam-electric generating facilities. TVA
is working with states and EPA Region IV to demonstrate that the data collected
by TVA in the vicinity of its facilities is sufficient to meet the requirements
for assessing the impacts of thermal discharges on the aquatic
environment.
In March
2007, TDEC adopted a lower, more conservative threshold (0.3 ppm) for issuing
precautionary advisories for fish consumption due to mercury. Adoption of the
lower threshold resulted in the issuance of several new precautionary fish
consumption advisories in April 2007 for all or parts of five TVA reservoirs
(Norris, Cherokee, South Holston, Watauga, and Tellico) and parts of four rivers
in the Tennessee Valley (Buffalo, Emory, Hiwassee, and Holston) as well as the
Loosahatchie, Wolf, and Mississippi Rivers in Tennessee that are not in the
Tennessee River watershed.
As part
of the 2007 advisory determinations, TDEC also identified several water bodies
where more data were needed to determine if advisories were
necessary. State agencies have since collected fish from those water
bodies and decided several of them needed advisories to protect public health.
The new Precautionary Advisory list for 2008 includes one additional TVA
reservoir (Beech) and three additional river segments in the Tennessee River
watershed (French Broad, Sequatchie, and Duck). Also, existing
advisories for several reservoirs and rivers were expanded to include mercury as
a chemical of concern and/or to include more kinds of fish.
TDEC’s
announcement of additional Precautionary Advisories for several Tennessee water
bodies does not mean that mercury levels in fish are increasing, but is more
reflective of the effect of the lowered threshold values for issuing a
precautionary consumption advisory. TVA has been monitoring mercury
levels in fish and sediments in TVA reservoirs for the last 35 years, and
TVA’s data were provided to TDEC as a part of its review process. TVA’s data
show significant reductions in mercury concentrations in fish from the
reservoirs with known industrial discharges that have now ceased. Other than
those areas historically impacted by industrial discharges, mercury
concentrations in fish have tended to fluctuate through time with no discernible
trend in fish from most reservoirs. Despite increased burning of coal for
electricity generation, current and historic data records indicate that mercury
concentrations in reservoir sediments have remained stable or
declined.
One of
the results of the major reductions in atmospheric emissions resulting from the
clean air expenditures discussed above is that wastewaters at TVA coal-fired
facilities and across the utility industry may be changing because of waste
streams from air quality control technologies. Varying amounts of ammonia or
similar compounds used as a necessary component of SCR and SNCR operations may
end up in facility wastewater ponds that may discharge through outfalls
regulated under the CWA. Operation of scrubbers for SO2 control
also results in additional amounts of pollutants being introduced into facility
wastewater treatment ponds. EPA is currently collecting information to determine
if the national Steam Electric Point Source Effluent Guidelines (“Effluent
Guidelines”) under the CWA need to be revised. If the Effluent
Guidelines are revised, potentially more restrictive discharge limitations for
existing parameters or the addition of new parameters could result in additional
wastewater treatment expenses to meet requirements of the CWA. These costs
cannot be accurately predicted at this time, but TVA is involved in and closely
monitoring EPA’s data collection activities and the progress of the Effluent
Guidelines review process. On the state level, new numeric nutrient criteria
development and implementation (an EPA requirement) may require additional
treatment costs to reduce nitrogen concentrations being added to the waste
treatment ponds as a result of the operation of air pollution control
equipment. TVA is closely monitoring the development and
implementation of numeric nutrient criteria, particularly by the states in TVA’s
service area and is encouraging regulatory agencies in the Valley states to
incorporate water quality trading regulations into their water quality
standards.
As is the
case across the utility industry and in other industrial sectors, TVA is also
facing more stringent requirements related to protection of wetlands, reductions
in storm water impacts from construction activities, water quality degradation,
new water quality criteria, and laboratory analytical methods. TVA is
also following litigation related to the use of herbicides, water transfers, and
releases from dams. TVA is not facing any substantive requirements
related to non-compliance with existing CWA regulations.
Hazardous
Substance Response, Oil Cleanup, and Similar Environmental Work
Liability
for releases and cleanup of hazardous substances is primarily regulated under
the federal Comprehensive Environmental Response, Compensation, and Liability
Act (“CERCLA”), and other federal and parallel state statutes. In a
manner similar to many other industries and power systems, TVA has generated or
used hazardous substances over the years. TVA is aware of alleged
hazardous-substance releases at 10 non-TVA areas for which it may have some
liability. TVA has reached agreements with EPA to settle its
liability at two of the non-TVA areas for a total of less than
$23,000. There have been no recent assertions of TVA liability for
five of the non-TVA areas, and there is little or no known evidence that TVA
contributed any significant quantity of hazardous substances to these five
sites. There is evidence that TVA sent some materials to the
remaining three non-TVA areas: the David Witherspoon site in Knoxville,
Tennessee, the Ward Transformer site in Raleigh, North Carolina, and the General
Waste Products site in Evansville, Indiana. As discussed below, TVA
is not able to estimate its liability related to these sites at this
time.
The
Witherspoon site is contaminated with radionuclides, polychlorinated biphenyls
(“PCBs”), and metals. DOE has admitted to being the main contributor
of materials to the Witherspoon site and is currently performing clean up
activities. DOE claims that TVA sent equipment to be recycled at this
facility, and there is some supporting evidence for the
claim. However, TVA believes it sent only a relatively small amount
of equipment and that none of it was radioactive. DOE has asked TVA
to “cooperate” in completing the cleanup, but it has not provided to TVA any
evidence of TVA’s percentage share of the contamination.
The Ward
Transformer site is contaminated by PCBs from electrical
equipment. EPA and a working group of potentially responsible parties
(the “PRP Work Group”) have provided documentation showing that TVA sent a
limited amount of equipment containing PCBs to the site in 1974. The
PRP Work Group is cleaning up on-site contamination in accordance with an
agreement with EPA. The cleanup effort has been divided into four areas: two
phases of soil cleanup; cleanup of off-site contamination in the downstream
drainage basin; and supplemental groundwater remediation. The first
phase of soil cleanup is underway, and the high-end cost estimate for this work
is about $66 million. There are no reliable estimates for the second
phase of soil cleanup or the supplemental groundwater
remediation. EPA has selected a cleanup plan for the down stream
drainage basin with a present-worth cost estimate of $6.1
million. TVA understands that EPA has incurred approximately $3
million in past response costs, and the PRP Work Group has reimbursed EPA
approximately $725,000 of those costs. The PRP Work Group plans to
propose a cost allocation schedule which it will use as the basis for offering
settlements to PRPs for the first phase of soil cleanup. It plans to
sue PRPs who do not settle. There also may be natural resource
damages liability at this site, but TVA is not aware of any estimated amount for
any such damages. TVA has a potential defense that it only sent
useful equipment to Ward and thus is not liable for arranging for disposal of a
hazardous substance at the site.
General
Waste Products was a scrap metal salvage yard that operated from the 1930s until
1998. The original defendants in a CERCLA action have filed a third
party complaint against TVA and others seeking cost contribution for cleanup of
contamination from lead batteries and PCB transformers at the
facility. There is evidence that TVA sent scrap metal to the
facility, but TVA has not found any records indicating that it sent batteries or
PCB equipment. There are two cleanup sites at the
facility. TVA has been informed that the first site has been cleaned
up at a cost of $3.2 million, and cleanup estimates for the second site range
from $2 million to $7 million. TVA’s allocated share of the cleanup
costs, if any, is expected to be relatively small.
TVA
operations at some TVA facilities have resulted in oil spills and other
contamination TVA plans to address, and TVA expects to incur costs of about $15
million for environmental work related to decommissioning of the Watts Bar
Fossil Plant.
As of
September 30, 2008, TVA’s estimated liability for cleanup and similar
environmental work for those sites for which sufficient information is available
to develop a cost estimate (primarily the TVA sites) is approximately $18
million on a non-discounted basis, including the Watts Bar Fossil Plant work,
and is included in Other
liabilities on the Balance Sheet.
Coal-Combustion
Wastes
In
accordance with a regulatory determination by EPA in May 2000, coal-combustion
and certain related wastes disposed of in landfills and surface impoundments are
not regulated as hazardous waste. In conjunction with this
determination, EPA committed to developing non-hazardous management standards
for these wastes. These standards are likely to include increased
groundwater monitoring, more stringent siting requirements, and closure of
existing waste-management facilities not meeting minimum
standards. On August 29, 2007, EPA issued a Notice of Data
Availability (“NODA”) in which it requested public comment on whether the
additional information mentioned in the notice should affect EPA’s decisions as
it continues to follow up on its commitment to develop management standards for
coal-combustion wastes. Although TVA did not comment on the NODA, the
Utility Solid Waste Activity Group, of which TVA is a member, did file extensive
comments with EPA regarding the risk assessment method that EPA chose to support
the NODA.
Employee Relations
On
September 30, 2008, TVA had 11,584 employees, of whom 5,010 were trades and
labor employees. Under the TVA Act, TVA is required to pay trades and
labor workers hired by TVA or its contractors the prevailing rate of
wages. This rate is the rate of wages for work of a similar nature
prevailing in the vicinity where the work is being performed. Neither
the federal labor relations laws covering most private sector employers nor
those covering most federal agencies apply to TVA. However, the TVA
Board has a long-standing policy of acknowledging and dealing with recognized
representatives of its employees, and that policy is reflected in long-term
agreements to recognize the unions (or their successors) that represent TVA
employees. Federal law prohibits TVA employees from engaging in
strikes against TVA.
ITEM 1A. RISK FACTORS
The risk
factors described below, as well as the other information included in this
Annual Report, should be carefully considered. Risks and
uncertainties described in these risk factors could cause future results to
differ materially from historical results as well as from the results predicted
in forward-looking statements. Although the risk factors described
below are the ones that TVA management considers significant, additional risk
factors that are not presently known to TVA management or that TVA management
presently considers insignificant may also impair TVA’s business
operations. Although TVA has the authority to set its own rates and
thus mitigate some risks by increasing rates, it is possible that partially or
completely eliminating one or more of these risks through rate increases might
adversely affect TVA commercially or politically. Accordingly, the
occurrence of any of the following could have a material adverse effect on TVA’s
cash flows, results of operations, and financial condition.
For ease
of reference, the risk factors are presented in four categories: strategic
risks, operational risks, financial risks, and risks related to TVA
securities.
Strategic Risks
New
laws, regulations, and administrative orders may negatively affect TVA’s cash
flows, results of operations, and financial condition, as well as the way TVA
conducts its business.
Although
it is difficult to predict exactly how any new laws, regulations, and
administrative orders would impact TVA, some of the possible effects are
described below.
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TVA
could lose its protected service
territory.
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TVA’s
service area is primarily defined by two provisions of law.
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The
TVA Act provides that, subject to certain minor exceptions, neither TVA
nor its distributor customers may be a source of power supply outside of
TVA’s defined service area. This provision is often called the
“fence” since it limits TVA’s sales activities to a specified service
area.
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The
Federal Power Act prevents FERC from ordering TVA to provide others with
access to its transmission lines for the purpose of delivering power to
customers within TVA’s defined service area, except to those customers
residing in Bristol, Virginia. This provision is often called
the “anti-cherrypicking provision” since it prevents competitors from
“cherrypicking” TVA’s customers.
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If
Congress were to eliminate or reduce the coverage of the anti-cherrypicking
provision, TVA could more easily lose customers, and the loss of these customers
could adversely affect TVA’s cash flows, results of operations, and financial
condition. See Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Legislative and Regulatory Matters —
Proposed Legislation.
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The
TVA Board could lose its sole authority to set rates for
electricity.
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Under the
TVA Act, the TVA Board has the sole authority to set the rates that TVA charges
for electricity, and these rates are not subject to review. The loss
of this authority could have material adverse effects on TVA including, but not
limited to, the following:
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TVA
might be unable to set rates at a level sufficient to generate adequate
revenues to service its financial obligations, properly operate and
maintain its power assets, and provide for reinvestment in its power
program; and
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TVA
might become subject to additional regulatory oversight that could impede
TVA’s ability to manage its
business.
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TVA
could become subject to increased environmental
regulation.
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There is
a risk that new environmental laws and regulations could become applicable to
TVA or the facilities it operates and that existing environmental regulations
could be revised or reinterpreted in a way that adversely affects
TVA. For example, proposals in Congress that would regulate CO2 and other
greenhouse gases could require TVA to incur significantly increased
costs. Any such developments could require TVA to make significant
capital expenditures, increase TVA’s operating and maintenance costs, require
TVA to pay a carbon penalty, or even lead to TVA’s closing certain
facilities. See Item 1, Business — Environmental
Matters.
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TVA could
become subject to Renewable Energy Portfolio
Standards.
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TVA is
not currently obligated to provide a percentage of the power it sells from
renewable sources but might be required to do so in the future. In such a
case, TVA would either have to build additional facilities that use renewable
resources to produce the power itself or purchase renewable power from other
companies. Such developments could require TVA to make significant capital
expenditures, increase its purchased power costs, or make changes in how it
operates its facilities. See Item 1, Business — Renewable and Clean
Energy.
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The NRC
could impose significant restrictions or requirements on
TVA.
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The NRC
has broad authority to impose requirements relating to the licensing, operation,
and decommissioning of nuclear generation facilities. If the NRC
modifies existing requirements or imposes new requirements, TVA could be
required to make substantial capital expenditures at its nuclear plants or make
substantial contributions to its nuclear decommissioning trust. In
addition, if TVA fails to comply with requirements promulgated by the NRC, the
NRC has the authority to impose fines, shut down units, or modify, suspend, or
revoke TVA’s operating licenses. See Item 1, Business — Nuclear.
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TVA could
lose responsibility for managing the Tennessee River
system.
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TVA’s
management of the Tennessee River system is important to effective operation of
the power system. TVA’s ability to integrate management of the
Tennessee River system with power system operations increases power system
reliability and reduces costs. Restrictions on how TVA manages the
Tennessee River system could negatively affect TVA’s operations.
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Congress
could take actions that lead to a downgrade of TVA’s credit
rating.
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TVA’s
rated securities are currently rated “Aaa” by Moody’s Investors Service and
“AAA” by Standard and Poor’s and Fitch Ratings, which are the highest ratings
assigned by these rating agencies. TVA’s credit ratings are not based
solely on its underlying business or financial condition, which by themselves
may not be commensurate with a triple-A rating. TVA’s current ratings
are based to a large extent on the body of legislation that defines TVA’s
business structure. Key characteristics of TVA’s business defined by
legislation include (1) the TVA Board’s ratemaking authority, (2) the current
competitive environment, which is defined by the fence and the
anti-cherrypicking provision, and (3) TVA’s status as a corporate agency and
instrumentality of the United States. Accordingly, if Congress takes
any action that effectively alters any of these characteristics, TVA’s credit
ratings could be downgraded.
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TVA’s debt
ceiling could become more
restrictive.
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The TVA
Act provides that TVA can issue bonds, notes, and other evidences of
indebtedness (“Bonds”) in an amount not to exceed $30 billion outstanding at any
time. If Congress either lowers the debt ceiling or broadens the
types of financial instruments that are covered by the debt ceiling, TVA might
not be able to raise enough capital to, among other things, service its
financial obligations, properly operate and maintain its power assets, and
provide for reinvestment in its power program.
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TVA
may lose some of its customers.
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As of
September 30, 2008, three distributor customers had notices in effect
terminating their power contracts with TVA. Although sales to these
three distributor customers generated only 0.5 percent of TVA’s total operating
revenues in 2008, the loss of additional customers could have a material adverse
effect on TVA’s cash flows, results of operations, and financial
condition. See Item 1, Business — Customers — Municipalities and Cooperatives
and Other
Customers.
Operational Risks
TVA’s
generation and transmission assets may not operate as planned.
Many of
TVA’s generation and transmission assets have been operating since the 1950s or
earlier and have been in nearly constant service since they were
completed. If these assets fail to operate as planned, TVA, among
other things:
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Might
have to invest a significant amount of resources to repair or replace the
assets;
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Might
be unable to operate the assets for a significant period of
time;
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Might
have to purchase replacement power on the open
market;
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Might
not be able to meet its contractual obligations to deliver power;
and
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Might
have to remediate collateral damage caused by a failure of the
assets.
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In
addition, the failure of TVA’s assets to perform as planned could cause health,
safety, and environmental problems and even result in such events as the failure
of a dam or a nuclear accident. Any of these potential outcomes could
negatively affect TVA’s cash flows, results of operations, and financial
condition. See Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Executive Summary — Challenges
During 2008.
TVA’s
fuel supplies might be disrupted.
TVA
purchases coal, uranium, fuel oil, and natural gas from a number of
suppliers. Disruption in the acquisition or delivery of fuel may
result from a variety of factors, including, but not limited to, weather,
production or transportation difficulties, labor challenges, or environmental
regulations affecting TVA’s fuel suppliers. These disruptions could
adversely affect TVA’s ability to operate its facilities and could require TVA
to acquire power at higher prices on the spot market, purchase more expensive
alternative fuels, or operate higher cost plants, thereby adversely affecting
TVA’s cash flows, results of operations, and financial condition.
Compliance
with existing and future environmental laws and regulations may affect TVA’s
operations in unexpected ways.
TVA is
subject to risks from existing federal, state, and local environmental laws and
regulations including, but not limited to, the following:
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Compliance
with existing environmental laws and regulations may cost TVA more than it
anticipates.
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At
some of TVA’s older facilities, it may be uneconomical for TVA to install
the necessary equipment to comply with future environmental laws, which
may cause TVA to shut down those
facilities.
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TVA
may be responsible for on-site liabilities associated with the
environmental condition of facilities that it has acquired or developed,
regardless of when the liabilities arose and whether they are known or
unknown.
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TVA
may be unable to obtain or maintain all required environmental regulatory
approvals. If there is a delay in obtaining any required
environmental regulatory approvals or if TVA fails to obtain, maintain, or
comply with any such approval, TVA may be unable to operate its facilities
or may have to pay fines or
penalties.
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See Item
1, Business — Environmental
Matters.
Compliance
with environmental laws and regulations relating to carbon dioxide and other
greenhouse gases may affect TVA’s operations in unexpected ways.
Future
compliance may be required resulting from the regulation of carbon dioxide and
other greenhouse gases. Any future legislative or regulatory actions to
address global climate change may be materially adverse to TVA’s financial
position or results of operations. The cost impact of legislation or
regulation to address global climate change would depend on the specific
legislation or regulation enacted, which cannot be determined at this
time. See Item 1, Business — Environmental
Matters.
TVA
is the sole power provider for customers within its service area, and if demand
for power in TVA’s service area increases, TVA is contractually obligated to
take steps to meet this increased demand.
If demand
for power in TVA’s service area increases, TVA may need to meet this increased
demand by purchasing power from other sources, building new generation and
transmission facilities, or purchasing existing generation and transmission
facilities. Purchasing power from external sources, as well as
acquiring or building new generation and transmission facilities, could
negatively affect TVA’s cash flows, results of operations, and financial
condition.
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 volatile in
recent years, and the price that TVA pays for purchased power may increase
significantly in the future. In addition, if one of TVA’s 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
enough purchased power or enough 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 not be able to supply enough
power to meet the demand, resulting in power curtailments or even
blackouts. See Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Risk Management Activities —
Credit Risk — Credit of Other Counterparties.
TVA’s
ability to supply power and its customers’ demands for power are influenced by
weather conditions.
Extreme
temperatures may increase the demand for power and require TVA to purchase power
at high prices in order to meet the demand from customers, while unusually mild
weather may result in decreased demand for power and lead to reduced electricity
sales. In addition, in periods of low rainfall or drought, TVA’s
low-cost hydroelectric generation may be reduced, requiring TVA to purchase
power or use more costly means of producing power. Furthermore, high
river water temperatures in the summer may limit TVA’s ability to use water from
the Tennessee or Cumberland River system for cooling at its generating
facilities, thereby limiting TVA’s ability to operate its generating
facilities. See Item 1, Business — Weather and Seasonality
and Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Executive Summary — Challenges
During 2008 — Weather Conditions.
TVA
may incur delays and additional costs in power plant construction and may be
unable to obtain necessary regulatory approval.
TVA has
begun the process of completing the construction of Watts Bar Nuclear Unit 2 and
may need to construct more generating facilities in the
future. The completion of such facilities involves substantial risks
of delays and overruns in the cost of labor and materials. In
addition, completion may require regulatory approval, as in the case of Watts
Bar Nuclear Unit 2. If TVA does not obtain the necessary regulatory
approval, is otherwise unable to complete the development or construction
of a facility, decides to cancel construction of a facility, or incurs
delays or cost overruns in connection with constructing a facility, TVA’s cash
flows, financial condition, and results of operations could be
negatively affected. In addition, if construction projects are
not completed according to specifications, TVA may suffer, among other
things, reduced plant efficiency and higher operating
costs. See Item 1, Business — Nuclear.
TVA
may face problems attracting and retaining skilled workers.
As TVA
employees retire and TVA faces competition for skilled workers, TVA may face
problems attracting and retaining skilled workers to, among other things,
operate and maintain TVA’s generation and transmission facilities and complete
large construction projects such as Watts Bar Nuclear Unit 2.
TVA
is involved in various legal and administrative proceedings whose outcomes may
affect TVA’s finances and operations.
TVA is
involved in various legal and administrative proceedings and is likely to become
involved in other legal proceedings in the future in the ordinary course of
business. Although TVA cannot predict the outcome of the individual
matters in which TVA is involved or will become involved, the resolution of
these matters could require TVA to make expenditures in excess of established
reserves and in amounts that could have a material adverse effect on TVA’s cash
flows, results of operations, and financial condition. Similarly,
resolution could require TVA to change its business practices or procedures,
which could also have a material adverse effect on TVA’s cash flows, results of
operations, and financial condition. See Item 3, Legal
Proceedings.
TVA’s
transmission reliability could be affected by problems at other utilities or TVA
facilities.
TVA’s
transmission facilities are directly interconnected with the transmission
facilities of neighboring utilities and are thus part of an interstate power
transmission grid. Accordingly, problems at other utilities, or at
TVA’s own facilities, may cause interruptions in TVA’s transmission
service. If TVA were to suffer a transmission service interruption,
TVA’s cash flows, results of operations, and financial condition could be
negatively affected.
Events
at non-TVA facilities which affect the supply of water to TVA’s generation
facilities may interfere with TVA’s ability to generate power.
TVA’s
coal-fired and nuclear generation facilities depend on water from the river
systems near 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, the U.S. Army Corps of Engineers operates and manages other
bodies of water upon which some TVA facilities rely. Events at these
non-TVA managed bodies of water or their associated hydroelectric facilities may
interfere with the flow of water and may result in TVA having insufficient water
to meet the needs of its plants. In such scenarios, TVA may be
required to reduce generation at its affected facilities to levels compatible
with the available supply of water. See Item 1, Business — Power Supply and Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary — Challenges
During 2008.
An
incident at any nuclear facility, even one that is not owned by or licensed to
TVA, could result in increased expenses and oversight.
A nuclear
incident at a TVA facility could have significant consequences including loss of
life, damage to the environment, damage to or loss of the facility, and damage
to non-TVA property. Any nuclear incident, even at a facility that is
not owned by or licensed to TVA, has the potential to impact TVA adversely by
obligating TVA to pay up to $105 million per year and a total of $671 million
per nuclear incident under the Price-Anderson Act. In addition, a
nuclear incident could negatively affect TVA by, among other things, obligating
TVA to pay retrospective premiums, reducing the availability of insurance,
increasing the costs of operating nuclear units, or leading to increased
regulation or restriction on the construction, operation, and decommissioning of
nuclear facilities.
Catastrophic
events could affect TVA’s ability to supply electricity or reduce demand for
electricity.
TVA could
be adversely affected by catastrophic events such as fires, earthquakes, floods,
tornadoes, wars, terrorist activities, pandemics, and other similar
events. These events, the frequency and severity of which are
unpredictable, could negatively affect TVA’s cash flows, results of operations,
and financial condition by, among other things, limiting TVA’s ability to
generate and transmit power, reducing the demand for power, disrupting fuel or
other supplies, leading to an economic downturn, or creating instability in the
financial markets.
Demand
for electricity supplied by TVA could be reduced by changes in
technology.
Research
and development activities are ongoing to improve existing and alternative
technologies to produce electricity, including gas turbines, fuel cells,
microturbines, and solar cells. It is possible that advances in these
or other alternative technologies could reduce the costs of electricity
production from alternative technologies to a level that will enable these
technologies to compete effectively with traditional power plants like
TVA’s. To the extent these technologies become a more cost-effective
option for certain customers, TVA’s sales to these customers could be reduced,
thereby negatively affecting TVA’s cash flows, results of operations, and
financial condition. In addition, demand for electricity may be
affected by the implementation of time-of-use rates. Depending on
design features, time-of-use rates may affect timing and volatility of cash
flow. Metering or related technology changes may impact the features
and penetration of time-of-use rates.
Financial Risks
TVA
is subject to a variety of market risks that could negatively affect TVA’s cash
flows, results of operations, and financial position.
TVA is
subject to a variety of market risks, including, but not limited to, commodity
price risk, investment price risk, interest rate risk, and credit
risk.
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Commodity Price
Risk. Prices of commodities critical to TVA’s
operations, including coal, uranium, natural gas, fuel oil, construction
materials, emission allowances, and electricity, have been extremely
volatile in recent years. If TVA fails to effectively manage
its commodity price risk, TVA’s rates could increase and thereby cause
customers to look for alternative power
suppliers.
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Investment Price
Risk. TVA is exposed to investment price risk in its
nuclear decommissioning trust, its asset retirement trust, and its pension
fund. If the value of the investments held in the nuclear
decommissioning trust or the pension fund decreases significantly, TVA
could be required to make substantial unplanned contributions to these
funds, which would negatively affect TVA’s cash flows, results of
operations, and financial
condition.
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Interest Rate
Risk. Changes in interest rates could negatively affect
TVA’s cash flows, results of operations, and financial condition by
increasing the amount of interest that TVA pays on new bonds that it
issues, decreasing the return that TVA receives on its short-term
investments, decreasing the value of the investments in TVA’s pension fund
and trusts, and increasing the losses on the mark-to-market valuation of
certain derivative transactions into which TVA has
entered.
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Credit
Risk. TVA is exposed to the risk that its counterparties
will not be able to perform their contractual obligations. If
TVA’s counterparties fail to perform their obligations, TVA’s cash flows,
results of operations, and financial condition could be adversely
affected. In addition, the failure of a counterparty to perform
could make it difficult for TVA to perform its obligations, particularly
if the counterparty is a supplier of electricity or fuel to
TVA.
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For more
information regarding market risks, see Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Risk Management Activities,
and for a discussion of the impact on TVA of recent developments in the
commodity, investment, interest rate, and credit markets, see Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Executive Summary
— Challenges During 2008 and Liquidity and Capital Resources —-
Sources of Liquidity.
TVA
and owners of TVA securities could be impacted by a downgrade of TVA’s credit
rating.
A
downgrade in TVA’s credit rating could have material adverse effects on TVA’s
cash flows, results of operations, and financial condition as well as on
investors in TVA securities. Among other things, a downgrade could
have the following effects:
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A
downgrade would increase TVA’s interest expense by increasing the interest
rates that TVA pays on new Bonds that it issues. An increase in
TVA’s interest expense would reduce the amount of cash available for other
purposes, which could result in the need to increase borrowings, to reduce
other expenses or capital investments, or to increase power
rates.
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A
significant downgrade could result in TVA’s having to post collateral
under certain physical and financial contracts that contain rating
triggers.
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A
downgrade below a contractual threshold could prevent TVA from borrowing
under two credit facilities totaling $2.25
billion.
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A
downgrade could lower the price of TVA securities in the secondary
market.
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See Item
7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and
Capital Resources.
TVA
may have to make significant unplanned contributions to fund its pension and
other postretirement benefit plans.
TVA’s
costs of providing pension benefits and other postretirement benefits depend
upon a number of factors, including, but not limited to:
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Provisions
of the pension and postretirement benefit
plans;
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Changing
employee demographics;
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Rates
of increase in compensation levels;
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Rates
of return on plan assets;
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Discount
rates used in determining future benefit
obligations;
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Rates
of increase in health care costs;
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Levels
of interest rates used to measure the required minimum funding levels of
the plans;
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Future
government regulation; and
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Contributions
made to the plans.
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Any
number of these factors could increase TVA’s costs of providing pension and
other postretirement benefits and require TVA to make significant unplanned
contributions to the plans. Such contributions would negatively
affect TVA’s cash flows, results of operations, and financial
condition. For a discussion of the impact of the recent turmoil in
the financial markets on TVA’s pension fund, including the funded status and
recent performance of the fund, see Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Executive Summary — Challenges
During 2008 — Investment Performance.
TVA
may have to make significant unplanned contributions to its nuclear
decommissioning trust.
TVA
maintains a nuclear decommissioning trust for the purpose of providing funds to
decommission its nuclear facilities. The decommissioning trust is
invested in securities generally designed to achieve a return in line with
overall equity market performance. TVA might have to make significant
unplanned contributions to the trust if, among other things:
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The
value of the investments in the trust declines
significantly;
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The
laws or regulations regarding nuclear decommissioning change the
decommissioning funding
requirements;
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The
assumed real rate of return on plan assets, which is currently five
percent, is lowered by the TVA
Board;
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Changes
in technology and experience related to decommissioning cause
decommissioning cost estimates to increase significantly;
or
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TVA
is required to decommission a nuclear plant sooner than it
anticipates.
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If TVA
makes unplanned contributions to the trust, the contributions would negatively
affect TVA’s cash flows, results of operations, and financial
condition. See Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Executive Summary — Challenges
During 2008 — Investment Performance.
TVA
may be unable to meet its current cash requirements if its access to the debt
markets is limited.
TVA’s
cash management policy is to use cash provided by operations together with
proceeds from power program borrowings to fund TVA’s current cash
requirements. In addition, TVA has access to a $150 million credit
facility with the U.S. Treasury and $2.25 billion of credit facilities with a
national bank. In light of TVA’s cash management policy, it is
critical that TVA continue to have access to the debt markets in order to meet
its cash requirements. The importance of having access to the debt
markets is underscored by the fact that TVA, unlike many utilities, relies
almost entirely on the debt markets to raise capital since it is not authorized
to issue equity securities. See Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and Capital
Resources.
Approaching
or reaching its debt ceiling could limit TVA’s ability to carry out its
business.
At
September 30, 2008, TVA had approximately $22.7 billion of Bonds outstanding
(not including noncash items of foreign currency valuation loss of $138 million
and net discount on sale of bonds of $199 million). TVA has a
statutorily imposed ceiling of $30 billion on outstanding Bonds. Approaching or reaching
this debt ceiling could adversely affect TVA’s business by limiting TVA’s
ability to borrow money and increasing the cost of servicing TVA’s
debt. In addition, approaching or reaching this debt ceiling could
lead to increased legislative or regulatory oversight of TVA’s
activities.
TVA’s
cash flows, results of operations, and financial condition could be negatively
affected by economic downturns.
Sustained
downturns or weakness in the economy in TVA’s service area or other parts of the
United States could reduce overall demand for power and thus reduce TVA’s power
sales and cash flows, especially as TVA’s industrial customers reduce their
operations and thus their consumption of power. See Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Executive Summary
— Future Challenges.
TVA’s
financial control system cannot guarantee that all control issues and instances
of fraud or errors will be detected.
No
financial control system, no matter how well designed and operated, can provide
absolute assurance that the objectives of the control system are met, and no
evaluation of financial controls can provide absolute assurance that all control
issues and instances of fraud or errors can be detected. The design
of any system of financial 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. For an assessment as of
September 30, 2008, of TVA’s disclosure controls and procedures (which were
deemed ineffective) and TVA’s internal controls and procedures (which were
deemed effective) as well as a discussion of the remediation during the fourth
quarter of 2008 of a material internal control weakness related to TVA’s
estimate of unbilled revenue, see Item 9A, Controls and Procedures.
TVA
could lose the ability to use regulatory accounting and be required to write off
a significant amount of regulatory assets.
TVA is
able to use regulatory accounting because it satisfies the requirements set
forth in Statement of Financial Accounting Standards (“SFAS”) No. 71, “Accounting for the Effects of
Certain Types of Regulation.” Accordingly, TVA records as
assets certain costs that would not be recorded as assets under generally
accepted accounting principles for non-regulated entities. As of
September 30, 2008, TVA had $6.9 billion of regulatory assets. If TVA
loses its ability to use regulatory accounting, TVA could be required to
write-off its regulatory assets. 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 to TVA.
Risks Related to TVA Securities
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 are payable solely
from TVA’s net power proceeds. Net power proceeds are defined as the
remainder of TVA’s gross power revenues after deducting the costs of operating,
maintaining, and administering its power properties and payments to states and
counties in lieu of taxes, 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.
The
trading market for TVA securities might be limited.
All of
TVA’s Bonds are listed on the New York Stock Exchange except for TVA’s discount
notes, which have maturities of less than one year, and the power bonds issued
under TVA’s electronotes®
program, which is TVA’s medium-term retail notes program. In
addition, some of TVA’s Bonds are listed on foreign stock
exchanges. Although many of TVA’s Bonds are listed on stock
exchanges, there can be no assurances that any market will develop or continue
to exist for any Bonds. Additionally, no assurances can be made as to
the ability of the holders of Bonds to sell their Bonds or 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 series of Bonds is offered through underwriters, those 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 10 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 1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM 2. PROPERTIES
TVA holds
personal property in its own name but holds real property as agent for the
United States of America. TVA may acquire real property by negotiated
purchase or by eminent domain.
Generating Properties
At
September 30, 2008, generating assets operated by TVA consisted of 59 coal-fired
units, six nuclear units, 109 conventional hydroelectric units, four pumped
storage units, 93 combustion turbine units, three combined cycle units, nine
diesel generator units, one digester gas site, one biomass cofiring site, one
wind energy site, and 15 solar energy sites. See Item 1,
Business — Power Supply
for a chart that indicates the location, capability, and in-service dates for
each of these properties. Construction on Watts Bar Unit 2 commenced
in December 2007. Completing Watts Bar Unit 2 is expected to take 60
months. TVA added seven combustion turbine units in 2008 and
subsequently sold an undivided 69.69 percent interest in three of the combined
cycle, combustion turbine units it had acquired. It now operates these three
units under a lease agreement. See Item 1, Business — Power Supply — Generation Facilities — Combustion
Turbine Facilities.
Twenty-four
of TVA’s simple cycle combustion turbines are subject to leaseback
arrangements. For more information regarding these arrangements, see
Note 13 — Leaseback
Obligations.
Transmission Properties
TVA’s
transmission system interconnects with systems of surrounding utilities and
consists primarily of the following assets:
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Approximately
15,860 circuit miles of transmission lines (primarily 500 kilovolt and 161
kilovolt lines);
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487
transmission substations, power switchyards, and switching stations;
and
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64
individual interchange and 1,006 customer connection
points.
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In 2003,
TVA entered into a leaseback of certain qualified technological equipment and
other software related to TVA’s transmission system. For more
information regarding this transaction, see Note 13 — Leaseback
Obligations.
Natural Resource Stewardship Properties
TVA
operates and maintains 49 dams, and TVA manages the following natural resource
stewardship properties:
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11,000
miles of reservoir shoreline;
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293,000
acres of reservoir land;
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650,000
surface acres of water; and
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Over
100 public recreation facilities.
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As part
of its stewardship responsibilities, TVA approval is required to be obtained
before construction of any obstruction affecting navigation, flood control, or
public lands can be constructed in or along the Tennessee River and its
tributaries.
TVA has a
variety of buildings throughout its service area in addition to the buildings
located at its generation and transmission facilities, including office
buildings, customer service centers, power service centers, warehouses, visitor
centers, and crew quarters. The most significant of these buildings
is the Knoxville Office Complex. TVA also leases buildings when it
deems appropriate, including its Chattanooga Office Complex, which consists of
approximately 1.2 million square feet of office space. The initial
term of TVA's lease of approximately 1.05 million square feet of the Chattanooga
Office Complex expires on January 1, 2011. On February 8, 2008, TVA
finalized an agreement to purchase this portion of the Chattanooga Office
Complex upon the expiration of the existing lease term on January 1, 2011. The
purchase price is $22 million, payable on January 3, 2011. See Note 4
— Asset Acquisitions and
Dispositions. The lease on the Monteagle Place the remaining
portion of the Chattanooga Office Complex (approximately 131,979 square feet)
expires on September 30, 2012. TVA also owns a significant number of
buildings in Muscle Shoals, Alabama, and is currently evaluating strategies for
long-term solutions to further reduce its Muscle Shoals portfolio.
Disposal of Property
Under the
TVA Act, TVA has broad authority to dispose of personal property but only
limited authority to dispose of real property. TVA’s primary sources
of authority to dispose of real property are briefly described
below:
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Under
Section 31 of the TVA Act, TVA has authority to dispose of surplus real
property at a public auction.
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Under
Section 4(k) of the TVA Act, TVA can dispose of real property for certain
specified purposes, including to provide replacement lands for certain
entities whose lands were flooded or destroyed by dam or reservoir
construction and to grant easements and rights-of-way upon which are
located transmission or distribution
lines.
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Under
Section 15d(g) of the TVA Act, TVA can dispose of real property in
connection with the construction of generating plants or other facilities
under certain circumstances.
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Under
40 U.S.C. § 1314, TVA has authority to grant easements for rights-of-way
and other purposes.
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In
addition, the Basic Tennessee Valley Authority Power Bond Resolution adopted by
the TVA Board on October 6, 1960, as amended on September 28, 1976, October 17,
1989, and March 25, 1992, prohibits TVA from mortgaging any part of its power
properties and from disposing of all or any substantial portion of these
properties unless TVA provides for a continuance of the interest, principal, and
sinking fund payments due and to become due on all outstanding Bonds, or for the
retirement of such Bonds.
ITEM 3. LEGAL PROCEEDINGS
TVA is
subject to various legal proceedings and claims that have arisen in the ordinary
course of business. These proceedings and claims include the matters
discussed below. In accordance with SFAS No. 5, “Accounting forContingencies,” TVA had
accrued approximately $46 million and $3 million with respect to the
proceedings described below as of September 30, 2008 and 2007, respectively, as
well as approximately $5 million and $4 million as of September 30, 2008, and
2007, respectively, with respect to other proceedings that have arisen in the
normal course of TVA’s business. TVA recognized $20 million, $4
million, and $24 million in 2008, 2007, and 2006, respectively, of expense by
increasing accruals related to legal proceedings. 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, TVA’s results of operations, liquidity, and financial condition could be
materially adversely affected.
Global Warming Cases,
Southern District of New York. 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
CO2
emissions from fossil-fuel electric generating facilities should be ordered
abated because they contribute to causing the nuisance. The first
case was filed by various states (California, Connecticut, Iowa, New Jersey, New
York, Rhode Island, Vermont, and Wisconsin) and the City of New York against TVA
and other power companies. The second case, which alleges both public
and private nuisance, was filed against the same defendants by Open Space
Institute, Inc., Open Space Conservancy, Inc., and the Audubon Society of New
Hampshire. The plaintiffs do not seek monetary damages, but instead
seek a court order requiring each defendant to cap its CO2 emissions
and then reduce these emissions by an unspecified percentage each year for at
least a decade. In September 2005, the district court dismissed both
lawsuits because they raised political questions that should not be decided by
the courts. The plaintiffs appealed to the United States Court of
Appeals for the Second Circuit (“Second Circuit”). Oral argument was
held before the Second Circuit on June 7, 2006. On June 21, 2007, the
Second Circuit directed the parties to submit letter briefs by July 6, 2007,
addressing the impact of the Supreme Court’s decision in Massachusetts v. EPA, 127
S.Ct. 1438 (2007), on the issues raised by the parties. On July 6,
2007, the defendants jointly submitted their letter brief. The Second
Circuit is deliberating on its decision.
Case Involving Alleged
Violations of the New Source Review Regulations at Bull Run Fossil
Plant. The National Parks Conservation Association, Inc.
(“NPCA”), and the Sierra Club, Inc. (“Sierra Club”) filed suit against TVA on
February 13, 2001, in the United States District Court for the Eastern District
of Tennessee, alleging that TVA did not comply with the new source review
(“NSR”) requirements of the CAA when TVA repaired its Bull Run Fossil Plant
(“Bull Run”), a coal-fired electric generating facility located in Anderson
County, Tennessee. In March 2005, the district court granted TVA’s
motion to dismiss the lawsuit on statute of limitation grounds. The
plaintiffs’ motion for reconsideration was denied, and they appealed to the
United States Court of Appeals for the Sixth Circuit (“Sixth
Circuit”). Friend of the court briefs supporting the plaintiffs’
appeal were filed by New York, Connecticut, Illinois, Iowa, Maryland, New
Hampshire, New Jersey, New Mexico, Rhode Island, Kentucky, Massachusetts, and
Pennsylvania. Several Ohio utilities filed a friend of the court
brief supporting TVA. A panel of three judges issued a decision
reversing the district court’s dismissal on March 2, 2007. TVA’s
request that the full Sixth Circuit rehear the appeal was
denied. The district court trial previously scheduled for
September 2, 2008, was postponed, and the district court instead heard oral
arguments on the parties’ motions for summary judgment on that
date. The trial has not yet been rescheduled. TVA is
already installing or has installed the control equipment that the plaintiffs
seek to require TVA to install in this case, and it is unlikely that an adverse
decision will result in substantial additional costs to TVA at Bull
Run. An adverse decision, however, could lead to additional
litigation and could cause TVA to change its emission control strategy and
increase costs. It is uncertain whether there would be significant
increased costs to TVA.
Case Involving Opacity at
Colbert Fossil Plant. 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 Fossil Plant (“Colbert”) between July
1, 1997, and June 30, 2002. The plaintiffs seek a court order that could require
TVA to incur substantial additional costs for environmental controls and pay
civil penalties of up to approximately $250 million. After the court dismissed
the complaint (finding that the challenged emissions were within Alabama’s two
percent de minimis rule, which provided a safe harbor if nonexempt opacity
monitor readings over 20 percent did not occur more than two percent of the time
each quarter), the plaintiffs appealed the district court’s decision to the
United States Court of Appeals for the Eleventh Circuit (“Eleventh
Circuit”). On November 22, 2005, the Eleventh Circuit affirmed the
district court’s dismissal of the claims for civil penalties but held that the
Alabama de minimis rule was not applicable because Alabama had not yet obtained
Environmental Protection Agency (“EPA”) approval of that rule. The
case was remanded to the district court for further proceedings. On
April 5, 2007, the plaintiffs moved for summary judgment. TVA opposed
the motion and moved to stay the proceedings. On April 12, 2007, EPA
proposed to approve Alabama’s de minimis rule subject to certain
changes. On July 16, 2007, the district court denied TVA’s motion to
stay the proceedings pending approval of Alabama’s de minimis
rule. Oral argument on the plaintiffs’ motion for summary judgment
was held on August 16, 2007. On August 27, 2007, the district court
granted the plaintiffs’ motion for summary judgment, finding that TVA had
violated the CAA at Colbert. The district court held that, while TVA
had achieved 99 percent compliance on Colbert Units 1-4 and 99.5 percent
compliance at Colbert Unit 5, TVA had exceeded the 20 percent opacity limit
(measured in six-minute intervals) more than 3,350 times between January 3,
2000, and September 30, 2002. The district court ordered TVA to
submit a proposed remediation plan, which TVA did on October 26,
2007. The
plaintiffs responded to TVA’s proposed plan, and the district court held a
hearing on the plan on December 15, 2008. EPA has approved
Alabama’s de minimis rule, which will become effective in 2009.
In
addition to Colbert, TVA has another coal-fired power plant in Alabama, Widows
Creek Fossil Plant (“Widows Creek”), which has a summer net capability of 1,508
megawatts. Since the operation of Widows Creek must meet the same
opacity requirements, this plant may be affected by the decision in this
case. The recently approved de minimis rule change helps reduce the
chances of an adverse effect on Widows Creek from the district court
decision.
Case Brought by North
Carolina Alleging Public Nuisance. On January 30, 2006, North
Carolina filed suit against TVA in the United States District Court for the
Western District of North Carolina alleging that TVA’s operation of its
coal-fired power plants in the States of Tennessee, Alabama, and Kentucky
constitute public nuisances. North Carolina is asking the court to
impose caps on emissions of certain pollutants from TVA’s coal-fired plants that
North Carolina considers to be equivalent to caps on emissions imposed by North
Carolina law on North Carolina’s two largest electric utilities. The
imposition of such caps could require TVA to install more pollution controls on
a faster schedule than required by federal law. The trial in this
case was completed on July 30, 2008. The parties submitted their
post-trial filings on September 15, 2008, and a decision will follow at a later
time.
Case Arising out of
Hurricane Katrina. In April 2006, TVA was added as a defendant
to a class action lawsuit brought in the United States District Court for the
Southern District of Mississippi by 14 residents of Mississippi allegedly
injured by Hurricane Katrina. The plaintiffs sued seven large oil
companies and an oil company trade association, three large chemical companies
and a chemical trade association, and 31 large companies involved in the mining
and/or burning of coal, including TVA and other utilities. The
plaintiffs allege that the defendants’ greenhouse gas emissions contributed to
global warming and were a proximate and direct cause of Hurricane Katrina’s
increased destructive force. The plaintiffs are seeking monetary
damages among other relief. TVA has moved to dismiss the complaint on
grounds that TVA’s operation of its coal-fired plants is not subject to tort
liability due to the discretionary function doctrine. The district
court dismissed the case on the grounds that the plaintiffs lacked
standing. The plaintiffs appealed the dismissal to the United States
Court of Appeals for the Fifth Circuit, and oral argument was held before a
three judge panel in July 2008. A judge on the panel subsequently
recused himself from the case, and the case was reargued during the week of
November 3, 2008.
East Kentucky Power
Cooperative Transmission Case. In April 2003, Warren Rural
Electric Cooperative Corporation (“Warren”) notified TVA that it was terminating
its power contract with TVA. 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. East Kentucky
asked to interconnect its transmission system with the TVA transmission system
in three places that are currently delivery points through which TVA supplies
power to Warren. TVA did not agree and East Kentucky asked FERC to
order TVA to provide the interconnections. In January 2006, FERC
issued a final order directing TVA to interconnect its transmission facilities
with East Kentucky’s system at three locations. TVA appealed the FERC
order in the United States Court of Appeals for the District of Columbia Circuit
(“D.C. Circuit”) seeking review of this order on the grounds that this order
violated the anti-cherrypicking provision. On January 10, 2007, TVA
and Warren executed an agreement under which Warren rescinded its notice of
termination. FERC terminated the proceeding but did not vacate its
previous order. On January 17, 2008, TVA filed an unopposed motion to
dismiss the D.C. Circuit appeal as moot. The D.C. Circuit dismissed
the case on January 29, 2008.
Case Involving AREVA Fuel
Fabrication. On November 9, 2005, TVA received two invoices
totaling $76 million from Framatome ANP Inc., which subsequently changed its
name to AREVA NP Inc. (“AREVA”). AREVA asserted that it was the
successor to the contract between TVA and Babcock and Wilcox Company (“B&W”)
under which B&W would provide fuel fabrication services for TVA’s Bellefonte
Nuclear Plant. AREVA’s invoices were based upon the premise that the
contract required TVA to buy more fuel fabrication services from B&W than
TVA actually purchased. In September 2006, TVA received a formal
claim from AREVA which requested a Contracting Officer’s decision pursuant to
the Contract Disputes Act of 1978 and reduced the amount sought to $26
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 $26 million claim and alleging that the contract required TVA to
purchase certain amounts of fuel and/or to pay a cancellation
fee. TVA filed its answer to the complaint on June 15,
2007. AREVA subsequently raised its claim to $48
million. Trial on the question of liability was scheduled to begin on
September 22, 2008, but has been reset for April 20, 2009. A second
trial on the question of damages will be held later, if
necessary. TVA and AREVA have negotiated the terms of a settlement
agreement. This agreement is contingent on approval by the TVA
Board. The parties have scheduled a meeting with an independent
third-party on December 16, 2008, to review the proposed settlement
agreement.
Notification of Potential
Liability for Ward Transformer Site. The Ward Transformer site
is contaminated by PCBs from electrical equipment. EPA and a working
group of potentially responsible parties (the “PRP Work Group”) have provided
documentation showing that TVA sent a limited amount of equipment containing
PCBs to the site in 1974. The PRP Work Group is cleaning up on-site
contamination in accordance with an agreement with EPA. The cleanup
effort has been divided into four areas: two phases of soil cleanup; cleanup of
off-site contamination in the downstream drainage basin; and supplemental
groundwater remediation. The first phase of soil cleanup is underway,
and the high-end cost estimate for this work is about $66
million. There are no reliable estimates for the second phase of soil
and cleanup or the supplemental groundwater remediation, although EPA has
selected a cleanup plan for the downstream drainage basin with a present worth
cost estimate of $6 million. TVA understands that EPA has incurred
approximately $3 million in past response costs, and the PRP Work Group has
reimbursed EPA approximately $725,000 of those costs. The PRP Work
Group plans to propose a cost allocation schedule which it will use as the basis
for offering settlements to PRPs for the first phase of soil
cleanup. It plans to sue PRPs who do not settle. There
also may be natural resource damages liability at this site, but TVA is not
aware of any estimated amount for any such damages. TVA has a
potential defense that it only sent useful equipment to Ward and thus is not
liable for arranging for disposal of a hazardous substance at the
site.
Case Involving the General
Waste Products Sites. In July 2008, a third-party complaint
under CERCLA was filed against TVA in the District Court for the Southern
District of Indiana, alleging that TVA, and several other defendants, disposed
of hazardous materials at the General Waste Products sites in Evansville,
Indiana. TVA was named in the complaint based on allegations that TVA
arranged for the disposal of contaminated materials at the sites. The
other third-party defendants are General Waste Products, General Electric
Company, Indianapolis Power and Light, National Tire and Battery, Old Ben Coal
Co., Solar Sources Inc., Whirlpool, White County Coal, PSI, Tell City Electric
Department, Frontier Kemper, Speed Queen, Allan Trockman (the former operator of
the site), and the City of Evansville. This action was brought by the
Evansville Greenway PRP Group, a group of entities who are currently being sued
in the underlying case for disposing of hazardous materials at the sites, in
order to require the third-party defendants to contribute to, or pay for, the
remediation of the sites. The complaint also includes a claim under
state law against the defendants for the release of hazardous
materials. TVA filed its answer to the complaint on October 29,
2008.
Completion of Browns Ferry
Unit 1, Team Incentive Fee Pool Claims. Under the
contracts for the restart of TVA’s Browns Ferry Unit 1, TVA and two engineering
and construction contractors, Bechtel Power Corporation (“Bechtel”) and Stone
& Webster Construction, Inc. (“Stone and Webster”), are to share in a team
incentive fee pool funded from cost savings based on underruns in the budgets
for their respective work scopes. The contracts provide that the fee pool
could not exceed $100 million regardless of the actual savings involved, and the
savings would be allocated as follows: 90 percent of the first $40 million
would be given to the contractors, and any amount over $40 million would be
split equally among TVA and the two contractors. Thus, if the maximum cost
savings of $100 million had been attained, each contractor’s payment from this
pool would have been $38 million, for a total payout under both contracts of $76
million with the remaining $24 million being credited to TVA. The
contractors have taken the position that they should each receive the maximum
payment. In 2008, Bechtel agreed to
settle its team incentive fee claim for a payment of $15 million, conditioned
upon Bechtel receiving an additional payment equal to any amount over $15
million that Stone and Webster receives in resolution of its team incentive fee
claim. TVA and Stone and Webster mediated the team
incentive fee claim
(as well as other claims) in May 2008 and discussions with Stone and
Webster are continuing. On
August 20, 2008, the TVA Board approved a proposed settlement with Stone and
Webster, contingent on Stone and Webster agreeing to certain
conditions. Stone and Webster has not agreed to the
conditions. It is reasonably possible that TVA could incur some
potential liability in excess of the amount previously calculated by TVA, and
TVA has created a reserve for the additional amount.
Paradise Fossil Plant Clean
Air Act Permit. On December 21, 2007, the Sierra Club, the
Center for Biological Diversity, Kentucky Heartwood, and Hilary Lambert filed a
petition with EPA raising objections to the conditions of TVA’s current CAA
permit at the Paradise Fossil Plant (“Paradise”). Among other things,
the petitioners allege that activities at Paradise triggered the NSR
requirements for NOx and that
the monitoring of opacity at Units 1 and 2 of the plant is
deficient. The current permit continues to remain in
effect. It is unclear whether or how the plant’s permit might be
modified as a result of this proceeding.
Employment
Proceedings. TVA is engaged in various administrative and
legal proceedings arising from employment disputes. These matters are
governed by federal law and involve issues typical of those encountered in the
ordinary course of business of a utility. They may include
allegations of discrimination or retaliation (including retaliation for raising
nuclear safety or environmental concerns), wrongful termination, and failure to
pay overtime under the Fair Labor Standards Act. Adverse outcomes in
these proceedings would not normally be material to TVA’s results of operations,
liquidity, and financial condition, although it is possible that some outcomes
could require TVA to change how it handles certain personnel matters or operates
its plants.
Information Request from
EPA. On April 25, 2008, TVA received a request from EPA under
section 114 of the CAA requesting extensive information about projects at and
the operations of 14 of TVA’s 59 coal-fired units. These 14 units are
located in the States of Alabama, Kentucky, and Tennessee. This request
for information is similar to but broader than section 114 requests that
other companies have received during EPA’s NSR enforcement initiative. TVA
has responded to this request. EPA’s request could be the first step
in an administrative proceeding against TVA that could then result in litigation
in the courts.
Notice of Violation at
Widows Creek Unit 7. On July 16, 2007, TVA received a Notice
of Violation (“NOV”) from EPA alleging that TVA failed to properly maintain
ductwork at Widows Creek Unit 7 and other violations. TVA repaired
the ductwork in 2005. While the NOV does not set out an
administrative penalty, it is likely that EPA may seek a monetary sanction
through giving up emission allowances, paying an administrative penalty, or
both. TVA and the State of Alabama entered into an agreed order in
which TVA agreed to pay the state $100,000. TVA is unable to estimate
the amount of potential monetary sanctions from EPA for which TVA may be liable
in connection with the NOV.
Administrative Proceeding
Regarding Bellefonte Nuclear Plant Units 3 and 4. TVA submitted its COLA
to NRC for Bellefonte Nuclear Plant (“Bellefonte”) Units 3 and 4 in October
2007. If approved, the license to build and operate the plant would
be issued to TVA. Obtaining the necessary license would give TVA more
certainty about the cost and schedule of a nuclear option for future
decisions. The COLA for two AP1000 reactors at Bellefonte was
officially docketed by NRC on January 18, 2008, indicating the NRC found it
complete and technically sufficient to support NRC’s more detailed
reviews.
On June
6, 2008, a joint petition for intervention and a request for a
hearing submitted to the NRC by the
Bellefonte Efficiency and Sustainability Team, the Blue Ridge Environmental
Defense League, and the Southern Alliance for Clean
Energy. The petition raised 19 potential contentions with respect to
TVA’s COLA. Both TVA and the NRC staff opposed the admission of the
petitioners’ proposed contentions, and, as a result, the admission of the
petitioners as parties to the proceeding. Additionally, TVA opposed
the admission of one of the petitioners to the proceeding on the grounds that it
lacked standing. The Atomic Safety and Licensing Board
presiding over the proceeding subsequently denied standing to one of the
petitioners and accepted four of the 19 contentions submitted by the remaining
two petitioners. A hearing on these admitted contentions will be
conducted in the future. The admitted contentions involve questions
about the estimated costs of the new nuclear plant, the storage of low-level
radioactive waste, and the impact of the facility’s operations, in particular
the plant intake, on aquatic species. Other COLA applicants have
received similar petitions raising similar potential
contentions.
The TVA
Board has not made a decision to construct new plant units at the Bellefonte
site, and TVA continues to evaluate all nuclear generation options at the
site.
Significant Litigation to
Which TVA Is Not a Party. On April 2, 2007, the Supreme Court
issued an opinion in the case of United States v. Duke Energy,
vacating the ruling of the United States Court of Appeals for the Fourth Circuit
(“Fourth Circuit”) in favor of Duke Energy and against EPA in EPA’s NSR
enforcement case against Duke Energy. The NSR regulations apply
primarily to the construction of new plants but can apply to existing plants if
a maintenance project (1) is “non-routine” and (2) increases
emissions. The Supreme Court held that under EPA’s Prevention of
Significant Deterioration regulations, increases in annual emissions should be
used for the test, not hourly emissions as utilities, including TVA, have argued
should be the standard. Annual emissions can increase when a project
improves the reliability of plant operations and, depending on the time period
over which emission changes are calculated, it is possible to argue that almost
all reliability projects increase annual emissions. Neither the
Supreme Court nor the Fourth Circuit addressed what the “routine” project test
should be. The United States District Court for the Middle District
of North Carolina had ruled for Duke Energy on this issue, holding that
“routine” must take into account what is routine in the industry and not just
what is routine at a particular plant or unit as EPA has argued. EPA did not
appeal this ruling. On October 5, 2007, EPA filed a motion with the
United States District Court for the Middle District of North Carolina asking
that court to vacate its entire prior ruling, including the portion relating to
the test for “routine” projects.
TVA is
currently involved in an NSR case involving Bull Run, which is discussed in more
detail above. The Supreme Court’s rejection of the hourly standard
for emissions testing could undermine one of TVA’s defenses in the Bull Run
case, although TVA has other available defenses. Environmental groups
and North Carolina have given TVA notice in the past that they may sue TVA for
alleged NSR violations at a number of TVA units. The Supreme Court’s decision
could encourage such suits, which are likely to involve units where emission
control systems such as scrubbers and selective catalytic reduction systems are
not installed, under construction, or planned to be installed in the relatively
near term.
Significant Litigation to
Which TVA Is Not a Party, Case Involving North Carolina’s Petition to
EPA. In 2005, North Carolina petitioned EPA under Section 126
of the CAA to impose additional emission reduction requirements for SO2 and NOx on
coal-fired power plants in 13 states, including the states where TVA’s
coal-fired power plants are located. In March 2006, EPA denied the
North Carolina petition primarily on the basis that CAIR remedies the problem.
In June 2006, North Carolina filed a petition for review of EPA’s decision with
the D.C. Circuit. On October 1, 2007, TVA filed a friend of the court
brief in support of EPA’s decision to deny North Carolina’s Section 126
petition. The D.C. Circuit ordered
the parties, including TVA, to file new briefs in the case and to address what
should happen if the court vacates CAIR.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not
applicable.
PART
II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Not
applicable.
ITEM 6. SELECTED FINANCIAL DATA
The
following selected financial data for the years 2004 through 2008 should be read
in conjunction with the audited financial statements and notes thereto
(collectively, the “Financial Statements”) presented in Item 8, Financial
Statements and Supplementary Data. Certain reclassifications have
been made to the 2004, 2005, 2006, and 2007 financial statement presentation to
conform to the 2008 presentation.
Statements of Income Data
For the
years ended September 30
(in
millions)
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Operating
revenues1,
7
|
$ | 10,382 | $ | 9,326 | $ | 8,983 | $ | 7,792 | 7 | $ | 7,525 | 7 | ||||||||
Revenue
capitalized during pre-commercial plant operations
|
– | (57 | ) | – | – | – | ||||||||||||||
Operating
expenses 6,
8
|
(8,198 | ) 2 | (7,726 | ) 2 | (7,560 | ) 2 | (6,455 | ) 2, 7 | (5,833 | ) 3, 7 | ||||||||||
Operating
income
|
2,184 | 1,543 | 1,423 | 1,337 | 1,692 | |||||||||||||||
Other
income, net 1, 4,
6, 7
|
9 | 71 | 78 | 57 | 7 | 64 | 7 | |||||||||||||
Unrealized
gain (loss) on derivative contracts, net
|
– | 41 | (15 | ) | 3 | (7 | ) | |||||||||||||
Net
interest expense 4,
8
|
(1,376 | ) | (1,232 | ) | (1,264 | ) | (1,312 | ) 8 | (1,363 | ) 8 | ||||||||||
Cumulative
effect of accounting changes
|
– | – | (109 | ) 5 | – | – | ||||||||||||||
Net
income
|
$ | 817 | $ | 423 | $ | 113 | $ | 85 | $ | 386 |
Notes
(1)
|
Prior
to 2007, TVA reported certain revenue not directly associated with revenue
derived from electric operations as Other
revenue. This income of $10 million, $12 million, and $8
million for 2006, 2005, and 2004, respectively, has been reclassified from
Other
revenue to Other
income. Additionally, certain items not directly
associated with the sale of electricity were previously reported as Sales of
electricity. This revenue of $22 million, $23 million,
and $22 million for 2006, 2005, and 2004, respectively, has been
reclassified from Sales of
electricity to Other
revenue.
|
(2)
|
During
2008, 2007, 2006, and 2005, TVA recognized a total of $9 million, $21
million, $14 million, and $24 million, respectively, in impairment losses
related to its Property, plant, and
equipment. The 2008 Loss on asset
impairment included a $4 million write-off due to project and
technology changes from a wet scrubber to a dry scrubber at John Sevier
Fossil Plant, a $4 million write-off of limestone grinding equipment
purchased for the Bull Run Fossil Plant when the decision was made to
purchase limestone in the pre-ground state, as well as approximately $1
million in write-offs of other Construction work in
progress assets. The 2007 Loss on asset
impairment included a $17 million write-down of a scrubber project
at Colbert and write-downs of $4 million related to other Construction in
progress assets. The 2006 Loss on asset
impairment included write-downs of $12 million on certain Construction in
progress assets related to new pollution-control and other
technologies that had not been proven effective and a re-evaluation of
other projects due to funding limitations and a $2 million write-down on
one of two buildings in TVA’s Knoxville Office Complex based on TVA’s
plans to sell or lease the East Tower of the Knoxville Office
Complex. The 2005 Loss on asset
impairment included a $16 million write-down on certain Construction in
progress assets related to new pollution-control and other
technologies that had not been proven effective and a re-evaluation of
other projects due to funding limitations and an $8 million write-down on
one of two buildings in TVA’s Knoxville Office Complex based on TVA’s
plans to sell or lease the East Tower of the Knoxville Office
Complex.
|
(3)
|
During
2004, TVA was notified by a supplier that it would not proceed with
manufacturing of fuel cells to be installed in the partially completed
Regenesys energy storage plant in Columbus,
Mississippi. Accordingly, TVA recognized a net $20 million loss
on the cancellation of the Regenesys
project.
|
(4)
|
Prior
to 2006, TVA reported short-term investment interest income with interest
expense. Interest income of $19 million and $6 million for 2005
and 2004, respectively, has been reclassified from Interest expense,
net to Other income,
net.
|
(5)
|
During
2006, TVA adopted FIN No. 47, “Accounting for Conditional
Asset Retirement Obligations – an interpretation of FASB Statement No.
143,” which resulted in a cumulative effect charge to income of
$109 million and an increase in accumulated depreciation of $20
million. See Note 5.
|
(6)
|
TVA
has certain service organizations which provide maintenance and testing
services to customers both inside and outside of TVA. For 2006
and 2005, the excess of cost recovery over actual cost and services
provided to TVA organizations of $12 million and $12 million,
respectively, has been reclassified from Other income to
Operating
expense.
|
(7)
|
Certain
items previously reported as revenue under Other revenue
were reclassified as Other
income. These items were not directly associated with
revenue derived from electric operations but are associated with the
operation of service organizations which provide environmental and
maintenance and testing services. Previously reported revenue
from these items of approximately $5 million and $13 million for 2005 and
2004, respectively, are now included in Other
income. Additionally, certain Other revenue
related to income derived from electric operations was recorded net of
related expenses. Expenses of $15 million and $13 million for
2005 and 2004, respectively, have been reclassified from Other revenue to
operating expenses.
|
(8)
|
Subsequent
to 2005, certain financing charges related to leaseback obligations were
recorded as Operating and
maintenance expense. Beginning with 2006, these
financing charges are classified as interest
expense. Previously reported financing charges of approximately
$51 million and $53 million for 2005 and 2004, respectively,
are now included in Interest on debt and
leaseback obligations.
|
Balance Sheets Data
At
September 30
(in
millions)
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Current
assets 1
|
$ | 2,503 | $ | 2,436 | $ | 2,513 | $ | 2,176 | $ | 2,295 | ||||||||||
Property,
plant, and equipment, net
|
25,779 | 24,832 | 24,421 | 23,888 | 23,699 | |||||||||||||||
Investment
funds
|
956 | 1,169 | 972 | 858 | 744 | |||||||||||||||
Regulatory
and other long-term assets
|
7,899 | 5,295 | 6,402 | 7,551 | 7,451 | |||||||||||||||
Total
assets
|
$ | 37,137 | $ | 33,732 | $ | 34,308 | $ | 34,473 | $ | 34,189 | ||||||||||
Liabilities
and proprietary capital
|
||||||||||||||||||||
Current
liabilities 1
|
$ | 4,252 | $ | 3,429 | $ | 5,229 | $ | 6,724 | $ | 5,420 | ||||||||||
Regulatory
and other liabilities
|
8,918 | 6,400 | 7,052 | 7,606 | 7,168 | |||||||||||||||
Long-term
debt, net
|
20,404 | 21,099 | 19,544 | 17,751 | 19,337 | |||||||||||||||
Total
liabilities
|
33,574 | 30,928 | 31,825 | 32,081 | 31,925 | |||||||||||||||
Retained
earnings
|
2,571 | 1,763 | 1,349 | 1,244 | 1,162 | |||||||||||||||
Other
proprietary capital
|
992 | 1,041 | 1,134 | 1,148 | 1,102 | |||||||||||||||
Total
proprietary capital
|
3,563 | 2,804 | 2,483 | 2,392 | 2,264 | |||||||||||||||
Total
liabilities and proprietary capital
|
$ | 37,137 | $ | 33,732 | $ | 34,308 | $ | 34,473 | $ | 34,189 |
Notes
(1)
|
In
2006, TVA began to apply certain customer advances previously reported as
Current
liabilities as a reduction to Accounts
receivable. The advances were $93 million in 2005 and
$91 million in 2004. A reduction occurred to both Current assets
and Current
liabilities for the same
amount.
|
Financial Obligations
As of
September 30
(in
millions)
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Net
long-term debt, excluding current maturities
|
$ | 20,404 | $ | 21,099 | $ | 19,544 | $ | 17,751 | $ | 19,337 | ||||||||||
Other
long-term obligations
|
||||||||||||||||||||
Capital
leases *
|
92 | 104 | 128 | 150 | 138 | |||||||||||||||
Leaseback
obligations
|
1,353 | 1,072 | 1,108 | 1,143 | 1,178 | |||||||||||||||
Energy
prepayment obligations
|
1,033 | 1,138 | 1,244 | 1,350 | 1,455 | |||||||||||||||
Total
other long-term obligations
|
2,478 | 2,314 | 2,480 | 2,643 | 2,771 | |||||||||||||||
Total
long-term obligations
|
22,882 | 23,413 | 22,024 | 20,394 | 22,108 | |||||||||||||||
Discount
notes
|
185 | 1,422 | 2,376 | 2,469 | 1,924 | |||||||||||||||
Current
maturities of long-term debt, net
|
2,030 | 90 | 985 | 2,693 | 2,000 | |||||||||||||||
Total
short-term obligations
|
2,215 | 1,512 | 3,361 | 5,162 | 3,924 | |||||||||||||||
Total
financial obligations
|
$ | 25,097 | $ | 24,925 | $ | 25,385 | $ | 25,556 | $ | 26,032 |
Note
*
|
Included
in Accrued
liabilities and Other
liabilities on the Balance
Sheets.
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars
in millions except where noted)
Business Overview
Distinguishing
Features of TVA’s Business
TVA
operates the nation’s largest public power system. In 2008, TVA
provided electricity to 52 large industrial customers, six federal
customers, and 159 distributor customers that serve nearly nine million
people in seven southeastern states. TVA generates almost all of its
revenues from the sale of electricity, and in 2008 revenues from the sale of
electricity totaled $10.3 billion. As a wholly-owned agency and
instrumentality of the United States, however, TVA is different from other
electric utilities in a number of ways. A few of the more
distinguishing features are discussed below.
Defined Service
Area. TVA has a defined service area established by federal
law. Subject to certain minor exceptions, TVA may not, without an act
of Congress, enter into contracts which would have the effect of making it or
the distributor customers of its power a source of power supply outside the area
for which TVA or its distributor customers were the primary source of power
supply on July 1, 1957. This statutory provision is referred to as
the “fence” because it bounds TVA’s sales activities, essentially limiting TVA
to power sales within a defined service area. Correspondingly,
however, the possibility of sales by others into TVA’s service area is
significantly limited. The Federal Power Act, primarily through its
anti-cherrypicking provision, prevents FERC from ordering TVA to provide access
to its transmission lines to others for the purpose of delivering power to
customers within its service area except for customers in Bristol,
Virginia.
Rate Authority. Typically, a utility is
regulated by a public utility commission, which approves the rates the utility
may charge. TVA, however, is self-regulated with respect to
rates. The TVA Act gives the TVA Board sole responsibility for
establishing the rates TVA charges for power. These rates are not
subject to judicial review or review or approval by any state or federal
regulatory body. In setting TVA’s rates, however, the TVA Board is
charged by the TVA Act to have due regard for the objective that power be sold
at rates as low as are feasible.
Funding. TVA’s
operations were originally funded primarily with appropriations from
Congress. In 1959, however, Congress passed legislation that required
TVA’s power program to be self-financing from power revenues and proceeds from
power program financings. Until 1999, TVA continued to receive some
appropriations for certain multipurpose activities and for its stewardship
activities. Since 1999, however, TVA has not received any
appropriations from Congress for any activities and has funded essential
stewardship activities primarily with power revenues in accordance with a
statutory directive from Congress.
TVA,
unlike investor-owned power companies, is not authorized to raise capital by
issuing equity securities. TVA relies primarily on cash from
operations and proceeds from power program borrowings to fund its
operations. The TVA Act authorizes TVA to issue bonds, notes, and
other evidences of indebtedness (collectively, “Bonds”) in an amount not to
exceed $30 billion at any time. From time to time, draft legislation
is introduced in Congress that would expand the types of financial obligations
that count towards TVA’s $30 billion debt ceiling. Under this draft
legislation, long-term obligations that finance capital assets would also count
toward the debt ceiling, including leaseback arrangements and power prepayment
agreements with original terms exceeding one year. If Congress
decides to broaden the type of financial instruments that are covered by the
debt ceiling or to lower the debt ceiling, TVA might not be able to raise enough
capital to, among other things, service its then-existing financial obligations,
properly operate and maintain its power assets, and provide for reinvestment in
its power program. At September 30, 2008, TVA had approximately $22.7
billion of Bonds outstanding (not including noncash items of foreign currency
valuation loss of $138 million and net discount on sale of bonds of $199
million). For additional information regarding TVA’s sources of
funding, see Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources —
Sources of Liquidity.
Stewardship Activities. TVA’s
mission includes managing the United States’ fifth largest river system — the
Tennessee River, its tributaries, and public lands along the shoreline — to
provide, among other things, year-round navigation, flood damage reduction,
affordable and reliable electricity, and, consistent with these primary
purposes, recreational opportunities, adequate water supply, improved water
quality, and economic development. There are 49 dams that comprise
TVA’s integrated reservoir system. The reservoir system provides 800
miles of commercially navigable waterway and also provides significant flood
reduction benefits both within the Tennessee River system and downstream on the
lower Ohio and Mississippi Rivers. The reservoir system also provides a water
supply for residential and industrial customers, as well as cooling water for
some of TVA’s coal-fired and nuclear power plants. TVA’s
Environmental Policy (approved in May 2008) provides objectives for an
integrated approach to TVA’s multi-faceted mission by providing cleaner,
reliable, and still affordable energy, supporting sustainable economic growth,
and engaging in proactive environmental stewardship. The
Environmental Policy provides additional direction in several environmental
stewardship areas, including water resource protection and improvements,
sustainable land use, and natural resource management. TVA also
manages 293,000 acres of reservoir lands for natural resource protection,
recreation, and other purposes.
Economic Development
Activities. Since its beginnings in 1933, part of TVA’s
mission has been to promote the development of the Tennessee
Valley. TVA works with its distributor customers, regional, state and
local agencies, and communities to showcase the advantages available to
businesses locating or expanding in TVA’s seven-state service
area. These efforts have resulted in new investments and quality jobs
that benefit Tennessee Valley residents.
At its
October 30, 2008 meeting, the TVA Board approved a new economic development
initiative, the Valley Investment Initiative. Under the Valley
Investment Initiative, TVA and distributors of TVA power will provide an
incentive award to existing companies in TVA’s seven-state service area that
demonstrate a multi-year commitment to sustained capital investment, the
creation of quality jobs, compatible and efficient power use, and a commitment
to remain in the TVA region.
To
monitor its progress in accomplishing its economic development mission, the TVA
Board uses an economic development index performance measure. See
Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Executive
Summary — 2008
Performance Indicators. This measure tracks the number of jobs
added and/or retained in the Tennessee Valley, the amount of capital investment
in the Valley, and the impact of the retained and added jobs on the economic
vitality of the Valley. These three metrics represent the influence
TVA has on sustainable economic growth in the Valley.
Executive Summary
Challenges
During 2008
TVA faced
several challenges during 2008 that impacted its cash flows, results of
operations, and financial condition. The most significant of these
challenges related to investment performance, weather conditions, higher
commodity prices, asset performance, and water supply and
temperature.
Investment
Performance. The performance of debt, equity, and other
markets in 2008 negatively impacted the asset values of investments held in
TVA’s pension and decommissioning trust funds. During 2008, the
investments in the TVA Retirement System declined in value $1,429 million, or 19
percent. As of September 30, 2008, the TVA retirement system was
approximately 80 percent funded. From October 1, 2008, to November
30, 2008, the investments in the TVA Retirement System declined in value an
additional $1,138 million, or 18 percent. Because of these declines,
TVA may be required to make additional contributions to the TVA Retirement
System in the future.
During
2008, the nuclear decommissioning trust portfolio declined in value $241
million, or 22 percent. As of September 30, 2008, TVA’s nuclear
decommissioning trust funding was 98 percent of the estimated present value of
the funding requirements established by the Nuclear Regulatory Commission
(“NRC”). From October 1, 2008, to November 30, 2008, the nuclear
decommissioning trust portfolio declined in value an estimated additional $206
million, or 24 percent.
TVA will
submit its biennial funding status report to NRC in March 2009. Based
on the status of the funding requirement at that time, TVA anticipates it may
make contributions to the decommissioning trust fund or provide other methods of
decommissioning funding assurance necessary to match projected decommissioning
fund balances. TVA is monitoring the monetary value of its nuclear
decommissioning trust fund in light of recent market performance and believes
that, over the long term before cessation of nuclear plant operations and
commencement of decommissioning activities, adequate funds from investments will
be available to support decommissioning.
During
2008, TVA’s asset retirement trust portfolio, which is invested entirely in
fixed income funds, increased in value $1.4 million, or 3.5
percent. From October 1, 2008, to November 30, 2008, the asset
retirement trust portfolio increased in value an additional $155 thousand, or
0.19 percent.
TVA’s
investment policies are based on the objective of meeting long-term obligations,
and the allocation of investments is based on the assumption of encountering
distressed market conditions from time to time. TVA does not
anticipate making significant changes in its basic investment policies as a
result of current market conditions. See Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Activities —
Investment Price
Risk.
Weather
Conditions. 2008 was the ninth driest year in the eastern
Tennessee Valley in 119 years of record-keeping. Rainfall in the
eastern Tennessee Valley was 76 percent of normal for the year, and runoff was
47 percent of normal. Largely as a result of this low rainfall and
runoff, TVA’s hydroelectric production for 2008 was slightly less than 6.7
billion kilowatt-hours, which was 26 percent, 33 percent, and 57 percent lower
than in 2007, 2006, and 2005, respectively. Because of the lower
hydroelectric production, TVA had to rely more heavily on purchased power and
more expensive generation sources such as combustion turbines during
2008.
Higher Commodity Prices. Due
to rising commodity prices across domestic and international markets, TVA
experienced increased costs in short-term markets for natural gas, fuel oil,
coal, and electricity during 2008. The market prices for these
commodities at September 30, 2008, increased 31 percent, 65 percent, 62 percent,
and 22 percent, respectively, as compared to the market prices at September 30,
2007. Market prices for these commodities at September 30, 2008, and
2007, are shown in the table below.
Commodity
Pricing Table
As of
September 30, 2008
Commodity
|
2008
|
2007
|
Percent
Change
|
|||||||||
Natural
Gas (Henry Hub, $/mmBtu)
|
$ | 9.01 | $ | 6.87 | 31 | % | ||||||
Fuel
Oil (Gulf Coast, $/mmBtu)
|
21.38 | 12.97 | 65 | % | ||||||||
Coal
(FOB mine, $/ton)
|
48.13 | 29.65 | 62 | % | ||||||||
Electricity
(Into-TVA, $/MWh)
|
70.95 | 58.03 | 22 | % |
Since
September 30, 2008, the market prices for some of these commodities have
fallen.
Although
the FCA provides a mechanism to regularly alter rates to reflect changing fuel
and purchased power costs, there is a lag between the occurrence of a change in
fuel and purchased power costs and the reflection of the change in
rates. As a result, TVA’s cash flows can be negatively affected by
the FCA. As of September 30, 2008, TVA had $28 million in deferred
fuel and purchased power costs that are expected to be recovered through the FCA
in future periods. See Item 1, Business — Rate Actions.
Performance of
Assets. Although TVA’s generation and transmission assets
performed well overall in meeting the peak demands during the summer of 2008,
TVA faced hard spots in its operations related to large generating unit
outages.
|
•
|
Browns
Ferry Unit 1 experienced five unplanned reactor shutdowns in the first
five months after restart in June
2007.
|
|
•
|
A
planned outage at Sequoyah Nuclear Plant Unit 1 was extended 16 days due
to the identification and repair of damage in the main generator during
the scheduled outage.
|
|
•
|
Browns
Ferry Nuclear Plant Unit 3 experienced an unplanned automatic shutdown due
to a main generator trip. As it was recovering from this
generator trip, a secondary problem was discovered which
required repairs and extended the duration of this outage 21
days.
|
|
•
|
The
duration of a planned outage scheduled at Watts Bar Nuclear Plant Unit 1
was extended nine days due to emergent issues and complications associated
with completion of identified outage
work.
|
|
•
|
Fossil
generation was 2.2 percent less than planned during 2008 primarily due to
a 35-day extension of a planned outage on Colbert Fossil Plant Unit 5 and
increased forced outage rates at Bull Run Fossil Plant and Widows Creek
Fossil Plant Unit 7.
|
See Item
7, Management’s Discussion and Analysis and Results of Operations — Results of Operations — Operating
Expenses.
Challenges Related to Water Supply
and Water Temperature. TVA faces challenges related to water supply and
water temperature on the Cumberland River system and on the Tennessee River
system. On the Cumberland River system, the U.S. Army Corps of
Engineers (“Corps”) operates hydroelectric facilities and TVA operates fossil
plants. TVA also operates hydroelectric facilities, fossil plants,
and nuclear plants on the Tennessee River system.
Cumberland River
Challenges. The Corps operates
eight hydroelectric facilities on the Cumberland River which fall under the SEPA
agreement with TVA. Of these facilities, Wolf Creek and Center Hill
Dams are in need of emergency repairs. The need to repair the dams
coupled with the drought has resulted in less water flow and above normal water
temperatures. TVA has been impacted in two ways.
First,
SEPA’s emergency operating plan reduced the amount of power TVA received from
SEPA due to the drought and the need to repair the Wolf Creek and Center Hill
Dams. It is likely that an easing of the drought will not eliminate
the need for the emergency operating plans in the future because it is unclear
how long it will take the Corps to repair these facilities.
Second,
during the summer of 2008, reduced flow through the Cumberland River system,
combined with higher than normal upstream river temperatures, forced TVA to
reduce (“derate”) the power output of its Cumberland and Gallatin Fossil Plants
to remain in compliance with discharge temperature limits contained in the
plants’ discharge permits. To mitigate the derates, TVA installed and
commenced operation of temporary cooling towers at its Cumberland Fossil Plant
in July 2008. Operation of the cooling towers reduced Cumberland
Fossil Plant's output by slightly less than one percent; however, no derates
were experienced at the plant after the cooling towers began
operating. Output from Gallatin Fossil Plant on the Cumberland River
was reduced by approximately three percent, primarily during off-peak hours, to
avoid exceeding thermal limits. Summer derates continue to remain a
possibility in the future, especially until the Wolf Creek and Center Hill Dams
are repaired and normal water flow is restored on the Cumberland
River.
Tennessee River System
Challenges. Due
to the drought, there has been significantly less rainfall and runoff in the
Tennessee River system. The result was that less water was available
for cooling purposes, and the water that was available was higher in
temperature. During the summer of 2008, temperatures on the Tennessee
River reached levels that required nearly constant use of cooling towers at
Sequoyah and Browns Ferry Nuclear Plants to keep the permitted thermal limits
for the river from being exceeded. Using the cooling towers required a
substantial amount of power that TVA would have otherwise sold. After
Browns Ferry lost the use of cooling towers due to equipment malfunction in
early August 2008, TVA temporarily reduced power output on all three units to 50
percent of capacity to avoid exceeding permitted thermal limits. While every
effort was made to take derates during low load periods to reduce financial and
operational impacts, some derates were required during higher load daytime hours
to meet the permitted temperature limits.
2008
Performance Indicators
TVA
quantifies the results of its operations in accordance with its Strategic Plan,
which outlines the policy-level direction for TVA and lists corporate-level
metrics to be used in monitoring progress toward successful implementation of
the plan. The Strategic Plan focuses on TVA’s performance in the
following five broad areas and establishes general guidelines for each
area:
Customers:
|
Maintain
power reliability, provide competitive rates, and build trust with TVA’s
customers;
|
People:
|
Build
pride in TVA’s performance and
reputation;
|
Financial:
|
Adhere
to a set of sound financial guiding principles to improve TVA’s fiscal
performance;
|
Assets:
|
Use
TVA’s assets to meet market demand and deliver public value;
and
|
Operations:
|
Improve
performance to be recognized as an industry
leader.
|
The Strategic Plan also outlines the
policy-level direction for TVA and lists corporate-level metrics to be used in
monitoring progress toward successful implementation of the
plan. These metrics encompass aspects of TVA’s mission in energy, the
environment, and economic development and may change from time to
time.
2008
Performance Indicators
Performance
Measure
|
Description
|
|||
Customer
|
TVA's
Delivered Cost of Power
|
|||
Excluding
FCA Costs
|
Measures
cost per MWh sold (excluding FCA costs). Addresses the highest customer
priority of "low cost and reliable power" and emphasizes controlling costs
and increasing output.
|
|||
FCA
Costs
|
Measures
TVA's FCA expenses per MWh sold. Includes eligible expenses recovered
through FCA mechanism (fuel, purchased power, emission allowance, and
reagents). Encourages TVA to take actions to lower the overall cost of
fuel, purchased power, and other eligible FCA costs.
|
|||
Economic
Development Index
|
Measures
the effectiveness of TVA’s sustainable economic development efforts by
focusing on jobs growth in the Tennessee Valley, the quality of those
jobs, and partnership investments in the TVA service
area.
|
|||
Participation
in Energy Efficiency & Peak Shaving Initiatives
|
Measures
the percent of TVA customers that are participating in demand-side
management programs (new and existing) such as energyright© New Homes or Heat
Pumps.
|
|||
Customer
Satisfaction Survey
|
Measures
distributors' and directly served customers' satisfaction with TVA in a
variety of areas including wholesale/retail supplier, performance of local
TVA customer service staff, and power quality and reliability of
transmission service, pricing, contracts, and power supply
mix.
|
|||
Connection
Point Interruptions
|
Measures
reliability from the customer perspective by focusing on interruptions of
power, including momentary, caused by the transmission system at
connection points.
|
|||
People
|
Cultural
Health Index
|
Survey
of TVA employees includes questions relating to the workforce environment,
safety, Winning Behaviors, and Winning Performance. CHI assesses employee
alignment, capability, and engagement as an overall gauge of cultural
health.
|
||
Safe
Workplace
|
Measures
TVA employee and staff augmentation safety related to the number of
Occupational Safety and Health Administration recordable injuries per
200,000 hours worked. Includes fatality, day time restricted duty/job
transfer, medical treatment, loss of consciousness, and other significant
work-related injury/illness.
|
|||
Financial
|
Debt-like
Obligations/Asset Value
|
Measures
TVA's debt-like obligations as a percent of total assets. Includes debt,
lease obligations, and prepaid energy obligations. Focuses on
achieving a more flexible cost structure.
|
||
Earnings/Asset
Value
|
Measures
income statement earnings before interest, depreciation, amortization, and
taxes divided by total assets. Emphasizes effective cost management and
productivity by focusing on TVA's return on assets.
|
|||
Non-fuel
O&M
|
Measures
all non-fuel operations and maintenance costs per MWh
sales. Emphasizes competitiveness by focusing on the most
controllable component of TVA's total costs.
|
|||
Asset/Operations
|
Key
Environmental Metrics
|
Measures
impact of TVA's operations on the environment by focusing on key
environmental footprint metrics. Includes weighted summation
of: NOx +
SO2 +
CO2 +
Clean Water Act Nonconformances + Oil Spills to Water + Reportable
Quantity Releases + Notices of Violation + Office
Recyclables.
|
||
Megawatt
Demand Reduction
|
||||
(MW
Reduced)
|
Measures
level of demand reduction for electricity (MW) through the efficient use
of electricity. Promotes conservation through the construction
of site-built homes that exceed minimum efficiency
standards.
|
|||
Equivalent
Availability Factor
|
Measures
the actual available generation from all TVA generating assets in a given
period compared to maximum potential availability. Focuses on the
generation component of the highest customer priority, "low cost and
reliable power."
|
Future
Challenges
TVA faces
several challenges that may impact its cash flows, results of operations, and
financial condition in the future. The most significant of these
challenges are discussed below.
Meeting the Power Needs in TVA’s
Service Area. Demand for power in TVA’s service area had grown
at an average of two percent per year from 2001 to 2007. During 2008,
demand increased only about 0.2 percent, however, for 2009, TVA has forecasted
relatively flat load and sales growth as compared to 2008. This
forecast is due in part to expected tighter economic
conditions. Although there are many drivers that can contribute to
lower sales growth and lower load, such as energy efficiency and more efficient
industrial and mechanical equipment, loads are dependent on the economic
conditions in TVA’s service area. As economic conditions have
deteriorated, TVA has experienced roughly a two percent reduction in expected
sales in early 2009 and anticipates that the energy sales for the remainder of
2009 will be lower than expected in the 2009 budget. TVA is not
anticipating conditions to improve significantly in the near future but
continues to monitor and react to these trends.
Despite
the recent reduction in power sales, TVA still projects that demand for power in
its service area will increase over the long-term and plans to meet the need for
additional power through a variety of means:
|
•
|
New Generation. TVA
intends to add new generation assets. This intention was
reflected in TVA’s decision to complete the construction of Watts Bar Unit
2. The completion of Watts Bar Unit 2 is scheduled to occur
in 2013 and cost approximately $2.5 billion. TVA plans to
consider other opportunities to add new generation from time to
time. Market conditions, like the volatility of the price of
construction materials and the potential shortage of skilled craft labor,
may add uncertainties to the cost and schedule of new
construction.
|
|
•
|
Distributor-Owned
Generation. Under interim agreements dated September 30,
2008, TVA and Seven States Power Corporation (“SSPC”), a non-profit
organization comprised of the majority of TVA distributor customers (who
are also members of the Tennessee Valley Public Power Association), took
the first steps in joint power plant ownership in the Tennessee
Valley. (See Item 1 Business — Power Supply — Generation Facilities,
Note 4 — New
Generation, and Note 13 — Leaseback Obligations,
)
|
|
•
|
Power
Purchases. Purchasing power from others will likely
remain a part of how TVA meets the power needs of its service
area. The Strategic Plan establishes a goal of balancing
production capabilities with power supply requirements by promoting the
conservation and efficient use of electricity and, when necessary, buying,
building, and/or leasing assets or entering into purchased power
agreements. Achieving this goal will allow TVA to reduce its
reliance on purchased power.
|
Non-Fuel Operating and Maintenance
Costs. TVA has established two significant goals relating to
non-fuel operating and maintenance costs.
|
•
|
Achieving
non-fuel operating and maintenance spending performance that ranks in the
top quartile in the electric utility industry by managing these costs over
the next three years; and after that
time.
|
|
•
|
Maintaining
spending performance within the top quartile by keeping the rate of
increase in these costs in line with the top quartile in the
industry.
|
Meeting
these goals will significantly affect TVA’s ability to add new generation
assets.
Future Contributions to TVA
Investment Funds. TVA’s nuclear decommissioning trust and
pension funds have been adversely affected by the recent turmoil in the
financial markets. If market conditions do not recover quickly enough
or continue to deteriorate, TVA may be required to make contributions to these
investment funds in excess of the amounts TVA is currently planning to
contribute for the foreseeable future.
Performance of Generation Assets.
Although TVA’s generation and transmission assets performed extremely
well overall in meeting the peak demands during the summer of 2008, TVA was
adversely affected by the failure of some assets to operate as planned during
times of high demand. As a result, TVA had to operate higher cost
units or purchase power in the higher cost energy spot market. See
Item 1, Business — Power
Supply. TVA is likely to face similar problems in the future
since many of TVA’s generation assets have been operating since the 1950s or
earlier and have been in nearly constant service since they were
completed. In addition, if drought conditions continue, TVA will have
limited availability to operate its hydroelectric generating assets, which are
its least expensive units to operate.
Bonds and Other Financial
Obligations. As of September 30, 2008, TVA had $22.7 billion of Bonds
outstanding (not including noncash items of foreign currency valuation loss of
$138 million and net discount on sale of bonds of $199 million). The
amount of TVA’s Bonds outstanding has been reduced by about $5 billion since
September 30, 1996, when the end of year balance of outstanding Bonds
peaked. Since that time, however, TVA has entered into energy
prepayment transactions that resulted in $1.6 billion in prepayment obligations
and certain leaseback transactions that resulted in $1.3 billion in
obligations. The amount of prepayment and leaseback obligations
outstanding at September 30, 2008, was $2.4 billion. Payments on
these Bonds and obligations do not change with the amount of power sold, and if
competition increases, TVA’s obligations to make these payments could limit its
ability to adjust to market pressures. While prudent management of
Bonds and other financial obligations will remain an important strategic
consideration in the future, increased capital commitments may make it difficult
for TVA to continue its trend of reducing these obligations.
Environmental
Regulation. TVA expects to see increased environmental
regulation in the future, including but not limited to the regulation of mercury
and the emission of greenhouse gases such as CO2. TVA
has considered, and intends to continue considering, fuel mix in making
decisions about additional generation. The restart of Browns Ferry
Unit 1, the decision to complete the construction of Watts Bar Unit 2, and TVA’s
filing of a combined operating license application for two new units at the
Bellefonte Nuclear Plant (“Bellefonte”), as well as TVA’s request to reactivate
the construction permit for the existing Bellefonte units (although no decision
to construct any units at Bellefonte has been made), are examples of TVA’s
decisions to pursue or consider generation sources that do not emit greenhouse
gases. The nature or level of future regulation of greenhouse gases
is unclear at this time. Accordingly, the costs associated with such
regulation are currently unknown but could be substantial. TVA would
have to recover such costs in rates or pursue some other action which, among
other options, might include removing some coal-fired units from
service.
Renewable Portfolio. Under
most proposed legislation, renewable power generation resources include solar,
wind, incremental hydroelectric, biomass, and landfill
gas. Generating power with renewable sources instead of coal-fired
plants could help reduce the carbon intensity of TVA’s
generation. Power generated using renewable sources, with current
technologies, may not be economically competitive compared to existing power
generation assets. Technology advancements will be needed to address
some of the operational issues associated with renewable energy, such as energy
storage to address intermittency and interconnection technologies to address
onsite, non-grid connected renewables and efficiencies.
Most
renewable energy resources are geographically specific. Some regions
of the United States have an abundance of wind and solar resources, whereas
other regions have hydroelectric resources. Regional differences and
limitations play a primary role in the types and amount of renewable and clean
energy developed across the country. Within the area served by TVA
(southeast United States), two of the most abundant renewable resources are
hydroelectric and biomass. Feasible wind energy in this region is
primarily associated with mountain top and ridgeline installations, and the
total potential capacity is limited when compared to other parts of the nation
where wind energy is more abundant. If TVA is required to increase
its use of renewable resources and the cost of doing so is greater than the
costs of other sources of generation, TVA’s costs may increase, and, as a
result, TVA may be forced to raise rates.
Liquidity and Capital Resources
Sources
of Liquidity
TVA’s
current liabilities exceed current assets because of continued use of short-term
debt to fund cash needs as well as scheduled maturities of long-term
debt. To meet short-term cash needs and contingencies, TVA depends on
various sources of liquidity. TVA’s primary sources of liquidity are
cash on hand and cash from operations and proceeds from the issuance of
short-term and long-term debt.
Financial
markets experienced extreme volatility in 2008, and have continued to experience
extreme volatility into 2009 amid negative developments in housing and
mortgage-related activities, weakness of major financial institutions,
government actions, and negative economic developments. These
conditions have resulted in disruptions in credit and lending activities,
particularly in the short-term credit markets through which corporate
institutions borrow and lend to each other. Disruptions in the
short-term credit markets have the potential to impact TVA because TVA uses
short-term debt to meet working capital needs, and because it typically invests
its cash holdings in the short-term debt securities of other
institutions.
TVA has
not experienced difficulty in issuing short-term debt, or in refunding maturing
debt, despite the disruptions in the credit markets. Throughout the
period, TVA has experienced strong demand for its short-term discount notes, and
has been able to issue discount notes at competitive rates.
Other
than issuing electronotes®,
which are retail notes and are generally smaller in size than TVA’s other
long-term debt, TVA has not sought to issue long-term debt since June
2008. Despite conditions in the credit markets, however, TVA believes
it would be able to issue long-term debt if needed.
Management
expects continued demand for TVA short-term debt securities. Along
with the short-term debt program, management expects operating cash flows, cash
on hand, and access to credit facilities to continue to provide more than
adequate liquidity for TVA for the foreseeable future.
Management
is not able to anticipate the long-term impacts of recent financial market
turmoil on TVA, the financial markets in which TVA participates, or the economy
of the Tennessee Valley. Management closely monitors conditions in
the markets in which TVA conducts business and the financial health of companies
with which it does business, and will continue to monitor these conditions in
the future in an effort to be proactive in maintaining financial
health.
The
majority of TVA’s balance of cash on hand is typically invested in short-term
investments. During 2008, TVA’s average daily balance of cash and
cash equivalents on hand was $357 million. The daily balance of cash
and cash equivalents maintained is based on near-term expectations for cash
expenditures and funding needs. Under the current market conditions,
TVA has placed more of its short-term investments in U.S. Treasury securities
and less in commercial paper money market funds.
In
addition to cash on hand, cash from operations, and proceeds from the issuance
of short-term and long-term debt, TVA’s sources of liquidity include a $150
million credit facility with the U.S. Treasury, two credit facilities totaling
$2.25 billion with a national bank, and occasional proceeds from other financing
arrangements including call monetization transactions, sales of assets, and
sales of receivables and loans. Each of these sources of liquidity is
discussed below.
Summary Cash
Flows. A major source of TVA’s liquidity is operating cash
flows resulting from the generation and sales of
electricity. A summary of cash flow components for the years ended
September 30 follows:
Summary
Cash Flows
For
the years ended September 30
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Cash
provided by (used in):
|
||||||||||||
Operating
activities
|
$ | 1,957 | $ | 1,788 | $ | 1,985 | ||||||
Investing
activities
|
(2,299 | ) | (1,686 | ) | (1,698 | ) | ||||||
Financing
activities
|
390 | (473 | ) | (289 | ) | |||||||
Net
(decrease) increase in cash and cash equivalents
|
$ | 48 | $ | (371 | ) | $ | (2 | ) |
Issuance of
Debt. The TVA Act authorizes TVA to issue Bonds in an amount
not to exceed $30 billion outstanding at any time. At September 30,
2008, TVA had only two types of Bonds outstanding: power bonds and
discount notes. Power bonds have maturities of between one and 50
years, and discount notes have maturities of less than one
year. Power bonds and discount notes rank on parity and have first
priority of payment out of net power proceeds. Net power proceeds are
defined as the remainder of TVA’s gross power revenues after deducting the costs
of operating, maintaining, and administering its power properties and payments
to states and counties in lieu of taxes, 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. See Note 11 — General.
Power
bonds and discount notes are both issued pursuant to section 15d of the TVA Act
and pursuant to the Basic Tennessee Valley Authority Power Bond Resolution
adopted by the TVA Board on October 6, 1960, as amended on September 28, 1976,
October 17, 1989, and March 25, 1992 (the “Basic Resolution”). The
TVA Act and the Basic 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;
|
|
•
|
Debt
service on outstanding Bonds;
|
|
•
|
Payments
to the U.S. Treasury as a repayment of and a return on the Power
Facilities Appropriation Investment;
and
|
|
•
|
Such
additional margin as the TVA Board may consider desirable for investment
in power system assets, retirement of outstanding Bonds in advance of
maturity, additional reduction of the Power Facilities Appropriation
Investment, and other purposes connected with TVA’s 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 Power
Facilities Appropriation Investment),
or
|
|
•
|
Investment
in power assets.
|
TVA must
next meet the bondholder protection test for the five-year period ending
September 30, 2010.
As
discussed above, TVA uses proceeds from the issuance of discount notes, in
addition to other sources of liquidity, to fund working capital
requirements. During 2008, 2007, and 2006, the average outstanding
balance of discount notes was $767 million, $2.3 billion, and $2.0 billion,
respectively, and the weighted average interest rate on discount notes was 3.71
percent, 5.17 percent, and 4.47 percent, respectively. At September
30, 2008, $185 million of discount notes were outstanding with a weighted
average interest rate of 1.26 percent. The discount notes are not
listed on any stock exchange.
TVA
issues power bonds primarily to refinance previously-issued power bonds as they
mature. During 2008 and 2007, TVA issued $2.1 billion and $1.0
billion of power bonds, respectively, and redeemed $689 million and $470 million
of power bonds, respectively. At September 30, 2008, outstanding
power bonds (including current maturities of long-term debt) consisted of the
following:
Outstanding
Power Bonds
As of
September 30, 2008
CUSIP
or Other Identifier
|
Maturity
|
Coupon
Rate
|
Principal
Amount
1
|
Stock
Exchange Listings
|
|||||||
electronotes®
|
03/15/2009
- 01/15/2028
|
3.200% - 5.625 | %2 | $ | 910 |
None
|
|||||
880591DB5
|
11/13/2008
|
5.375 | % | 2,000 |
New
York, Hong Kong, Luxembourg, Singapore
|
||||||
880591DN9
|
01/18/2011
|
5.625 | % | 1,000 |
New
York, Luxembourg
|
||||||
880591DL3
|
05/23/2012
|
7.140 | % | 29 |
New
York
|
||||||
880591DT6
|
05/23/2012
|
6.790 | % | 1,486 |
New
York
|
||||||
880591CW0
|
03/15/2013
|
6.000 | % | 1,359 |
New
York, Hong Kong, Luxembourg, Singapore
|
||||||
880591DW9
|
08/01/2013
|
4.750 | % | 940 |
New
York, Luxembourg
|
||||||
880591DY5
|
06/15/2015
|
4.375 | % | 1,000 |
New
York, Luxembourg
|
||||||
880591DS8
|
12/15/2016
|
4.875 | % | 524 |
New
York
|
||||||
880591EA6
|
07/18/2017
|
5.500 | % | 1,000 |
New
York, Luxembourg
|
||||||
880591CU4
|
12/15/2017
|
6.250 | % | 650 |
New
York
|
||||||
880591EC2
|
04/01/2018
|
4.500 | % | 1,000 |
New
York, Luxembourg
|
||||||
880591DC3
|
06/07/2021
|
5.805 | %3 | 356 |
New
York, Luxembourg
|
||||||
880591CJ9
|
11/01/2025
|
6.750 | % | 1,350 |
New
York, Hong Kong, Luxembourg, Singapore
|
||||||
880591300 |
06/01/2028
|
5.460 | % | 350 |
New
York
|
||||||
880591409 |
05/01/2029
|
5.174 | % | 298 |
New
York
|
||||||
880591DM1
|
05/01/2030
|
7.125 | % | 1,000 |
New
York, Luxembourg
|
||||||
880591DP4
|
06/07/2032
|
6.587 | %3 | 445 |
New
York, Luxembourg
|
||||||
880591DV1
|
07/15/2033
|
4.700 | % | 472 |
New
York, Luxembourg
|
||||||
880591DX7
|
06/15/2035
|
4.650 | % | 436 |
New
York
|
||||||
880591CK6
|
04/01/2036
|
5.980 | % | 121 |
New
York
|
||||||
880591CS9
|
04/01/2036
|
5.880 | % | 1,500 |
New
York
|
||||||
880591CP5
|
01/15/2038
|
6.150 | % | 1,000 |
New
York
|
||||||
880591ED0
|
06/15/2038
|
5.500 | % | 500 |
New
York
|
||||||
880591BL5
|
04/15/2042
|
8.250 | % | 1,000 |
New
York
|
||||||
880591DU3
|
06/07/2043
|
4.962 | %3 | 267 |
New
York, Luxembourg
|
||||||
880591CF7
|
07/15/2045
|
6.235 | % | 140 |
New
York
|
||||||
880591EB4
|
01/15/2048
|
4.875 | % | 500 |
New
York, Luxembourg
|
||||||
880591DZ2
|
04/01/2056
|
5.375 | % | 1,000 |
New
York
|
||||||
Subtotal
|
22,633 | ||||||||||
Unamortized
discounts, premiums, and other
|
(199 | ) | |||||||||
Total
outstanding power bonds, net
|
$ | 22,434 |
Notes
(1)
|
The
above table includes net exchange losses from currency transactions of
$138 million at September 30, 2008.
|
(2)
|
The
weighted average interest rate of TVA’s outstanding electronotes®
was 4.83 percent at September 30,
2008.
|
(3)
|
The
coupon rate represents TVA’s effective interest
rate.
|
As of
September 30, 2008, all of TVA’s Bonds were rated by at least one rating agency
except for two issues of power bonds and TVA’s discount notes. TVA’s
rated Bonds are currently rated “Aaa” by Moody’s Investors Service and/or “AAA”
by Standard & Poor’s and/or Fitch Ratings, which are the highest ratings
assigned by these agencies. The ratings are not recommendations to buy, sell, or
hold any TVA securities and may be subject to revision or withdrawal at any time
by the rating agencies. Ratings are assigned independently, and each should be
evaluated as such.
For
additional information about TVA debt issuance activity and debt instruments
issued and outstanding as of September 30, 2008 and 2007, including identifiers,
rates, maturities, outstanding principal amounts, and redemption features, see
Note 11.
$150 Million Note with
U.S.Treasury. TVA has access to financing arrangements with
the U.S. Treasury, whereby the U.S. Treasury is authorized to accept an interim
obligation with maturity of one year or less in an aggregate amount outstanding
not to exceed $150 million. Interest accrues daily at a rate
determined by the U.S. Secretary of the Treasury each month based on the average
of outstanding obligations of the United States with maturities of one year or
less. During 2008, 2007, and 2006, the daily average amounts
outstanding were approximately $74 million, $132 million, and $131 million,
respectively. The outstanding balances were repaid
quarterly. In 2009, TVA and the U.S. Treasury replaced the $150
million note under which TVA previously borrowed from the U.S. Treasury with a
memorandum of understanding under which TVA will have a $150 million credit
facility. There are no fees other than interest on borrowings under
the credit facility. TVA plans to use the U.S. Treasury credit facility as a
source of liquidity, but not as a primary source of liquidity, in
2009. See Note 9 — Payments to U.S. Treasury and
Note 11 — Short-Term
Debt.
Credit Facilities. TVA has
short-term funding available in the form of two short-term revolving credit
facilities, one of which is a $1.25 billion facility that matures on May 13,
2009, and the other of which is a $1 billion facility that matures on November
9, 2009. See Note 18 — Credit Facility
Agreements. The interest rate on any borrowing under both of
these facilities is variable and based on market factors and the rating of TVA’s
senior unsecured long-term non-credit enhanced debt. TVA is required
to pay an unused facility fee on the portion of the total $2.25 billion against
which TVA has not borrowed. The fee may fluctuate depending on the
non-enhanced credit ratings on TVA’s senior unsecured long-term
debt. There were no outstanding borrowings under the facilities at
September 30, 2008. TVA anticipates renewing each credit facility as
it matures. TVA anticipates that when it renews the second credit
facility in May 2009, the amount of this facility will also be
reduced.
Call Monetization
Transactions. From time to time TVA has entered into swaption
transactions to monetize the value of call provisions on certain of its Bond
issues. A swaption essentially grants a third party the right to
enter into a swap agreement with TVA under which TVA receives a floating rate of
interest and pays the third party a fixed rate of interest equal to the interest
rate on the Bond issue whose call provision TVA monetized. Through
September 30, 2008, TVA has entered into four swaption transactions that
generated proceeds of $261 million.
|
•
|
In
2003, TVA monetized the call provisions on a $1 billion Bond issue and a
$476 million Bond issue by entering into swaption agreements with a third
party in exchange for $175 million and $81 million,
respectively.
|
|
•
|
In
2005, TVA monetized the call provisions on two Bond issues ($42 million
total par value) by entering into swaption agreements with a third party
in exchange for $5 million.
|
For more
information regarding TVA’s call monetization transactions, see Note 10 — Swaptions and Related Interest Rate
Swaps.
Sale of Interest in TVA Generating
Facility. On September 30, 2008, TVA obtained approximately
$325 million in proceeds from selling a 69.69 percent undivided interest in its
three-unit, 792-megawatt summer net capability, combined cycle combustion
turbine facility located in Southaven, Mississippi. Seven States
Power Corporation (“SSPC”), the purchaser, through its wholly-owned subsidiary,
Seven States Southaven, LLC (“SSSL”), has the ability to acquire up to a 90
percent undivided interest in the facility and may increase its ownership in the
facility up to this amount on or prior to May 9, 2009. Because of
TVA’s continued ownership interest in the facility as well as buy-back
provisions, the transaction did not qualify as a sale and accordingly has been
recorded as a leaseback obligation. See Note 4 — Asset Acquisitions and
Dispositions.
Sales of
Receivables/Loans. From time to time TVA obtains proceeds from
selling receivables and loans. During 2008, TVA sold $2 million of
receivables at par such that TVA did not recognize a gain or loss on the
sale. These were receivables from a power customer related to energy
conservation projects. The proceeds from the sale of these
receivables are included within the Cash Flow Statement under the caption Cash flows from investing
activities.
During
2007, TVA sold $2 million of receivables at par such that TVA did not recognize
a gain or loss on the sale. These were receivables from a power customer related
to the construction of a substation. The proceeds from the sale of
these receivables are included within the Cash Flow Statement under the caption
Cash flows from
investing activities.
TVA did
not retain any claim on these receivables and loans sold, and they are no longer
reported on TVA’s Balance Sheets. For more information regarding TVA’s sales of
receivables and loans, see Note 1 — Sales of
Receivables/Loans.
2008
Compared to 2007
Net cash
provided by operating activities increased from $1,788 million in 2007 to $1,957
million in 2008. This $169 million increase primarily resulted
from:
|
•
|
An
increase in cash from operating revenues of $1,109 million resulting
primarily from increases in revenue from municipalities and cooperatives
and industries directly served, in both cases, from higher average rates
and the FCA and, in the case of industries directly served, higher
volume.
|
This
increase was partially offset by:
|
•
|
An
increase in cash paid for fuel and purchased power of $376 million due to
higher volume and increased market prices for purchased
power;
|
|
•
|
An
increase in cash paid for interest of $147
million;
|
|
•
|
An
increase in cash used by changes in working capital of $115 million
resulting primarily from an $88 million decrease in accounts payable and
accrued liabilities in 2008 compared to a $103 million increase in 2007
and a $40 million larger increase in inventories and other, net, partially
offset by an $85 million smaller increase in accounts receivable and a $31
million larger increase in interest
payable;
|
|
•
|
An
increase in pension contributions of $85
million;
|
|
•
|
Cash
provided by deferred items of $5 million in 2008 compared to $61 million
of cash provided by deferred items in 2007. This change is
primarily due to funds collected in rates in 2007 that were used to fund
future generation. See Note 1 — Reserve for Future
Generation;
|
|
•
|
An
increase in cash paid for refueling outage costs of $54
million;
|
|
•
|
An
increase in tax equivalent payments of $40 million;
and
|
|
•
|
An
increase in cash outlays for routine and recurring operating costs of $25
million.
|
Net cash
used in investing activities increased from $1,686 million in 2007 to $2,299
million in 2008. This $613 million increase resulted primarily
from:
|
•
|
An
increase in expenditures for capital projects of $484 million primarily
due to the purchase of a three-unit, 792-megawatt combined cycle,
combustion turbine facility located in Southaven,
Mississippi;
|
|
•
|
A
$119 million increase in expenditures for the enrichment and fabrication
of nuclear fuel related to a buildup of fuel for strategic inventory
purposes; and
|
|
•
|
A
$23 million decrease in cash from collateral deposits. See Note
1 — Restricted Cash and
Investments.
|
Net cash
used by financing activities was $473 million in 2007 as compared to net cash
provided by financing activities of $390 million in 2008. The $863
million change was primarily the result of:
|
•
|
An
increase in long-term debt issues as a result of the issuance of $2,105
million of long-term debt; and
|
|
•
|
Proceeds
of $325 million from the sale/leaseback of the Southaven
facility.
|
These
items were partially offset by:
|
•
|
The
net redemption of $1,237 million of short-term debt in 2008 as compared to
the net redemption of $955 million of short-term debt in 2007;
and
|
|
•
|
An
increase in redemptions and repurchases of long-term debt of $219 million,
with long-term debt of $689 million retired in
2008.
|
2007
Compared to 2006
Net cash
provided by operating activities decreased from $1,985 million in 2006 to $1,788
million in 2007. This $197 million decrease primarily resulted
from:
|
•
|
An
increase in cash paid for fuel and purchased power of $249 million due to
higher volume of fuel and purchased power needed to replace hydroelectric
generation as well as increased market prices for
fuel;
|
|
•
|
An
increase in cash outlays for routine and recurring operating costs of $108
million;
|
|
•
|
An
increase in tax equivalent payments of $76 million;
and
|
|
•
|
An
increase in expenditures for nuclear refueling outages of $24 million due
to three planned outages in 2007 compared to two planned outages in the
prior year.
|
These
items were partially offset by:
|
•
|
A
decrease of $154 million in cash used by changes in working capital
resulting primarily from a smaller increase in the accounts receivable
balance of $142 million and a larger increase in accounts payable and
accrued liabilities of $9 million;
|
|
•
|
Cash
provided by deferred items of $61 million in 2007 compared to a $35
million net use of cash in 2006. This change is primarily due
to funds collected in rates during 2007 that were used to fund future
generation. See Note 1— Reserve for Future
Generation; and
|
|
•
|
A
decrease in cash paid for interest of $33 million in
2007.
|
Cash used
in investing activities decreased from $1,698 million in 2006 to $1,686 million
in 2007. This $12 million decrease resulted primarily
from:
|
•
|
A
source of cash from collateral deposits in 2007 of $48 million as compared
to a net use of cash of $91 million in 2006. See Note 1 — Restricted Cash and
Investments; and
|
|
•
|
A
decrease in expenditures for the enrichment and fabrication of nuclear
fuel of $74 million
related to the restart of Browns Ferry Unit 1 in
2007.
|
These
items were partially offset by:
|
•
|
An
increase in expenditures of $111 million to acquire the Gleason and
Marshall County combustion turbine facilities in
2007;
|
|
•
|
A
$40 million contribution to the Asset Retirement Trust. See
Note 1 — Investment
Funds;
|
|
•
|
A
damage award of $35 million that TVA received in 2006 in its breach of
contract suit against the DOE not present in 2007;
and
|
|
•
|
An
increase in expenditures for capital projects of $9 million.
|
Net cash
used in financing activities increased from $289 million in 2006 to $473 million
in 2007. This $184 million increase resulted primarily
from:
|
•
|
A
decrease of $92 million in long-term debt issues;
and
|
|
•
|
An
increase in net redemptions of short-term debt of $862
million.
|
These
items were partially offset by a decrease in redemptions of long-term debt of
$771 million in 2007 compared to 2006.
Cash
Requirements and Contractual Obligations
Due to
the nature of the power industry, which requires large multi-year capital
investments, using trends and multi-year forecasts is important in assessing the
effectiveness of management’s decisions related to capital expenditures,
pricing, and accessing capital markets.
The
future planned construction expenditures for property, plant, and equipment
additions, including clean air projects and new generation, are estimated to be
as follows:
Future
Planned Construction Expenditures 1
As of
September 30
Actual
|
Estimated
Construction Expenditures
|
|||||||||||||||||||||||
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
|||||||||||||||||||
Watts
Bar Unit 2
|
$ | 245 | $ | 649 | $ | 681 | $ | 595 | $ | 314 | $ | – | ||||||||||||
Other
Capacity Expansion Expenditures
|
827 | 665 | 773 | 957 | 1,507 | 1,954 | ||||||||||||||||||
Clean
Air Expenditures
|
277 | 232 | 223 | 440 | 475 | 608 | ||||||||||||||||||
Transmission
Expenditures 2
|
98 | 32 | 45 | 34 | 40 | 41 | ||||||||||||||||||
Other
Capital Expenditures 3
|
547 | 510 | 489 | 557 | 566 | 557 | ||||||||||||||||||
Total
Capital Projects Requirements
|
$ | 1,994 | 4 | $ | 2,088 | $ | 2,211 | $ | 2,583 | $ | 2,902 | $ | 3,160 |
Notes
(1)
|
TVA
plans to fund these expenditures with power revenues and proceeds from
power program financings. This table shows only expenditures
that are currently planned. Additional expenditures may be
required for TVA to meet the anticipated growth in demand for power in its
service area.
|
(2)
|
Transmission
Expenditures include reimbursable projects. Transmission
expenditures for capacity expansion or load growth are included in Other
Capacity Expansion Expenditures.
|
(3)
|
Other
Capital Expenditures are primarily associated with short lead time
construction projects aimed at the continued safe and reliable operation
of generating assets.
|
(4)
|
The
numbers above exclude allowance for funds used during construction of $4
million in 2008.
|
TVA
conducts a continuing review of its construction expenditures and financing
programs. The amounts shown in the table above are forward-looking
amounts based on a number of assumptions and are subject to various
uncertainties. Actual amounts may differ materially based upon a
number of factors, including, but not limited to, changes in assumptions about
system load growth, environmental regulation, rates of inflation, total cost of
major projects, and availability and cost of external sources of capital, as
well as the outcome of the ongoing restructuring of the electric
industry. See Forward-Looking
Information.
Management
does not anticipate that TVA will substantially change its strategy for meeting
long-term power supply needs due to recent conditions in the financial
markets. TVA’s primary sources of funding for new generation
investments are expected to continue to be cash from operations and power
program financings.
In the
near term, TVA may be negatively impacted by investments in new generation (for
example Watts Bar Unit 2) that are not expected to provide a cash return until
put into service.
TVA also
has certain obligations and commitments to make future payments under contracts.
The following table sets forth TVA’s estimates of future payments as of
September 30, 2008. See Notes 9, 11, and 15 for a further description
of these obligations and commitments.
Commitments
and Contingencies
Payments
due in the year ending September 30
|
||||||||||||||||||||||||||||
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
||||||||||||||||||||||
Debt
|
$ | 2,215 | $ | – | $ | 1,000 | $ | 1,514 | $ | 2,388 | $ | 15,563 | $ | 22,680 | 1 | |||||||||||||
Interest
payments relating to debt
|
1,243 | 1,186 | 1,158 | 1,130 | 985 | 15,962 | 21,664 | |||||||||||||||||||||
Lease
obligations
|
||||||||||||||||||||||||||||
Capital
|
58 | 58 | 54 | 6 | 3 | 337 | 516 | |||||||||||||||||||||
Non-cancelable
operating
|
64 | 60 | 51 | 43 | 37 | 207 | 462 | |||||||||||||||||||||
Purchase
obligations
|
||||||||||||||||||||||||||||
Power
|
220 | 236 | 249 | 232 | 177 | 6,092 | 7,206 | |||||||||||||||||||||
Fuel
|
1,184 | 787 | 603 | 398 | 327 | 863 | 4,162 | |||||||||||||||||||||
Other
|
121 | 30 | 23 | 25 | 18 | 100 | 317 | |||||||||||||||||||||
Payments
on leasebacks
|
85 | 89 | 95 | 97 | 100 | 918 | 1,384 | |||||||||||||||||||||
Payment
to U.S. Treasury
|
||||||||||||||||||||||||||||
Return
of Power Facilities Appropriation
Investment
|
20 | 20 | 20 | 20 | 20 | 10 | 110 | |||||||||||||||||||||
Return
on Power Facilities Appropriation
Investment
|
14 | 21 | 20 | 19 | 17 | 155 | 246 | |||||||||||||||||||||
Retirement
plans
|
– | – | – | – | – | – | – | |||||||||||||||||||||
Total
|
$ | 5,224 | $ | 2,487 | $ | 3,273 | $ | 3,484 | $ | 4,072 | $ | 40,207 | $ | 58,747 |
Note
(1)
|
Does
not include noncash items of foreign currency valuation loss of $138
million and net discount on sale of Bonds of $199
million.
|
During
2008, TVA executed certain contracts related to the resumption of construction
activities at Watts Bar Unit 2. As of September 30, 2008,
expenditures against these contracts are forecasted to be approximately $1.3
billion through 2012.
In
addition to the cash requirements above, TVA has contractual obligations in the
form of revenue discounts related to energy prepayments. See Note 1
— Energy Prepayment
Obligations.
Energy
Prepayment Obligations
Payments
due in the year ending September 30
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
||||||||||||||||||||||
Energy
Prepayment Obligations
|
$ | 1,033 | $ | 105 | $ | 105 | $ | 105 | $ | 105 | $ | 102 | $ | 511 |
Results of Operations
Sales
of Electricity
Sales of electricity accounted for
substantially all of TVA’s operating revenues in 2008, 2007, and
2006. TVA sells power at wholesale to distributor customers,
consisting of municipalities and cooperatives that resell the power to their
customers at retail rates. TVA also sells power to (1) directly
served customers, consisting primarily of federal agencies and customers with
large or unusual loads, and (2) exchange power customers (electric systems that
border TVA’s service area) with which TVA has entered into exchange power
arrangements. The following table compares TVA’s energy sales
statistics for 2008, 2007, and 2006.
Sales
of Electricity
|
||||||||||||||||||||
For
the years ended September 30
|
||||||||||||||||||||
(millions
of kWh)
|
||||||||||||||||||||
2008
|
Percent
Change
|
2007
|
Percent
Change
|
2006
|
||||||||||||||||
Municipalities
and cooperatives
|
139,596 | (2.0 | %) | 142,461 | 2.8 | % | 138,624 | |||||||||||||
Industries
directly served
|
34,695 | 11.9 | % | 30,993 | 0.0 | % | 30,987 | |||||||||||||
Federal
agencies and other
|
2,013 | (3.0 | %) | 2,075 | 1.7 | % | 2,040 | |||||||||||||
Total
sales of electricity
|
176,304 | 0.4 | % | 175,529 | 2.3 | % | 171,651 | |||||||||||||
Heating
degree days
|
3,109 | (0.4 | %) | 3,123 | 0.2 | % | 3,118 | |||||||||||||
Cooling
degree days
|
1,990 | (15.7 | %) | 2,361 | 12.0 | % | 2,108 | |||||||||||||
Combined
degree days
|
5,099 | (7.0 | %) | 5,484 | 4.9 | % | 5,226 |
2008
Compared to 2007
Significant
items contributing to the 775 million kilowatt-hour increase in electricity
sales included:
|
•
|
A
3,702 million kilowatt-hour increase in sales to industries directly
served primarily due to increased sales to TVA’s two largest industrial
customers, and increased sales to one other large customer due to
increased demand since becoming a directly served customer in October
2006. These three customers accounted for 86 percent of the
increase in sales to industries directly
served.
|
This
increase in sales to industries directly served was partially offset
by:
|
•
|
A
2,865 million kilowatt-hour decrease in sales to municipalities and
cooperatives primarily due to a decrease in combined degree days of 385
days, or 7.0 percent. The unfavorable weather effects were
partially offset by the addition of a new municipal and cooperative
customer (Bristol Virginia Utilities) beginning in January 2008 and an
additional day of sales in 2008 due to leap
year.
|
|
•
|
A
62 million kilowatt-hour decrease in sales to Federal agencies and
other.
|
|
o
|
This
decrease was attributable to a 102 million kilowatt-hour decrease in
off-system sales mainly reflecting decreased generation available for sale
and market opportunities.
|
|
o
|
The
decrease in off-system sales was partially offset by a 40 million
kilowatt-hour increase in sales to federal agencies directly served due to
increased demand load among federal
agencies.
|
2007
Compared to 2006
Significant
items contributing to the 3,878 million kilowatt-hour increase in electricity
sales included:
|
•
|
A
3,837 million kilowatt-hour increase in sales to municipalities and
cooperatives primarily as a result of an increase in residential power
demand (which is more weather sensitive) as a result of an increase in
combined degree days of 258 days, or 4.9 percent, during
2007.
|
|
•
|
A
35 million kilowatt-hour increase in sales to Federal agencies and
other.
|
|
o
|
This
increase was attributable to an 89 million kilowatt-hour increase in
off-system sales mainly reflecting increased generation available for
sale.
|
|
o
|
The
increase in off-system sales was partially offset by a 54 million
kilowatt-hour decrease in sales to federal agencies directly served
primarily due to a decrease in demand by one of TVA’s largest federal
agencies directly served as a result of a change in the nature and scope
of its load.
|
|
•
|
A
six million kilowatt-hour increase in sales to industries directly served
largely attributable to customer
growth.
|
As
economic conditions have deteriorated, TVA has experienced roughly a two percent
reduction from expected sales in early 2009, and TVA is not anticipating
conditions to improve significantly in the near future. See Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Executive Summary
—Future Challenges — Meeting the Power Needs in TVA’s Service
Area.
Financial
Results
The
following table compares operating results and selected statistics for 2008,
2007, and 2006:
Summary
Statements of Income
For the
years ended September 30
2008
|
2007
|
2006
|
||||||||||
Operating
revenues
|
$ | 10,382 | $ | 9,326 | $ | 8,983 | ||||||
Revenue
capitalized during pre-commercial plant operations
|
– | (57 | ) | – | ||||||||
Operating
expenses
|
(8,198 | ) | (7,726 | ) | (7,560 | ) | ||||||
Operating
income
|
2,184 | 1,543 | 1,423 | |||||||||
Other
income
|
15 | 73 | 80 | |||||||||
Other
expense
|
(6 | ) | (2 | ) | (2 | ) | ||||||
Unrealized
gain (loss) on derivative contracts, net
|
– | 41 | (15 | ) | ||||||||
Interest
expense, net
|
(1,376 | ) | (1,232 | ) | (1,264 | ) | ||||||
Income
before cumulative effects of accounting changes
|
817 | 423 | 222 | |||||||||
Cumulative
effect of change in accounting for conditional asset retirement
obligations
|
– | – | (109 | ) | ||||||||
Net
income
|
$ | 817 | $ | 423 | $ | 113 |
2008
Compared to 2007
Net
income for 2008 was $817 million compared with net income of $423 million for
2007. The $394 million increase in net income was mainly attributable
to:
|
•
|
A
$1,056 million increase in operating revenues;
and
|
|
•
|
A
decrease of $57 million in revenue capitalized during pre-commercial plant
operations.
|
These
items were partially offset by:
|
•
|
A
$472 million increase in operating
expenses;
|
|
•
|
A
$144 million increase in net interest
expense;
|
|
•
|
A
$58 million decrease in other
income;
|
|
•
|
A
$41 million decrease in net unrealized gain on derivative contracts
resulting largely from the change in ratemaking methodology for gains and
losses on swaps and swaptions used in call monetization transactions;
and
|
|
•
|
A
$4 million increase in other
expenses.
|
Operating
Revenues. Operating revenues during 2008 and 2007 consisted of
the following:
Operating
Revenues
|
||||||||||||
For
the years ended September 30
|
||||||||||||
2008
|
2007
|
Percent
Change
|
||||||||||
Operating
revenues
|
||||||||||||
Municipalities
and cooperatives
|
$ | 8,659 | $ | 7,847 | 10.3 | % | ||||||
Industries
directly served
|
1,472 | 1,221 | 20.6 | % | ||||||||
Federal
agencies and other
|
121 | 112 | 8.0 | % | ||||||||
Other
revenue
|
130 | 146 | (11.0 | %) | ||||||||
Total
operating revenues
|
$ | 10,382 | $ | 9,326 | 11.3 | % |
Significant
items contributing to the $1,056 million increase in operating revenues
included:
|
•
|
An
$812 million increase in revenue from municipalities and cooperatives
resulting from:
|
|
o
|
$605
million in additional FCA revenue;
|
|
o
|
$363
million in additional revenue from rate increases averaging 4.8 percent;
and
|
|
o
|
$113
million in additional revenue due to sales growth of 1.2
percent.
|
These
increases were partially offset by a $269 million decline in revenue due to
decreased sales of 3.2 percent resulting from milder weather (7 percent fewer
heating and cooling degree days) in 2008.
|
•
|
A
$251 million increase in revenue from industries directly served as a
result of increased sales of 11.9 percent, the FCA, and fluctuations in
rates. These items contributed to increased revenue of $145
million, $66 million, and $40 million respectively;
and
|
|
•
|
A
$9 million increase in revenue from Federal agencies and
other.
|
|
o
|
This
increase was the result of a $14 million increase in revenues from federal
agencies directly served due to the FCA, increased sales of 2.3 percent,
and an increase in average rates of 4.1
percent.
|
|
o
|
The
increase in revenues from federal agencies directly served was partially
offset by a $5 million decrease in off-system sales reflecting decreased
sales of 33.1 percent partially offset by an increase in average rates of
6.7 percent.
|
These
items were partially offset by a $16 million decrease in other revenue primarily
due to decreased revenues from wheeling activity and the inclusion in 2007 of
sales of salvage inventory primarily related to Bellefonte Nuclear Plant that
did not reoccur in 2008.
During
2007 there was also a $57 million revenue offset related to the Browns Ferry
Unit 1 pre-commercial plant operations. See Note 1 — Capitalized Revenue During
Pre-Commercial Plant Operations.
As
economic conditions have deteriorated, TVA has experienced roughly a two
percent reduction in expected sales in early 2009 and anticipates that the
energy sales for the remainder of 2009 will be lower than expected in
the 2009 budget.
Operating Expenses. A table
of operating expenses for 2008 and 2007 follows:
TVA
Operating Expenses
For
the years ended September 30
|
||||||||||||
2008
|
2007
|
Percent
Change
|
||||||||||
Operating
expenses
|
||||||||||||
Fuel
and purchased power
|
$ | 4,176 | $ | 3,449 | 21.1 | % | ||||||
Operating
and maintenance
|
2,298 | 2,332 | (1.5 | %) | ||||||||
Depreciation,
amortization, and accretion
|
1,224 | 1,473 | (16.9 | %) | ||||||||
Tax
equivalents
|
491 | 451 | 8.9 | % | ||||||||
Loss
on asset impairment
|
9 | 21 | (57.1 | %) | ||||||||
Total
operating expenses
|
$ | 8,198 | $ | 7,726 | 6.1 | % |
Significant
drivers contributing to the $472 million increase in total operating expenses
included:
|
•
|
A
$727 million increase in Fuel and purchased
power expense.
|
|
o
|
This
increase was mainly due to a $507 million increase in fuel expense and a
$221 million increase in purchased power
expense.
|
|
–
|
The
increase in fuel expense resulted primarily
from:
|
|
•
|
Higher
aggregate fuel cost per kilowatt-hour net thermal generation of 11.0
percent, which resulted in $263 million in additional
expense;
|
|
•
|
Increased
net generation at coal-fired, combustion turbine, and nuclear plants of
2.9 percent, which resulted in $67 million in additional expense;
and
|
|
•
|
A
decrease in the FCA net deferral and amortization for fuel expense of $177
million.
|
|
–
|
The
increase in purchased power expense resulted primarily
from:
|
|
•
|
An
increase in the average price of purchased power of 16.8 percent, which
resulted in $199 million in additional expense;
and
|
|
•
|
A
decrease in the FCA net deferral and amortization for purchased power
expense of $93 million.
|
|
–
|
These
increases were partially offset by a decrease in volume of purchased power
of 5.7 percent, which resulted in a decrease of $71 million in purchased
power expense. Although purchased power volume decreased in
2008, TVA purchased significantly more power than planned due to decreased
hydro generation of 26.1 percent as a result of ongoing drought conditions
in 2008.
|
|
•
|
A
$40 million increase in Tax equivalent
payments reflecting increased gross revenues from the sale of power
(excluding sales or deliveries to other federal agencies and off-system
sales with other utilities) during 2007 as compared to
2006.
|
The
increases in Fuel and
purchased power expense and Tax equivalent
payments were partially offset by:
|
•
|
A
$249 million decrease in Depreciation,
amortization, and accretion
expense.
|
|
o
|
The decrease was
primarily attributable to a decrease in depreciation and accretion expense
related to a change in regulatory accounting for non-nuclear asset
retirement obligations. In August 2008, the TVA Board
approved a potential funding source through rates for non-nuclear
decommissioning costs through the accumulation of assets in an asset
retirement trust. As a result, all cumulative costs that had
been incurred previously were reclassified to a regulatory
asset. This adjustment totaled $350 million and was a one-time
decrease to depreciation, amortization, and accretion expense in
2008. See Note
6.
|
|
o
|
This
decrease was partially offset by an increase in depreciation expense
primarily due to increases in completed plant accounts as a result of net
plant additions and an increase in depreciation rates at several of TVA’s
facilities.
|
|
•
|
A
$34 million decrease in Operating and
maintenance expense.
|
|
o
|
This
decrease was mainly a result of:
|
|
–
|
A
$61 million decrease in pension costs as a result of a 0.35 percent higher
discount rate used during 2008;
|
|
–
|
A
$21 million reduction in operating and maintenance costs related to power
system operations and river operations due to a decrease in operating and
maintenance projects and a reduction in headcount as part of TVA’s efforts
to reduce non-fuel operating and maintenance
expense.
|
|
–
|
A
$15 million decrease in operating and maintenance expense related to
nuclear generation and development primarily due to the absence of Watts
Bar Unit 2 studies during 2008; and
|
|
–
|
A
$7 million decrease in operating and maintenance cost at coal-fired and
combustion turbine plants largely due
to:
|
|
•
|
A
decrease in planned outages of 49 days in 2008;
and
|
|
•
|
Significant
operating and maintenance projects at Paradise and Cumberland Fossil
Plants in 2007 that did not reoccur in
2008.
|
|
o
|
These
items were partially offset by the
following:
|
|
–
|
Increased
operating and maintenance expense at nuclear plants of $62 million due to
the following:
|
|
•
|
Increased
cost of operating Browns Ferry Unit 1, which did not begin commercial
operation until August 2007;
|
|
•
|
Increased
contractor and labor cost;
|
|
•
|
Various
forced maintenance outages; and
|
|
•
|
Increased costs
at Browns Ferry related to maintenance projects undertaken
in 2008 to improve plant performance and reliability in an
effort to reduce future
unplanned outages.
|
|
–
|
Increased
workers’ compensation expense of $14 million primarily due to a 0.74
percent lower discount rate utilized to estimate workers’ compensation in
2008.
|
|
•
|
A
$12 million decrease in Loss on Asset
Impairment.
|
|
o
|
The
$9 million Loss on
asset impairment in 2008 included $8 million from partial
write-downs for scrubber projects at Bull Run and John Sevier related to
Construction in
progress assets and approximately $1 million in write-offs of other
Construction in
progress assets.
|
|
o
|
The
$21 million Loss
on asset impairment in 2007 resulted
from:
|
|
–
|
A
$17 million write-down of a scrubber project at Colbert during 2007;
and
|
|
–
|
Write-downs
of $4 million related to other Construction in
progress assets during 2007.
|
Other Income. The
$58 million decrease in other income was largely attributable to decreased
interest income from short-term investments, realized and unrealized losses on
TVA’s supplemental executive retirement plan funds and restricted investments
related to the collateral held by TVA, and a decrease in external business
revenues.
Other Expense. The
$4 million increase in other expense was primarily due to the write off of two
economic development investments in the fourth quarter of 2008.
Unrealized Gain on Derivative
Contracts, Net. The decrease in Unrealized gain on derivative
contracts, net was attributable to a change in ratemaking
methodology. Beginning in 2008, TVA began using regulatory accounting
treatment for swaps and swaptions related to call monetization transactions to
reflect that the gain or loss is included in the ratemaking formula when these
transactions actually settle. This treatment removes the non-cash
impacts to TVA’s earnings that result from marking the value of these
instruments to market each quarter. The values of the swaps and
swaptions for 2008 were recorded on TVA’s balance sheet and no income was
recognized. However, TVA recognized $41 million as Unrealized gain on derivative
contracts, net during 2007. See Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Changes in Ratemaking Impacting
Accounting.
Interest
Expense. Interest expense, outstanding debt, and interest
rates during 2008 and 2007 were as follows:
Interest
Expense
For
the years ended September 30
|
||||||||||||
2008
|
2007
|
Percent
Change
|
||||||||||
Interest
expense
|
||||||||||||
Interest
on debt and leaseback obligations
|
$ | 1,373 | $ | 1,390 | (1.2 | %) | ||||||
Amortization
of debt discount, issue, and reacquisition costs, net
|
20 | 19 | 5.3 | % | ||||||||
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(17 | ) | (177 | ) | (90.4 | %) | ||||||
Net
interest expense
|
$ | 1,376 | $ | 1,232 | 11.7 | % | ||||||
(percent)
|
||||||||||||
2008 | 2007 |
Percent
Change
|
||||||||||
Interest
rates (average)
|
||||||||||||
Long-term
|
6.00 | 6.02 | (0.3 | %) | ||||||||
Discount
notes
|
3.71 | 5.21 | (28.8 | %) | ||||||||
Blended
|
5.92 | 5.94 | (0.3 | %) |
Significant
items contributing to the $144 million increase in net interest expense
included:
|
•
|
A
$160 million decrease in capitalized interest on construction projects and
nuclear fuel expenditures primarily due to the change in ratemaking
methodology regarding AFUDC. TVA continues to capitalize a
portion of current interest costs associated with funds invested in most
nuclear fuel inventories, but since October 1, 2007, interest on funds
invested in construction projects has been capitalized only if
(1) the expected total cost of a project is $1 billion or more
and (2) the estimated construction period is at least three
years. AFUDC interest continues to be a component of asset cost
for projects meeting this criteria and will be recovered in future periods
through depreciation expense. In addition, AFUDC continues to
be a reduction to interest expense as costs are incurred. The
interest costs associated with funds invested in construction projects
that do not satisfy the $1 billion and three-year criteria are no longer
capitalized as AFUDC and are recovered in current year rates as a
component of interest expense; and
|
|
•
|
An
increase of $1.5 billion in the average balance of long-term outstanding
debt in 2008.
|
These
items were partially offset by:
|
•
|
A
decrease in the average long-term interest rate from 6.02 percent in 2007
to 6.00 percent in 2008;
|
|
•
|
A
decrease in the average discount notes interest rate from 5.21 percent in
2007 to 3.71 percent in 2008; and
|
|
•
|
A
decrease of $1.5 billion in the average balance of discount notes
outstanding in 2008.
|
2007
Compared to 2006
Net
income for 2007 was $423 million compared with net income of $113 million for
2006. The $310 million increase in net income was mainly attributable
to:
|
•
|
A
$109 million cumulative expense charge in 2006 for adoption of a new
accounting standard related to conditional asset retirement obligations
that did not occur in 2007;
|
|
•
|
A
$343 million increase in operating
revenues;
|
|
•
|
A
change of $56 million in net unrealized gain/(loss) on derivative
contracts; and
|
|
•
|
A
$32 million decrease in net interest
expense.
|
These
items were partially offset by:
|
•
|
A
$166 million increase in operating
expenses;
|
|
•
|
A
$7 million decrease in other income;
and
|
|
•
|
Revenue
of $57 million capitalized during pre-commercial plant operations during
2007.
|
Operating
Revenues. Operating revenues during 2007 and 2006 consisted of
the following:
Operating
Revenues
|
||||||||||||
For
the years ended September 30
|
||||||||||||
2007
|
2006
|
Percent
Change
|
||||||||||
Operating
revenues
|
||||||||||||
Municipalities
and cooperatives
|
$ | 7,847 | $ | 7,659 | 2.5 | % | ||||||
Industries
directly served
|
1,221 | 1,065 | 14.6 | % | ||||||||
Federal
agencies and other
|
112 | 116 | (3.4 | %) | ||||||||
Other
revenue
|
146 | 143 | 2.1 | % | ||||||||
Total
operating revenues
|
$ | 9,326 | $ | 8,983 | 3.8 | % |
Significant
items contributing to the $343 million increase in operating revenues
included:
|
•
|
A
$188 million increase in revenue from Municipalities and
cooperatives primarily due to increased sales of 2.8 percent
and increased FCA revenue of $76 million, partially offset by a
decrease in average rates of 1.3
percent;
|
|
•
|
A
$156 million increase in revenue from Industries directly
served attributable to an increase in average rates of 15.1 percent
and a slight increase in sales; and
|
|
•
|
A
$3 million increase in Other revenue
primarily due to increased revenue from salvage sales partially offset by
decreased transmission revenues from wheeling
activity.
|
These
items were partially offset by:
|
•
|
A
$4 million decrease in revenue from Federal agencies and
other.
|
|
○
|
This
decrease was the result of an $8 million decrease in revenues from federal
agencies directly served due to decreased sales of 3.0 percent, and a
decrease in average rates of 4.4
percent.
|
|
○
|
The
decrease in revenues from federal agencies directly served was partially
offset by a $4 million increase in off-system sales reflecting increased
sales of 40.7 percent partially offset by a decrease in average rates of
6.5 percent.
|
During
2007 there was also a $57 million revenue offset related to the Browns Ferry
Unit 1 pre-commercial plant operations. See Note 1 — Capitalized Revenue During
Pre-Commercial Plant Operations.
Operating Expenses. A table
of operating expenses for 2007 and 2006 follows:
TVA
Operating Expenses
For
the years ended September 30
|
||||||||||||
2007
|
2006
|
Percent
Change
|
||||||||||
Operating
expenses
|
||||||||||||
Fuel
and purchased power
|
$ | 3,449 | $ | 3,342 | 3.2 | % | ||||||
Operating
and maintenance
|
2,332 | 2,328 | 0.2 | % | ||||||||
Depreciation,
amortization, and accretion
|
1,473 | 1,500 | (1.8 | %) | ||||||||
Tax
equivalents
|
451 | 376 | 19.9 | % | ||||||||
Loss
on asset impairment
|
21 | 14 | 50.0 | % | ||||||||
Total
operating expenses
|
$ | 7,726 | $ | 7,560 | 2.2 | % |
Significant
drivers contributing to the $166 million increase in total operating expenses
included:
|
•
|
A
$75 million increase in Tax equivalent
payments reflecting increased gross revenues from the sale of power
(excluding sales or deliveries to other federal agencies and off-system
sales with other utilities) during 2006 as compared to 2005.
|
|
•
|
A
$107 million increase in Fuel and purchased
power expense.
|
|
o
|
This
increase was mainly due to a $114 million increase in purchased power
expense.
|
|
–
|
The
increase in purchased power expense was primarily a result of a 16.4
percent increase in the volume of purchased power to accommodate decreased
hydroelectric generation of 9.2 percent and the extended outage of Unit 3
at TVA’s Paradise Fossil Plant during the third quarter of
2007. The increase in volume resulted in $178 million in
additional expense.
|
|
–
|
The
increase in volume was partially offset by the
following:
|
|
•
|
A
decrease in the average price of purchased power of 0.8 percent, which
decreased expense by $10 million;
and
|
|
•
|
An
FCA net deferral and amortization for purchased power expense of $54
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 during 2007. This $54 million
deferred amount will be charged to customers in future FCA
adjustments.
|
|
o
|
The
increase in purchased power expense was partially offset by a $7 million
decrease in fuel expense.
|
|
–
|
The
decrease in fuel expense resulted primarily from an FCA net deferral and
amortization for fuel expense of $95 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 during
2007. This $95 million deferred amount will be charged to the
customers in future FCA
adjustments.
|
|
–
|
The
decrease was partially offset by the
following:
|
|
•
|
Higher
aggregate fuel cost per kilowatt-hour net thermal generation of 2.7
percent; and
|
|
•
|
Increased
generation of 0.6 percent, 14.9 percent, and 2.5 percent at the
coal-fired, combustion turbine, and nuclear plants, respectively, in part
because of the lower hydroelectric generation in 2007.
|
|
•
|
A
$7 million increase in Loss on asset
impairment from $14 million in 2006 to $21 million in
2007.
|
o
|
The
$21 million Loss
on asset impairment in 2007 resulted
from:
|
|
–
|
A
$17 million write-down of a scrubber project at Colbert during 2007;
and
|
|
–
|
Write-downs
of $4 million related to other Construction in
progress assets during 2007.
|
o
|
The
$14 million Loss
on asset impairment in 2006 resulted
from:
|
|
–
|
Write-downs
of $12 million on certain Construction in
progress assets related to new pollution-control and other
technologies that had not been proven effective and a re-evaluation of
other projects due to funding limitations;
and
|
|
–
|
A
$2 million write-down on one of two buildings in TVA’s Knoxville Office
Complex based on TVA’s plans to sell or lease the East Tower of the
Knoxville Office Complex during 2006.
|
|
•
|
A
$4 million increase in Operating and
maintenance expense.
|
|
o
|
This
increase was mainly a result of:
|
|
–
|
Increased
outage and routine operating and maintenance costs at coal-fired plants of
$55 million due to:
|
|
•
|
An
increase in outage days of 78 days as a result of four more planned
outages during 2007;
|
|
•
|
Significant
repair work on Unit 3 at Paradise Fossil Plant;
and
|
|
•
|
Acquisition
of new combustion turbine units during
2007.
|
|
–
|
A
$17 million increase in expense primarily related to Watts Bar Unit 2
studies during 2007;
|
|
–
|
A
$10 million increase in severance expense during
2007;
|
|
–
|
A
$5 million increase in workers’ compensation expense primarily as a result
of a 0.05 percent lower discount rate utilized during 2007 and increased
costs to administer the program;
and
|
|
–
|
A
$13 million increase in operating and maintenance expenses at nuclear
plants primarily as a result of the restart of Browns Ferry Unit 1, which
returned to commercial operation on August 1,
2007.
|
|
o
|
These
items were partially offset by decreased pension financing costs of $91
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.
|
The
increases in Tax
equivalent payments, Fuel and purchased power
expense, Loss on
asset impairment, and Operating and maintenance
expense were partially offset by:
|
•
|
A
$27 million decrease in Depreciation,
amortization, and accretion
expense.
|
|
o
|
This
decrease was mainly a result of a $41 million decrease in depreciation
expense primarily attributable to the depreciation rate reduction for
Browns Ferry Nuclear Plant reflecting the 20-year license extension
approved by NRC on May 4, 2006.
|
|
o
|
This
item was partially offset by a $14 million increase in accretion expense
reflecting the adoption of FIN No. 47, the updated incremental accretion
for SFAS No. 143, and an increase in asset retirement obligation liability
during 2007.
|
Other Income. The
$7 million decrease in other income was largely attributable to decreased
interest earnings on the collateral deposit funds held by TVA and decreased
interest income from short-term investments due to a lower average outstanding
balance on investments in 2007 partially offset by a higher average interest
rate.
Unrealized Gain (Loss) on Derivative
Contracts, Net. Significant items contributing to the $56
million change in net unrealized gain (loss) on derivative contracts
included:
|
•
|
A
$58 million smaller loss related to the mark-to-market valuation
adjustment of an embedded call option, from a $61 million loss during 2006
to a $3 million loss during 2007;
and
|
|
•
|
A
$9 million larger gain related to the mark-to-market valuation of swaption
contracts, from a $19 million gain during 2006 to a $28 million gain
during 2007.
|
These
items were partially offset by an $11 million smaller gain related to the
mark-to-market valuation adjustment of an interest rate swap contract, from a
$27 million gain during 2006 to a $16 million gain during 2007.
Interest
Expense. Interest expense, outstanding debt, and interest
rates during 2007 and 2006 were as follows:
Interest
Expense
For
the years ended September 30
|
||||||||||||
2007
|
2006
|
Percent
Change
|
||||||||||
Interest
expense
|
||||||||||||
Interest
on debt and leaseback obligations
|
$ | 1,390 | $ | 1,406 | (1.1 | %) | ||||||
Amortization
of debt discount, issue, and reacquisition costs, net
|
19 | 21 | (9.5 | %) | ||||||||
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(177 | ) | (163 | ) | 8.6 | % | ||||||
Net
interest expense
|
$ | 1,232 | $ | 1,264 | (2.5 | %) | ||||||
(percent)
|
||||||||||||
2007 | 2006 |
Percent
Change
|
||||||||||
Interest
rates (average)
|
||||||||||||
Long-term
|
6.02 | 6.17 | (2.4 | %) | ||||||||
Discount
notes
|
5.21 | 4.47 | 16.6 | % | ||||||||
Blended
|
5.94 | 6.02 | (1.3 | %) |
Significant
items contributing to the $32 million decrease in net interest expense
included:
|
•
|
A
decrease in the average long-term interest rate from 6.17 percent in 2006
to 6.02 percent in 2007;
|
|
•
|
A
decrease of $283 million in the average balance of long-term outstanding
debt in 2007; and
|
|
•
|
A
$14 million increase in AFUDC due to a 4.0 percent increase in the
construction work in progress base in
2007.
|
These
items were partially offset by:
|
•
|
An
increase in the average discount notes interest rate from 4.47 percent in
2006 to 5.21 percent in 2007; and
|
|
•
|
An
increase of $260 million in the average balance of discount notes
outstanding in 2007.
|
Off-Balance Sheet Arrangements
In
February 1997, TVA entered into a purchase power agreement with Choctaw
Generation, Inc. (subsequently assigned to Choctaw Generation Limited
Partnership) to purchase all the power generated from its facility located in
Choctaw County, Mississippi. The facility had a committed capacity of
440 megawatts and the term of the agreement was 30 years. Under the
accounting guidance provided by Financial Accounting Standards Board (“FASB”)
Interpretation No. 46, “Consolidation of Variable Interest
Entities,” as amended by FASB Interpretation No. 46R (as amended, “FIN
No. 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 (“Choctaw”). As a result, TVA is unable to
determine whether FIN No. 46R would require TVA to consolidate Choctaw
Generation Limited Partnership’s balance sheet, results of operations, and cash
flows for the year ended September 30, 2008. Power purchases for 2008
under the agreement amounted to $118 million, and the remaining financial
commitment under this agreement is $6.7 billion. TVA has no
additional financial commitments beyond the purchase power agreement with
respect to the facility.
Certain
contracts with independent power producers qualify as operating leases in
accordance with the requirements of EITF No. 01-08, “Determining Whether an Arrangement
Contains a Lease.” In accordance with SFAS No. 13, “Accounting for Leases,”
variable costs associated with these contracts meet the definition of contingent
rentals. Amounts under these contracts qualifying as contingent
rentals through September 30, 2008, amounted to $96 million. In
accordance with the requirements of EITF No. 98-09, “Accounting for Contingent
Rent,” TVA accrues contingent rentals when the achievement of the event
that triggers the contingent rental expense is probable. Because of
the uncertainty associated with future power demand, TVA accrues contingent
rentals under these arrangements as power is purchased.
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 regard to the level of
judgment involved and its potential impact on TVA’s financial
results. Estimates are deemed critical either when a different
estimate could have reasonably been used, or where changes in the estimate are
reasonably likely to occur from period to period, and such use or change would
materially impact TVA’s financial condition, changes in financial position, or
results of operations. TVA’s critical accounting policies are also
discussed in Note 1.
Regulatory
Accounting
TVA power
rates are not subject to regulation through a public service commission or other
similar entity. TVA’s Board is authorized by the TVA Act to set rates
for power sold to its customers. This rate-setting authority meets
the “self-regulated” provisions of SFAS No. 71, “Accounting for the Effects of
Certain Types of Regulation,” and TVA meets the remaining criteria of
SFAS No. 71 because (1) TVA’s regulated rates are designed to recover its costs
of providing electricity and (2) in view of demand for electricity and the level
of competition, it is reasonable to assume that the rates, set at levels that
will recover TVA’s costs, can be charged and collected. Accordingly,
TVA records certain assets and liabilities that result from the regulated
ratemaking process that would not be recorded under 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 these assessments, 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 would be
required to write off these costs under the provisions of SFAS No. 101, “Regulated Enterprises – Accounting
for the Discontinuation of Application of FASB Statement No.
71.” Any asset write-offs would be required to be recognized
in earnings in the period in which future recoveries cease to be
probable. See Note 6.
Long-Lived
Assets
TVA
capitalizes long-lived assets such as property, plant, and equipment at
historical cost, which includes direct and indirect costs and
AFUDC. TVA recovers the costs of these long-lived assets through
depreciation of the physical assets as they are consumed in the process of
providing products or services. Depreciation is generally computed on
a straight-line basis over the estimated productive lives of the various classes
of assets. When TVA retires its regulated long-lived assets, it
charges the original asset cost, less salvage value, to accumulated depreciation
in accordance with utility industry practice.
Long-Lived
Asset Impairments
TVA
evaluates the carrying value of long-lived assets when circumstances indicate
the carrying value of those assets may not be recoverable. Under the
provisions of SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” an asset impairment exists for a
long-lived asset to be held and used when the carrying value exceeds the sum of
estimates of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset. If the asset is impaired, the
asset’s carrying value is adjusted downward to its estimated fair value with a
corresponding impairment loss recognized in earnings. Additionally,
TVA regularly evaluates construction in progress projects. If the
project is cancelled or deemed to have no future economic benefit, the project
costs are written off as an asset impairment.
Revenue
Recognition
Revenues
from power sales are recorded as power is delivered to customers. TVA
is primarily a wholesale provider of power to distributor customers
(distributors) that resell the power to end users at retail rates. Under
TVA’s end-use billing arrangements with distributors, TVA relies on the
distributors to report their end-use sales. Because of the delay between
the wholesale delivery of power to the customer and the report of end-use sales
to TVA, TVA must estimate the unbilled revenue at the end of each financial
reporting period. TVA accrues estimated unbilled revenues for power
sales provided to customers for the period of time from the meter read date to
the end of the month. The methodology for estimating unbilled revenue
from electricity sales uses meter readings for each customer for the current
billing period. See Note 1 — Revenues.
Asset
Retirement Obligations
In
accordance with the provisions of SFAS No. 143, “Accounting for Asset Retirement
Obligations,” and FIN No. 47, “Accounting for Conditional Asset
Retirement Obligations — an Interpretation of FASB Statement No. 143,”
TVA recognizes legal obligations associated with the future retirement of
certain tangible long-lived assets. These obligations relate to
fossil-fired generating plants, nuclear generating plants, hydroelectric
generating plants/dams, transmission structures, and other property-related
assets. These other property-related assets include, but are not
limited to, easements, leases, and coal rights. Activities involved
with retiring these assets could include decontamination and demolition of
structures, removal and disposal of wastes, and site
reclamation. Revisions to the amount and timing of certain cash flow
estimates of asset retirement obligations may be made based on engineering
studies. For nuclear assets, the studies are performed annually in
accordance with NRC requirements. For non-nuclear obligations,
revisions are made as needed in accordance with guidance provided by SFAS No.
143 and FIN No. 47. Any accretion or depreciation expense related to
these liabilities and assets are charged to a regulatory asset in accordance
with SFAS No. 71. See Note 5.
Nuclear
Decommissioning
Utilities
that own and operate nuclear plants are required to use different procedures in
estimating nuclear decommissioning costs under SFAS No. 143 than those that are
used in estimating nuclear decommissioning costs that are reported to the
NRC. The two sets of procedures produce different estimates for the
costs of decommissioning primarily because of the difference in the discount
rates used to calculate the present value of decommissioning
costs. At September 30, 2008, the present value of the estimated
future nuclear decommissioning cost under SFAS No. 143 was $1.7 billion and was
included in Asset
retirement obligations, and the unamortized regulatory asset of $764
million was included in Other regulatory
assets. Under the NRC’s regulations, the present value of the
estimated future nuclear decommissioning cost was $862 million at September 30,
2008. This decommissioning cost estimate is based on NRC’s
requirements
for removing a plant from service, releasing the property for unrestricted use,
and terminating the operating license. The actual decommissioning
costs may vary from the derived estimates because of changes in current
assumptions, such as the assumed dates of decommissioning, changes in regulatory
requirements, changes in technology, and changes in the cost of labor,
materials, and equipment.
TVA
maintains a nuclear decommissioning trust to provide funding for the ultimate
decommissioning of its nuclear power plants. The trust’s funds are
invested in securities generally designed to achieve a return in line with
overall equity market performance. The assets of the fund are
invested in debt and equity securities and certain derivative
instruments. The derivative instruments are used across various asset
classes to achieve a desired investment structure. The balance in the
trust as of September 30, 2008, is less than the present value of the estimated
future nuclear decommissioning costs under both the NRC methodology and under
SFAS No. 143.
The
following key assumptions can have a significant effect on estimates related to
the nuclear decommissioning costs:
|
•
|
Timing
– In projecting decommissioning costs, two assumptions must be made to
estimate the timing of plant decommissioning. First, the date
of the plant’s retirement must be estimated. At a multiple unit
site, the expiration of the unit with the latest to expire operating
license is typically used for this purpose, or an assumption could be made
that the plant will be relicensed and operate for some time beyond the
original license term. Second, an assumption must be made
whether decommissioning will begin immediately upon plant retirement, or
whether the plant will be held in SAFSTOR status — a status authorized by
applicable regulations which allows for a nuclear facility to be
maintained and monitored in a condition that allows the radioactivity to
decay, after which the facility is decommissioned and
dismantled. While the impact of these assumptions cannot be
determined with precision, assuming either license extension or use of
SAFSTOR status can significantly decrease the present value of these
obligations.
|
|
•
|
Technology
and Regulation – There is limited experience with actual decommissioning
of large nuclear facilities. Changes in technology and
experience as well as changes in regulations regarding nuclear
decommissioning could cause cost estimates to change
significantly. The impact of these potential changes is not
presently determinable. TVA’s cost studies assume current
technology and regulations.
|
|
•
|
Discount
Rate – TVA uses a blended rate of 5.32 percent to calculate the present
value of the weighted estimated cash flows required to satisfy TVA’s
decommissioning obligation.
|
|
•
|
Investment
Rate of Return – TVA assumes that its decommissioning fund will achieve a
rate of return that is five percent greater than the rate of
inflation. This results in a 9.2 percent estimated investment
rate of return for all periods
presented.
|
|
•
|
Cost
Escalation Factors – TVA’s decommissioning estimates include an assumption
that decommissioning costs will escalate over present cost levels by four
percent annually.
|
Pension
and Other Postretirement Benefits
TVA
sponsors a defined benefit pension plan that is qualified under IRS rules and
covers substantially all of its full-time employees. The TVA
Retirement System (“TVARS”), a separate legal entity governed by its own board
of directors, administers TVA-sponsored retirement plans. TVA also
provides a supplemental executive retirement plan to certain executives in
critical positions that provides supplemental pension benefits in addition to
those provided by the qualified defined benefit pension
plan. Additionally, TVA provides postretirement health care benefits
for most of its full-time employees who reach retirement age while still working
for TVA. TVA’s costs of providing these benefits are impacted by
numerous factors including the provisions of the plans, changing employee
demographics, and various actuarial calculations, assumptions, and accounting
mechanisms. The most significant of these factors are discussed
below.
Expected Return on Plan
Assets. The qualified defined benefit pension plan is the only
plan that is funded with qualified plan assets. The expected return
on pension plan assets used to develop net pension cost was 8.75 percent, 8.75
percent, and 8.25 percent during 2008, 2007, and 2006, respectively, and is
determined at the beginning of the period. Changes in the rates are
generally based on studies performed by third party professional asset
managers. A higher expected rate of return decreases net periodic
pension cost, which in turn increases profitability. TVA plans to
reduce the expected rate of return to 8.00 percent for 2009 based on a recent
asset/liability study performed by third party professional asset
managers. The 2009 expected rate of return also reflects a change in
the allocation policy of TVARS assets. The change in the TVARS asset
allocation policy was based on a recommendation by TVARS investment
consultant. The changes in the expected return on plan assets
discussed above do not affect TVA’s postretirement benefits plan because TVA
does not separately set aside assets to fund such benefits. TVA funds
its postretirement plan
benefits on an as-paid basis. This change also does not impact
the supplemental executive retirement plan as any assets set aside for that plan
are not considered plan assets under SFAS No. 87, “Employers’ Accounting for
Pensions,” as amended by 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).” The actuarial loss related to
the difference between expected and actual return on plan assets for the pension
for 2008 was $2 billion. This amount has been recognized as a
regulatory asset. Actual returns for the year ending September 30,
2008, decreased by 19 percent. Plan assets have further declined
another $1,138 million, or 18 percent, through November 30, 2008.
Discount Rate. In the case of
selecting an assumed discount rate, TVA reviews market yields on high-quality
corporate debt and long-term obligations of the U.S. Treasury and endeavors to
match, through the use of a proprietary bond portfolio, instrument maturities
with the maturities of its pension obligations in accordance with the prevailing
accounting standards. In addition, TVA looks at published pension
spot yield curves and applies expected cash flows to the curve to approximate
the rate expected to settle the projected benefit payments. The discount rates
used to determine pension expense were 6.25 percent, 5.90 percent, and 5.38
percent during 2008, 2007, and 2006, respectively. The discount rate
is determined at the beginning of the period. TVA plans to use a
discount rate of 7.50 percent in the determination of 2009 net periodic pension
cost and also used this rate to value plan obligations at the end of
2008. Changes in the discount rate were due to increased long-term
interest rates. The discount rate is somewhat volatile because it is
determined based upon the prevailing rate as of the measurement
date. The discount rate used to determine the postretirement benefits
costs is the same rate used to determine pension benefits costs due to a similar
expected duration of the postretirement and pension benefit
obligations. A higher discount rate decreases the plan obligations
and correspondingly decreases the net periodic pension and postretirement
benefits costs for those plans where actuarial losses are being
amortized. On the other hand, a lower discount rate increases net
periodic pension and postretirement benefits costs and thus reduces TVA’s
profitability.
The
expected rate of return on pension plan assets and the discount rate, as well as
the amortization of actuarial gains and losses, were determined in accordance
with consistent methodologies, as described in Note 14.
Mortality. Mortality
assumptions are based on the results obtained from an actual company experience
study performed for the most recent six years for retirees as well as other plan
participants. TVA obtained an updated study in 2008 and, accordingly,
adjusted the mortality rates from the 1983 Group Annuity Mortality Tables to the
RP-2000 Mortality Tables.
Health Care Cost Trends. TVA
reviews actual recent cost trends and projected future trends in establishing
health care cost trend rates. Based on this review process, TVA did
not reset its health care cost trend rate assumption used in calculating the
2008 and 2007 accumulated postretirement benefit obligations. The
assumed health care trend rate used for 2008 and 2007 was 8.0
percent. No change was made due to consistent actual performance in
the plan. In addition, an 8.5 percent trend rate was used during
2006. The 2008 health care cost trend rate of 8.0 percent is assumed
to gradually decrease each successive year until it reaches a five percent
annual increase in health care costs in the year beginning October 1, 2014, and
beyond.
Sensitivity of Costs to Changes in
Assumptions. The following chart reflects the sensitivity of
pension costs to changes in certain actuarial assumptions:
Sensitivity
of Pension Costs to Changes in Assumptions
Actuarial
Assumption
|
Change
in Assumption
|
Impact
on 2009 Pension Cost
|
Impact
on 2008 Projected Benefit Obligation
|
|||||||||
(Increase
in millions)
|
||||||||||||
Discount
rate
|
(0.25 | %) | $ | 14 | $ | 195 | ||||||
Rate
of return on plan assets
|
(0.25 | %) | $ | 17 |
NA
|
Each
fluctuation above assumes that the other components of the calculation are held
constant and excludes any impact for unamortized actuarial gains or
losses.
The
following chart reflects the sensitivity of postretirement benefit costs to
changes in the health care cost trend rate:
Sensitivity
of Postretirement Benefit Costs to Changes in Assumptions
(Increase
in millions)
|
1%
Increase
|
1%
Decrease
|
||||||
Effect
on total of service and interest cost components
|
$ | 4 | $ | (5 | ) | |||
Effect
on end-of-year accumulated postretirement benefit
obligation
|
$ | 59 | $ | (60 | ) |
Each
fluctuation above assumes that the other components of the calculation are held
constant and excludes any impact for unamortized actuarial gains or
losses.
Accounting
Mechanisms. In accordance with current accounting
methodologies, TVA utilizes a number of accounting mechanisms that reduce the
volatility of reported pension costs. Differences between actuarial
assumptions and actual plan results are deferred and are amortized into periodic
cost only when the accumulated differences exceed 10 percent of the greater of
the projected benefit obligation or the market-related value of plan
assets. If necessary, the excess is amortized over the average
remaining service period of active employees.
Additionally,
TVA recognizes the impact of asset performance on pension expense over a
three-year phase-in period through a “market-related” value of assets
calculation. Since the market-related value of assets recognizes
investment gains and losses over a three year period, the future value of assets
will be impacted as previously deferred gains or losses are
recognized. As a result, the losses that the pension plan assets
experienced in the current year may have an adverse impact on pension cost in
future years depending on whether the actuarial losses at each measurement date
exceed the 10 percent corridor in accordance with current accounting
methodologies. See Note 14 for a discussion of obligations and funded
status.
Medicare
Provisions. There have been several recent developments
related to retiree health care benefits, including cost sharing and legislation,
such as Medicare Part D of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. Under the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, employers may receive retiree drug
subsidies for Medicare-eligible retirees who enroll in the employer’s retiree
prescription drug plan, provided that the plan is determined to be “actuarially
equivalent” to standard coverage provided under Medicare Part D. TVA
determined that its retiree prescription drug coverage did not qualify for
retiree drug subsidies. As a result, through its prescription benefit
manager, TVA maintained for 2008 an employer-sponsored prescription drug plan
(“PDP”). By providing an employer-sponsored PDP, TVA’s prescription
benefit manager receives subsidies from Medicare which are passed through to
Medicare-eligible retirees in the form of lower premiums. See Note 14
for further description.
Expected
Contributions. TVA expects to contribute $5 million to its
supplemental executive retirement plan and $29 million to its postretirement
health care benefit plans in 2009. TVA made a contribution to
the qualified defined benefit pension plan on September 30, 2008, of $85 million
that constitutes the amount that was expected to be contributed in
2009.
Changes in Ratemaking Impacting Accounting
At its
September 27, 2007, meeting, the TVA Board approved the following changes in
ratemaking, which resulted in changes in accounting for the types of
transactions described below.
Allowance for Funds Used During
Construction. Capitalization of interest and other financing
costs has been a generally accepted practice in the utility industry. The
concept of permitting the capitalization of interest on major plant construction
projects results from a regulatory philosophy that today's customers should not
pay for the costs of financing construction that will benefit only future
customers. As a result, major plant construction costs are not included in rates
until the plant is placed in service. To provide a return on investment during a
period of construction, utilities typically recover the cost of construction
funds from future users by capitalizing a portion of current interest costs
associated with funds invested in the construction projects. This
capitalized interest is referred to as AFUDC.
In
accordance with the accounting policy that was in effect on September 30, 2007,
TVA capitalized a portion of current interest costs associated with funds
invested in most construction projects and most nuclear fuel
inventories. TVA will continue to capitalize a portion of current
interest costs associated with funds invested in most nuclear fuel inventories,
but since October 1, 2007, interest on funds invested in construction projects
has been capitalized only if (1) the expected total cost of a project is
$1 billion or more and (2) the estimated construction period is at least
three years. Capitalized interest continues to be a component of the
asset cost and is recovered in future periods through depreciation
expense. In addition, AFUDC continues to be a reduction to interest
expense as costs are incurred. The interest costs associated with
funds invested in construction projects that do not satisfy the $1 billion and
three-year criteria are not capitalized as AFUDC, remain in the Statement of
Income, and are recovered in current year rates as a component of interest
expense. TVA recorded a total of $17 million in AFUDC in 2008 which
reflects a decrease of $160 million from the $177 million in AFUDC that TVA
recorded in 2007.
Call
Monetizations. From time to time TVA has entered into swaption
transactions to monetize the value of call provisions on certain of its Bond
issues. A swaption essentially grants a third party an option to
enter into a swap agreement with TVA under which TVA receives a floating rate of
interest and pays the third party a fixed rate of interest equal to the interest
rate on the Bond issue whose call provision TVA monetized. Selling
such an option creates a liability for TVA until such time as TVA buys back the
option or until the option matures.
These
call monetization transactions result in long-term liabilities which are marked
to market each quarter. In accordance with the accounting policy that
was in effect on September 30, 2007, the changes in the value of these
liabilities were reported as unrealized gains or losses through TVA’s income
statement in accordance with SFAS No. 133. The volatility of the valuations
resulted in the recognition of sizable amounts of non-cash expense or income,
which affects net income.
Beginning
in 2008, the TVA Board approved the utilization of regulatory accounting
treatment for swaps and swaptions related to call monetization transactions in
order to better match the income statement recognition of gain and loss with the
economic reality of when these transactions actually settle. This
treatment removes the non-cash impacts to TVA’s earnings that result from
marking the value of these instruments to market each quarter. The value of the
swaps and swaptions are still recorded on TVA’s balance sheet, and any interest
expense impacts continue to be reflected in TVA’s income
statement. If this new accounting treatment had been effective during
2007, TVA’s net income for 2007 would have been reduced by less than $50
million.
Non-Nuclear Decommissioning
Costs. In September 2007, the TVA Board approved the
establishment of an asset retirement trust to more effectively segregate,
manage, and invest funds to help meet future asset retirement
obligations. TVA made a $40 million initial contribution to the asset
retirement trust on September 28, 2007. TVA made an additional $40 million
contribution to the asset retirement trust on September 26, 2008. As of
September 30, 2008, the assets of the trust totaled $81
million. Although the TVA Board approved contributions to the asset
retirement trust in 2007 and 2008, the TVA Board did not approve funding for the
trust as part of its budget and ratemaking process in relation to providing a
potential funding source through rates for non-nuclear decommissioning costs
until August 2008, at which time the TVA Board
approved making a contribution to the trust in 2009. The funds from the asset
retirement trust may be used, among other things, to pay the cost of
retiring non-nuclear long-lived assets from the accumulation of assets in the
trust. The costs of retiring non-nuclear long-lived assets represent the net
deferred costs related to the future closure and retirement of TVA's
non-nuclear long-lived
assets under various legal requirements as recognized by SFAS No. 143 and FIN
No. 47. These costs had previously
been included in rates as the asset retirement obligation (“ARO”) was accreted
and the ARO asset was depreciated. In accordance with EITF 93-4, these
costs did not previously meet the asset recognition criteria in paragraph nine
of SFAS No. 71 at the date the costs were
incurred. Because of the establishment of the asset retirement trust and the
approval of the funding in 2009 rates as part of the TVA Board’s budget and
ratemaking process, these costs currently meet asset recognition criteria. Therefore,
all cumulative costs incurred since 2003, when SFAS No. 143 was adopted, were
recaptured as a regulatory
asset as of September 30, 2008. The regulatory asset initially created related
to this adjustment totaled $350 million. The offset to
this adjustment was a one-time decrease to depreciation, amortization, and
accretion expense.
These
future costs can be funded through a combination of investment funds already set
aside in the asset retirement trust, future earnings on those investment funds,
and future cash contributions to the investment funds. Through this rate action,
the TVA Board has demonstrated the ability
and intent to include non-nuclear retirement costs in allowable costs and in
rates. Further, the TVA Board has included
contributions for 2009 to the asset retirement trust fund in its 2009 budget and
in the related rates. As a result, it is probable
that future revenue will result from inclusion of the deferred non-nuclear asset
retirement costs in allowable costs for
ratemaking purposes.
New Accounting Standards and Interpretations
Accounting for Planned Major
Maintenance Activities. On September 8, 2006, the Financial
Accounting Standards Board (“FASB”) released FASB Staff Position (“FSP”) AUG
AIR-1, “Accounting for Planned
Major Maintenance Activities.” The FSP addresses the
accounting for planned major maintenance activities and amends certain
provisions in the American Institute of Certified Public Accountants Industry
Audit Guide, “Audits of
Airlines,” and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting.” The
guidance in this FSP states that entities should adopt an accounting method that
recognizes overhaul expenses in the appropriate period. The following accounting
methods are most often employed/permitted: direct expensing method; built-in
overhaul method; or deferral method. The guidance in this FSP is
applicable to entities in all industries and must be applied to the first fiscal
year beginning after December 15, 2006. TVA adopted this guidance for
2008. Except for the recording of certain regulatory assets, TVA’s
policy is to expense maintenance costs as incurred (direct expensing
method). Therefore, the adoption of this FSP did not have a material
impact on TVA’s results of operations or financial position.
Fair Value
Measurements. In September 2006, FASB issued SFAS No. 157,
“Fair Value Measurements.”
(“SFAS No. 157”). SFAS No. 157 provides guidance for
using fair value to measure assets and liabilities that currently require fair
value measurement. SFAS
No. 157 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. Provisions of SFAS No. 157 were
to be effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. However, in February 2008, FASB issued FSP FAS 157-2, "Effective Date of FASB Statement
No. 157,” (“SFAS No. 157-2”), which delays the effective date of SFAS No.
157 for
nonfinancial assets and nonfinancial liabilities except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. This FSP delays the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal
years for items within the scope of this FSP. TVA will implement SFAS
No. 157 in the first quarter of 2009, and will utilize the deferral portion of
FSP FAS 157-2 for all nonfinancial assets and liabilities within its
scope. In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” ("FSP FAS
157-3"). FSP FAS 157-3 clarifies the application of SFAS No. 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. The guidance emphasizes that
determining fair value in an inactive market depends on the facts and
circumstances and may require the use of significant judgment. FSP
FAS 157-3 is effective upon issuance, including prior periods for which
financial statements have not been issued, and will become effective for TVA at
upon its implementation of SFAS No. 157 during the first quarter of
2009. TVA is evaluating the requirements of SFAS No. 157 and the
related FSP’s and has not yet determined the impact of their implementation,
which may or may not be material to TVA’s results of operations or financial
position.
Fair Value Option.
In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement No.
115,” (“SFAS No. 159”).
This statement 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 SFAS No. 159 are elective. The
provisions of SFAS No. 159 are effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. Early adoption
is permitted as of the beginning of the previous fiscal year provided that the
entity makes that choice in the first 120 days of that fiscal year and also
elects to apply the provisions of SFAS No. 157. SFAS No. 159 will
become effective for TVA during the first quarter of 2009. 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
TVA’s results of operations or financial position.
Offsetting
Amounts. On April 30, 2007, FASB issued FSP FIN No. 39-1, “Amendment of FASB Interpretation
No. 39,” which addresses certain modifications to FASB Interpretation No.
39, “Offsetting of Amounts
Related to Certain Contracts.” This FSP replaces the terms “conditional
contracts” and “exchange contracts” with the term “derivative instruments” as
defined in SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” The FSP also permits a
reporting entity to offset fair value amounts recognized for the right to
reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts recognized for derivative
instruments executed with the same counterparty under the same master netting
arrangement. The guidance in the FSP is effective for fiscal years
beginning after November 15, 2007, with early application
permitted. At this time, TVA is evaluating the requirements of this
guidance and has not yet determined the potential impact of its implementation,
which may or may not be material to TVA’s financial position.
Business
Combinations. In December 2007, FASB issued SFAS No. 141R,
“Business Combinations,”
(“SFAS No. 141R”). This statement establishes principles and
requirements for determining how an enterprise recognizes and measures the fair
value of certain assets and liabilities acquired in a business combination,
including non-controlling interests, contingent consideration, and certain
acquired contingencies. SFAS No. 141R also requires
acquisition-related transaction expenses and restructuring costs to be expensed
as incurred rather than capitalized as a component of the business
combination. The provisions of SFAS No. 141R are effective as of the
beginning of an entity’s first fiscal year that begins on or after December 15,
2008. Early adoption is prohibited. SFAS No. 141R will
become effective for TVA as of October 1, 2009. TVA expects that SFAS
No. 141R could have an impact on accounting for any businesses acquired after
the effective date of this pronouncement.
Derivative Instruments and
Hedging Activities. In March 2008, FASB issued SFAS No. 161,
“Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No. 133,”
(“SFAS No. 161”) which establishes, among other things, the disclosure
requirements for derivative instruments and hedging activities. SFAS
No. 161 amends and expands the disclosure requirements of SFAS No. 133. The effective date of
adoption for TVA is the second quarter of 2009.
Hierarchy of Generally
Accepted Accounting Principles. In May 2008, FASB issued SFAS
No. 162, “The Hierarchy of
Generally Accepted Accounting Principles,” (“SFAS No.
162”). SFAS No. 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements. SFAS No. 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.” The implementation of SFAS No. 162 is not
expected to have a material impact on TVA’s consolidated financial position and
results of operations.
Employers’ Disclosures about
Postretirement Benefit Plan Assets. On October 29, 2008,
FASB issued FSP No.132 (R)-a, “Employers’ Disclosures about
Pensions and Other Postretirement Benefits,” to require that an employer
disclose the following information about the fair value of plan assets: 1) the
level within the fair value hierarchy in which fair value measurements of plan
assets fall; 2) information about the inputs and valuation techniques used to
measure the fair value of plan assets; and 3) a reconciliation of beginning and
ending balances for fair value measurements of plan assets using significant
unobservable inputs. The final FSP will be effective for fiscal years
ending after December 15, 2009, with early application permitted. At initial
adoption, application of the FSP would not be required for earlier periods that
are presented for comparative purposes. TVA is currently evaluating
the potential impact of adopting this FSP on its disclosures in the financial
statements.
Legislative and Regulatory Matters
President’s
Budget
On
February 4, 2008, the Office of Management and Budget (“OMB”) transmitted the
President’s proposed 2009 federal budget to Congress. The proposed
budget recommends allowing Congress to establish the amount of TVA’s Office of
Inspector General’s budget and directing TVA to fund the amount with power
revenues beginning in 2009. Funding for TVA’s Office of the Inspector
General is currently established by TVA. The U.S. Senate
Appropriations Committee’s (“Committee”) report for the 2009 Energy and Water
Development Appropriation Bill (“Bill”) noted that the Committee did not
recommend including this proposal of the President in the Bill because TVA has
funded the requests of the TVA Inspector General from power revenues and
receipts, and the Committee saw no compelling reason to change the funding
mechanism for the TVA Inspector General.
In
October 2008, Congress passed the Inspector General Reform Act of 2008 (“Reform
Act”). Section 8 of the Reform Act addresses the budgets of Inspector
Generals. It does not include the provision recommended in the
President’s proposed 2009 budget in connection with the funding of TVA’s Office
of the Inspector General. It provides an avenue for an Inspector
General, including TVA’s Inspector General, to inform Congress if he or she
believes that the funding included in the President’s budget for that Inspector
General’s office would substantially inhibit the office’s
performance.
Proposed
Legislation
On March
13, 2007, Senators Jim Bunning and Mitch McConnell of Kentucky introduced the
Access to Competitive Power Act of 2007 in the U.S. Senate. Under
this bill, TVA and federal power marketing agencies would be subject to greater
FERC jurisdiction with respect to transmission, including rates, terms, and
conditions of service. No congressional action had taken place on
this bill as of September 30, 2008, and none is expected prior to adjournment of
the 110th Congress.
On
October 18, 2007, Senators Joseph Lieberman and John Warner introduced America’s
Climate Security Act of 2007 in the U.S. Senate. This economy-wide
bill would mandate the reduction of greenhouse gas emissions of covered
facilities through a cap-and-trade structure. Covered facilities
include those that use more than 5,000 tons of coal per
year. Compliance may be met through trading, banking, borrowing, and
offsets. In May 2008, Senators Lieberman and Warner reintroduced the
bill as the Lieberman-Warner Climate Security Act of 2008, S.
3036. On June 6, 2008, the bill failed to obtain enough votes to
overcome a filibuster and to move to final consideration in the U.S.
Senate. No further congressional action is expected prior to
adjournment of the 110th Congress.
For a
discussion of environmental legislation and regulation, see Item 1, Business —
Environmental
Matters.
TVA can
control neither what legislation becomes law nor what regulations are
promulgated. Even legislation or regulations of which TVA has been
made aware may be changed in ways which are difficult to predict or have
unforeseen consequences. TVA cannot therefore predict with certainty
or with any accuracy whether the initiatives discussed above will become law in
the future and in what form, and what their impact would be on
TVA. Moreover, given the nature of the legislative process, it is
possible that new legislation or a change to existing legislation that has a
significant impact on TVA’s activities could become law with little or no
advance notice. As a federal entity, the very nature of TVA can be
changed by legislation. For a discussion of the potential impact of
legislation and regulation on TVA, see Item 1A, Risk Factors.
Environmental Matters
TVA’s
power generation activities, like those across the utility industry and in other
industrial sectors, are subject to federal, state, and local environmental laws
and regulations. Major areas of regulation affecting TVA’s activities
include air quality control, water quality control, and management and disposal
of solid and hazardous wastes. Looking to the future, regulations in
all of these areas are expected to become more stringent along with increased
emphasis on dealing with climate change, expanding renewable generation
alternatives, and encouraging efficient use of electricity.
Due to
the increasing level and complexity of environmental requirements and
expectations, TVA completed a new high-level environmental policy to align with
and execute the direction in the Strategic Plan. The Environmental
Policy (“Environmental Policy”) was approved by the TVA Board on May 19, 2008,
and is intended to be an integrated framework which provides policy-level
guidance to carry out TVA's mission of providing cleaner, affordable energy,
sustainable economic development, and proactive environmental
stewardship. The TVA Environmental Policy sets out environmental objectives
and critical success factors in six environmental dimensions: climate change
mitigation, air quality improvement, water resource protection and improvement,
waste minimization, sustainable land use, and natural resource
management.
TVA has
incurred, and expects to continue to incur, substantial capital and operating
and maintenance costs to comply with evolving environmental requirements
primarily associated with, but not limited to, the operation of TVA’s 59
coal-fired generating units. It is virtually certain that environmental
requirements placed on the operation of TVA’s coal-fired and other 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.
Air
Quality Control Developments
Air
quality in the United States and in the Tennessee Valley has significantly
improved since the enactment of the Clean Air Act (“CAA”) in
1970. These air quality improvements are expected to continue as the
CAA continues to be implemented and evolve as a result of legislative and
regulatory changes. Three substances emitted from coal-fired units —
sulfur dioxide (“SO2”), oxides
of nitrogen (“NOx”), and
particulates — have historically been the focus of CAA emission reduction
regulatory programs, and these are discussed in more detail
below.
Expenditures
related to clean air projects aimed at controlling emissions of these substances
during 2008 and 2007 were approximately $274 million and $239 million,
respectively. These figures include expenditures in 2008 of $9 million to
continue to reduce NOx emissions
through the installation of selective non-catalytic reduction (“SNCR”) systems,
and $240 million for the installation of flue gas desulfurization systems
(“scrubbers”) to continue to reduce SO2
emissions. TVA had previously estimated its total capital cost for
reducing emissions from its power plants from 1977 through 2010 would reach $5.5
billion, $5.1 billion of which had already been spent as of September 30,
2008. TVA estimates that compliance with future CAA requirements and
potential mercury regulations, but not including carbon dioxide (“CO2”), as
discussed below could lead to additional costs of $3.0 billion to $3.7 billion
in the decade beginning in 2011. There could be additional material
costs if reductions of greenhouse gases, including CO2, are
mandated under the CAA or via legislation, or if future legislative, regulatory,
or judicial actions lead to more stringent emission reduction requirements for
conventional pollutants. These costs cannot reasonably be predicted
at this time.
On July
11, 2008, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) issued
a decision in State of North
Carolina vs. EPA that vacated the Clean Air Interstate Rule (“CAIR”) in
its entirety and directed the EPA to promulgate a new rule that is consistent
with the D.C. Circuit opinion. EPA promulgated CAIR in 2005 and the rule
required significant additional utility SO2 and
NOx
emission reductions to address ozone and fine particulate matter attainment
issues in 28 eastern states, including all of TVA’s operating area, and the
District of Columbia. The requirements of CAIR formed the basis for
TVA’s (and much of the utility industry’s) planning with regard to air emission
controls beginning in 2009 and continuing well into the next
decade. In the absence of CAIR, the uncertainty regarding compliance
requirements, methods, and timelines may result in increased capital
expenditures and operating expenses. In addition, it is unclear whether the
petitions for a re-hearing or review of this decision will be granted by the
D.C. Circuit, which could prolong the uncertainty of the regulatory
landscape.
In the
absence of CAIR, other requirements of the CAA, such as achievement of ozone and
fine particulate ambient air quality standards, requirements relating to
regional haze, and control of interstate transport of air pollution (Section 126
petitions), will continue to drive installation of additional controls on
electric generating units across the industry, including at TVA. As discussed in
more detail below, TVA will continue its previously announced emissions
reduction program, including completion of scrubber installations for SO2 control at
Bull Run, Kingston, and John Sevier Fossil Plants, and annual operation of the
21 selective catalytic reduction (“SCR”) and other NOx controls
beginning in October 2008.
On
February 8, 2008, the D.C. Circuit vacated the EPA’s decision to remove coal and
oil-fired Electric Generating Units from the list of stationary sources whose
hazardous air pollutant (“HAP”) emissions are subject to Maximum Achievable
Control Technology (“MACT”) standards under section 112 of the CAA.
The D.C. Circuit also vacated and remanded the Clean Air Mercury Rule (“CAMR”)
which set mercury limits via a cap-and-trade program. Unless the D.C.
Circuit’s ruling is reversed, or EPA is able to determine that mercury emissions
are adequately controlled in accordance with the D.C. Circuit’s remand
instructions, EPA will have to regulate mercury emissions from utilities under
section 112(d) of the CAA, setting MACT standards for emissions based on command
and control type requirements. The cost to comply with the MACT standards is not
known, but is expected to be higher than the cost would have been to comply with
CAMR. Regardless of the status of the EPA’s regulatory program for mercury, TVA
will continue to reduce mercury emissions from its coal-fired power
plants. Over the next five years, mercury emissions from its
coal-fired plants are expected to continue to decline, primarily as a result of
the co-benefits received from the controls TVA is installing to reduce SO2 and
NOx emissions.
The D.C.
Circuit’s recent decisions with regard to CAIR and CAMR may also have the effect
of reviving interest in Congress in adopting multi-pollutant control legislation
focused on the electric power sector. Among other things, such an approach could
seek to establish coordinated caps for power plant emissions of mercury, SO2, NOx, and
CO2.
The legislative and regulatory landscape is continuing to change for these and
other issues and the outcome cannot be predicted accurately at this
time.
Sulfur Dioxide. Utility
SO2
emissions are currently regulated under the Federal Acid Rain Program and state
programs designed to meet the National Ambient Air Quality Standards (“NAAQS”)
for SO2 and fine
particulate matter. Looking forward, these programs, as well as implementation
of the regional haze program, will result in additional regulation of SO2
emissions.
Through
calendar year 2007, TVA had reduced its SO2 emissions
by 84 percent from the peak 1977 level by switching to lower-sulfur coals,
continuing to operate an Atmospheric Fluidized Bed Combustion (“AFBC”) unit at
its Shawnee Fossil Plant, operating existing scrubbers on six larger units, and
installing and operating a scrubber on an additional large unit at Paradise
Fossil Plant. TVA is constructing a scrubber at Bull Run Fossil
Plant, which is scheduled to begin operation in 2009, and two scrubbers at its
Kingston Fossil Plant, which are scheduled to begin operation in
2010. In April 2008, the TVA Board approved construction of
additional flue gas desulfurization equipment at the four-unit John Sevier
Fossil Plant in east Tennessee (“John Sevier”), which is expected to begin
operation in 2012. Additionally, TVA has switched, or plans to switch, to
lower-sulfur coal at several additional units in the next few
years. It is likely that additional emission reduction measures will
have to be undertaken in addition to these announced actions to achieve
compliance with requirements yet to be adopted. Such measures will
also help to meet the goal identified in TVA’s Environmental Policy to reduce
emissions by continuing to install emission reduction equipment and new
technology with the aim of controlling over 80 percent of fossil generation in
the next 10 years.
Nitrogen
Oxides. Utility NOx emissions
continue to be regulated under state programs to achieve and maintain EPA’s
NAAQS for ozone and fine particles, the Federal Acid Rain Program, and the
regional haze program. On March 12, 2008, EPA issued final rules adopting
new, more stringent NAAQS for ozone. EPA lowered the primary
standard, created to protect public health with an adequate margin of safety,
from 0.084 parts per million (“ppm”) to 0.075 ppm. EPA also
promulgated a new secondary standard, mainly created to protect vegetation. The
form and level of the secondary standard are the same as the primary
standard.
In 2009,
states will have to recommend to EPA those counties proposed to be designated as
“non-attainment” counties under the new standards, and in 2010, EPA is expected
to finalize attainment designations using 2006 to 2008 monitoring
data. States must submit plans to EPA no later than 2013 that
demonstrate attainment with the standard. Areas must reach attainment
by deadlines that vary (2013 to 2030) depending on the severity of the ozone
problem.
Based on
2005-2007 monitoring data, virtually all of the larger cities in the Tennessee
Valley area and their associated Metropolitan Statistical Areas, as well as
those rural counties where ozone monitors are present, will likely be designated
as non-attainment areas under the new standard.
Non-attainment
designation can impact industrial development and expansion since new businesses
tend to avoid non-attainment areas, and expansion of existing businesses becomes
more difficult. Non-attainment can have serious repercussions for
counties by increasing costs to industry, delaying the air permitting process,
and restricting expansion of existing sources. Consumers are also
likely to be affected as a result of the institution of vehicle inspection and
fuel restriction programs. Non-attainment can also impact
transportation planning since loss of federal highway funds can occur unless
projects demonstrate “conformity” with the new standards.
TVA
contributes to ambient ozone levels primarily as a result of NOx emissions
from fossil-fired power plants. As a result of its emission reduction program,
TVA’s summertime NOx emissions
have declined substantially. Since 1995, TVA has reduced its NOx emissions
during the summer (when ozone levels increase) by 82 percent by installing
various controls, including low-NOx burners
and/or combustion controls, on 58 of its 59 coal-fired units and installing SCRs
on 21 of the largest units. (The AFBC unit at Shawnee Fossil Plant is inherently
low NOx
emitting.)
In 2005,
TVA installed SNCR systems, which generally have lower NOx removal
capabilities than SCRs, on two units, Johnsonville Unit 1 and Shawnee Unit 1, to
demonstrate long-term technology capability, and continues to operate the SNCR
at Johnsonville Unit 1 in West Tennessee. In 2007, TVA began
operating the High Energy Reagent Technology (“HERT”) system on Unit 1 at John
Sevier, and on Unit 4 at Johnsonville Fossil Plant (“Johnsonville”). HERT
is similar to SNCR technology but has higher removal capabilities. Similar
HERT equipment is planned for installation on the other three John Sevier units
and Johnsonville Units 2 and 3 by May 2009, and TVA has announced plans to
install SCRs at John Sevier by 2015.
TVA’s
NOx
emission reduction program is expected to continue to depend primarily on SCRs,
but will also incorporate some mix of SNCRs and/or HERTs as TVA gains more
experience with these technologies. These plans may change depending
on the timing and severity of future regulatory developments affecting power
plant emissions. In October 2008, TVA began operating this NOx control
equipment year round (except for maintenance outages).
An
increase in the number of counties in the Tennessee Valley designated as
non-attainment areas is likely to focus additional regulatory attention on all
NOx
emission sources, including TVA sources.
Particulates/Opacity. Coarse
particulates (defined as particles of 10 micrometers or larger), which include
fly ash, have long been regulated by states to meet EPA’s NAAQS for particulate
matter. All of TVA’s coal-fired units have been equipped with
mechanical collectors, electrostatic precipitators, scrubbers, or baghouses,
which have reduced particulate emissions from the TVA system by more than 99
percent compared to uncontrolled units. In 1997, EPA issued separate
NAAQS for even smaller particles with a size of up to 2.5 micrometers (“fine
particles” or “PM2.5”). Counties
and parts of counties in the Knoxville and Chattanooga, Tennessee, metropolitan
areas have been designated as non-attainment areas under the 1997
standard.
In
September 2006, EPA revised the 1997 standards. The 2006 revisions
tighten the 24-hour fine particle standard and retain the 1997 annual fine
particle standard. EPA also decided to retain the existing 24-hour
standard for coarse particles, but revoked the related annual standard. On
August 19, 2008, EPA sent letters to state and tribal representatives responding
to their initial recommendations for areas meeting and not meeting the 24-hour
national ambient air quality standards for PM2.5. States
and tribes now have the opportunity to comment on EPA’s modifications to their
recommendations and to provide new information and analyses to EPA if
appropriate. Several counties and parts of counties in the Tennessee Valley that
include or are close to TVA coal-fired generating plants are included in this
preliminary designation. Particular areas of concern to TVA are the Kentucky
counties of Muhlenberg and McCracken, the Tennessee counties of Humphreys,
Montgomery, and Stewart, and the counties in the Knoxville area. EPA
has announced plans to make final designations in December 2008 using air
quality monitoring data from 2005, 2006, and 2007. TVA will continue
efforts to reduce emissions and engage regional and national stakeholders to
further understand and improve regional air quality. TVA’s continued
installations of scrubbers for SO2 control
and SCRs and other technologies for NOx control as
described above are expected to continue to reduce fine particle
levels.
Issues
regarding utility compliance with state opacity requirements are also
increasing. Opacity measures the denseness (or color) of power plant
plumes and has traditionally been used by states as a means of monitoring good
maintenance and operation of particulate control equipment. Under
some conditions, retrofitting a unit with additional equipment to better control
SO2
and NOx emissions
can adversely affect opacity performance, and TVA and other utilities are
addressing this issue. There are also disputes and lawsuits over the
role of continuous opacity monitors in determining compliance with opacity
limitations, and TVA has received an adverse decision in one such
lawsuit. See Item 3, Legal Proceedings.
Climate Change. In 1995, TVA
was the first utility in the nation to participate in “Climate Challenge,” a
DOE-sponsored voluntary greenhouse gas reduction program. Over the
past decade, TVA has reduced, avoided, or sequestered over 305 million tons of
CO2
under this program. TVA also participates in the President’s Climate
VISION program which calls on the electric utility sector, along with other
industry sectors, to help meet a national goal of reducing the greenhouse
intensity of the U.S. economy by 18 percent from 2002 to 2012.
TVA has
taken and is continuing to take significant voluntary steps that will reduce the
carbon intensity of its electric generation, including the recovery of Browns
Ferry Unit 1, planned power up-rates of Browns Ferry Units 1, 2 and 3 (which
will increase the generating capability of the units resulting in additional
avoided emissions of CO2), the
completion of Watts Bar Unit 2, and the completion of the hydroelectric
modernization program. TVA has also filed with the NRC a combined
operating license application for two advanced nuclear reactors at the
Bellefonte Nuclear Plant near Hollywood, Alabama, and requested that the NRC
reinstate the construction permit for Bellefonte Nuclear Units 1 and 2, although
no decision has been made to complete those units or to build the new
reactors. TVA is also committed to increasing its renewable energy by
adding regional renewable energy sources to its generation
portfolio.
In
addition, TVA is a member of the Southeast Regional Carbon Sequestration
Partnership and is working with the Electric Power Research Institute and other
electric utilities on projects investigating technologies for CO2 capture
and geologic storage, as well as carbon sequestration via reforestation.
Legislation was introduced in the last Congress to require reductions of CO2 that, if
enacted, could have resulted in significant additional costs for TVA and other
utilities with coal-fired generation. In general, any carbon
legislation will result in some level of increase in the price of electricity to
consumers, regardless of form, severity, and timing of the legislation, and
TVA's analyses of previous versions of several proposed climate bills indicate
that the price increases could be substantial. These analyses also show
that TVA's existing coal-fired generating assets will continue to play an
important role in meeting the energy needs of the Tennessee
Valley. TVA expects that the next Congress and Administration will
again take up the issue of climate change and is incorporating the possibility
of mandatory carbon reductions and a renewable portfolio standard into its long
range planning. TVA will continue to monitor legislative and regulatory
developments related to CO2 and a
renewable portfolio standard to assess any potential financial and
operational impacts as information becomes available. Looking ahead,
TVA’s Environmental Policy contains a Climate Change Mitigation objective to
stop the growth in volume of emissions and reduce the rate of carbon emissions
by 2020.
In
addition to legislative activity, climate change issues are the subject of a
number of lawsuits, including lawsuits against TVA. See Item 3, Legal
Proceedings. On November 29, 2006, the U.S. Supreme Court heard the
case of Massachusetts v.
EPA, concerning whether EPA has the authority and duty to regulate
CO2
emissions under the CAA. On April 2, 2007, the Supreme Court found
that greenhouse gases, including CO2, are
pollutants under the CAA, and that EPA thus does have the authority to
regulate these gases. The Supreme Court also concluded that EPA's refusal
to regulate these pollutants was based on impermissible reasons, and remanded
the case to EPA to make a judgment regarding endangerment (either that
greenhouse gases do, or do not, pose a threat to health and welfare) with
respect to certain mobile sources. While this case focused on CO2 emissions
from motor vehicles, it sets a precedent for regulation in other industrial
sectors, such as the electric utility industry.
In July
2008, EPA issued an Advance Notice of Proposed Rulemaking (“ANPR”) that
addressed essentially all regulatory proceedings before EPA in which greenhouse
gas emissions and climate change are issues, including consideration of
greenhouse gas emissions in establishing new source performance standards and
resolving pending appeals of new source review permit applications. The ANPR
sought comments on the framework and direction of EPA’s actions to regulate
greenhouse gas emissions from a wide range of facilities, including electric
generating facilities. The ANPR outlines issues to be addressed in
new legislation that may be required in order to regulate greenhouse gas
emissions. Regulatory options that may be considered in such
legislation include, but are not limited to, the enactment of a cap-and-trade
policy and development and deployment of alternative fuels, renewable energy
resources, and energy conservation. Whether climate change legislation will be
enacted during the 2009 to 2010 legislative session, and if so its potential
impacts, cannot be assessed at this time. Any such legislation, or
similar regulatory action by EPA under the CAA or otherwise, would probably have
a significant impact on fossil-fueled generation facilities.
States
are also becoming more active in the regulation of emissions that are believed
to be contributing to global climate change. Several northeastern
states have formed the Regional Greenhouse Gas Initiative, which is in the
process of being implemented, and California passed a bill capping greenhouse
gas emissions in the state. Other states are considering a variety of
actions. North Carolina is studying initiatives aimed at climate
change under the provisions of the state’s Clean Smokestacks Act of
2002. This act required the State Division of Air Quality to study
potential control of CO2 emissions
from coal-fired utility plants and other stationary sources. This has
also prompted efforts to develop a climate action plan for North
Carolina.
Renewables
and Clean Energy
In light
of increasing national focus on renewable and clean energy and TVA's desire to
reduce its environmental footprint, on May 19, 2008, the TVA Board approved
guiding principals for an Energy Efficiency and Demand Response Plan and a
Renewable and Clean Energy Assessment.
The
Energy Efficiency and Demand Response Plan seeks to slow the current rate of
growth in the region’s power demand by providing opportunities for residential,
business, and industrial consumer groups to use energy more
efficiently. In the short term, the plan proposes reducing the growth
in peak demand by up to 1,400 megawatts by the end of the 2012 fiscal
year.
The
Renewable and Clean Energy Assessment strives to add clean energy resources to
TVA’s generating mix to help reduce carbon emissions while minimizing costs and
maintaining a reliable power supply. The assessment proposes to review TVA’s
generation mix and identify a road map for pursuing additional renewable and
clean energy supply in the region, and recommends consideration of different
sources of renewable energy and a reduction in carbon intensity in TVA’s
generation mix, along with additional energy conservation by everyone who uses
electricity.
Water
Quality Control 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 (“CWA”), EPA promulgated a final rule for existing
power producing facilities (“Phase II Rule”) that became effective on September
7, 2004. On January 25, 2007, the U.S. Court of Appeals for the
Second Circuit (the “Second Circuit”) remanded the Phase II Rule, holding, among
other things, that costs cannot be compared to benefits in picking the best
technology available (“BTA”) to minimize the adverse environmental impacts of
intake structures. The Utility Water Act Group, Entergy Corporation,
and PSEG Fossil LLC filed a petition seeking review of the decision by the U.S.
Supreme Court. TVA and the attorneys general of several states,
including Alabama, Kentucky, and Tennessee, supported this
petition. On April 14, 2008, the U.S. Supreme Court granted the
petition, limiting its review to one issue: "Whether Section 316(b)
of the CWA authorizes EPA to compare costs with benefits in determining the
'best technology available for minimizing adverse environmental impact' at
cooling water intake structures.” The Department of Justice and industry
petitioners will defend the EPA rule supporting the concept that costs under the
rule should be limited to those that are “not significantly greater than” the
benefits to be derived. The case has been argued before the U.S.
Supreme Court. TVA is unable to predict the outcome.
On July
9, 2007, EPA suspended all but one provision of the Phase II Rule until the
agency resolves the issues raised by the Second Circuit's remand. The
provision that was retained requires permitting authorities to apply, in the
interim, Best Professional Judgment (“BPJ”) controls for existing
facilities. BPJ controls are those that reflect the best technology
available for minimizing the adverse environmental impacts of intake
structures. The use of BPJ controls reflects a return to the
regulatory process that was used by permitting authorities to regulate the
impact of intake structures prior to the promulgation of the Phase II
Rule.
All of
the intakes at TVA's existing coal and nuclear generating facilities were
subject to the Phase II Rule. Given the uncertainty over the ultimate
outcome of the appellate process and what the changes in the final rule as
ultimately issued by EPA will be, the impacts of the eventual rulemaking are
uncertain at this time.
Section
303d of the CWA requires states to develop and report to EPA on a two-year cycle
a list of waters that are “impaired” or are expected to not meet water quality
standards in the next two years and need additional pollution controls. The
Tennessee Department of Environment and Conservation (“TDEC”) placed a portion
of Barkley Reservoir downstream of TVA's Cumberland Fossil Plant on its 2008
list of impaired streams (the “303d List”). This section of Barkley
Reservoir had not been listed previously. The reservoir conditions in 2007,
especially for temperature and dissolved oxygen, changed significantly due
primarily to reduced flows in the Cumberland River resulting from emergency dam
repairs on the Wolf Creek and Center Hill Dams coupled with the most severe
drought on record in the region. The lower flows made less water available to
dissipate the heated discharge from Cumberland Fossil Plant and resulted in
increased river temperatures. The prospect of continued reduced flows through
the Cumberland River system during the period required to complete the necessary
repairs to Wolf Creek and Center Hill Dams may impact the generation of
electricity from TVA's Cumberland and Gallatin Fossil Plants. Placing this
section of Barkley reservoir on the 303d List could also impact the thermal
limits imposed by the State of Tennessee when the discharge permit for
Cumberland Fossil Plant is renewed in 2010, or earlier if the state or EPA
determines that additional actions are required to protect the aquatic
environment below the plant. TVA is working with the U.S. Army Corps
of Engineers and TDEC to minimize the impacts to TVA's generating plants and
improve the conditions observed in the river in 2007. TVA began
operating temporary cooling towers at Cumberland Fossil Plant to reduce the
temperature of the water discharged to the river.
EPA, and
many states, are taking increased interest in evaluating the potential effects
of thermal discharges from steam-electric generating facilities. TVA
is working with states and EPA Region IV to demonstrate that the data collected
by TVA in the vicinity of its facilities is sufficient to meet the requirements
for assessing the impacts of thermal discharges on the aquatic
environment.
In March
2007, TDEC adopted a lower, more conservative threshold (0.3 ppm) for issuing
precautionary advisories for fish consumption due to mercury. Adoption of the
lower threshold resulted in the issuance of several new precautionary fish
consumption advisories in April 2007 for all or parts of five TVA reservoirs
(Norris, Cherokee, South Holston, Watauga, and Tellico) and parts of four rivers
in the Tennessee Valley (Buffalo, Emory, Hiwassee, and Holston) as well as the
Loosahatchie, Wolf, and Mississippi Rivers in Tennessee that are not in the
Tennessee River watershed.
As part
of the 2007 advisory determinations, TDEC also identified several water bodies
where more data were needed to determine if advisories were
necessary. State agencies have since collected fish from those water
bodies and decided several of them needed advisories to protect public health.
The new Precautionary Advisory list for 2008 includes one additional TVA
reservoir (Beech) and three additional river segments in the Tennessee River
watershed (French Broad, Sequatchie, and Duck). Also, existing
advisories for several reservoirs and rivers were expanded to include mercury as
a chemical of concern and/or to include more kinds of fish.
TDEC’s
announcement of additional Precautionary Advisories for several Tennessee water
bodies does not mean that mercury levels in fish are increasing, but is more
reflective of the effect of the lowered threshold values for issuing a
precautionary consumption advisory. TVA has been monitoring mercury
levels in fish and sediments in TVA reservoirs for the last 35 years, and
TVA’s data were provided to TDEC as a part of its review process. TVA’s data
show significant reductions in mercury concentrations in fish from the
reservoirs with known industrial discharges that have now ceased. Other than
those areas historically impacted by industrial discharges, mercury
concentrations in fish have tended to fluctuate through time with no discernible
trend in fish from most reservoirs. Despite increased burning of coal for
electricity generation, current and historic data records indicate that mercury
concentrations in reservoir sediments have remained stable or
declined.
One of
the results of the major reductions in atmospheric emissions resulting from the
clean air expenditures discussed above is that wastewaters at TVA coal-fired
facilities and across the utility industry may be changing because of waste
streams from air quality control technologies. Varying amounts of ammonia or
similar compounds used as a necessary component of SCR and SNCR operations may
end up in facility wastewater ponds that may discharge through outfalls
regulated under the CWA. Operation of scrubbers for SO2 control
also results in additional amounts of pollutants being introduced into facility
wastewater treatment ponds. EPA is currently collecting information to determine
if the national Steam Electric Point Source Effluent Guidelines (“Effluent
Guidelines”) under the CWA need to be revised. If the Effluent
Guidelines are revised, potentially more restrictive discharge limitations for
existing parameters or the addition of new parameters could result in additional
wastewater treatment expenses to meet requirements of the CWA. These costs
cannot be accurately predicted at this time, but TVA is involved in and closely
monitoring EPA’s data collection activities and the progress of the Effluent
Guidelines review process. On the state level, new numeric nutrient criteria
development and implementation (an EPA requirement) may require additional
treatment costs to reduce nitrogen concentrations being added to the waste
treatment ponds as a result of the operation of air pollution control
equipment. TVA is closely monitoring the development and
implementation of numeric nutrient criteria, particularly by the states in TVA’s
service area and is encouraging regulatory agencies in the Valley states to
incorporate water quality trading regulations into their water quality
standards.
As is the
case across the utility industry and in other industrial sectors, TVA is also
facing more stringent requirements related to protection of wetlands, reductions
in storm water impacts from construction activities, water quality degradation,
new water quality criteria, and laboratory analytical methods. TVA is
also following litigation related to the use of herbicides, water transfers, and
releases from dams. TVA is not facing any substantive requirements
related to non-compliance with existing CWA regulations.
Hazardous
Substance Response, Oil Cleanup, and Similar Environmental Work
Liability
for releases and cleanup of hazardous substances is primarily regulated under
the federal Comprehensive Environmental Response, Compensation, and Liability
Act (“CERCLA”), and other federal and parallel state statutes. In a
manner similar to many other industries and power systems, TVA has generated or
used hazardous substances over the years. TVA is aware of alleged
hazardous-substance releases at 10 non-TVA areas for which it may have some
liability. TVA has reached agreements with EPA to settle its
liability at two of the non-TVA areas for a total of less than
$23,000. There have been no recent assertions of TVA liability for
five of the non-TVA areas, and there is little or no known evidence that TVA
contributed any significant quantity of hazardous substances to these five
sites. There is evidence that TVA sent some materials to the
remaining three non-TVA areas: the David Witherspoon site in Knoxville,
Tennessee, the Ward Transformer site in Raleigh, North Carolina, and the General
Waste Products site in Evansville, Indiana. As discussed below, TVA
is not able to estimate its liability related to these sites at this
time.
The
Witherspoon site is contaminated with radionuclides, polychlorinated biphenyls
(“PCBs”), and metals. DOE has admitted to being the main contributor
of materials to the Witherspoon site and is currently performing clean up
activities. DOE claims that TVA sent equipment to be recycled at this
facility, and there is some supporting evidence for the
claim. However, TVA believes it sent only a relatively small amount
of equipment and that none of it was radioactive. DOE has asked TVA
to “cooperate” in completing the cleanup, but it has not provided to TVA any
evidence of TVA’s percentage share of the contamination.
The Ward
Transformer site is contaminated by PCBs from electrical
equipment. EPA and a working group of potentially responsible parties
(the “PRP Work Group”) have provided documentation showing that TVA sent a
limited amount of equipment containing PCBs to the site in 1974. The
PRP Work Group is cleaning up on-site contamination in accordance with an
agreement with EPA. The cleanup effort has been divided into four areas: two
phases of soil cleanup; cleanup of off-site contamination in the downstream
drainage basin; and supplemental groundwater remediation. The first
phase of soil cleanup is underway, and the high-end cost estimate for this work
is about $66 million. There are no reliable estimates for the second
phase of soil cleanup or the supplemental groundwater
remediation. EPA has selected a cleanup plan for the down stream
drainage basin with a present-worth cost estimate of $6.1
million. TVA understands that EPA has incurred approximately $3
million in past response costs, and the PRP Work Group has reimbursed EPA
approximately $725,000 of those costs. The PRP Work Group plans to
propose a cost allocation schedule which it will use as the basis for offering
settlements to PRPs for the first phase of soil cleanup. It plans to
sue PRPs who do not settle. There also may be natural resource
damages liability at this site, but TVA is not aware of any estimated amount for
any such damages. TVA has a potential defense that it only sent
useful equipment to Ward and thus is not liable for arranging for disposal of a
hazardous substance at the site.
General
Waste Products was a scrap metal salvage yard that operated from the 1930s until
1998. The original defendants in a CERCLA action have filed a third
party complaint against TVA and others seeking cost contribution for cleanup of
contamination from lead batteries and PCB transformers at the
facility. There is evidence that TVA sent scrap metal to the
facility, but TVA has not found any records indicating that it sent batteries or
PCB equipment. There are two cleanup sites at the
facility. TVA has been informed that the first site has been cleaned
up at a cost of $3.2 million, and cleanup estimates for the second site range
from $2 million to $7 million. TVA’s allocated share of the cleanup
costs, if any, is expected to be relatively small.
TVA
operations at some TVA facilities have resulted in oil spills and other
contamination TVA plans to address, and TVA expects to incur costs of about $15
million for environmental work related to decommissioning of the Watts Bar
Fossil Plant.
As of
September 30, 2008, TVA’s estimated liability for cleanup and similar
environmental work for those sites for which sufficient information is available
to develop a cost estimate (primarily the TVA sites) is approximately $18
million on a non-discounted basis, including the Watts Bar Fossil Plant work,
and is included in Other
liabilities on the Balance Sheet.
Coal-Combustion
Wastes
In
accordance with a regulatory determination by EPA in May 2000, coal-combustion
and certain related wastes disposed of in landfills and surface impoundments are
not regulated as hazardous waste. In conjunction with this
determination, EPA committed to developing non-hazardous management standards
for these wastes. These standards are likely to include increased
groundwater monitoring, more stringent siting requirements, and closure of
existing waste-management facilities not meeting minimum
standards. On August 29, 2007, EPA issued a Notice of Data
Availability (“NODA”) in which it requested public comment on whether the
additional information mentioned in the notice should affect EPA’s decisions as
it continues to follow up on its commitment to develop management standards for
coal-combustion wastes. Although TVA did not comment on the NODA, the
Utility Solid Waste Activity Group, of which TVA is a member, did file extensive
comments with EPA regarding the risk assessment method that EPA chose to support
the NODA.
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 in Item 3, Legal Proceedings. In accordance with SFAS No.
5, “Accounting forContingencies,” TVA had
accrued approximately $46 million and $3 million with respect to the proceedings
described in Item 3, Legal Proceedings, as of September 30, 2008, and 2007,
respectively, as well as approximately $5 million and $4 million as of September
30, 2008, and 2007, respectively, with respect to other proceedings that have
arisen in the normal course of TVA’s business. No assurance can be
given that TVA will not be subject to significant additional claims and
liabilities. If actual liabilities significantly exceed the estimates
made, TVA’s results of operations, liquidity, and financial condition could be
materially adversely affected.
For a
discussion of TVA’s current legal proceedings and anticipated outcomes, see Item
3, Legal Proceedings.
Risk Management Activities
Risk
Governance
The
Enterprise Risk Council (“ERC”) was created in August 2005 to strengthen and
formalize TVA’s enterprise-wide risk management efforts. The ERC is
responsible for the highest level of risk oversight at TVA and is also
responsible for communicating enterprise-wide risks with policy implications to
the TVA Board or a designated TVA Board committee. The ERC’s current
members are the president and chief executive officer (chair), the chief
financial officer, the chief operating officer, the general counsel, and a
designated representative from the Office of the Inspector General (“OIG”)
(advisory).
In
addition to the ERC, TVA has established three subordinate risk committees,
Financial, Operational, and Strategic, to manage risks based on natural
groupings. Each of the subordinate committees reports directly to the
ERC. Membership in the subordinate committees includes senior
management from organizations that manage the applicable risks and advisory
representatives from the OIG and from the Office of the General
Counsel. The ERC and the risk committees meet regularly.
The ERC
and risk committees have cataloged major enterprise level risks for TVA into
three main categories: strategic risks, operational risks, and financial
risks. A discussion of significant risk factors under each of these
categories, as well as risk factors related to TVA securities, is presented in
Item 1A, Risk Factors. Enterprise risk management is
an on-going effort at TVA. As such, it will continue to
evolve in a manner that will best support TVA's mission.
Commodity Price
Risk
TVA
measures price risk associated with the commodities that are critical to its
operations using either a Value at Risk (“VaR”) methodology or sensitivity
analysis. Following is an explanation of these methods along with
their calculated measures of TVA’s commodity price risk.
Value
at Risk
TVA uses
a VaR methodology, which is also used by other energy companies, to measure the
amount of price risk that exists within certain of its commodity
portfolios. Price risk is quantified using what is referred to as the
variance-covariance technique of measuring VaR, which provides a consistent
measure of risk across diverse energy markets and products. This
technique requires the use of a number of assumptions including a confidence
level for losses, market liquidity, and a specified holding
period. This methodology uses standard statistical techniques to
predict market movements in light of current prices, historical volatilities,
and current specific commodity correlations.
The VaR
calculation gives TVA a dollar amount which reflects the maximum potential loss
in the fair value of its portfolios due to adverse market movements over a
10-day period within a specified confidence level. TVA’s VaR calculations are
based on a 95 percent confidence level, which means that there is a 2.5 percent
probability that TVA’s portfolios will incur a loss in value in 10 days at least
as large as the reported VaR. For example, if the VaR is calculated at $5
million, there is a 97.5 percent probability that if prices move against current
positions, the reduction in the value of the portfolio resulting from such
10-day price movements would be less than $5 million.
The
following table illustrates the potential unfavorable price impact on TVA’s
electricity, natural gas, SO2 emission
allowance, and NOx emission
allowance portfolios as measured by the VaR model based on a 10-day holding
period and a 95 percent confidence level. The high and low valuations
represent the highest and lowest VaR values during 2008, and the average
calculation represents the average of the VaR values during 2008.
Value
at Risk
September
30, 2008
|
Average
|
High
|
Low
|
September
30, 2007
|
||||||||||||||||
Electricity
1
|
$ | 23 | $ | 30 | $ | 64 | $ | 18 | $ | 69 | ||||||||||
Natural
Gas 2
|
18 | 15 | 26 | 3 | 5 | |||||||||||||||
SO2
Emission Allowances 3
|
24 | 63 | 64 | 15 | 20 | |||||||||||||||
NOx
Emission Allowances 4
|
2 | 2 | 3 | 2 | 1 |
Notes
(1)
|
TVA’s
VaR calculations for electricity are based on its on-peak electricity
portfolio, which includes electricity forwards and option
contracts.
|
(2)
|
TVA’s
VaR calculations for natural gas are based on TVA’s natural gas portfolio,
which includes natural gas forwards, futures, options on futures, and swap
futures contracts.
|
(3)
|
TVA’s
VaR calculations for SO2
emission allowances are based on TVA’s portfolio of SO2
emission allowances.
|
(4)
|
TVA’s
VaR calculations for NOx
emission allowances are based on TVA’s portfolio of NOx
emission allowances.
|
VaR has
several limitations as a measure of portfolio risk, including, but not limited
to, its inability to adequately reflect (1) the risk of a portfolio with
significant option exposure, (2) the risk of extreme price movements, and (3)
the significant regulatory and legislative risks facing TVA.
Electricity. TVA
enters into electricity forward contracts in order to hedge its economic risks
directly associated with meeting its power supply obligations. During
2008, TVA supplied approximately 9.7 percent of system energy requirements with
power purchased under electricity forward contracts.
TVA’s
average electricity market risk exposure has increased annually since
2003. The increases have resulted primarily from TVA’s purchases of
power to meet growing demand and, to a lesser extent, from increased volatility
in the electricity markets.
As shown
in the Value at Risk table above, at a 95 percent confidence level, the average
VaR for TVA’s electricity portfolio for 2008 for a 10-day holding period was $30
million.
Natural Gas. TVA
uses natural gas to operate combustion turbine peaking units and to supply fuel
under power purchase agreements in which TVA is the fuel
supplier. TVA hedges a portion of its natural gas needs by entering
into futures contracts, options on futures contracts, swaps, and options on
swaps under a financial hedging program. At September 30, 2008, TVA
had derivative positions outstanding under the program equivalent to about 3,154
contracts, made up of 2,090 futures contracts, 160 options contracts, and 904
swap futures contracts, with an approximate net market value of $715
million.
As shown
on the Value at Risk table above, at a 95 percent confidence level, the average
VaR for TVA’s natural gas portfolio for 2008 for a 10-day holding period was $15
million.
Emission
Allowances. TVA acquires both SO2 emission
allowances and NOx emission
allowances to help TVA comply with the emission requirements of the CAA and its
implementing regulations. In addition to meeting TVA’s emissions
requirements, TVA also manages the emission positions utilizing the market to
optimize the value of its emission allowance portfolio. As shown in
the VaR table above, at a 95 percent confidence level, the average VaR for 2008
for a 10-day holding period for TVA’s SO2 emission
allowance portfolio and NOx emission
allowance portfolio was $63 million and $2 million, respectively.
Fuel Oil. TVA
purchases fuel oil as a substitute fuel source for TVA’s combustion turbines and
for start up purposes at many of TVA’s fossil plants. In addition,
many of TVA’s rail transport contracts for movement of certain commodities such
as coal are indexed to fuel oil. TVA is currently in the process of
developing an additional portion of the financial hedging program to purchase
fuel oil derivative contracts to hedge TVA’s exposure to price
movements.
Sensitivity
Analysis
TVA uses
sensitivity analysis to measure the potential impact that selected hypothetical
changes in certain commodity prices would have on TVA over a selected period of
time. The selected hypothetical changes in commodity prices are
intended to reflect reasonably possible near-term changes.
Coal. During 2008,
TVA purchased 93 percent of its coal requirements under long-term coal contracts
and 7 percent of its coal requirements under short-term contracts. If
the rates that TVA paid for coal under short-term contracts during 2008 were 10
percent higher than the rates TVA actually paid, TVA’s coal expense would have
increased by $15 million in 2008.
Uranium. During
2008, TVA did not have to purchase any uranium on the spot market, and as of
September 30, 2008, TVA had all of its uranium requirements through 2011 either
in inventory or under contract. Accordingly, a hypothetical 10
percent change in uranium prices during 2009 would have no material effect on
TVA’s financial position, results of operations, or cash flows. See
Item 1, Business — Fuel Supply
— Nuclear Fuel.
Cash Flow at
Risk
Cash Flow
at Risk (“CFaR”) is a risk metric that reflects how energy commodity volatility
and price changes translate into fluctuations in TVA’s financial health captured
by cash flow. Although TVA currently has a FCA that mitigates much of
its fuel-cost risk and also conducts an extensive financial trading program to
hedge some of its portfolio risks, TVA still faces volumetric risk and other
uncertainties that affect cash flow. TVA continues to manage CFaR for
the mutual benefit of TVA and its customers.
TVA
forecasts CFaR using a computer model. The rolling 12 month forecast
is used to pinpoint months with greater amounts of CFaR that need to be hedged
to limit price exposure. At September 30, 2008, TVA estimated its
2009 CFaR at $228 million based on a 90 percent confidence level.
Investment Price
Risk
TVA’s
investment price risk relates primarily to investments in TVA’s nuclear
decommissioning trust, asset retirement trust, and pension plan.
Nuclear
Decommissioning Trust
The
nuclear decommissioning trust is generally designed to achieve a return in line
with overall equity market performance. The assets of the trust are
invested in debt and equity securities and certain derivative instruments
including forwards, futures, options, and swaps, and through these investments
the trust has exposure to U.S. equities, international equities, real estate
investment trusts, high-yield debt, U.S. Treasury inflation-protected
securities, commodities, and currencies. As of September 30, 2008,
the value of the investments in the trust was $845 million, and an immediate 10
percent decrease in the price of the investments in the trust would have reduced
the value of the trust by $85 million. See Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and
Estimates — Nuclear Decommissioning for more information regarding TVA’s
nuclear decommissioning trust.
Asset
Retirement Trust
The asset
retirement trust is presently invested to achieve a return in line with fixed
income market performance. The assets of the trust are invested in fixed income
commingled funds. As of September 30, 2008, the value of the
investments in the trust was $81 million, and an immediate 10 percent decrease
in the price of the investments in the trust would have reduced the value of the
trust by $8 million.
Pension
Fund
The
assets in TVA’s pension plan are primarily stocks and bonds. The
Tennessee Valley Authority Retirement System (“TVARS”) targets an asset
allocation policy for its pension plan assets which, in prior years,
approximated 60 percent equity securities and 40 percent fixed income
securities. TVARS is transitioning to a new asset allocation policy adopted
March 1, 2007, which targets an asset allocation policy of 65 percent equity
securities and 35 percent fixed income securities. The pension
fund is invested in equity securities, debt securities, and derivative
instruments such as futures, options, and swaps, and through these investments
the fund has exposure to U.S. equities, international equities, real estate
investment trusts, investment-grade debt, high-yield debt, U.S. Treasury
inflation-protected securities, commodities, and currencies. As of
September 30, 2008, the value of the investments in the pension fund was $6.2
billion, and an immediate 10 percent decrease in the value of the investments in
the fund would have reduced the value of the fund by approximately $622
million. See Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Critical Accounting Policies and
Estimates — Pension and
Other Postretirement Benefits and Note 14 for additional information
regarding TVA’s pension fund.
Interest Rate
Risk
TVA’s
interest rate risk is related primarily to its short-term investments, Bonds,
swaption transaction, and interest rate swaps related to three of TVA’s swaption
transactions.
Short-Term
Investments
At
September 30, 2008, TVA had $213 million of cash and cash equivalents, and the
average balance of cash and cash equivalents for 2008 was $357
million. If the rates of interest that TVA received on its short-term
investments during 2008 had been one percentage point lower than the rates of
interest that TVA actually received on these investments, TVA would have
received approximately $4 million less in interest from its short-term
investments during 2008. In addition, changes in interest rates could
affect the value of TVA’s investments in its pension fund, asset retirement
trust, and nuclear decommissioning trust. See Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Activities —
Investment Price Risk.
Debt
Portfolio
Short-Term
Debt. At September 30, 2008, TVA’s short-term borrowings were
$185 million, and the current maturities of long-term debt were $2
billion. Based on TVA’s interest rate exposure at September 30, 2008,
an immediate one percentage point increase in interest rates would have resulted
in an increase of $22 million in TVA’s short-term interest expense during
2009. This calculation assumes that the balance of short-term debt
during 2009 equals the short-term debt balance at September 30, 2008, plus an
amount representing the refinancing of current maturities of long-term
debt.
Long-Term Debt. At
September 30, 2008, the interest rates on all of TVA’s outstanding long-term
debt were fixed. Accordingly, an immediate one percentage point
increase in interest rates would not have affected TVA’s interest expense
associated with its long-term debt. When TVA’s long-term debt matures
or is redeemed, however, TVA typically refinances this debt by issuing
additional long-term debt. Accordingly, if interest rates are high
when TVA issues this additional long-term debt, TVA’s cash flows, results of
operations, and financial condition may be adversely affected. This
risk is somewhat mitigated by the fact that TVA’s debt portfolio is diversified
in terms of maturities and has a long average life. As of September
30, 2008, the average life of TVA’s debt portfolio was 15.8 years. A
schedule of TVA’s debt maturities is contained in Note 11.
Swaption
and Related Interest Rate Swap Agreements
Changes
in interest rates also affect the mark-to-market valuation of TVA’s swaption
agreement and related interest rate swaps. Unrealized gains and losses on these
transactions are reflected on TVA’s balance sheets in a regulatory asset
account, and realized gains and losses are reflected in earnings. Based on
TVA’s interest rate exposure at September 30, 2008, an immediate one percentage
point decrease in interest rates would have decreased the mark-to-market
valuation of TVA’s swaption agreement and related interest rate swaps by $353
million.
Currency Exchange Rate
Risk
As of
September 30, 2008, TVA had three issues of Bonds outstanding whose principal
and interest payments are denominated in British pounds sterling. TVA
issued these Bonds in amounts of £200 million, £250 million, and £150 million in
1999, 2001, and 2003, respectively. When TVA issued these Bonds, it
hedged its currency exchange rate risk by entering into currency swap
agreements. Accordingly, as of September 30, 2008, a 10 percent
change in the British pound sterling-U.S. dollar exchange rate would not have
had a material impact on TVA’s cash flows, results of operations, or financial
position.
Credit
Risk
Credit
risk is the exposure to economic loss that would occur as a result of a
counterparty’s nonperformance of its contractual
obligations. Where exposed to credit risk, TVA analyzes the
counterparty’s financial condition prior to entering into an agreement,
establishes credit limits, monitors the appropriateness of those limits, as well
as any changes in the creditworthiness of the counterparty on an ongoing basis,
and employs credit mitigation measures, such as collateral or prepayment
arrangements and master purchase and sale agreements, to mitigate credit
risk.
Credit
of Customers
The
majority of TVA’s credit risk is limited to trade accounts receivable from
delivered power sales to municipal and cooperative distributor customers, all
located in the Tennessee Valley region. To a lesser extent, TVA is
exposed to credit risk from industries and federal agencies directly served and
from exchange power arrangements with a small number of investor-owned regional
utilities related to either delivered power or the replacement of open positions
of longer-term purchased power or fuel agreements. As previously
mentioned in Item 1, Business — Customers — Other Customers,
power sales to the United States Enrichment Corporation (“USEC”) represented 5.3
percent of TVA’s total operating revenues in 2008. USEC’s senior
unsecured credit ratings are currently ‘CCC‘ by Standard & Poor’s and ‘Caa2’
by Moody’s Investors Service. As a result of USEC’s credit ratings,
the company has provided credit assurance to TVA, under the terms of its power
contract.
TVA had
concentrations of accounts receivable from seven customers that represented 40
percent of total accounts receivable as of September 30, 2008.
The table
below summarizes TVA’s customer credit risk from trade accounts receivable as of
September 30, 2008:
Customer
Credit Risk
As
of September 30
|
||||
Trade
Accounts Receivable 1
|
||||
Municipalities
and Cooperative Distributor Customers
|
||||
Investment
Grade
|
$ | 868 | ||
Internally
Rated — Investment Grade
|
430 | |||
Industries
and Federal Agencies Directly Served
|
||||
Investment
Grade
|
46 | |||
Non-investment
Grade
|
20 | |||
Internally
Rated — Investment Grade
|
3 | |||
Internally
Rated — Non-investment Grade
|
9 | |||
Exchange
Power Arrangements
|
||||
Investment
Grade
|
4 | |||
Non-investment
Grade
|
– | |||
Internally
Rated — Investment Grade
|
– | |||
Internally
Rated — Non-investment Grade
|
1 | |||
Subtotal
|
1,381 | |||
Other
Accounts Receivable
|
||||
Miscellaneous
Accounts
|
26 | |||
Provision
for Uncollectible Accounts
|
(2 | ) | ||
Subtotal
|
24 | |||
Total
|
$ | 1,405 |
Note
(1) Includes
unbilled power receivables of $1,000 million.
Credit
of Other Counterparties
In
addition to being exposed to economic loss due to the nonperformance of TVA’s
customers, TVA is exposed to economic loss because of the nonperformance of its
other counterparties, including suppliers and counterparties to its derivative
contracts. Where exposed to performance risk, TVA analyzes the
counterparty’s financial condition prior to entering into an agreement and
employs performance assurance measures, such as parent guarantees, letters of
credit, cash deposits, or performance bonds, to mitigate the risk.
TVA has
various agreements under which it has exposure to various institutions with
which it does business. Most of these are not material on a net
exposure basis. Policies and procedures for counterparty credit review have
generally protected TVA against significant exposure to institutions in poor
financial condition due to current market and economic conditions.
Credit of
Suppliers. If one of TVA’s fuel or purchased power suppliers
fails to perform under the terms of its contract with TVA, TVA might lose the
money that it paid to the supplier under the contract and have to purchase
replacement fuel or power on the spot market, perhaps at a significantly higher
price than TVA was entitled to pay under the contract. In addition, TVA might
not be able to acquire replacement fuel or power in a timely manner and thus
might be unable to satisfy its own obligations to deliver power. As
mentioned in Item 1, Business — Power Supply — Purchased Power and
Other Agreements, TVA has a power purchase agreement with Choctaw that
expires on March 31, 2032. Choctaw’s senior secured credit ratings
are currently ‘BB’ by Standard & Poor’s and ‘Ba1’ with Moody’s Investors
Service. As a result of Choctaw’s credit ratings, the company has
provided credit assurance to TVA, per the terms of its agreement.
In
September 2008, Lehman Brothers Holdings Inc. (“Lehman”), an investment bank,
filed for protection under Chapter 11 of the Federal Bankruptcy
Code. Lehman’s relationship with TVA had primarily been as an
underwriter and market maker for TVA debt securities. TVA had no net
exposure to Lehman or its subsidiaries as of the date of its bankruptcy
filing. TVA’s pension and NDT funds held minimal amounts of Lehman
securities.
Credit of Derivative
Counterparties. TVA has entered into derivative contracts for
hedging purposes, and TVA’s nuclear decommissioning trust and pension fund have
entered into derivative contracts for investment purposes. If a
counterparty to one of TVA’s hedging transactions defaults, TVA might incur
substantial costs in connection with entering into a replacement hedging
transaction. If a counterparty to the derivative contracts into which
the nuclear decommissioning trust and the pension fund have entered for
investment purposes defaults, the value of the investment could decline
significantly, or perhaps become worthless.
Credit
of TVA
A
downgrade in TVA’s credit rating could have material adverse effects on TVA’s
cash flows, results of operations, and financial condition and would harm
investors in TVA securities. Among other things, a downgrade
could have the following effects:
•
|
A
downgrade would increase TVA’s interest expense by increasing the interest
rates that TVA pays on debt securities that it issues. An
increase in TVA’s interest expense would reduce the amount of cash
available for other purposes, which could result in the need to increase
borrowings, to reduce other expenses or capital investments, or to
increase electricity rates.
|
•
|
A
significant downgrade could result in TVA having to post additional
collateral under certain physical and financial contracts that contain
rating triggers.
|
•
|
A
downgrade below a contractual threshold could prevent TVA from borrowing
under two credit facilities totaling $2.25
billion.
|
•
|
A
downgrade could lower the price of TVA securities in the secondary market,
thereby hurting investors who sell TVA securities after the downgrade and
diminishing the attractiveness and marketability of TVA
Bonds.
|
For a
discussion of factors that could lead to a downgrade in TVA’s credit rating, see
Item 1A, Risk Factors.
Subsequent Events
See Note
18.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Quantitative
and qualitative disclosures about market risk are reported in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Risk Management
Activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
TENNESSEE
VALLEY AUTHORITY
STATEMENTS OF INCOME
For the
years ended September 30
(in
millions)
2008
|
2007
|
2006
|
||||||||||
Operating
revenues
|
||||||||||||
Sales
of electricity
|
||||||||||||
Municipalities
and cooperatives
|
$ | 8,659 | $ | 7,847 | $ | 7,659 | ||||||
Industries
directly served
|
1,472 | 1,221 | 1,065 | |||||||||
Federal
agencies and other
|
121 | 112 | 116 | |||||||||
Other
revenue
|
130 | 146 | 143 | |||||||||
Operating
revenues
|
10,382 | 9,326 | 8,983 | |||||||||
Revenue
capitalized during pre-commercial plant operations
|
– | (57 | ) | – | ||||||||
Net
operating revenues
|
10,382 | 9,269 | 8,983 | |||||||||
Operating
expenses
|
||||||||||||
Fuel
and purchased power
|
4,176 | 3,449 | 3,342 | |||||||||
Operating
and maintenance
|
2,298 | 2,332 | 2,328 | |||||||||
Depreciation,
amortization, and accretion
|
1,224 | 1,473 | 1,500 | |||||||||
Tax
equivalents
|
491 | 451 | 376 | |||||||||
Loss
on asset impairment
|
9 | 21 | 14 | |||||||||
Total
operating expenses
|
8,198 | 7,726 | 7,560 | |||||||||
Operating
income
|
2,184 | 1,543 | 1,423 | |||||||||
Other
income
|
15 | 73 | 80 | |||||||||
Other
expense
|
(6 | ) | (2 | ) | (2 | ) | ||||||
Unrealized
gain (loss) on derivative contracts, net
|
– | 41 | (15 | ) | ||||||||
Interest
expense
|
||||||||||||
Interest
on debt and leaseback obligations
|
1,373 | 1,390 | 1,406 | |||||||||
Amortization
of debt discount, issue, and reacquisition costs, net
|
20 | 19 | 21 | |||||||||
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(17 | ) | (177 | ) | (163 | ) | ||||||
Net
interest expense
|
1,376 | 1,232 | 1,264 | |||||||||
Income
before cumulative effects of accounting changes
|
817 | 423 | 222 | |||||||||
Cumulative
effect of change in accounting for conditional asset retirement
obligations
|
– | – | (109 | ) | ||||||||
Net
income
|
$ | 817 | $ | 423 | $ | 113 |
The
accompanying notes are an integral part of these financial
statements.
TENNESSEE
VALLEY AUTHORITY
BALANCE SHEETS
At
September 30
(in
millions)
ASSETS
|
||||||||
2008
|
2007
|
|||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 213 | $ | 165 | ||||
Restricted
cash and investments
|
106 | 150 | ||||||
Accounts
receivable, net
|
1,405 | 1,458 | ||||||
Inventories
and other, net
|
779 | 663 | ||||||
Total
current assets
|
2,503 | 2,436 | ||||||
Property, plant, and equipment
(Note 3)
|
||||||||
Completed
plant
|
40,079 | 38,811 | ||||||
Less
accumulated depreciation
|
(16,983 | ) | (15,937 | ) | ||||
Net
completed plant
|
23,096 | 22,874 | ||||||
Construction
in progress
|
1,892 | 1,286 | ||||||
Nuclear
fuel and capital leases
|
791 | 672 | ||||||
Total
property, plant, and equipment, net
|
25,779 | 24,832 | ||||||
Investment
funds
|
956 | 1,169 | ||||||
Regulatory
and other long-term assets
|
||||||||
Deferred
nuclear generating units
|
2,738 | 3,130 | ||||||
Other
regulatory assets (Note 6)
|
4,166 | 1,790 | ||||||
Subtotal
|
6,904 | 4,920 | ||||||
Other
long-term assets
|
995 | 375 | ||||||
Total
regulatory and other long-term assets
|
7,899 | 5,295 | ||||||
Total
assets
|
$ | 37,137 | $ | 33,732 | ||||
LIABILITIES
AND PROPRIETARY CAPITAL
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 1,333 | $ | 1,205 | ||||
Collateral
funds held
|
103 | 157 | ||||||
Accrued
interest
|
441 | 406 | ||||||
Current
portion of leaseback obligations
|
54 | 43 | ||||||
Current
portion of energy prepayment obligations
|
106 | 106 | ||||||
Short-term
debt, net
|
185 | 1,422 | ||||||
Current
maturities of long-term debt (Note 11)
|
2,030 | 90 | ||||||
Total
current liabilities
|
4,252 | 3,429 | ||||||
Other
liabilities
|
||||||||
Other
liabilities
|
3,514 | 2,067 | ||||||
Regulatory
liabilities (Note 6)
|
860 | 83 | ||||||
Asset
retirement obligations
|
2,318 | 2,189 | ||||||
Leaseback
obligations
|
1,299 | 1,029 | ||||||
Energy
prepayment obligations
|
927 | 1,032 | ||||||
Total
other liabilities
|
8,918 | 6,400 | ||||||
Long-term debt, net
(Note 11)
|
20,404 | 21,099 | ||||||
Total
liabilities
|
33,574 | 30,928 | ||||||
Commitments and
contingencies (Note 15)
|
||||||||
Proprietary
capital
|
||||||||
Appropriation
investment
|
4,723 | 4,743 | ||||||
Retained
earnings
|
2,571 | 1,763 | ||||||
Accumulated
other comprehensive loss
|
(37 | ) | (19 | ) | ||||
Accumulated
net expense of stewardship programs
|
(3,694 | ) | (3,683 | ) | ||||
Total
proprietary capital
|
3,563 | 2,804 | ||||||
Total
liabilities and proprietary capital
|
$ | 37,137 | $ | 33,732 |
The
accompanying notes are an integral part of these financial
statements.
TENNESSEE VALLEY AUTHORITY
STATEMENTS
OF CASH FLOWS
For the
years ended September 30
(in
millions)
2008
|
2007
|
2006
|
||||||||||
Cash
flows from operating activities
|
||||||||||||
Net
income
|
$ | 817 | $ | 423 | $ | 113 | ||||||
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||||
Depreciation,
amortization, and accretion
|
1,244 | 1,492 | 1,521 | |||||||||
Nuclear
refueling outage amortization
|
107 | 86 | 89 | |||||||||
Loss
on asset impairment
|
9 | 21 | 14 | |||||||||
Cumulative
effect of change in accounting principle
|
– | – | 109 | |||||||||
Amortization
of nuclear fuel
|
189 | 137 | 128 | |||||||||
Non-cash
retirement benefit expense
|
141 | 201 | 302 | |||||||||
Net
unrealized (loss) gain on derivative contracts
|
– | (41 | ) | 15 | ||||||||
Prepayment
credits applied to revenue
|
(105 | ) | (105 | ) | (105 | ) | ||||||
Fuel
cost adjustment deferral
|
123 | (150 | ) | – | ||||||||
Other,
net
|
(13 | ) | (31 | ) | (3 | ) | ||||||
Changes
in current assets and liabilities
|
||||||||||||
Accounts
receivable, net
|
(59 | ) | (144 | ) | (15 | ) | ||||||
Inventories
and other, net
|
(138 | ) | (98 | ) | (120 | ) | ||||||
Accounts
payable and accrued liabilities
|
(88 | ) | 103 | 96 | ||||||||
Accrued
interest
|
35 | 4 | 23 | |||||||||
Pension
contributions
|
(160 | ) | (75 | ) | (75 | ) | ||||||
Refueling
outage costs
|
(150 | ) | (96 | ) | (72 | ) | ||||||
Other,
net
|
5 | 61 | (35 | ) | ||||||||
Net
cash provided by operating activities
|
1,957 | 1,788 | 1,985 | |||||||||
Cash
flows from investing activities
|
||||||||||||
Construction
expenditures
|
(1,508 | ) | (1,379 | ) | (1,370 | ) | ||||||
Combustion
turbine asset acquisitions
|
(466 | ) | (111 | ) | – | |||||||
Nuclear
fuel expenditures
|
(322 | ) | (203 | ) | (277 | ) | ||||||
Change
in restricted cash and investments
|
25 | 48 | (91 | ) | ||||||||
Purchases
of investments
|
(39 | ) | (44 | ) | – | |||||||
Loans
and other receivables
|
||||||||||||
Advances
|
(6 | ) | (16 | ) | (17 | ) | ||||||
Repayments
|
13 | 16 | 13 | |||||||||
Proceeds
from sale of receivables/loans (Note 1)
|
– | 2 | 11 | |||||||||
Proceeds
from settlement of litigation
|
– | – | 35 | |||||||||
Other,
net
|
4 | 1 | (2 | ) | ||||||||
Net
cash used in investing activities
|
(2,299 | ) | (1,686 | ) | (1,698 | ) | ||||||
Cash
flows from financing activities
|
||||||||||||
Long-term
debt
|
||||||||||||
Issues
|
2,105 | 1,040 | 1,132 | |||||||||
Redemptions
and repurchases (Note 11)
|
(689 | ) | (470 | ) | (1,241 | ) | ||||||
Short-term
(redemptions)/borrowings, net
|
(1,237 | ) | (955 | ) | (93 | ) | ||||||
Proceeds
from sale/leaseback
|
325 | – | – | |||||||||
Payments
on leaseback financing
|
(36 | ) | (30 | ) | (28 | ) | ||||||
Payments
on equipment financing
|
(7 | ) | (7 | ) | (6 | ) | ||||||
Financing
costs, net
|
(32 | ) | (11 | ) | (14 | ) | ||||||
Payments
to U.S. Treasury
|
(40 | ) | (40 | ) | (38 | ) | ||||||
Other
|
1 | – | (1 | ) | ||||||||
Net
cash provided by (used in) financing activities
|
390 | (473 | ) | (289 | ) | |||||||
Net
change in cash and cash equivalents
|
48 | (371 | ) | (2 | ) | |||||||
Cash
and cash equivalents at beginning of year
|
165 | 536 | 538 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 213 | $ | 165 | $ | 536 |
See Note
12 for supplemental cash flow information.
The
accompanying notes are an integral part of these financial
statements.
STATEMENTS
OF CHANGES IN PROPRIETARY CAPITAL
For the
years ended September 30
(in
millions)
Appropriation
Investment
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated
Net Expense of Stewardship Programs
|
Total
|
Comprehensive
Income
|
|||||||||||||||||||
Balance
at September 30, 2005
|
$ | 4,783 | $ | 1,244 | $ | 27 | $ | (3,662 | ) | $ | 2,392 | |||||||||||||
Net
income (loss)
|
– | 123 | – | (10 | ) | 113 | $ | 113 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (18 | ) | – | – | (18 | ) | – | ||||||||||||||||
Accumulated
other comprehensive income (Note 9)
|
– | – | 16 | – | 16 | 16 | ||||||||||||||||||
Return
of Power Facility Appropriation Investment
|
(20 | ) | – | – | – | (20 | ) | – | ||||||||||||||||
Balance
at September 30, 2006
|
$ | 4,763 | $ | 1,349 | $ | 43 | $ | (3,672 | ) | $ | 2,483 | $ | 129 | |||||||||||
Net
income (loss)
|
– | 434 | – | (11 | ) | 423 | $ | 423 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (20 | ) | – | – | (20 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss (Note 9)
|
– | – | (62 | ) | – | (62 | ) | (62 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(20 | ) | – | – | – | (20 | ) | – | ||||||||||||||||
Balance
at September 30, 2007
|
$ | 4,743 | $ | 1,763 | $ | (19 | ) | $ | (3,683 | ) | $ | 2,804 | $ | 361 | ||||||||||
Net
income (loss)
|
– | 828 | – | (11 | ) | 817 | $ | 817 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (20 | ) | – | – | (20 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss (Note 9)
|
– | – | (18 | ) | – | (18 | ) | (18 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(20 | ) | – | – | – | (20 | ) | – | ||||||||||||||||
Balance
at September 30, 2008
|
$ | 4,723 | $ | 2,571 | $ | (37 | ) | $ | (3,694 | ) | $ | 3,563 | $ | 799 |
The
accompanying notes are an integral part of these financial
statements.
NOTES TO FINANCIAL STATEMENTS
(Dollars
in millions except where noted)
1.
Summary of Significant Accounting Policies
General
The
Tennessee Valley Authority (“TVA”) is a wholly-owned corporate agency and
instrumentality of the United States. TVA was created by the U.S.
Congress in 1933 by virtue of the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C.
§§ 831-831ee (as amended, the “TVA Act”). TVA was created to
improve navigation on the Tennessee River, reduce flood damage, provide
agricultural and industrial development, and provide electric power to the
Tennessee Valley region. TVA manages the Tennessee River and its
tributaries for multiple river-system purposes, such as navigation; flood damage
reduction; power generation; environmental stewardship; shoreline use; and water
supply for power plant operations, consumer use, recreation, and
industry.
Substantially
all of TVA’s revenues and assets are attributable to the power
program. TVA provides power in most of Tennessee, northern Alabama,
northeastern Mississippi, and southwestern Kentucky, and in portions of northern
Georgia, western North Carolina, and southwestern Virginia to a population of
nearly nine 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 annual payments to the U.S.
Treasury in repayment of, and as a return on, the government’s appropriation
investment in TVA power facilities (the “Power Facility Appropriation
Investment”). In the 1998 Energy and Water Development Appropriations
Act, Congress directed TVA to fund essential stewardship activities related to
its management of the Tennessee River system and TVA properties with power funds
in the event that there were insufficient appropriations or other available
funds to pay for such activities in any fiscal year. Congress has not
provided any appropriations to TVA to fund such activities since
1999. Consequently, during 2000, TVA began paying for essential
stewardship activities primarily with power revenues, with the remainder funded
with user fees and other forms of revenues derived in connection with those
activities. These activities related to stewardship properties do not
meet the criteria of an operating segment pursuant to Statement of Financial
Accounting Standard (“SFAS”) No. 131, “Disclosures About Segments of an
Enterprise and Related Information.” Accordingly, these assets
and properties are included as part of the power program, TVA’s only operating
segment.
Power
rates are established by the TVA board of directors (“TVA Board”) as authorized
by the TVA Act. The TVA Act requires TVA to charge rates for power
that will produce gross revenues sufficient to provide funds for operation,
maintenance, and administration of its power system; payments to states and
counties in lieu of taxes; debt service on outstanding indebtedness; payments to
the U.S. Treasury in repayment of and as a return on the Power Facility
Appropriation Investment; and such additional margin as the TVA Board may
consider desirable for investment in power system assets, retirement of
outstanding Bonds in advance of maturity, additional reduction of the Power
Facility Appropriation Investment, and other purposes connected with TVA’s power
business. In setting TVA’s rates, the TVA Board is charged by the TVA
Act to have due regard for the primary objectives of the TVA Act, including the
objective that power shall be sold at rates as low as are
feasible. Rates set by the TVA Board are not subject to review or
approval by any state or federal regulatory body.
Fiscal
Year
Unless
otherwise indicated, years (2008, 2007, etc.) refer to TVA’s fiscal years ended
September 30.
Cost-Based
Regulation
The
rate-setting authority vested in the TVA Board by the TVA Act meets the
“self-regulated” provisions of SFAS No. 71, “Accounting for the Effects of
Certain Types of Regulation.” In addition, TVA meets the
remaining criteria for the application of SFAS No. 71 because (1) TVA’s
regulated rates are designed to recover its costs of providing electricity and
(2) in view of the demand for electricity and the level of competition it is
reasonable to assume that the rates, set at levels that will recover TVA’s
costs, can be charged and collected. Accordingly, TVA records certain
assets and liabilities that result from the regulated ratemaking process that
would not be recorded under generally accepted accounting principles (“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 or deferral of gains that will be
credited to customers in future periods. 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 these assessments, 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 would be required to write off these costs.
Any asset write-offs would be required to be recognized in earnings in the
period in which future recovery ceases to be probable.
Management
Estimates
TVA
prepares its financial statements in conformity with GAAP in the United States
applied on a consistent basis. In some cases, management may make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the related amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Cash
and Cash Equivalents
Cash and cash
equivalents include the cash available in TVA’s commercial bank accounts
and U.S. Treasury accounts, as well as short-term securities held for the
primary purpose of general liquidity. Such securities mature within
three months from the original date of issuance.
Restricted
Cash and Investments
As of
September 30, 2008 and 2007, TVA had $106 million and $150 million,
respectively, in Restricted cash and
investments on its Balance Sheets primarily related to collateral posted
with TVA by a swap counterparty in accordance with certain credit terms included
in the swap agreement, which resulted in the funds being reported in Restricted cash and
investments.
Accounts
Receivable
Accounts
Receivable. Accounts receivable primarily consist of amounts
due from customers for power sales. The table below summarizes the
types and amounts of receivables:
Accounts
Receivable
As
of September 30
|
||||||||
2008
|
2007
|
|||||||
Power
receivables billed
|
$ | 357 | $ | 316 | ||||
Power
receivables unbilled
|
1,000 | 986 | ||||||
Fuel
cost adjustment – current
|
24 | 132 | ||||||
Total
power receivables
|
1,381 | 1,434 | ||||||
Other
receivables
|
26 | 26 | ||||||
Allowance
for uncollectible accounts
|
$ | (2 | ) | $ | (2 | ) | ||
Net
accounts receivable
|
$ | 1,405 | $ | 1,458 |
Allowance
for Uncollectible Accounts
The
allowance for uncollectible accounts reflects TVA’s estimate of probable losses
inherent in the accounts receivable, unbilled revenue, and loans receivable
balances. TVA determines the allowance based on known accounts,
historical experience, and other currently available information including
events such as customer bankruptcy and/or a customer failing to fulfill payment
arrangements after 90 days. TVA’s corporate credit department is
consulted to assess the financial condition of customers and the credit quality
of the accounts. The allowance for uncollectible accounts was $2
million at both September 30, 2008, and 2007, for accounts
receivable. Additionally, loans receivable of $75 million and $79
million as of September 30, 2008, and 2007, respectively, are included in Other long-term assets,
and reported net of allowances for uncollectible accounts of $13 million
and $15 million as of September 30, 2008, and 2007, respectively.
Revenues
Revenues
from power sales are recorded as power is delivered to customers. In addition to
power sales invoiced and recorded during the month, TVA accrues estimated
unbilled revenues for power sales provided to customers for the period of time
from the end of the customer's billing cycle to the end of TVA's accounting
period. Components of the unbilled revenue include estimated wholesale meter
readings at the applicable rates and sales of excess generation at market rates.
These components can fluctuate as a result of a number of factors including
weather, generation patterns, and other operational constraints. These factors
can be unpredictable and can vary from historical trends. Exchange
power sales are presented in the accompanying Statements of Income as a
component of Sales of
electricity-Federal agencies and other. Exchange power sales are sales of
excess power after meeting TVA native load and direct served requirements.
(Native load refers to the customers on whose behalf a company, by statute,
franchise, regulatory requirement, or contract, has undertaken an obligation to
serve.)
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
would be required to meet future power demand in its service area. Because these
amounts were intended to fund future costs, they were originally deferred as a
regulatory liability. The funds were based on a predetermined rate
applied to electricity sales approved as part of TVA’s 2007 budget. Collections
for 2007 amounted to $76 million. Following the purchase of two
combustion turbine facilities, these funds were applied as credits to Completed plant and are
reflected on the September 30, 2008, and September 30, 2007, Balance Sheets.
These funds collected for future generation were amortized to revenue in order
to match revenue with the corresponding depreciation expense of the purchased
assets on the Statement of Income. This revenue recognition process began when
the assets were placed into service. The reserve for future
generation was not extended beyond 2007.
Inventories
Certain Fuel, Materials, and
Supplies. Coal, oil, limestone, tire-based fuel inventories,
and materials and supplies inventories are valued using an average unit cost
method. A new average cost is computed after each transaction and
inventory issuances are priced at the latest moving weighted average unit
cost. At September 30, 2008 and 2007, TVA had $381 million and $316
million, respectively, in fuel inventories and $347 million and $317 million,
respectively, in materials and supplies inventory.
Allowance for Inventory
Obsolescence. TVA reviews supply and material inventories by
category and usage on a periodic basis. Each category is assigned a
probability of becoming obsolete based on the type of material and historical
usage data. Based on the estimated value of the inventory, TVA
adjusts its allowance for inventory obsolescence. The allowance for
surplus and obsolete inventory was $47 million and $43 million at September 30,
2008, and 2007, respectively.
Emission
Allowances. TVA has emission allowances for sulfur dioxide
(“SO2”) and
nitrogen oxides (“NOx”) which
are accounted for as inventory. The average cost of allowances used
each month is charged to operating expense based on tons of SO2 and
NOx
emitted. NOx emission
allowances are used only during the ozone season, which occurs from May through
September. Allowances granted to TVA by the Environmental Protection
Agency (“EPA”) are recorded at zero cost.
Property,
Plant, and Equipment, and Depreciation
Additions
to plant are recorded at cost, which includes direct and indirect costs and an
allowance for funds used during construction (“AFUDC”). Beginning in
2008, TVA continues to capitalize a portion of current interest costs associated
with funds invested in most nuclear fuel inventories, but interest on funds
invested in construction projects will be capitalized only if (1) the expected
total cost of a project is $1 billion or more, and (2) the estimated
construction period is at least three years. The cost of current
repairs and minor replacements is charged to operating expense. Nuclear fuel
inventories, which are included in Property, plant, and
equipment, are valued using the average cost method for raw materials and
the specific identification method for nuclear fuel in a
reactor. Amortization of nuclear fuel is calculated on a
units-of-production basis and is included in fuel expense.
TVA
accounts for its properties using the composite depreciation convention of
accounting. Accordingly, the original cost of property retired, less
salvage value, is charged to accumulated depreciation. Depreciation
is generally computed on a straight-line basis over the estimated service lives
of the various classes of assets. Depreciation expense
expressed as a percentage of the average annual depreciable completed plant was
2.97 percent for 2008, 2.90 percent for 2007, and 3.17 percent for
2006. Depreciation rates by asset class are as follows:
TVA
Property, Plant, and Equipment Depreciation Rates
As
of September 30
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Asset
Class:
|
(percent)
|
|||||||||||
Nuclear
|
2.57 | 2.29 | 3.00 | |||||||||
Coal-Fired
|
3.44 | 3.59 | 3.53 | |||||||||
Hydroelectric
|
1.72 | 1.82 | 1.79 | |||||||||
Combustion
turbine/diesel generators
|
4.39 | 4.70 | 4.54 | |||||||||
Transmission
|
2.74 | 2.53 | 2.57 | |||||||||
Other
|
6.38 | 7.05 | 6.26 |
Depreciation
rates are determined based on an external cost study. TVA
obtained and implemented a new study during the fourth quarter of
2008. Rates were changed prospectively as a change in estimate. The
effect of the change in rates related to this study was a $3.3 million
decrease in depreciation expense for the year ended September 30, 2008. The
monthly decrease is $1.7 million, resulting in an annualized impact to
depreciation expense of approximately $20 million. Depreciation
expense for the years ended September 30, 2008, 2007, and 2006, was $1,129
million, $1,048 million, and $1,090 million, respectively. The single
major reason for the reduction in depreciation expense for 2007 and 2006 was the
change in the depreciation rate for Browns Ferry Nuclear Plant. The
depreciation rate change was the result of NRC granting TVA a 20-year operating
license extension. The change in the depreciation rate for the Other asset class category
was due to the addition of communication-type equipment in 2007 having a
depreciable life of five years.
Property,
plant, and equipment also includes assets recorded under capital lease
agreements which primarily consist of office facilities of $34 million and $30
million as of September 30, 2008, and 2007, respectively, and fuel fabrication
and blending facilities of $34 million and $39 million as of September 30, 2008,
and 2007, respectively.
Blended
Low Enriched Uranium Program
Under the
blended low enriched uranium (“BLEU”) program, TVA, the Department of Energy
(“DOE”), and nuclear fuel contractors have entered into agreements providing for
surplus highly enriched uranium to be blended with other uranium down to a level
that allows the blended uranium to be fabricated into fuel that can be used in
nuclear power plants. This blended nuclear fuel was first loaded in a
Browns Ferry reactor in 2005, which initiated the amortization of the costs of
the BLEU fuel assemblies to nuclear fuel expense.
Under the
terms of an interagency agreement between TVA and DOE, DOE supplies
off-specification, highly enriched uranium materials to the appropriate third
party fuel processors for processing into usable fuel for TVA. In
exchange, DOE will participate to a degree in the savings generated by TVA’s use
of this blended nuclear fuel. Over the life of the program, TVA
projects that DOE’s share of savings generated by TVA’s use of this blended
nuclear fuel could result in future payments to DOE of as much as $251
million. TVA anticipates these future payments could begin in 2009
and last until 2013. TVA accrued an obligation related to the portion
of the ultimate future payments estimated to be attributable to the BLEU fuel
currently in use. As of September 30, 2008 this obligation was $22
million.
The third
party fuel processors own the conversion and processing facilities and will
retain title to all land, property, plant, and equipment used in the BLEU fuel
program. In accordance with the requirements of EITF No. 01-08, “Determining Whether an Arrangement
Contains a Lease,” and SFAS No. 13, “Accounting for Leases,”
however, TVA recognized a capital lease asset and corresponding lease obligation
related to amounts paid or payable to a third party fuel
processor. Accounting recognition of the capital lease asset and
obligation recharacterization resulted from contract modifications to the
preexisting fuel fabrication contract.
Investment
Funds
Investment funds
consist primarily of trust funds designated to fund nuclear decommissioning
requirements (see Note 15 — Contingencies — Decommissioning
Costs), asset retirement obligations (see Note 5 — Asset Retirement Trust), and
the supplemental executive retirement plan (“SERP”) (see Note 14 — Overview of
Plans and Benefits — Supplemental Executive Retirement
Plan). Decommissioning funds and SERP funds, which are
classified as trading, are invested in portfolios of securities generally
designed to earn returns in line with overall equity market
performance. Asset retirement funds, which are classified as trading,
are invested in commingled funds designed to earn returns in line with fixed
income market performance.
Other
Long-Term Assets
The
year-end balances of TVA’s Other long-term assets
are as follows:
Other
Long-Term Assets
As of
September 30
2008
|
2007
|
|||||||
Loans
and long-term receivables, net
|
$ | 81 | $ | 79 | ||||
Valuation
of currency swaps
|
101 | 280 | ||||||
Valuation
of commodity contracts
|
813 | 16 | ||||||
Total
other long-term assets
|
$ | 995 | $ | 375 |
TVA
enters into coal contracts with volume options to protect against market
prices. The $797 million increase in Valuation of commodity
contracts is related to increases in the price of this
commodity.
For
additional information on the components of Other long-term assets,
see Note 1 — Allowance for
Uncollectible Accounts, Note 10 — Overview of Accounting Treatment,
Commodity Contracts, and Swaps, and Note 13 — Loans and Other Long-term
Receivables.
Energy
Prepayment Obligations
During
2002, TVA introduced an energy prepayment program, the discounted energy units
(“DEU”) program. Under this program, TVA customers could purchase
DEUs generally in $1 million increments, and each DEU entitles the purchaser to
a $0.025/kilowatt-hour discount on a specified quantity of firm power over a
period of years (five, 10, 15, or 20) for each kilowatt-hour in the prepaid
block. The remainder of the price of the kilowatt-hours delivered to
the customer is due upon billing.
TVA did
not offer the DEU program after 2005. Total sales for the program
since inception have been approximately $55 million. TVA is
accounting for the prepayment proceeds as unearned revenue and is reporting the
obligations to deliver power as Energy prepayment
obligations and Current portion of energy
prepayment obligations on the September 30, 2008, and 2007, Balance
Sheets.
TVA
recognizes revenue as electricity is delivered to customers, based on the ratio
of units of kilowatt-hours delivered to total units of kilowatt-hours under
contract. As of September 30, 2008, approximately $32 million has
been applied against power billings on a cumulative basis during the life of the
program, of which over approximately $6 million was recognized as noncash
revenue during each of 2008, 2007, and 2006.
In 2004,
TVA and its largest customer, Memphis Light, Gas and Water Division (“MLGW”),
entered into an energy prepayment agreement under which MLGW prepaid TVA $1.5
billion for the future costs of electricity to be delivered by TVA to MLGW over
a period of 180 months. TVA accounted for the prepayment as unearned
revenue and is reporting the obligation to deliver power under this arrangement
as Energy prepayment
obligations and Current portion of energy
prepayment obligations on the September 30, 2008, and 2007, Balance
Sheets. TVA expects to recognize approximately $100 million of
noncash revenue in each year of the arrangement as electricity is delivered to
MLGW based on the ratio of units of kilowatt-hours delivered to total units of
kilowatt-hours under contract. As of September 30, 2008, $490 million
had been recognized as noncash revenue on a cumulative basis during the life of
the agreement, $100 million of which was recognized as noncash revenue during
each of 2008, 2007, and 2006.
Insurance
Although
TVA uses private companies to administer its health-care plans for eligible
active and retired employees not covered by Medicare, TVA does not purchase
health insurance. Consulting actuaries assist TVA in determining
certain liabilities for self-assumed claims. TVA recovers the costs
of losses through power rates and through adjustments to the participants’
contributions to their benefit plans. These liabilities are included
in Other
liabilities on the Balance Sheets.
TVA
purchases nuclear liability insurance, nuclear property, decommissioning, and
decontamination insurance, and nuclear accidental outage
insurance. See Note 15 — Contingencies — Nuclear
Insurance.
TVA
purchases excess liability and excess workers’ compensation liability insurance
above a self-insured retention. TVA recovers the costs of losses
through power rates. The Federal Employees’ Compensation Act governs
liability to employees for service-connected injuries.
TVA
purchases property insurance for certain conventional (non-nuclear) assets as
well as outage insurance (business interruption) for selected conventional
generating assets. TVA also purchases liability insurance which
provides coverage for its directors and officers subject to the terms and
conditions of the policy.
Sale
of Receivables/Loans
During
2008, TVA sold $2 million of receivables at par such that TVA did not recognize
a gain or loss on the sale. These receivables were from a power customer and
were related to energy conservation projects. The proceeds from the
sale of these receivables are included in the Cash Flow Statement under the
caption Cash flows from
investing activities.
During
2007, TVA sold $2 million of receivables at par such that TVA did not recognize
a gain or loss on the sale. These receivables were from a power customer and
were related to the construction of a substation. The proceeds from
the sale of these receivables are included in the Cash Flow Statement under the
caption Cash flows from
investing activities.
TVA did
not retain any claim on these receivables sold, and they are no longer reported
on TVA’s Balance Sheets.
Asset
Retirement Obligations
In
accordance with the provisions of SFAS No. 143, “Accounting for Asset Retirement
Obligations," TVA recognizes legal obligations associated with the future
retirement of certain tangible long-lived assets. TVA records
estimates of such disposal costs only at the time the legal obligation
arises. See Note 5.
Based on
updating assumptions in the engineering studies annually in accordance with NRC
requirements, revisions to the amount and timing of certain cash flow estimates
of nuclear asset retirement obligations may be made. TVA recognizes
as incurred all obligations related to closure and removal of its nuclear
units. TVA measures the liability for closure at the present value of
the weighted estimated cash flows required to satisfy the related obligation,
discounted at the credit adjusted rate of interest in effect at the time the
liability was actually incurred or originally accrued. Earnings from
decommissioning fund investments, amortization of the decommissioning regulatory
asset, and interest expense on the decommissioning liability are deferred as a
regulatory asset. See Note 15 — Contingencies — Decommissioning
Costs. Beginning in 2003, TVA evaluated the nature and scope
of its decommissioning policy as it relates to all electric
plants. The evaluation was used to determine the need for recognition
of additional asset retirement obligations as described in SFAS No. 143, “Accounting for Asset Retirement
Obligations.” SFAS No. 143 became effective for TVA at the
beginning of 2003. See Note 5. On September 30, 2006, TVA
began applying the guidance of FIN No. 47, “Accounting for Conditional Asset
Retirement Obligations—an Interpretation of FASB Statement No.
143.” See Note 5 for the effects of applying this
interpretation.
Non-Nuclear
Decommissioning Costs
In
September 2007, the TVA Board approved the establishment of an asset retirement
trust to more effectively segregate, manage, and invest funds to help meet
future asset retirement obligations. TVA made a $40 million initial
contribution to the asset retirement trust on September 28, 2007. TVA made an
additional $40 million contribution to the asset retirement trust on September
26, 2008. As of September 30, 2008, the assets of the trust totaled $81
million. Although the TVA Board approved contributions to the asset
retirement trust in 2007 and 2008, the TVA Board did not approve funding for the
trust as part of its budget and ratemaking process in relation to providing a
potential funding source through rates for non-nuclear decommissioning costs
until August 2008, at which time the TVA Board
approved making
a contribution
to the trust in 2009. The funds from the asset retirement trust may be used,
among other things, to pay the
cost of retiring non-nuclear long-lived assets from the accumulation of assets
in the trust. The costs of retiring non-nuclear long-lived assets represent the
net deferred costs related to the future closure and retirement of TVA's
non-nuclear long-lived
assets under various legal requirements as recognized by SFAS No. 143 and FIN
No. 47. These costs had previously
been included in rates as the asset retirement obligation (“ARO”) was accreted
and the asset was depreciated. In accordance with EITF 93-4,
these costs did not previously meet the asset recognition criteria in paragraph
nine of SFAS No. 71 at the date the costs
were incurred. Because of the establishment of the asset retirement trust and
the approval of the funding in 2009 rates as part of the TVA Board’s budget and
ratemaking process, these costs currently meet asset recognition criteria.
Therefore, all cumulative costs incurred since 2003, when SFAS No. 143 was
adopted, were recaptured as a regulatory
asset as of September 30, 2008. The regulatory asset initially created related
to this adjustment totaled $350 million. The
offset to this adjustment was a one-time decrease to depreciation, amortization,
and accretion expense.
These
future costs can be funded through a combination of investment funds already set
aside in the asset retirement trust, future earnings on those investment funds,
and future cash contributions to the investment funds. Through this rate action,
the TVA Board has demonstrated the
ability and intent to include non-nuclear retirement costs in allowable costs
and in rates. Further, the TVA Board has included
contributions for 2009 to the asset retirement trust fund in its 2009 budget and
in the related rates. As a result, it is
probable that future revenue will result from inclusion of the deferred
non-nuclear asset retirement costs in allowable costs
for ratemaking purposes.
Capitalized
Revenue During Pre-Commercial Plant Operations
As part
of the process of restarting Browns Ferry Unit 1, TVA commenced pre-commercial
plant operations on June 2, 2007. The pre-commercial plant operations
period ended July 31, 2007, and commercial operations began on August 1,
2007. The electricity produced during the pre-commercial plant
operations period was used to serve the demands of the system; therefore, TVA
calculated estimates of revenue realized from such pre-commercial generation
based on the guidance provided by FERC regulations. The calculated
revenue of $57 million was capitalized to offset project costs and is reported
as a contra-revenue account on the income statement. During this same
period, TVA capitalized operating costs, including fuel, of over $9
million.
Discounts
on Sales
TVA’s DEU
program (see Note 1 — Energy
Prepayment Obligations) allowed customers to use cash on hand to prepay
TVA for some of their power needs, providing funding to TVA and a savings to
customers in the form of a discount on future purchases. The distributor
customer receives a discount on a specified volume of firm energy
purchased. The supplement to the power contract specifies the
discount rate (2.5 cents per kilowatt-hour), the monthly block of kilowatt-hours
to which the discount applies, the number of years (term), and contingencies
upon contract termination.
TVA’s
largest customer, MLGW, also has a power prepayment agreement (see Note 1 —
Energy Prepayment
Obligations) under which it has prepaid $1.5 billion for a fixed amount
of power. TVA repays MLGW in the form of a monthly credit sufficient
for MLGW to pay debt service on its prepayment bonds and receive a return on its
investment.
Discounts
for these programs amounted to $47 million for each of the years ended September
30, 2008, 2007, and 2006.
Allowance
for Funds Used During Construction
AFUDC
capitalized during the year ended September 30, 2008, was $17 million as
compared with $177 million capitalized during the year ended September 30,
2007. TVA capitalizes interest as an allowance for funds used during
construction ("AFUDC"), based on the average interest rate of TVA’s outstanding
debt. The allowance is applicable to construction in progress related to certain
projects and certain nuclear fuel inventories. TVA will continue to capitalize a
portion of current interest costs associated with funds invested in most nuclear
fuel inventories, but since October 1, 2007, interest on funds invested in
capital projects has been capitalized only for projects with (1) an expected
total project cost of $1 billion or more, and (2) an estimated construction
period of at least three years in duration. The adoption of this new criteria
has greatly reduced the number of qualifying projects, which was approximately
800 at September 30, 2007. Only one project — Watts Bar Nuclear Plant Unit 2 —
met the new AFUDC criteria during the year ended September 30, 2008. The
accumulated balance of costs for qualifying projects, which is used to calculate
AFUDC, averaged approximately $3 billion for the year ended September 30,
2007. By contrast, the accumulated balance of costs for qualifying
construction projects averaged approximately $81 million for the year ended
September 30, 2008.
Software
Costs
TVA
capitalizes certain costs incurred in connection with developing or obtaining
internal-use software. Capitalized software costs are included in
Property, plant, and
equipment on the Balance Sheet and are primarily amortized over five
years. TVA capitalized costs of $31 million in 2008 and $22 million
in 2007 related to an enterprise management project. Software costs
that do not meet capitalization criteria are expensed as incurred.
Research
and Development Costs
Research
and development costs are expensed when incurred. TVA’s research
programs include those related to transmission technologies, emerging
technologies (clean energy, renewables, distributed resources, and energy
efficiency), technologies related to generation (fossil, nuclear, and hydro),
and environmental technologies. Annual research and development costs
of $21 million in 2008, and $20 million in 2007 and 2006 were expensed and
included in the Statements of Income caption Operating and
maintenance.
Payments
In Lieu of Taxes
The TVA
Act requires TVA to make payments to states and counties in which TVA conducts
its power operations and in which TVA has acquired power properties previously
subject to state and local taxation. The amount of these payments is
five percent of gross revenues from sales of power during the preceding year,
excluding sales or deliveries to other federal agencies and off-system sales
with other utilities, with a provision for minimum payments under certain
circumstances.
Impairment
of Assets
TVA
evaluates long-lived assets for impairment in accordance with the provisions of
SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” when events or changes
in circumstances indicate that the carrying value of such assets may not be
recoverable. For long-lived assets, TVA bases its evaluation on
impairment indicators such as the nature of the assets, the future economic
benefit of the assets, any historical or future profitability measurements, and
other external market conditions or factors that may be present. If
such impairment indicators are present or other factors exist that indicate that
the carrying amount of an asset may not be recoverable, TVA determines whether
an impairment has occurred based on an estimate of undiscounted cash flows
attributable to the asset as compared with the carrying value of the
asset. If an impairment has occurred, the amount of the impairment
recognized is measured as the excess of the asset’s carrying value over its fair
value. Additionally, TVA regularly evaluates construction
projects. If the project is cancelled or deemed to have no future
economic benefit, the project is written off as an asset
impairment. See Note 7.
Maintenance
Costs
TVA
records maintenance costs and repairs related to its property, plants,
and equipment on TVA’s Statements of Income as they are incurred
except for the recording of certain regulatory assets. See Note
6.
Impact
of New Accounting Standards and Interpretations
Accounting for Planned Major
Maintenance Activities. On September 8, 2006, the Financial
Accounting Standards Board (“FASB”) released FASB Staff Position (“FSP”) AUG
AIR-1, “Accounting for Planned
Major Maintenance Activities.” The FSP addresses the
accounting for planned major maintenance activities and amends certain
provisions in the American Institute of Certified Public Accountants Industry
Audit Guide, “Audits of
Airlines,” and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting.” The
guidance in this FSP states that entities should adopt an accounting method that
recognizes overhaul expenses in the appropriate period. The following accounting
methods are most often employed/permitted: direct expensing method; built-in
overhaul method; or deferral method. The guidance in this FSP is
applicable to entities in all industries and must be applied to the first fiscal
year beginning after December 15, 2006. TVA adopted this guidance for
2008. Except for the recording of certain regulatory assets, TVA’s
policy is to expense maintenance costs as incurred (direct expensing
method). Therefore, the adoption of this FSP did not have a material
impact on TVA’s results of operations or financial position.
Fair Value
Measurements. In September 2006, FASB issued SFAS No. 157,
“Fair Value Measurements.”
(“SFAS No. 157”). SFAS No. 157 provides guidance for
using fair value to measure assets and liabilities that currently require fair
value measurement. SFAS
No. 157 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. Provisions of SFAS No. 157 were
to be effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. However, in February 2008, FASB issued FSP FAS 157-2, "Effective Date of FASB Statement
No. 157,” (“SFAS No. 157-2”), which delays the effective date of SFAS No.
157 for
nonfinancial assets and nonfinancial liabilities except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. This FSP delays the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal
years for items within the scope of this FSP. TVA will implement SFAS
No. 157 in the first quarter of 2009, and will utilize the deferral portion of
FSP FAS 157-2 for all nonfinancial assets and liabilities within its
scope. In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” ("FSP FAS
157-3"). FSP FAS 157-3 clarifies the application of SFAS No. 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. The guidance emphasizes that
determining fair value in an inactive market depends on the facts and
circumstances and may require the use of significant judgment. FSP
FAS 157-3 is effective upon issuance, including prior periods for which
financial statements have not been issued, and will become effective for TVA at
upon its implementation of SFAS No. 157 during the first quarter of
2009. TVA is evaluating the requirements of SFAS No. 157 and the
related FSP’s and has not yet determined the impact of their implementation,
which may or may not be material to TVA’s results of operations or financial
position.
Fair Value Option.
In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement No.
115,” (“SFAS No. 159”).
This statement 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 SFAS No. 159 are elective. The
provisions of SFAS No. 159 are effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. Early adoption
is permitted as of the beginning of the previous fiscal year provided that the
entity makes that choice in the first 120 days of that fiscal year and also
elects to apply the provisions of SFAS No. 157. SFAS No. 159 will
become effective for TVA during the first quarter of 2009. 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
TVA’s results of operations or financial position.
Offsetting
Amounts. On April 30, 2007, FASB issued FSP FIN No. 39-1, “Amendment of FASB Interpretation
No. 39,” which addresses certain modifications to FASB Interpretation No.
39, “Offsetting of Amounts
Related to Certain Contracts.” This FSP replaces the terms “conditional
contracts” and “exchange contracts” with the term “derivative instruments” as
defined in SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” The FSP also permits a
reporting entity to offset fair value amounts recognized for the right to
reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts recognized for derivative
instruments executed with the same counterparty under the same master netting
arrangement. The guidance in the FSP is effective for fiscal years
beginning after November 15, 2007, with early application
permitted. At this time, TVA is evaluating the requirements of this
guidance and has not yet determined the potential impact of its implementation,
which may or may not be material to TVA’s financial position.
Business
Combinations. In December 2007, FASB issued SFAS No. 141R,
“Business Combinations,”
(“SFAS No. 141R”). This statement establishes principles and
requirements for determining how an enterprise recognizes and measures the fair
value of certain assets and liabilities acquired in a business combination,
including non-controlling interests, contingent consideration, and certain
acquired contingencies. SFAS No. 141R also requires
acquisition-related transaction expenses and restructuring costs to be expensed
as incurred rather than capitalized as a component of the business
combination. The provisions of SFAS No. 141R are effective as of the
beginning of an entity’s first fiscal year that begins on or after December 15,
2008. Early adoption is prohibited. SFAS No. 141R will
become effective for TVA as of October 1, 2009. TVA expects that SFAS
No. 141R could have an impact on accounting for any businesses acquired after
the effective date of this pronouncement.
Derivative Instruments and
Hedging Activities. In March 2008, FASB issued SFAS No. 161,
“Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No. 133,”
(“SFAS No. 161”) which establishes, among other things, the disclosure
requirements for derivative instruments and hedging activities. SFAS
No. 161 amends and expands the disclosure requirements of SFAS No. 133. The effective date of
adoption for TVA is the second quarter of 2009.
Hierarchy of Generally
Accepted Accounting Principles. In May 2008, FASB issued SFAS
No. 162, “The Hierarchy of
Generally Accepted Accounting Principles,” (“SFAS No.
162”). SFAS No. 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements. SFAS No. 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.” The implementation of SFAS No. 162 is not
expected to have a material impact on TVA’s consolidated financial position and
results of operations.
Employers’ Disclosures about
Postretirement Benefit Plan Assets. On October 29, 2008,
FASB issued FSP No.132 (R)-a, “Employers’ Disclosures about
Pensions and Other Postretirement Benefits,” to require that an employer
disclose the following information about the fair value of plan assets: 1) the
level within the fair value hierarchy in which fair value measurements of plan
assets fall; 2) information about the inputs and valuation techniques used to
measure the fair value of plan assets; and 3) a reconciliation of beginning and
ending balances for fair value measurements of plan assets using significant
unobservable inputs. The final FSP will be effective for fiscal years
ending after December 15, 2009, with early application permitted. At initial
adoption, application of the FSP would not be required for earlier periods that
are presented for comparative purposes. TVA is currently evaluating
the potential impact of adopting this FSP on its disclosures in the financial
statements.
2.
Nuclear Power Program
At
September 30, 2008, TVA's nuclear power program consisted of seven units — six
operating (commercially generating electricity) and one in the planning stages
on which construction resumed in 2008. The units are in three
locations with investments in property, plant, and equipment as follows and in
the status indicated:
Nuclear
Production Plants
As of
September 30, 2008
Completed
Plant, Net
|
Construction
in Progress
|
Fuel
Investment
|
||||||||||
Browns
Ferry
|
$ | 3,927 | $ | 150 | $ | 306 | ||||||
Sequoyah
|
1,461 | 94 | 118 | |||||||||
Watts
Bar*
|
5,228 | 250 | 84 | |||||||||
Raw
materials
|
– | – | 214 | |||||||||
Total
Nuclear Production
|
$ | 10,616 | $ | 494 | $ | 722 |
Note
* Watts
Bar Unit 2 is in planning stages, and construction on it resumed in
2008.
On
August 1, 2007, the TVA Board approved the completion of Watts Bar Nuclear
Plant Unit 2 (“Watts Bar Unit 2”), construction of which was halted in
1985. Preliminary project activities began at Watts Bar Unit 2 in
October 2007. TVA began to engage in unrestricted construction
activities at the end of December 2007. The project is scheduled to
be completed by 2013.
The TVA
Board determined as of the end of 2001 that the values of some of its existing
assets were impaired and should be reduced. Certain nuclear assets —
portions of Bellefonte Unit 1 and Unit 2 and Watts Bar Unit 2 in its entirety —
were identified as assets for which the estimated cash flows expected to be
provided through future rates were less than recorded book
values. Accordingly, TVA revalued certain nuclear assets — Watts Bar
Unit 2 in its entirety and portions of Bellefonte Unit 1 and Unit 2 — downward
by $2.2 billion and recognized an impairment loss. During 2004, the
TVA Board approved the reclassification of approximately $203 million of
Bellefonte assets from Deferred nuclear generating
units to Completed
plant. In July 2005, the TVA Board approved the amortization
of TVA’s remaining investment in the deferred generating units at Bellefonte
over a 10-year period beginning in 2006. See Note 1 — Cost-Based
Regulation. TVA began amortizing and recovering in rates the
investment of the $3.9 billion in deferred nuclear generating units at
Bellefonte Nuclear Plant (“Bellefonte”) on October 1, 2005. TVA’s
Board approved canceling the unfinished Bellefonte construction project in
November 2005 and the NRC approved TVA’s request to terminate the construction
permits in September 2006. See Note 6 — Deferred Nuclear Generating
Units. None of these actions interfere in any way with TVA’s
ability to use the site for future projects.
In
September 2005, NuStart Development LLC (“NuStart”) selected Bellefonte as one
of the two sites in the country for a new advanced design nuclear
plant. NuStart is an industry consortium comprised of 10 utilities
and two reactor vendors whose purpose is to satisfactorily demonstrate the
new NRC licensing process for new nuclear plants. NuStart intends to
seek a combined construction and operating license for the site for the new
Advanced Passive 1000 reactor design by Westinghouse Electric
Co. As the license applicant, TVA submitted its combined license
application to NRC for Bellefonte Units 3 and 4 in October 2007, and it was
accepted for detailed review by the NRC on January 18, 2008. If
approved, the license to build and operate the plant would be issued to
TVA. The NRC will complete an evaluation of its combined construction
and operating license application review schedule in December 2008 prior to
making a decision as to the new schedule. Costs related to
preparation of the construction and operating license are being paid by
NuStart. The TVA Board has not made a decision to construct a new
plant at the Bellefonte site, and TVA continues to evaluate all nuclear
generation options at the site. As part of this evaluation, TVA asked
the NRC in August 2008 to reinstate the construction permits for its two
unfinished nuclear units also at the Bellefonte site. Reinstating the
construction permits would allow TVA to place the units in a deferred status
again with the NRC and would help TVA clarify the regulatory requirements and
continue to evaluate the feasibility of using Bellefonte Units 1 and 2 to meet
future base-load power demand.
3.
Completed Plant
Completed
plant consisted of the following at September 30:
TVA Completed Plant
As of
September 30
2008
|
2007
|
|||||||||||||||||||||||
Cost
|
Accumulated
Depreciation
|
Net
|
Cost
|
Accumulated
Depreciation
|
Net
|
|||||||||||||||||||
Coal-Fired
|
$ | 11,371 | $ | 5,950 | $ | 5,421 | $ | 11,093 | $ | 5,606 | $ | 5,487 | ||||||||||||
Combustion
turbine
|
1,608 | 614 | 994 | 1,212 | 555 | 657 | ||||||||||||||||||
Nuclear
|
17,598 | 6,982 | 10,616 | 17,514 | 6,551 | 10,963 | ||||||||||||||||||
Transmission
|
5,074 | 1,745 | 3,329 | 4,680 | 1,682 | 2,998 | ||||||||||||||||||
Hydroelectric
|
2,098 | 762 | 1,336 | 1,991 | 718 | 1,273 | ||||||||||||||||||
Other
electrical plant
|
1,358 | 604 | 754 | 1,315 | 471 | 844 | ||||||||||||||||||
Subtotal
|
39,107 | 16,657 | 22,450 | 37,805 | 15,583 | 22,222 | ||||||||||||||||||
Multipurpose
dams
|
928 | 316 | 612 | 962 | 345 | 617 | ||||||||||||||||||
Other
stewardship
|
44 | 10 | 34 | 44 | 9 | 35 | ||||||||||||||||||
Subtotal
|
972 | 326 | 646 | 1,006 | 354 | 652 | ||||||||||||||||||
Total
|
$ | 40,079 | $ | 16,983 | $ | 23,096 | $ | 38,811 | $ | 15,937 | $ | 22,874 |
4.
Asset Acquisitions and Dispositions
New
Generation
On May 9,
2008, TVA completed the purchase, as part of a bankruptcy auction process, of a
three-unit, 792-megawatt summer net capability combined cycle combustion turbine
facility located in Southaven, Mississippi, owned by Southaven Power, LLC
(“Southaven Power”). The purchase of the facility fits with the goals
of TVA’s Strategic Plan adopted by the TVA Board on May 31, 2007, to diversify
its generation facilities by acquiring natural gas plants.
The
purchase price of the facility included a base purchase price of $461 million
and a $5 million payment to Southaven Power in connection with a termination of
an operation-and-maintenance agreement held by a Southaven Power
affiliate. The aggregated purchase price of $466 million was
allocated to the cost of the facility which is included in Completed plant on the
Balance Sheet.
On
September 30, 2008, Seven States Power Corporation (“SSPC”) exercised an option
to buy a portion of the Southaven facility. SSPC bought this portion
through its wholly-owned subsidiary, Seven States Southaven, LLC
(“SSSL”). SSSL paid TVA approximately $325 million and purchased an
undivided 69.69 percent interest in the facility. SSPC has the
ability to acquire up to a 90 percent undivided interest in the facility
and may increase its ownership in the facility up to this amount on or after
January 2, 2009, and not later than May 9, 2009. SSSL and TVA
have entered into a lease under which TVA leases SSSL’s undivided interest in
the facility and operates the entire facility through April 30,
2010. Revenues resulting from the sale of electricity generated by
Southaven Power and resulting expenses related to generation are included on the
income statement for the year ended September 30, 2008.
As part
of the transaction, SSSL has the right at any time and for any reason to require
TVA to buy back SSSL’s interest in the facility at SSSL’s original purchase
price (plus the cost of SSSL’s share of any capital improvements) minus
amortization costs that TVA pays under the lease. As part of any such
buy-back, TVA would pay off the remaining balance on SSSL’s loan, with that
amount being credited against the buy-back price that TVA would pay to
SSSL. A buy-back may also be triggered under certain circumstances
including, among other things, a default by SSSL. Finally, TVA will
buy back SSSL’s interest in the facility if long-term operational and power
sales arrangements for the facility among TVA, SSSL, and SSPC are not in place
by April 30, 2010. TVA’s
buy-back obligation will terminate if such long-term arrangements are in place
by that date. In the event of a buy-back, TVA would re-acquire SSSL’s
interest in the facility and the related assets. While TVA does not
plan to liquidate the assets to cover the payments in the event of a buy-back,
TVA believes its recourse in obtaining full interest in the assets is sufficient
to cover its obligation. Because of TVA’s continued ownership
interest in the facility as well as the buy-back provisions, the transaction did
not qualify as a sale and, accordingly, has been recorded as a leaseback
obligation. As of September 30, 2008, the carrying amount of the
obligation was approximately $325 million. TVA recognized the
buy-back obligation as a Current portion of leaseback
obligations of $13 million and a long-term Leaseback obligation of
$312 million on its September 30, 2008 Balance Sheet.
Buildings
On
February 8, 2008, TVA finalized an agreement to purchase the portion of TVA’s
Chattanooga Office Complex in Chattanooga, Tennessee, leased from Chattanooga
Valley Associates (with the exception of Monteagle Place, which includes
approximately 131,979 square feet) upon the expiration of the existing lease
term on January 1, 2011. The purchase price is $22 million, payable
on January 3, 2011. Accordingly, the regulatory liability for capital
lease liabilities and the property, plant, and equipment account for capital
leases were adjusted in accordance with FASB Interpretation No. 26,
“Accounting for Purchase of a
Leased Asset by the Lessee during the Term of the Lease — an interpretation of
FASB Statement No. 13.”
5.
Asset Retirement Obligations
During
2008, TVA’s total asset retirement obligations (“ARO”) liability increased $129
million. The increase was comprised of $1.5 million in new AROs, $121 million in
ARO accretion, and $6.5 million in non-nuclear AROs as a result of changes in
estimated annual cash outflows related to certain obligations and revisions in
the estimated lives of certain plants. The nuclear accretion expense of $92
million and the non-nuclear accretion expense of $29 million were deferred and
charged to a regulatory asset in accordance with SFAS No. 71. The amount of the
write-offs equaled TVA’s actual accumulated costs incurred on the
projects.
Reconciliation
of Asset Retirement Obligation Liability
As of
September 30
2008
|
2007
|
|||||||
Balance
at beginning of period
|
$ | 2,189 | $ | 1,985 | ||||
Changes
in nuclear estimates to future cash flows
|
– | 90 | ||||||
Non-nuclear
additional obligations
|
8 | 1 | ||||||
8 | 91 | |||||||
Add: ARO
(accretion) expense
|
||||||||
Nuclear
accretion (recorded as a regulatory asset)
|
92 | 85 | ||||||
Non-nuclear
accretion (recorded as a regulatory asset)
|
29 | 28 | ||||||
121 | 113 | |||||||
Balance
at end of period
|
$ | 2,318 | $ | 2,189 |
Asset Retirement Trust. In
September 2007, the TVA Board approved the establishment of the asset retirement
trust (“ART”) to more effectively segregate, manage, and invest funds to help,
among other things, meet future asset retirement obligations. The
purpose of the trust is to hold funds for the contemplated future retirement of
TVA’s long-lived assets and to comply with any order relating to the retirement
of long-lived assets. While the asset retirement trust is broad
enough to assist in funding the costs of decommissioning nuclear assets, TVA’s
nuclear decommissioning trust is the established means to fund the cost of
decommissioning nuclear plants. TVA made a $40 million initial
contribution to the ART on September 28, 2007. TVA made an additional
$40 million contribution to the ART on September 26, 2008. As of
September 30, 2008, the assets of the trust totaled $81
million. While similar in concept, the ART is separate from TVA's
nuclear decommissioning trust fund. TVA is not legally obligated to
establish or maintain a trust for funding non-nuclear related asset retirement
obligations, nor is it obligated to make any future contributions, regardless of
funded status, to the ART. Future contributions may be made at the
discretion of the TVA Board.
6. Regulatory
Assets and Liabilities
Regulatory
assets capitalized under the provisions of SFAS No. 71 are included in Deferred nuclear generating
units and Other
regulatory assets on the September 30, 2008 and 2007, Balance
Sheets. Components of Other regulatory assets
include certain charges related to the closure and removal from service of
nuclear generating units, debt reacquisition costs, non-nuclear decommissioning
costs, deferred outage costs, deferred losses relating to TVA’s financial
trading program, unrealized losses on certain swap and swaption contracts,
deferred capital lease asset costs, deferred pension costs, deferred other
postretirement benefit costs, and fuel cost adjustments. All
regulatory assets are probable of recovery in future
revenues. Components of Regulatory liabilities
include unrealized gains on coal purchase contracts, a reserve for future
generation, capital lease liabilities, and accrued in lieu of tax
payments. See Note 1 — Cost-Based Regulation and
Note 2.
The
year-end balances of TVA’s regulatory assets and liabilities are as
follows:
TVA
Regulatory Assets and Liabilities
As
of September 30
|
||||||||
2008
|
2007
|
|||||||
Regulatory
Assets:
|
||||||||
Deferred other
postretirement benefit costs
|
$ | 157 | $ | 142 | ||||
Deferred
pension costs
|
2,120 | 831 | ||||||
Nuclear
decommissioning costs
|
764 | 419 | ||||||
Non-nuclear
decommissioning costs
|
349 | – | ||||||
Debt
reacquisition costs
|
209 | 210 | ||||||
Deferred
losses relating to TVA’s financial trading program
|
146 | 8 | ||||||
Unrealized
loss on certain swap and swaption contracts
|
226 | – | ||||||
Deferred
outage costs
|
139 | 96 | ||||||
Deferred
capital lease asset costs
|
52 | 66 | ||||||
Fuel
cost adjustment: long-term
|
4 | 18 | ||||||
Subtotal
|
4,166 | 1,790 | ||||||
Deferred
nuclear generating units
|
2,738 | 3,130 | ||||||
Subtotal
|
6,904 | 4,920 | ||||||
Fuel
cost adjustment receivable: short-term
|
24 | 132 | ||||||
Total
|
$ | 6,928 | $ | 5,052 | ||||
Regulatory
Liabilities:
|
||||||||
Unrealized
gain on coal purchase contracts
|
$ | 813 | $ | 16 | ||||
Capital
lease liability
|
47 | 67 | ||||||
Subtotal
|
860 | 83 | ||||||
Reserve
for future generation
|
70 | 74 | ||||||
Accrued
tax equivalents
|
40 | 4 | ||||||
Total
|
$ | 970 | $ | 161 |
Deferred Other Postretirement
Benefit Costs. With the adoption of
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),” (“SFAS No.
158”) in 2007, TVA was
required to measure its benefit obligations related to other postretirement
benefit costs as of the year end balance sheet date. TVA was required
to recognize the funded status of the plan on the balance sheet with a
corresponding offset to Accumulated Other Comprehensive Income
(“AOCI”). SFAS No. 71 defines “incurred cost” as a cost arising from
cash paid out or obligation to pay for an acquired asset or service, a loss from
any cause that has been sustained and has been or must be paid
for. In this case, the unfunded obligation represents a projected
liability to the employee for services rendered, and thus it meets the
definition of an incurred cost. Therefore, amounts otherwise charged
to AOCI for these costs will be recorded as a regulatory asset since TVA
has historically recovered other postretirement benefit expense in
rates. Through historical and current year expense included in
ratemaking, the TVA Board has demonstrated the ability and intent to include
other postemployment benefit (“OPEB”) costs in allowable costs and in rates for
ratemaking purposes. As a result, it is probable that future revenue,
if necessary, will result from inclusion of the OPEB regulatory asset in
allowable costs for ratemaking purposes.
Deferred Pension Costs. With the adoption of
SFAS No. 158 in 2007, TVA was required to measure its benefit obligations
related to pension benefit costs as of the year end balance sheet
date. TVA was required to recognize the funded status of the
qualified pension plan on the balance sheet with a corresponding offset
to AOCI. Note 5 of SFAS No. 71 defines “incurred cost” as a cost
arising from cash paid out or obligation to pay for an acquired asset or
service, a loss from any cause that has been sustained and has been or must be
paid for. In this case, the unfunded obligation represents a
projected liability to the employee for services rendered, and thus it meets the
definition of an incurred cost. Therefore, amounts otherwise charged
to AOCI for these costs will be recorded as a regulatory asset since TVA
has historically recovered pension benefit expense in
rates. Through historical and current year expense and/or
contributions included in ratemaking, the TVA Board has demonstrated the
ability and intent to include pension costs in allowable costs and in rates for
ratemaking purposes. As a result, it is probable that future revenue,
if necessary, will result from inclusion of the pension regulatory asset in
allowable costs for ratemaking purposes.
Nuclear Decommissioning
Costs. Nuclear decommissioning costs include: (1) certain
deferred charges related to the future closure and decommissioning of TVA’s
nuclear generating units under NRC requirements and (2) recognition of changes
in the liability, investment funds, and certain other deferred charges under the
accounting rules for asset retirement obligations. These future costs
will be funded through a combination of investment funds already set aside by
TVA, future earnings on those investment funds, and if necessary, additional TVA
cash contributions to the investment funds. See Note 1 — Investment Funds and Note
5.
Non-Nuclear Decommissioning
Costs. In September 2007, the TVA Board approved the
establishment of an asset retirement trust to more effectively segregate,
manage, and invest funds to help meet future asset retirement
obligations. TVA made a $40 million initial contribution to the asset
retirement trust on September 28, 2007. TVA made an additional $40
million contribution to the asset retirement trust on September 26,
2008. As of September 30, 2008, the assets of the trust totaled $81
million. Although the TVA Board approved contributions to the asset
retirement trust in 2007 and 2008, the TVA Board did not approve funding for the
trust as part of its budget and ratemaking process in relation to providing a
potential funding source through rates for non-nuclear decommissioning costs
until August 2008, at which time the TVA Board approved making a contribution to
the trust in 2009. The funds from the asset retirement trust may be
used, among other things, to pay the cost of retiring non-nuclear long-lived
assets from the accumulation of assets in the trust. The costs of retiring
non-nuclear long-lived assets represent the net deferred costs related to the
future closure and retirement of TVA's non-nuclear long-lived assets under
various legal requirements as recognized by SFAS No. 143 and FIN No. 47. These
costs had previously been included in rates as the ARO was accreted and the
asset was depreciated. In accordance with EITF 93-4, these costs did not
previously meet the asset recognition criteria in paragraph nine of SFAS No. 71
at the date the costs were incurred. Because of the establishment of the asset
retirement trust and the approval of the funding in 2009 rates as part of the
TVA Board’s budget and ratemaking process, these costs currently meet asset
recognition criteria. Therefore, all cumulative costs incurred since 2003, when
SFAS No. 143 was adopted, were recaptured as a regulatory asset as of September
30, 2008. The regulatory asset initially created related to this adjustment
totaled $350 million. The offset to this adjustment was a one-time decrease to
depreciation, amortization, and accretion expense.
Debt Reacquisition
Costs. Reacquisition expenses, call premiums, and other
related costs, such as unamortized debt issue costs associated with redeemed
Bond issues, are deferred under provisions of the FERC’s Uniform System of
Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions
of the Federal Power Act (“Uniform System of Accounts”). These costs
are deferred and amortized (accreted) on a straight-line basis over the weighted
average life of TVA’s debt portfolio. (Even though TVA is not a
public utility subject generally to FERC jurisdiction, the TVA Act requires TVA
to keep accounts in accordance with the requirements established by
FERC.)
Deferred Losses Relating to TVA’s
Financial Trading Program. Deferred losses relating to TVA’s
financial trading program represent unrealized gains and losses on futures and
options. The program is used to reduce TVA’s economic risk exposure
associated with electricity generation, purchases, and
sales. Unrealized losses as of September 30, 2008, were approximately
$146 million and as of September 30, 2007, were $8 million. This
accounting treatment reflects TVA’s ability and intent to recover the cost of
these commodity contracts in future periods through the FCA.
Swap and Swaption
Transactions. On October 1, 2007, TVA began using regulatory
accounting treatment to defer the mark-to-market unrealized gains and losses on
certain swap and swaption contracts to reflect that the gain or loss is included
in the ratemaking formula when these transactions actually
settle. The value of the swap and swaptions is recorded on TVA’s
Balance Sheet with realized gains or losses, if any, recorded in TVA’s Income
Statement. The deferred unrealized loss on the value of swaps and
swaptions was $226 million at September 30, 2008, and is included as a Regulatory asset on the
September 30, 2008, Balance Sheet.
Deferred Outage
Costs. TVA’s investment in the fuel used in its nuclear units
is being amortized and accounted for as a component of fuel
expense. See Note 2. Nuclear refueling outage and
maintenance costs already incurred are deferred and amortized on a straight-line
basis over the estimated period until the next refueling outage. The
balance of deferred outage costs at September 30, 2008, and 2007, were $139
million and $96 million, respectively.
Deferred Capital Lease Asset
Costs. Deferred capital lease asset costs represent the
difference between FERC’s Uniform System of Accounts model balances recovered in
rates and the SFAS No. 13, “Accounting for Leases,”
model balances. Under the Uniform System of Accounts, TVA recognizes
the initial capital lease asset and liability at inception of the lease in
accordance with SFAS No. 13; however, the annual expense under the Uniform
System of Accounts is equal to the annual lease payments, which differs from
SFAS No. 13 accounting treatment. This practice results in TVA’s
capital lease asset balances being higher than they otherwise would have been
under the SFAS No. 13 model, with the difference representing a regulatory asset
related to each capital lease. These costs are being amortized over
the respective lease terms as lease payments are made.
Fuel Cost
Adjustment. On July 28, 2006, the TVA Board approved the FCA
to be applied quarterly as a mechanism to adjust TVA's rates to reflect changing
fuel and purchased power costs beginning in 2007. As of September 30,
2008, TVA had recognized a regulatory asset of $28 million, including $24
million classified as a receivable representing deferred power costs to be
recovered through the FCA adjustments in future periods. To more
closely reflect the cash flows related to the collection of the FCA, TVA
recorded $24 million in accounts receivable and the remaining balance of $4
million in regulatory assets.
Deferred Nuclear Generating
Units. In July 2005, the TVA Board approved the amortization, and
inclusion into rates, of TVA’s $3.9 billion investment in the deferred nuclear
generating units at Bellefonte Nuclear Plant over a 10-year period beginning in
2006. The TVA Board determined that a 10-year recovery period would
not place an undue burden on ratepayers while still ensuring the probability of
cost recovery during that 10-year period. See Note 2.
Regulatory
liabilities accounted for under the provisions of SFAS No. 71 consist of
mark-to-market valuation gains on coal purchase contracts, capital leases,
accrued tax equivalents, and reserve for future generation.
Unrealized Gains on Coal Purchase
Contracts. Unrealized gains on coal purchase contracts represent the
estimated unrealized gains related to the mark-to-market valuation of coal
purchase contracts. Under the accounting rules contained in SFAS No. 133, as
amended, these contracts qualify as derivative contracts but do not qualify for
cash flow hedge accounting treatment. As a result, TVA recognizes the
changes in the market value of these derivative contracts as a regulatory
liability. This treatment reflects TVA’s ability and intent to
recover the cost of these commodity contracts on a settlement basis for
ratemaking purposes through the FCA. TVA has historically recognized
the actual cost of fuel received under these contracts in fuel expense at the
time the fuel is used to generate electricity. These contracts expire
at various times through 2017. See Note 10.
Capital Lease
Liability. As a result of a capital lease payment stream
requiring larger cash payments during the latter years of the lease term than
during the early years of the lease term, TVA levelized the annual lease expense
recognition related to this lease in order to promote the fair and equitable
cost recovery from ratepayers. These levelized costs are being
amortized over the lease term.
Reserve for Future Generation.
During 2007, TVA collected $76 million in rates intended to fund future
generation based on the need for additional generating capacity that would be
required to meet future power demand in its service area. Because
these amounts were intended to fund future costs, they were originally deferred
as a regulatory liability. Once generating capacity is acquired, funds in the
reserve account are to be reclassified from a regulatory liability to completed
plant. In December 2006, TVA purchased two combustion turbine facilities for a
combined purchase price of $98 million. One facility is a 659-megawatt summer
net capability, dual-fuel combustion turbine facility and includes certain
related transmission facilities. The second facility is a 519-megawatt summer
capability, natural gas-fired combustion turbine facility. The 519-megawatt
summer net capability facility was available for commercial operation in January
2007, and the 659-megawatt summer net capability facility was available for
commercial operation in May 2007. During 2008, depreciation related to the
519-megawatt summer capability facility was $0.9 million and depreciation
related to the 659-megawatt summer net capability facility was $3 million. TVA
also recognized revenue of nearly $4 million during 2008 consistent with the
manner in which the related assets are being depreciated. The balance
of the reserve for future generation was $70 million at September 30,
2008. See Note 1 — Reserve for Future
Generation.
Accrued Tax
Equivalents. The FCA structure approved by the TVA Board in
2007 included a provision related to the current funding of the future expense
TVA will incur for tax equivalent payments. As TVA records the fuel
cost adjustment, the percent of the calculation that relates to a future
liability for tax equivalent payments is recorded as a regulatory
liability. The resulting liability of $40 million at September 30,
2008, and $4 million at September 30, 2007, is included in Accounts payable on the
respective Balance Sheets.
7.
Asset Impairment
During
2008 and 2007, TVA recognized a total of $9 million and $21 million,
respectively, in impairment losses related to its Property, plant, and
equipment. The $9 million Loss on asset
impairment in 2008 included a $4 million write-off due to project and
technology changes from a wet scrubber to a dry scrubber at John Sevier Fossil
Plant. The Loss on asset
impairment also included a $4 million write-off of limestone grinding
equipment purchased for the Bull Run Fossil Plant when the decision was made to
purchase limestone in the pre-ground state, as well as approximately $1 million
in write-offs of other Construction Work in
Progress assets. The $21 million Loss on asset impairment
in 2007 included a $17 million write-off of a scrubber project at TVA’s
Colbert Fossil Plant (“Colbert”) and write-downs of $4 million related to other
Construction in
progress assets.
8. Variable
Interest Entities
In
February 1997, TVA entered into a purchase power agreement with Choctaw
Generation, Inc. (subsequently assigned to Choctaw Generation Limited
Partnership) to purchase all the power generated from its facility located in
Choctaw County, Mississippi. The facility had a committed capacity of
440 megawatts and the term of the agreement was 30 years. Under the
accounting guidance provided by FASB Interpretation No. 46, “Consolidation of Variable Interest
Entities,” as amended by FASB Interpretation No. 46R (as amended, “FIN
No. 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 No. 46R would require TVA to consolidate Choctaw Generation Limited
Partnership’s balance sheet, results of operations, and cash flows for the year
ended September 30, 2008. Power purchases for 2008 under the
agreement amounted to $118 million, and the remaining financial commitment under
this agreement is $6.7 billion. TVA has no additional financial
commitments beyond the purchase power agreement with respect to the
facility.
9.
Proprietary Capital
Appropriation
Investment
TVA’s
power program and stewardship program were originally funded primarily by
appropriations from Congress. In 1959, however, Congress passed
legislation that required TVA’s power program to be self-financing from power
revenues and proceeds from power program financings. While TVA’s power program
did not directly receive appropriated funds after it became self-financing, TVA
continued to receive appropriations for certain multipurpose and other
mission-related activities as well as for its stewardship activities. TVA has
not received any appropriations from Congress for any activities since 1999, and
since that time, TVA has funded stewardship program activities primarily with
power revenues in accordance with a statutory directive from
Congress.
In 1959,
Congress also passed legislation that required TVA, beginning in 1961, to make
annual payments to the U.S. Treasury from net power proceeds as a repayment of
and as a return on the Power Facility Appropriation Investment until an
additional $1 billion of the Power Facility Appropriation Investment has been
repaid. Of this $1 billion amount, $110 million remained unpaid at
September 30, 2008. Once the additional $1 billion of the Power
Facility Appropriation Investment has been repaid, the TVA Act requires TVA to
continue making payments to the U.S. Treasury as a return on the remaining Power
Facility Appropriation Investment. The remaining Power Facility
Appropriation Investment will be $258 million if TVA receives no additional
appropriations from Congress for its power program.
The table
below summarizes TVA's activities related to appropriated funds.
Appropriations
Activity
|
||||||||||||
As
of September 30
|
||||||||||||
Power
Facility Appropriation Investment
|
Stewardship
Program Appropriations
|
Total
Appropriation Investment
|
||||||||||
Appropriation
Investment at September 30, 2006
|
$ | 408 | $ | 4,355 | $ | 4,763 | ||||||
Less
repayments to the U.S. Treasury
|
(20 | ) | – | (20 | ) | |||||||
Appropriation
Investment at September 30, 2007
|
388 | 4,355 | 4,743 | |||||||||
Less
repayments to the U.S. Treasury
|
(20 | ) | – | (20 | ) | |||||||
Appropriation
Investment at September 30, 2008
|
$ | 368 | $ | 4,355 | $ | 4,723 |
Payments
to the U.S. Treasury
TVA paid
$20 million each year for 2008, 2007, and 2006 as a repayment of the Power
Facility Appropriation Investment. In addition, TVA paid the U.S.
Treasury $20 million in 2008, $20 million in 2007, and $18 million in 2006 as a
return on the Power Facility Appropriation Investment. The amount of
the return on the Power Facility Appropriation Investment is based on the Power
Facility Appropriation Investment balance as of the beginning of that year and
the computed average interest rate payable by the U.S. Treasury on its total
marketable public obligations as of the same date. The interest rates
payable by TVA on the Power Facility Appropriation Investment were 4.90 percent,
4.87 percent, and 4.24 percent for 2008, 2007, and 2006,
respectively.
Accumulated
Other Comprehensive Income
SFAS No.
130, “Reporting Comprehensive
Income,” requires the disclosure of comprehensive income or loss to
reflect changes in capital that result from transactions and economic events
from nonowner sources. The items included in Accumulated other
comprehensive income (loss) consist of market valuation adjustments for
certain derivative instruments (see Note 10). The Accumulated other
comprehensive income (loss) as of September 30, 2008, 2007,
and 2006, was $(37) million, $(19) million, and $43 million,
respectively.
Total
Other Comprehensive Income (Loss) Activity
As
of September 30
|
||||
Accumulated
other comprehensive income, September 30, 2005
|
$ | 27 | ||
Changes
in fair value:
|
||||
Inflation
swap
|
(11 | ) | ||
Foreign
currency swaps 1
|
27 | |||
Accumulated
other comprehensive income, September 30, 2006
|
43 | |||
Changes
in fair value:
|
||||
Inflation
swap
|
9 | |||
Foreign
currency swaps 1
|
(71 | ) | ||
Accumulated
other comprehensive loss, September 30, 2007
|
(19 | ) | ||
Changes
in fair value:
|
||||
Foreign
currency swaps 1
|
(18 | ) | ||
Accumulated
other comprehensive loss, September 30, 2008
|
$ | (37 | ) |
Notes
(1)
|
Foreign
currency swap changes are shown net of reclassifications from Other comprehensive
income to earnings.
|
TVA
records exchange rate gains and losses on debt in earnings and marks its
currency swap assets to market through other comprehensive
income. TVA then reclassifies an amount out of other comprehensive
income into earnings, offsetting the earnings gain/loss from recording the
exchange gain/loss on the debt. The amounts reclassified from other
comprehensive income resulted in a charge to earnings of $161 million in 2008,
an increase to earnings of $104 million in 2007, and an increase to earnings of
$143 million in 2006. These reclassifications, coupled with the
recording of the exchange gain/loss on the debt, resulted in a net effect on
earnings of zero for 2008, 2007, and 2006. Due to the number of
variables affecting the future gains/losses on these instruments, TVA is unable
to reasonably estimate the amount to be reclassified from other comprehensive
income to earnings in future years.
Unrealized
Losses on Swap/Swaption Contracts
In the
first quarter of 2008, TVA began using regulatory accounting treatment to defer
the unrealized mark-to-market gains and losses on certain swap and swaption
contracts to reflect that the gain or loss is included in the ratemaking formula
when these transactions actually settle. The value of the swap and
swaptions is still recorded on TVA’s balance sheet with realized gains or losses
on these contracts recorded in TVA's income statement. The deferred
unrealized loss on the value of the swaps and swaption was $226 million for 2008
and is included as a Regulatory asset on the
September 30, 2008, Balance Sheet. See Swap and Swaption
Transactions in Note 6.
10.
Risk Management Activities and Derivative Transactions
TVA is
exposed to various market risks. These market risks include risks
related to commodity prices, investment prices, interest rates, currency
exchange rates, inflation, and counterparty credit risk. To help
manage certain of these risks, TVA has entered into various derivative
transactions, principally commodity option contracts, forward contracts, swaps,
swaptions, futures, and options on futures. It is TVA’s policy to
enter into derivative transactions solely for hedging purposes and not for
speculative purposes.
Overview
of Accounting Treatment
The
following tables summarize the accounting treatment that certain of TVA’s
financial derivative transactions receive.
Summary
of Derivative Instruments That Receive Hedge Accounting Treatment
At
September 30, 2008
Derivative
Hedging Instrument
|
Hedged
Item
|
Purpose
of Hedge Transaction
|
Type
of Hedge
|
Accounting
for Derivative Hedging Instrument
|
Accounting
for the Hedged Item
|
|||||
Currency
Swaps
|
Anticipated
payment denominated in a foreign currency
|
To
protect against changes in cash flows caused by changes in
foreign-currency exchange rates
|
Cash
Flow
|
Cumulative
unrealized gains and losses are recorded in Other comprehensive income and
reclassified to earnings to the extent they are offset by cumulative gains
and losses on the hedged transaction.
|
No
adjustment is made to the basis of the hedged
item.
|
Summary
of Derivative Instruments That Do Not Receive Hedge Accounting
Treatment
At
September 30, 2008
Derivative
Type
|
Purpose
of Derivative
|
Accounting
for Derivative Instrument
|
||
Swaption
|
To
protect against decreases in value of the embedded call
|
Gains
and losses are recorded as regulatory assets or liabilities until
settlement, at which time the gains/losses (if any) are recognized in
gain/loss on derivative contracts.
|
||
Interest
Rate Swaps
|
To
fix short-term debt variable rate to a fixed rate
|
Gains
and losses are recorded as regulatory assets or liabilities until
settlement, at which time the gains/losses (if any) are recognized in
gain/loss on derivative contracts.
|
||
Coal
Contracts with Volume Options
|
To
protect against fluctuations in market prices of the item to be
purchased
|
Gains
and losses are recorded as regulatory assets or liabilities until
settlement at which time they are recognized in fuel and purchased power
expense.
|
||
Futures
and Options on Futures
|
To
protect against fluctuations in the price of the item to be
purchased
|
Realized
gains and losses are recorded in earnings as purchased power expense;
unrealized gains and losses are recorded as a regulatory
asset/liability.
|
TVA has
recorded the following amounts for its derivative financial instruments
described in the tables above:
Mark-to-Market
Values of TVA Derivatives
At
September 30
2008
Balance
|
2008
Balance Sheet Presentation
|
2007
Balance
|
2007
Balance Sheet Presentation
|
2008
Notional Amount
|
Year
of Expiration
|
||||||||||
Currency
swaps:
|
|||||||||||||||
Sterling
|
$ |
2
|
Other
long-term assets
|
$ |
63
|
Other
long-term assets
|
£200
million
|
2021
|
|||||||
Sterling
|
72
|
Other
long-term assets
|
148
|
Other
long-term assets
|
£250
million
|
2032
|
|||||||||
Sterling
|
27
|
Other
long-term assets
|
69
|
Other
long-term assets
|
£150
million
|
2043
|
|||||||||
Swaption
|
|||||||||||||||
$1
billion notional
|
(416
|
)
|
Other
liabilities
|
(269
|
)
|
Other
liabilities
|
$1
billion
|
2042
|
|||||||
Interest
rate swaps:
|
|||||||||||||||
$476
million notional
|
|
(188
|
)
|
Other
liabilities
|
|
(115
|
)
|
Other
liabilities
|
$476
million
|
2044
|
|||||
$28
million notional
|
(5
|
)
|
Other
liabilities
|
(3
|
)
|
Other
liabilities
|
$28
million
|
2022
|
|||||||
$14
million notional
|
(2
|
)
|
Other
liabilities
|
(1
|
)
|
Other
liabilities
|
$14
million
|
2022
|
|||||||
Coal
contracts with volume options
|
813
|
Other
long-term assets
|
16
|
Other
long-term assets
|
37
million tons
|
2011
|
|||||||||
Futures
and options on futures:
|
|||||||||||||||
Margin
cash account*
|
25
|
Inventories
and other, net
|
18
|
Inventories
and other, net
|
89,810,000
mmBtu
|
2009
|
|||||||||
Unrealized
losses
|
(146
|
)
|
Other
regulatory assets
|
(8
|
)
|
Other
regulatory assets
|
–
|
–
|
Note
*
|
In
accordance with certain credit terms, TVA used leveraging to trade
financial instruments under the financial trading
program. Therefore, the margin cash account balance does not
represent 100 percent of the net market value of the derivative positions
outstanding as shown in the Financial Trading Program Activity
table.
|
Swaps
To hedge
certain market risks to which TVA is subject, TVA has entered into three
currency swaps which were still outstanding at September 30,
2008. Additionally, TVA was a party to an inflation swap which
expired during 2007. Following is a discussion of these swaps as well
as a discussion of the hedge accounting treatment that these swaps
receive.
Currency
Swaps. TVA entered into currency swap contracts during 2003,
2001, and 1999 as hedges for sterling-denominated Bond transactions in which TVA
issued £150 million, £250 million, and £200 million of Bonds,
respectively. The overall effective cost to TVA of these Bonds and
the associated swaps was 4.96 percent, 6.59 percent, and 5.81 percent,
respectively. Any gains or losses on the Bonds due to the foreign
currency transactions are offset by losses or gains on the swap
contracts. At September 30, 2008 and 2007, the currency transactions
had resulted in net exchange losses of $138 million and of $299 million,
respectively, which are included in Long-term debt,
net. However, the net exchange losses were offset by
corresponding gains on the swap contracts, which are reported as a deferred
asset.
In
accordance with SFAS No. 133, as amended, the foreign currency swap contracts
represent cash flow hedges of certain Bond transactions and any mark-to-market
gains or losses have been recognized in Accumulated other
comprehensive income (loss). If any loss (gain) were to be incurred as a
result of the early termination of the foreign currency swap contract, any
resulting charge (income) would be amortized over the remaining life of the
associated Bond as a component of interest expense.
Inflation Swap. In
1997, TVA issued $300 million of inflation-indexed accreting principal
Bonds. The 10-year Bonds had a fixed coupon rate that was paid on the
inflation-adjusted principal amount. TVA hedged its inflation
exposure under the securities through a receive-floating, pay-fixed inflation
swap agreement. The overall effective cost to TVA of these Bonds and
the associated swap was 6.64 percent. At the termination of the swap
in 2007, TVA received the additional $23 million in accretion from the swap
counterparty.
In
accordance with SFAS No. 133, as amended, the inflation swap contract
represented a cash flow hedge of a Bond transaction, with mark-to-market gains
or losses recognized in Accumulated other
comprehensive income (loss). The inflation swap contract
expired during 2007.
Swaptions
and Related Interest Rate Swaps
TVA has
entered into four swaption transactions to monetize the value of call provisions
on certain of its Bond issues. A swaption essentially grants a third
party the right to enter into a swap agreement with TVA under which TVA receives
a floating rate of interest and pays the third party a fixed rate of interest
equal to the interest rate on the bond issue whose call provision TVA
monetized.
|
•
|
In
2003, TVA monetized the call provisions on a $1 billion Bond issue by
entering into a swaption agreement with a third party in exchange for $175
million (the “2003A Swaption”).
|
|
•
|
In
2003, TVA also monetized the call provisions on a Bond issue of $476
million by entering into a swaption agreement with a third party in
exchange for $81 million (the “2003B
Swaption”).
|
|
•
|
In
2005, TVA monetized the call provisions on two electronotes®
issues ($42 million total par value) by entering into swaption agreements
with a third party in exchange for $5 million (the “2005
Swaptions”).
|
In
February 2004, the counterparty to the 2003B Swaption transaction exercised its
option to enter into a swap with TVA, effective April 10, 2004, requiring TVA to
make fixed rate payments to the counterparty of 6.875 percent and the
counterparty to make floating payments to TVA based on London Interbank Offered
Rate (“LIBOR”). These payments are based on a notional principal
amount of $476 million, and the parties began making these payments on June 15,
2004.
In
February 2008, the counterparty to the 2005 Swaption transactions exercised its
options to enter into swaps with TVA, effective March 11, 2008. Under
the swaps, TVA is required to make fixed rate payments to the counterparty at
6.125 percent and the counterparty is required to make floating payments to TVA
based on LIBOR. These payments are based on a combined notional
amount of $41.7 million and began on April 15, 2008.
The 2003A
Swaption was recorded in Other liabilities on
the September 30, 2008, and 2007, Balance Sheets and was designated as a hedge
of future changes in the fair value of the original call
provision. Under SFAS No. 133, as amended, TVA records the changes in
market value of both the swaption and the embedded call. These values
historically have been highly correlated; however, to the extent that the values
do not perfectly offset, any differences will be recognized currently through
earnings. In the third quarter of 2006, the hedge related to the
2003A Swaption ceased to be effective and continued to be ineffective during the
fourth quarter of 2007 from an accounting perspective.
On
October 1, 2007, TVA began using regulatory accounting treatment to defer the
mark-to-market gains and losses on these swap and swaption contracts to reflect
that the gain or loss is included in the ratemaking formula when these
transactions settle. The value of the swap and swaption contracts is
recorded on TVA’s balance sheet with realized gains or losses, if any, recorded
in TVA’s income statement.
For the
year-ended September 30, 2008, the changes in market value resulted in a
deferred unrealized loss on the value of swaps and swaptions of $226 million and
is included as a regulatory asset on the September 30, 2008, balance
sheet. For the year ended September 30, 2007, the changes in market
value resulted in an unrealized gain of $41 million, which was recognized in
earnings.
Commodity
Contracts
TVA
enters into forward contracts that hedge cash flow exposures to market
fluctuations in the price and delivery of certain commodities including coal,
natural gas, and electricity. TVA expects to take or make delivery,
as appropriate, under these forward contracts. Accordingly, these
contracts qualify for normal purchases and normal sales accounting under SFAS
No. 133, as amended. As of September 30, 2008, TVA did not have
derivative contracts related to the purchase of electricity.
Coal
Contracts with Volume Options
TVA
enters into certain coal supply contracts that require delivery of a contractual
quantity of coal (base tons) at contract prices. Certain coal
contracts also contain options that permit TVA to either increase or reduce the
amounts of coal delivered within contract guidelines. Essentially, the option to
take more or less coal represents a purchased option that is combined with the
forward coal contract in a single supply contract. TVA marks to
market the value of these contracts on a quarterly basis in accordance with SFAS
No. 133.
At
September 30, 2008, TVA had 10 coal contracts containing volume optionality and
had an approximate net market value of $813 million, which TVA deferred as a
regulatory asset/liability. TVA will continue to defer all unrealized
gains or losses related to the exercise of these options and record only
realized gains or losses as fossil fuel expense at the time the commodity is
consumed.
At
September 30, 2007, TVA had 15 coal contracts containing volume optionality and
had an approximate net market value of $16 million, which TVA deferred as a
regulatory asset/liability. TVA will continue to defer all unrealized
gains or losses related to the exercise of these options and record only
realized gains or losses as fossil fuel expense at the time the commodity is
consumed.
Coal
Contracts with Volume Options
At
September 30
|
||||||
2008
|
2007
|
|||||
Number
of Contracts
|
Notional
Amount
(in
Tons)
|
Total
Contract Value
(in
millions)
|
Number
of Contracts
|
Notional
Amount
(in
Tons)
|
Total
Contract Value
(in
millions)
|
|
Coal
Contracts with Volume Options
|
10
|
37
million
|
$ 813
|
15
|
103
million
|
$ 16
|
Futures
and Options on Futures
In 2005,
the TVA Board approved a financial trading program under which TVA can purchase
swaps, options on swaps, futures, and options on futures to hedge TVA’s exposure
to natural gas and fuel oil prices. In August 2007, the TVA Board
expanded the financial trading program, among other things, (1) to permit
financial trading for the purpose of hedging or otherwise limiting the economic
risks associated with the price of electricity, coal, emission allowances,
nuclear fuel, and other commodities such as ammonia and limestone, as well as
the price of natural gas and fuel oil, (2) to authorize the use of futures,
swaps, options, and combinations of these instruments as long as these
instruments are standard in the industry, (3) to authorize the use of the
Intercontinental Exchange as well as the New York Mercantile Exchange to trade
financial instruments, and (4) to increase the aggregate transaction limit
to $130 million (based on one-day Value at Risk). Under the expanded
program, TVA is still prohibited from trading financial instruments for
speculative purposes.
Futures
and Options Activity
At
September 30
2008
|
2007
|
|||||||||||||||
Notional
Amount
|
Contract
Value
|
Notional
Amount
|
Contract
Value
|
|||||||||||||
(in
mmBtu)
|
(in
millions)
|
(in
mmBtu)
|
(in
millions)
|
|||||||||||||
Futures
contracts
|
||||||||||||||||
Financial
positions, beginning of period, net
|
16,230,000 | $ | 131 | 4,290,000 | $ | 35 | ||||||||||
Purchased
|
46,540,000 | 419 | 52,780,000 | 403 | ||||||||||||
Settled
|
(41,870,000 | ) | (390 | ) | (40,840,000 | ) | (273 | ) | ||||||||
Realized
gains (losses)
|
– | 22 | – | (34 | ) | |||||||||||
Net
positions-long
|
20,900,000 | 182 | 16,230,000 | 131 | ||||||||||||
Swap
futures
|
||||||||||||||||
Financial
positions, beginning of period, net
|
1,970,000 | 12 | 1,822,500 | 11 | ||||||||||||
Fixed
portion
|
92,090,200 | 900 | 17,007,500 | 120 | ||||||||||||
Floating
portion - realized
|
(23,550,200 | ) | (222 | ) | (16,860,000 | ) | (108 | ) | ||||||||
Realized
(losses)
|
– | (3 | ) | – | (11 | ) | ||||||||||
Net
positions-long
|
70,510,000 | 687 | 1,970,000 | 12 | ||||||||||||
Option
contracts
|
||||||||||||||||
Financial
positions, beginning of period, net
|
5,600,000 | 1 | – | – | ||||||||||||
Calls
purchased
|
3,550,000 | 1 | 2,900,000 | 2 | ||||||||||||
Puts
sold
|
(5,150,000 | ) | (2 | ) | 2,900,000 | (1 | ) | |||||||||
Positions
closed or expired
|
(5,600,000 | ) | (8 | ) | (200,000 | ) | – | |||||||||
Net
positions-long
|
(1,600,000 | ) | (8 | ) | 5,600,000 | 1 | ||||||||||
Holding
(losses)/gains
|
||||||||||||||||
Unrealized
(losses) at beginning of period, net
|
– | (8 | ) | – | (6 | ) | ||||||||||
Unrealized
(losses) for the period
|
– | (138 | ) | – | (2 | ) | ||||||||||
Unrealized
(losses) at end of period, net
|
– | (146 | ) | – | (8 | ) | ||||||||||
Financial
positions at end of period, net
|
89,810,000 | $ | 715 | 23,800,000 | $ | 136 |
At
September 30, 2008, TVA had derivative positions outstanding under the program
equivalent to about 3,154 natural gas contracts, made up of 2,090 futures
contracts, 904 swap futures contracts, and 160 options contracts with an
approximate net market value of $715 million. For the year ended
September 30, 2008, TVA recognized realized gains of $11 million, which were
recorded as a decrease to purchased power expense. Unrealized losses
at the end of the year were $146 million, which TVA deferred as a regulatory
asset in accordance with the FCA rate mechanism. TVA will continue to
defer all financial trading program unrealized gains or losses and record only
realized gains or losses as purchased power costs at the time the derivative
instruments are settled.
At
September 30, 2007, TVA had derivative positions outstanding under the program
equivalent to about 2,971 natural gas contracts, made up of 1,623 futures
contracts, 788 swap futures contracts, and 560 options contracts with an
approximate net market value of $136 million. For the year ended
September 30, 2007, TVA recognized realized losses of $45 million, which were
recorded as an increase to purchased power expense. Unrealized losses
at the end of the year were $8 million, which TVA deferred as a regulatory asset
in accordance with the FCA rate mechanism. TVA will continue to defer
all financial trading program unrealized gains or losses and record only
realized gains or losses as purchased power costs at the time the derivative
instruments are settled.
Natural Gas Positions
Outstanding
At
September 30
|
||||||||||||||||||||||||
2008
|
2007
|
|||||||||||||||||||||||
Number
of Contracts
|
Notional
Amount per Contract
(in
mmBtu)
|
Total
Notional Amount
(in
mmBtu)
|
Number
of Contracts
|
Notional
Amount per Contract
(in
mmBtu)
|
Total
Notional Amount
(in
mmBtu)
|
|||||||||||||||||||
Natural
gas futures
|
2,090 | 10,000 | 20,900,000 | 1,623 | 10,000 | 16,230,000 | ||||||||||||||||||
Natural
gas swaps
|
||||||||||||||||||||||||
Bilateral
swaps (daily)
|
551 | 9,274 | 5,110,000 | – | – | – | ||||||||||||||||||
Bilateral
swaps (monthly)
|
353 | 185,269 | 65,400,000 | 788 | 2,500 | 1,970,000 | ||||||||||||||||||
Subtotal
|
904 | 70,510,000 | 788 | 1,970,000 | ||||||||||||||||||||
Natural
gas options
|
||||||||||||||||||||||||
Bilateral
options
|
– | 10,000 | – | – | – | – | ||||||||||||||||||
Exchange
traded options
|
160 | – | (1,600,000 | ) | 560 | 10,000 | 5,600,000 | |||||||||||||||||
Subtotal
|
160 | 10,000 | (1,600,000 | 560 | 5,600,000 | |||||||||||||||||||
Total
|
3,154 | 89,810,000 | 2,971 | 23,800,000 |
Concentration
of Credit Risk
Credit
risk is the exposure to economic loss that would occur as a result of a
counterparty’s nonperformance of its contractual obligations. Where
exposed to credit risk, TVA analyzes the counterparty’s financial condition
prior to entering into an agreement, establishes credit limits, monitors the
appropriateness of those limits, as well as any changes in the creditworthiness
of the counterparty on an ongoing basis, and employs credit mitigation measures,
such as collateral or prepayment arrangements and master purchase and sale
agreements, to mitigate credit risk. The majority of TVA’s credit
risk is limited to trade accounts receivable from delivered power sales to
municipal and cooperative distributor customers, all located in the Tennessee
Valley region. To a lesser extent, TVA is exposed to credit risk from
industries and federal agencies directly served and from exchange power
arrangements with a small number of investor-owned regional utilities related to
either delivered power or the replacement of open positions of longer-term
purchased power or fuel agreements.
Seven
customers, which represented approximately 36 percent and 37 percent of TVA’s
total power sales in 2008 and 2007, respectively, purchased power from TVA under
contracts that require either five or 10 years’ notice to
terminate. Six of these are municipal and cooperative distributor
customers, who were assigned investment grade (public or internally rated)
credit ratings. Sales to the seventh customer, USEC, which was
previously mentioned, represented 5.3 percent of TVA’s total operating revenues
in 2008. USEC’s senior unsecured credit ratings are currently “CCC”
with Standard & Poor’s and ‘Caa2’ with Moody’s Investors
Service. As a result of USEC’s credit ratings, the company has
provided credit assurance to TVA, per the terms of its power
contract. Outstanding accounts receivable for
the top seven customers at September 30, 2008, were $554 million,
or 40 percent of total outstanding accounts receivable, and at September 30,
2007, were $567 million, or 40 percent of total outstanding accounts
receivable.
11.
Debt
General
The TVA
Act authorizes TVA to issue Bonds in an amount not to exceed $30 billion at any
time. At September 30, 2008, TVA had only two types of Bonds
outstanding: power bonds and discount notes. Power bonds have
maturities of between one and 50 years, and discount notes have maturities of
less than one year. Power bonds and discount notes are both issued
pursuant to section 15d of the TVA Act and pursuant to the Basic Tennessee
Valley Authority Power Bond Resolution adopted by the TVA Board on October 6,
1960, as amended on September 28, 1976, October 17, 1989, and March 25, 1992
(the “Basic Resolution”). TVA Bonds are not obligations of the United
States, and the United States does not guarantee the payments of principal or
interest on Bonds.
Power
bonds and discount notes rank on parity and have first priority of payment out
of net power proceeds, which are defined as:
|
•
|
the
remainder of TVA’s gross power
revenues
|
|
o
|
after
deducting
|
|
–
|
the
costs of operating, maintaining, and administering its power properties,
and
|
|
–
|
payments
to states and counties in lieu of taxes,
but
|
|
o
|
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.
|
Because
TVA’s lease payments under its leaseback transactions are considered costs of
operating, maintaining, and administering its power properties, those payments
have priority over TVA’s payments on the Bonds. See Note 13 — Leaseback
Obligations. Once Net Power Proceeds have been applied to
payments on power bonds and discount notes as well as any other Bonds that TVA
may issue in the future that rank on parity with or subordinate to power bonds
and discount notes, Section 2.3 of the Basic Resolution provides that the
remaining net power proceeds shall be used only for minimum payments into the
United States Treasury required by the TVA Act in repayment of and as a return
on the Power Facility Appropriation Investment, investment in power assets,
additional reductions of TVA’s capital obligations, and other lawful purposes
related to TVA’s power program.
The TVA
Act and the Basic 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, among other
things, debt service on outstanding Bonds. See Note 1 — General. 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 Power
Facility Appropriation Investment)
or
|
|
–
|
investment
in power assets.
|
TVA must
next meet the bondholder protection test for the five-year period ending
September 30, 2010. See Note 9 — Appropriation
Investment.
Short-Term
Debt
The
weighted average rates applicable to short-term debt outstanding in the public
market as of September 30, 2008, 2007, and 2006, were 1.26 percent, 4.74
percent, and 5.21 percent, respectively. During 2008, 2007, and 2006,
the maximum outstanding balances of TVA short-term borrowings held by the public
were $1.6 billion, $2.8 billion, and $2.8 billion, respectively. For
these same years, the average amounts (and weighted average interest rates) of
TVA short-term borrowings were approximately $767 million (3.71 percent), $2.3
billion (5.17 percent), and $2.0 billion (4.47 percent),
respectively.
TVA also
has access to a financing arrangement with the U.S. Treasury whereby the U.S.
Treasury is authorized to accept interim obligations with maturities of one year
or less in an aggregate amount outstanding 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 2008, 2007, and 2006, the daily average
amounts outstanding (and average interest rates) were approximately $74 million
(3.02 percent), $132 million
(5.07 percent), and $131 million (4.33 percent),
respectively. In 2009, TVA and the U.S. Treasury replaced the $150
million note under which TVA previously borrowed from the U.S. Treasury with a
memorandum of understanding under which TVA will have a $150 million credit
facility. There are no fees other than interest on borrowings under
the credit facility. TVA plans to use the U.S. Treasury credit facility as a
source of liquidity, but not as a primary source of liquidity, in 2009.
TVA has
short-term funding available in the form of two short-term revolving credit
facilities, one of which is a $1.25 billion facility that matures on May 13,
2009, and the other of which is a $1 billion facility that matures on November
9, 2009. See Note 18 — Credit Facility
Agreements. The interest rate on any borrowing under these
facilities is variable and based on market factors and the rating of TVA’s
senior unsecured long-term non-credit enhanced debt. TVA is required
to pay an unused facility fee on the portion of the total $2.25 billion against
which TVA has not borrowed. The fee may fluctuate depending on the
non-enhanced credit ratings on TVA’s senior unsecured long-term
debt. There were no outstanding borrowings under the facilities at
September 30, 2008. TVA anticipates renewing each credit facility
from time to time.
Put
and Call Options
Bond
issues of $2.1 billion held by the public are redeemable in whole or in part, at
TVA’s option, on call dates ranging from the present to 2020 and at call prices
ranging from 100 percent to 106 percent of the principal
amount. Fifty-eight Bond issues totaling $910 million, with maturity
dates ranging from 2009 to 2028, include a “survivor’s option,” which allows for
right of redemption upon the death of a beneficial owner in certain specified
circumstances. There is no accounting difference between a
“survivor’s option” put and a “regular” put on any TVA put Bond.
Additionally,
TVA has two issues of Putable Automatic Rate Reset Securities (“PARRS”)
outstanding. After a fixed-rate period of five years, the coupon rate
on the PARRS may automatically be reset downward under certain market conditions
on an annual basis. The coupon rate reset on the PARRS is based on a
calculation. For both series of PARRS, the coupon rate will reset downward
on the reset date if the rate calculated is below the coupon rate on
the Bond. The calculation dates, potential reset dates, and
terms of the calculation are different for each series. The coupon rate on
the 1998 Series D PARRS may be reset on June 1 (annually) if the sum of the
five-day average of the 30-Year Constant Maturity Treasury (“CMT”) rate for the
week ending the last Friday in April, plus 94 basis points, is below the
then-current coupon rate. The coupon rate on the 1999 Series A PARRS
may be reset on May 1 (annually) if the sum of the five-day average of the
30-Year CMT rate for the week ending the last Friday in March, plus 84 basis
points, is below the then-current coupon rate. The coupon rates may only
be reset downward, but investors may request to redeem their Bonds at par value
in conjunction with a coupon rate reset for a limited period of time prior to
the reset dates and under certain circumstances.
Due to
the contingent nature of the put option on the PARRS, TVA determines whether the
PARRS should be classified as long-term debt or current maturities of long-term
debt by calculating the expected reset rate on the bonds. The
expected reset rate is calculated using forward rates and the fixed spread for
each Bond issue as noted above. If the expected reset rate is less
than the coupon on the Bond, the PARRS are included in current
maturities. Otherwise, the PARRS are included in long-term
debt. At September 30, 2008, the expected reset rate was higher than
the current coupon on each issue of PARRS; therefore, the par amount outstanding
is classified as long-term debt.
The 1998
Series D PARRS issue totals $350 million, matures in June 2028, and had its
first reset date in June 2003. The rate reset to 5.95 percent from
6.75 percent in June 2003, at which time $23 million of the original $575
million of 1998 Series D PARRS were redeemed at par. The rate reset again to
5.49 percent from 5.95 percent in June 2005, at which time $86 million of the
1998 Series D PARRS were redeemed at par. The rate reset once more to
5.46 percent from 5.49 percent in June 2008, at which time $108 million of the
1998 Series D PARRS were redeemed at par. The 1999 Series A PARRS
issue totals $298 million, matures in May 2029, and had its first rate reset
date in May 2004. The rate reset in May 2004 to 5.62 percent from
6.50 percent, and $115 million of the original $525 million of 1999 Series A
PARRS were redeemed at par. The rate reset again to 5.17 percent from
5.62 percent in May 2008, at which time $102 million of the 1999 Series A PARRS
were redeemed at par.
Debt
Securities Activity
The table
below summarizes TVA’s Bond activity for the period from October 1, 2006, to
September 30, 2008.
Debt
Securities Activity from October 1, 2006, to September 30, 2008
Principal
Amount
|
||||||||
Redemptions/Maturities:
|
2008
|
2007
|
||||||
electronotes®
|
||||||||
First
quarter
|
$ | – | $ | 2 | ||||
Second
quarter
|
197 | 5 | ||||||
Third
quarter
|
115 | 5 | ||||||
Fourth
quarter
|
– | 1 | ||||||
1998
Series D
|
7 | – | ||||||
1999
Series A
|
10 | – | ||||||
1999
Series A
|
102 | – | ||||||
1998
Series D
|
108 | – | ||||||
1997
Series E
|
100 | – | ||||||
2003
Series C
|
50 | – | ||||||
2001
Series D
|
– | 75 | ||||||
1997
Series A
|
– | 382 | ||||||
Total
|
$ | 689 | $ | 470 | ||||
Issues:
|
||||||||
electronotes®
|
||||||||
First
quarter
|
$ | 41 | $ | 9 | ||||
Second
quarter
|
61 | 19 | ||||||
Third
quarter
|
3 | 8 | ||||||
Fourth
quarter
|
– | 4 | ||||||
2008
Series A
|
500 | – | ||||||
2008
Series B
|
1,000 | – | ||||||
2008
Series C
|
500 | – | ||||||
2007
Series A
|
– | 1,000 | ||||||
Total
|
$ | 2,105 | $ | 1,040 |
Debt
Outstanding
Debt
outstanding at September 30, 2008, consisted of the following:
Short-Term
Debt
As of
September 30
CUSIP
or Other Identifier
|
Maturity
|
Call/(Put)
Date
|
Coupon
Rate
|
2008
Par
Amount
|
2007
Par
Amount
|
|||||||||
Discount
Notes (net of discount)
|
$ | 185 | $ | 1,422 | ||||||||||
Current
maturities of long-term debt:
|
||||||||||||||
88059TBQ3
|
01/15/2008
|
01/15/2004
|
3.05 | % | – | 10 | ||||||||
88059TBS9
|
01/15/2008
|
01/15/2004
|
3.30 | % | – | 40 | ||||||||
88059TCB5
|
05/15/2008
|
05/15/2004
|
2.45 | % | – | 40 | ||||||||
880591DB5
|
11/13/2008
|
|
5.38 | % | 2,000 | – | ||||||||
88059TCW9
|
03/15/2009
|
03/15/2005
|
3.20 | % | 30 | – | ||||||||
Current
maturities of long-term debt
|
2,030 | 90 | ||||||||||||
Total
debt due within one year, net
|
$ | 2,215 | $ | 1,512 |
Long-Term
Debt 1
As of
September 30
CUSIP
or Other Identifier
|
Maturity
|
Call/(Put)
Date
|
Coupon
Rate
|
2008
Par
Amount
|
2007
Par
Amount
|
|||||||||
880591DB5
|
11/13/2008
|
|
5.375 | % | – | 2,000 | ||||||||
88059TCW9
|
03/15/2009
|
03/15/2005
|
3.200 | % | – | 30 | ||||||||
Maturing
in 2009
|
– | 2,030 | ||||||||||||
880591DP3
|
04/15/2010
|
04/15/2007
|
5.125 | % | – | 21 | ||||||||
88059TDD0
|
06/15/2010
|
06/15/2006
|
4.125 | % | – | 41 | ||||||||
Maturing
in 2010
|
– | 62 | ||||||||||||
880591DN9
|
01/18/2011
|
|
5.625 | % | 1,000 | 1,000 | ||||||||
88059TDQ1
|
05/15/2011
|
05/15/2007
|
5.250 | % | – | 6 | ||||||||
88059TDR9
|
06/15/2011
|
06/15/2007
|
5.250 | % | – | 9 | ||||||||
Maturing
in 2011
|
1,000 | 1,015 | ||||||||||||
880591DL3
|
05/23/2012
|
|
7.140 | % | 29 | 29 | ||||||||
880591DT6
|
05/23/2012
|
|
6.790 | % | 1,486 | 1,486 | ||||||||
88059TBH3
|
09/15/2012
|
09/15/2004
|
4.375 | % | – | 10 | ||||||||
Maturing
in 2012
|
1,515 | 1,525 | ||||||||||||
880591CW0
|
03/15/2013
|
|
6.000 | % | 1,359 | 1,359 | ||||||||
88059TBR1
|
01/15/2013
|
01/15/2005
|
4.375 | % | 14 | 14 | ||||||||
88059TBW0
|
03/15/2013
|
03/15/2005
|
4.000 | % | 22 | 23 | ||||||||
88059TBX8
|
03/15/2013
|
03/15/2004
|
4.250 | % | 12 | 12 | ||||||||
88059TCD1
|
06/15/2013
|
06/15/2004
|
3.500 | % | 12 | 12 | ||||||||
880591DW9
|
08/01/2013
|
|
4.750 | % | 940 | 990 | ||||||||
88059TCF6
|
07/15/2013
|
07/15/2005
|
4.350 | % | 17 | 17 | ||||||||
88059TDS7
|
07/15/2013
|
07/15/2008
|
5.625 | % | 9 | 9 | ||||||||
88059TEG2
|
04/15/2013
|
07/15/2009
|
3.500 | % | 3 | – | ||||||||
Maturing
in 2013
|
2,388 | 2,436 | ||||||||||||
88059TCL3
|
10/15/2013
|
10/15/2005
|
4.500 | % | 12 | 12 | ||||||||
88059TCQ2
|
12/15/2013
|
12/15/2005
|
4.700 | % | 8 | 8 | ||||||||
88059TDX6
|
02/15/2014
|
02/15/2008
|
5.250 | % | – | 7 | ||||||||
88059TDZ1
|
04/15/2014
|
04/15/2008
|
5.000 | % | 4 | 4 | ||||||||
Maturing
in 2014
|
24 | 31 | ||||||||||||
88059TDE8
|
07/15/2015
|
07/15/2007
|
4.500 | % | 6 | 7 | ||||||||
88059TBY6
|
04/15/2015
|
04/15/2005
|
4.600 | % | 20 | 20 | ||||||||
88059TBJ9
|
10/15/2014
|
10/15/2004
|
4.600 | % | 21 | 21 | ||||||||
88059TCH2
|
08/15/2015
|
08/15/2005
|
5.125 | % | 33 | 34 | ||||||||
88059TDB4
|
04/15/2015
|
04/15/2007
|
5.000 | % | 49 | 50 | ||||||||
88059TBN0
|
12/15/2014
|
12/15/2004
|
5.000 | % | 54 | 54 | ||||||||
880591DY5
|
06/15/2015
|
|
4.375 | % | 1,000 | 1,000 | ||||||||
880591ED9
|
11/15/2014
|
11/15/2008
|
4.800 | % | 17 | – | ||||||||
Maturing
in 2015
|
1,200 | 1,186 | ||||||||||||
88050TBK6
|
10/15/2015
|
10/15/2005
|
5.050 | % | 19 | 19 | ||||||||
88059TDH1
|
10/15/2015
|
10/15/2007
|
5.000 | % | 27 | 27 | ||||||||
88059TBL4
|
11/15/2015
|
11/15/2005
|
4.800 | % | 26 | 26 | ||||||||
88059TCR0
|
12/15/2015
|
12/15/2005
|
4.875 | % | 11 | 11 | ||||||||
88059TDK4
|
12/15/2015
|
12/15/2006
|
5.375 | % | – | 10 | ||||||||
88059TBU4
|
02/15/2016
|
02/15/2006
|
4.550 | % | 8 | 8 | ||||||||
88059TCV1
|
02/15/2016
|
02/15/2006
|
4.500 | % | 3 | 3 | ||||||||
88059TDN8
|
03/15/2016
|
03/15/2008
|
5.375 | % | – | 8 | ||||||||
88059TCC3
|
06/15/2016
|
06/15/2006
|
3.875 | % | 3 | 3 | ||||||||
88059TDT5
|
08/15/2016
|
08/15/2007
|
5.625 | % | – | 4 | ||||||||
88059TCJ8
|
09/15/2016
|
09/15/2006
|
4.950 | % | 11 | 11 | ||||||||
88059TDU2
|
09/15/2016
|
09/15/2007
|
5.375 | % | 14 | 14 | ||||||||
880591DS8
|
12/15/2016
|
4.875 | % | 524 | 524 | |||||||||
88059TCS8
|
01/15/2017
|
01/15/2007
|
5.000 | % | 28 | 28 | ||||||||
88059TDW8
|
01/15/2017
|
01/15/2008
|
5.250 | % | 6 | 6 | ||||||||
88059TEA5
|
06/15/2017
|
06/15/2008
|
5.500 | % | 4 | 4 | ||||||||
880591EA6
|
07/18/2017
|
5.500 | % | 1,000 | 1,000 | |||||||||
88059TEB3
|
09/15/2017
|
09/15/2009
|
5.000 | % | 4 | 4 |
CUSIP
or Other Identifier
|
Maturity
|
Call/(Put)
Date
|
Coupon
Rate
|
2008
Par
Amount
|
2007
Par
Amount
|
|||||||||
880591CU4
|
12/15/2017
|
|
6.250 | % | 650 | 750 | ||||||||
88059TCA7
|
05/15/2018
|
05/15/2004
|
4.750 | % | 24 | 24 | ||||||||
88059TCE9
|
07/15/2018
|
07/15/2004
|
4.700 | % | 34 | 35 | ||||||||
88059TCN9
|
11/15/2018
|
11/15/2006
|
5.125 | % | 18 | 18 | ||||||||
88059TEF4
|
03/15/2018
|
03/15/2010
|
4.500 | % | 25 | – | ||||||||
880591EC2
|
04/01/2018
|
4.500 | % | 1,000 | – | |||||||||
88059TCT6
|
01/15/2019
|
01/15/2005
|
5.000 | % | 27 | 28 | ||||||||
88059TCX7
|
03/15/2019
|
03/15/2007
|
4.500 | % | 12 | 12 | ||||||||
88059TDF5
|
08/15/2020
|
08/15/2008
|
5.000 | % | 10 | 10 | ||||||||
88059TDG3
|
09/15/2020
|
09/15/2008
|
4.800 | % | 3 | 3 | ||||||||
88059TDJ7
|
11/15/2020
|
11/15/2008
|
5.500 | % | 11 | 11 | ||||||||
88059TDL2
|
01/18/2021
|
01/15/2009
|
5.125 | % | 5 | 5 | ||||||||
880591DC3
|
06/07/2021
|
|
5.805 | % 2 | 356 | 409 | ||||||||
88859TAN1
|
12/15/2021
|
12/15/2005
|
6.000 | % | – | 25 | ||||||||
88059TAR2
|
01/15/2022
|
01/15/2006
|
6.125 | % | – | 28 | ||||||||
88059TDY4
|
03/15/2022
|
03/15/2008
|
5.375 | % | 6 | 6 | ||||||||
88059TAX9
|
04/15/2022
|
04/15/2006
|
6.125 | % | – | 13 | ||||||||
88059TBE0
|
08/15/2022
|
08/15/2006
|
5.500 | % | – | 28 | ||||||||
88059TBM2
|
11/15/2022
|
11/15/2006
|
5.000 | % | 10 | 11 | ||||||||
88059TBP5
|
12/15/2022
|
12/15/2006
|
5.000 | % | 19 | 19 | ||||||||
88059TEC1
|
10/15/2022
|
10/15/2008
|
5.500 | % | 25 | – | ||||||||
88059TBT7
|
01/15/2023
|
01/15/2007
|
5.000 | % | 10 | 11 | ||||||||
88059TBV2
|
02/15/2023
|
02/15/2007
|
5.000 | % | 16 | 16 | ||||||||
88059TBZ3
|
05/15/2023
|
05/15/2004
|
5.125 | % | 14 | 14 | ||||||||
88059TCK5
|
10/15/2023
|
10/15/2007
|
5.200 | % | 13 | 14 | ||||||||
88059TCP4
|
11/15/2023
|
11/15/2004
|
5.250 | % | 11 | 12 | ||||||||
88059TCU3
|
02/15/2024
|
02/15/2008
|
5.125 | % | 8 | 9 | ||||||||
88059TCY5
|
04/15/2024
|
04/15/2005
|
5.375 | % | 14 | 14 | ||||||||
88059TCZ2
|
02/15/2025
|
02/15/2006
|
5.000 | % | 18 | 18 | ||||||||
88059TDA6
|
03/15/2025
|
03/15/2009
|
5.000 | % | 6 | 6 | ||||||||
88059TDC2
|
05/15/2025
|
05/15/2009
|
5.125 | % | 13 | 14 | ||||||||
880591CJ9
|
11/01/2025
|
|
6.750 | % | 1,350 | 1,350 | ||||||||
88059TDM0
|
02/15/2026
|
02/15/2010
|
5.500 | % | 6 | 7 | ||||||||
88059TDV0
|
10/15/2026
|
10/15/2010
|
5.500 | % | 9 | 9 | ||||||||
8805913003 |
06/01/2028
|
5.490 | % | 350 | 466 | |||||||||
88059TEE7
|
01/15/2028
|
01/15/2012
|
4.375 | % | 36 | – | ||||||||
8805914093 |
05/01/2029
|
5.618 | % | 298 | 410 | |||||||||
880591DM1
|
05/01/2030
|
|
7.125 | % | 1,000 | 1,000 | ||||||||
880591DP4
|
06/07/2032
|
|
6.587 | % 2 | 445 | 512 | ||||||||
880591DV1
|
07/15/2033
|
|
4.700 | % | 472 | 472 | ||||||||
880591DX7
|
06/15/2035
|
|
4.650 | % | 436 | 436 | ||||||||
880591CK6
|
04/01/2036
|
|
5.980 | % | 121 | 121 | ||||||||
880591CS9
|
04/01/2036
|
|
5.880 | % | 1,500 | 1,500 | ||||||||
880591CP5
|
01/15/2038
|
|
6.150 | % | 1,000 | 1,000 | ||||||||
880591ED0
|
06/15/2038
|
5.500 | % | 500 | – | |||||||||
880591BL5
|
04/15/2042
|
04/15/2012
|
8.250 | % | 1,000 | 1,000 | ||||||||
880591DU3
|
06/07/2043
|
|
4.962 | % 2 | 267 | 307 | ||||||||
880591CF7
|
07/15/2045
|
07/15/2020
|
6.235 | % | 140 | 140 | ||||||||
880591EB4
|
01/15/2048
|
4.875 | % | 500 | – | |||||||||
880591DZ2
|
04/01/2056
|
|
5.375 | % | 1,000 | 1,000 | ||||||||
Maturing
2016-2056
|
14,476 | 13,003 | ||||||||||||
Subtotal
|
20,603 | 21,288 | ||||||||||||
Unamortized
discounts, premiums, and
other
|
(199 | ) | (189 | ) | ||||||||||
Total
long-term debt, net
|
$ | 20,404 | $ | 21,099 |
Notes
|
(1)
|
The
above table includes net exchange losses from currency transactions of
$138 million and $299 million at September 30, 2008 and 2007,
respectively.
|
|
(2)
|
The
coupon rate represents TVA’s effective interest
rate.
|
|
(3)
|
TVA
PARRS, CUSIP numbers 880591300 and 880591409, may be redeemed under
certain conditions. See Note 11 — Put and Call
Options.
|
12.
Supplemental Cash Flow Information
Interest
paid was $1,372 million in 2008, $1,425 million in 2007, and $1,422 million in
2006. These amounts differ from interest expense due to the timing of
payments and interest capitalized of $17 million in 2008, $177 million in 2007,
and $163 million in 2006 as a part of major capital expenditures.
In 2006
TVA had non-cash activity resulting from financing transactions of $13 million
related to a gain on the repurchase of Bonds. There were no major
non-cash investing or financing activities for 2007 or 2008.
Cash
flows from futures contracts, forward contracts, option contracts, or swap
contracts that are accounted for as hedges are classified in the same category
as the item being hedged or on a basis consistent with the nature of the
instrument.
13. Fair
Value of Financial Instruments
TVA uses
the methods and assumptions described below to estimate the fair value of each
significant class of financial instrument. The fair market value of the
financial instruments held at September 30, 2008, may not be representative of
the actual gains or losses that will be recorded when these instruments mature
or are called or presented for early redemption. The estimated values
of TVA’s financial instruments at September 30 are as follows:
Estimated
Values of Financial Instruments
As
of September 30
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
Cash
and cash equivalents
|
$ | 213 | $ | 213 | $ | 165 | $ | 165 | ||||||||
Restricted
cash and investments
|
106 | 106 | 150 | 150 | ||||||||||||
Investment
funds
|
956 | 956 | 1,169 | 1,169 | ||||||||||||
Loans
and other long-term receivables
|
81 | 81 | 79 | 79 | ||||||||||||
Short-term
debt, net of discount
|
185 | 185 | 1,422 | 1,422 | ||||||||||||
Long-term
debt (including current portion), net of discount
|
22,434 | 23,851 | 21,189 | 22,453 | ||||||||||||
Leaseback
obligations
|
1,353 | 1,353 | 1,072 | 1,072 |
Cash
and Cash Equivalents, Short-Term Investments, and Short-Term Debt
Because
of the short-term maturity of these instruments, the carrying amount
approximates fair value.
Restricted
Cash and Investments
Because
of the short-term maturity of these instruments, the carrying amount
approximates fair value.
Investment
Funds
Information
on investments by major type at September 30 is as follows:
TVA
Investments By Type
As of
September 30
2008
|
2007
|
|||||||
Securities
held as trading
|
$ | 951 | $ | 1,162 | ||||
Other
|
5 | 7 | ||||||
Total
investment funds
|
$ | 956 | $ | 1,169 |
Gains and
losses on trading securities are recognized in current earnings. The
gains and losses on the nuclear decommissioning trust and the ART are
subsequently reclassified to a regulatory asset account in accordance with TVA’s
regulatory accounting policy. The nuclear decommissioning trust had
unrealized losses of $184 million in 2008, unrealized gains of $80 million in
2007, and unrealized losses of $24 million in 2006. The ART had no
unrealized gains or losses during 2008 or 2007. The nuclear
decommissioning trust was composed of 1,601 security and fund positions as of
September 30, 2008. The ART was composed of three fund positions as
of September 30, 2008.
Loans
and Other Long-Term Receivables
Fair
values for loans and long-term receivables are estimated by determining the
present value of future cash flows using a discounted rate equal to lending
rates for similar loans made to borrowers with similar credit ratings and for
the same remaining maturities. The carrying amount approximates fair
value.
Long-Term
Debt
Fair
value of long-term debt traded in the public market is determined by multiplying
the par value of the debt by the indicative market price at the Balance Sheet
date.
Leaseback
Obligations
Prior to
2004, TVA received approximately $945 million in proceeds by entering into
leaseback transactions for 24 new peaking combustion turbine
units. TVA also received approximately $389 million in proceeds by
entering into a leaseback transaction for qualified technological equipment and
software in 2003. Due to TVA’s continuing involvement in the
operation and maintenance of the leased units and equipment and its control over
the distribution of power produced by the combustion turbine facilities during
the leaseback term, TVA accounted for the lease proceeds of $1,334 million as
financing obligations as required in accordance with SFAS No. 66, “Accounting for Sales of Real
Estate,” and SFAS No. 98, “Accounting for
Leases.” Accordingly, the outstanding leaseback obligations of
$1,029 million at September 30, 2008, and $1,072 million at September 30, 2007,
are included in Current
portion of leaseback obligations ($41 million and $43 million,
respectively) and Leaseback obligations
($987 million and $1,029 million, respectively) in TVA’s 2008 and 2007 year-end
Balance Sheets.
On
September 30, 2008, TVA received $325 million in proceeds by entering into a
leaseback transaction for the Southaven facility with Seven States Power
Corporation. Due to the nature of the transaction, the carrying
amount of the obligation and the fair market value are equal. The
outstanding Southaven obligation of $325 million at September 30, 2008 is
included in Current
portion of leaseback obligations ($13 million) and leaseback obligations
($312 million) in TVA’s 2008 year-end Balance Sheet.
At
September 30, 2008 and 2007, the total balances of the leaseback obligations
were $1,353 million and $1,072 million, respectively.
14.
Benefit Plans
TVA
sponsors a qualified defined benefit pension plan that covers most of its
full-time employees, a qualified defined contribution plan that covers most of
its full-time employees, an unfunded postretirement health care plan that
provides for non-vested contributions toward the cost of certain retirees’
medical coverage, other postemployment benefits such as workers’ compensation,
and a supplemental executive retirement plan. Following are
discussions of each of these plans as well as discussions of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003.
Overview
of Plans and Benefits
Defined Benefit Pension
Plan. TVA sponsors a defined benefit plan for most of its
full-time employees that provides two benefit structures: the Original Benefit
Structure and the Cash Balance Benefit Structure.
|
•
|
Original Benefit
Structure. The pension benefit for a member
participating in the Original Benefit Structure is based on the member’s
creditable service, the member’s average monthly salary for the highest
three consecutive years of base pay, and a pension factor based on the
member’s age and years of service, less a Social Security
offset.
|
|
•
|
Cash Balance Benefit
Structure. The pension benefit for a member
participating in the Cash Balance Benefit Structure is based on credits
accumulated in the member’s account and the member’s age. A
member’s account receives credits each pay period equal to 6.00 percent of
his or her straight-time earnings. The account also receives
monthly interest credits at a rate set at the beginning of each year equal
to the change in the Consumer Price Index (“CPI”) plus 3.00 percent, with
the provision that the rate may not be less than 6.00 percent or more than
10.00 percent. The actual changes in the CPI for 2008 and 2007
were 3.00 percent and 3.43 percent, which resulted in interest rates of
6.00 percent and 6.43 percent,
respectively.
|
Members
of both the Original Benefit Structure and the Cash Balance Benefit Structure
can also become eligible for a vested supplemental pension benefit based on age
and years of service, which is designed to help retirees offset the cost of
medical insurance.
The
defined benefit pension plan is administered by a separate legal entity, the TVA
Retirement System (“TVARS”), which is governed by its own board of directors
(“TVARS Board”). Upon notification by the TVARS Board of a
recommended contribution for the next fiscal year, TVA determines whether to
make the recommended contribution or any contribution that may be required by
the rules and regulations of TVARS.
Defined Contribution Plan.
TVARS also administers a defined contribution 401(k) plan to which TVA
makes matching contributions of 25 cents on the dollar (up to 1.5 percent of
annual pay) for members participating in the Original Benefit Structure and of
75 cents on the dollar (up to 4.5 percent of annual pay) for members
participating in the Cash Balance Benefit Structure. TVA made matching
contributions of about $21 million to the plan during 2008, $21 million during
2007, and $19 million during 2006.
Supplemental Executive Retirement Plan. In 1995, TVA
established a supplemental executive retirement plan (“SERP”) for certain
executives in critical positions to provide supplemental pension benefits tied
to compensation that is not creditable under the qualified pension plan. TVA has
historically funded the annual calculated expense.
Other Postretirement
Benefits. TVA sponsors an
unfunded postretirement benefits plan that provides for non-vested contributions
toward the cost of certain eligible retirees’ medical coverage. This plan
formerly covered all eligible retirees participating in the TVA medical plan,
and TVA’s contributions were a flat dollar amount based on the participants’
ages and years of service and certain payments toward the plan costs. This plan
now operates on a much more limited basis, covering only certain retirees and
surviving dependents who do not qualify for TVARS benefits, including the vested
supplemental pension benefit.
Other Postemployment
Benefits. TVA employees injured in work-related incidents are
covered by the TVA’s workers’ compensation program for federal employees
administered through the Department of Labor by the Office of Workers’
Compensation Programs in accordance with the provisions of the Federal
Employees’ Compensation Act (“FECA”). FECA provides compensation
benefits to federal employees for permanent and temporary disability due to
employment-related injury or disease.
Accounting
Mechanisms
Regulatory
Accounting. As a regulated entity, TVA has reclassified all
amounts related to unrecognized prior service costs, net actuarial gains or
losses, and subsequent changes in the funded status into a regulatory asset in
accordance with the provisions of SFAS No. 71, “Accounting for the Effects of
Certain Types of Regulation.” Under this guidance, the
deferral of incurred costs is allowed if the costs are probable of future
recovery in customer rates. In conjunction with TVA’s 2008 adoption
of SFAS No. 158 and the application of SFAS No. 71, TVA deferred $973 million of
unamortized prior service costs and net actuarial losses related to its pension
and postretirement benefit plans that TVA management believes (1) are probable
of recovery in future periods and (2) qualify for regulatory accounting
treatment under SFAS No. 71.
TVA uses
the projected unit credit cost method to determine the service cost and the
projected benefit obligation for retirement, termination, and ancillary
benefits. Under this method, a “projected accrued benefit” is
calculated as of the beginning of the year and as of the end of the year for
each benefit that may be payable in the future. The “projected
accrued benefit” is based on the plan’s accrual formula and upon service as of
the beginning or end of the year, but using final average compensation, social
security benefits, and other relevant factors projected to the age at which the
employee is assumed to leave active service. The projected benefit
obligation is the actuarial present value of the “projected accrued benefits” as
of the beginning of the year for employed participants and is the actuarial
present value of all benefits for other participants. The service
cost is the actuarial present value of the difference between the “projected
accrued benefits” as of the beginning and end of the year.
TVA
utilized the corridor approach to gain/loss amortization. Differences
between actuarial assumptions and actual plan results are deferred and amortized
into periodic cost only when the accumulated differences exceed 10 percent of
the greater of the projected benefit obligation or the market-related value of
plan assets. If necessary, the excess is amortized over the average
remaining service period of active employees.
Additionally,
TVA recognizes the impact of asset performance on pension expense over a
three-year phase-in period through a “market-related” value of assets
calculation. Since the market-related value of assets recognizes
investment gains and losses over a three year period, the future value of assets
will be impacted as previously deferred gains or losses are
recognized. The market-related value is used in calculating expected
return on plan assets and net gain or loss for pension cost
determination. The net gain or loss to be amortized is derived from a
comparison of the expected return on market-related value of plan assets with
the actual return on plan assets. A portion of any difference between
the two is reflected in the end-of-year market-related asset value and net gain
or loss; the remainder is reflected in those balances in future
periods.
Obligations
and Funded Status
The
changes in plan obligations, assets, and funded status for the years ended
September 30 were as follows:
Obligations
and Funded Status
As of
September 30
Pension
Benefits
|
Other
Postretirement Benefits
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Change
in benefit obligation
|
||||||||||||||||
Benefit
obligation at beginning of year
|
$ | 8,642 | $ | 8,646 | $ | 464 | $ | 451 | ||||||||
Service
cost
|
110 | 121 | 5 | 5 | ||||||||||||
Interest
cost
|
522 | 495 | 28 | 26 | ||||||||||||
Plan
participants’ contributions
|
34 | 35 | 78 | 77 | ||||||||||||
Amendments
|
3 | 5 | – | – | ||||||||||||
Actuarial
(gain) / loss
|
(708 | ) | (183 | ) | 25 | 2 | ||||||||||
Net
transfers from variable fund/401(k) plan
|
7 | 11 | – | – | ||||||||||||
Expenses
paid
|
(5 | ) | (4 | ) | – | – | ||||||||||
Benefits
paid
|
(525 | ) | (484 | ) | (102 | ) | (97 | ) | ||||||||
Benefit
obligation at end of year
|
8,080 | 8,642 | 498 | 464 | ||||||||||||
Change
in plan assets
|
||||||||||||||||
Fair
value of plan assets at beginning of year
|
7,977 | 7,328 | – | – | ||||||||||||
Actual
return on plan assets
|
(1,465 | ) | 1,013 | – | – | |||||||||||
Plan
participants’ contributions
|
34 | 35 | 78 | 77 | ||||||||||||
Net
transfers from variable fund/401(k) plan
|
7 | 11 | – | – | ||||||||||||
Employer
contributions
|
165 | 78 | 24 | 20 | ||||||||||||
Expenses
paid
|
(5 | ) | (4 | ) | – | – | ||||||||||
Benefits
paid
|
(525 | ) | (484 | ) | (102 | ) | (97 | ) | ||||||||
Fair
value of plan assets at end of year
|
6,188 | 7,977 | – | – | ||||||||||||
Funded
status
|
$ | (1,892 | ) | $ | (665 | ) | $ | (498 | ) | $ | (464 | ) |
The
effect of plan amendments disclosed in the table above refers to the
supplemental executive retirement plan, whereby additional participants were
added to the plan in each of the years.
Amounts
recognized in the Balance Sheet at September 30 consist of:
Obligations
and Funded Status
Recognized
Amounts
As of
September 30
Pension
Benefits
|
Other
Postretirement Benefits
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Regulatory
assets
|
$ | 2,120 | $ | 831 | $ | 157 | $ | 142 | ||||||||
Accrued
liabilities
|
(5 | ) | (3 | ) | (29 | ) | (24 | ) | ||||||||
Other
(long-term) liabilities
|
(1,887 | ) | (662 | ) | (469 | ) | (440 | ) |
Unrecognized
amounts included in regulatory assets yet to be recognized as components of
accrued benefit cost at September 30 consist of:
Obligations
and Funded Status
Unrecognized
Amounts
As of
September 30
Pension
Benefits
|
Other
Postretirement Benefits
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Unrecognized
prior service cost
|
$ | 214 | $ | 248 | $ | 29 | $ | 34 | ||||||||
Unrecognized
net loss
|
1,906 | 583 | 128 | 108 | ||||||||||||
Total
regulatory assets
|
$ | 2,120 | $ | 831 | $ | 157 | $ | 142 |
The
projected benefit obligation, accumulated benefit obligation, and fair value of
plan assets for the pension plans with accumulated benefit obligations in excess
of plan assets at September 30, 2008 and 2007, were as follows:
Projected
Benefit Obligations in Excess of Plan Assets
As of
September 30
2008
|
2007
|
|||||||
Projected
benefit obligation
|
$ | 8,080 | $ | 8,642 | ||||
Accumulated
benefit obligation
|
7,870 | 8,312 | ||||||
Fair
value of plan assets
|
6,188 | 7,977 |
The
components of net periodic benefit cost and other amounts recognized as changes
in regulatory assets for the years ended September 30 were as
follows:
Components
of Net Periodic Benefit Cost
For the
years ended of September 30
Pension
Benefits
|
Other
Postretirement Benefits
|
|||||||||||||||||||||||
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||
Components
of net periodic benefit cost
|
||||||||||||||||||||||||
Service
cost
|
$ | 110 | $ | 122 | $ | 128 | $ | 5 | $ | 5 | $ | 9 | ||||||||||||
Interest
cost
|
522 | 493 | 443 | 28 | 26 | 29 | ||||||||||||||||||
Expected
return on plan assets
|
(608 | ) | (571 | ) | (490 | ) | – | – | – | |||||||||||||||
Amortization
of prior service cost
|
37 | 37 | 37 | 5 | 5 | 5 | ||||||||||||||||||
Recognized
net actuarial loss
|
41 | 83 | 133 | 5 | 6 | 15 | ||||||||||||||||||
Total
net periodic benefit cost
|
$ | 102 | $ | 164 | $ | 251 | $ | 43 | $ | 42 | $ | 58 |
The
amounts in the regulatory asset that are expected to be recognized as components
of net periodic benefit cost during the next fiscal year are as
follows:
Regulatory
Asset
As of
September 30, 2008
Pension
Benefits
|
Other
Postretirement
Benefits
|
Total
|
||||||||||
Prior
service cost
|
$ | 36 | $ | 5 | $ | 41 | ||||||
Net
actuarial loss
|
14 | 7 | 21 |
Plan
Assumptions
TVA’s
reported costs of providing the plan benefits are impacted by numerous factors
including the provisions of the plans, changing employee demographics, and
various assumptions, the most significant of which are noted below.
Components
Recognized as Regulatory Assets
As of
September 30
Pension
Benefits
|
Other
Postretirement Benefits
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Assumptions
utilized to determine benefit obligations at September 30
|
||||||||||||||||
Discount
rate
|
7.50 | % | 6.25 | % | 7.50 | % | 6.25 | % | ||||||||
Expected
return on plan assets
|
8.00 | % | 8.75 | % | N/A | N/A | ||||||||||
Rate
of compensation increase
|
3.3% – 10.1 | % | 3.3% – 10.1 | % | N/A | N/A | ||||||||||
Initial
health care cost trend rate
|
N/A | N/A | 8.00 | % | 8.00 | % | ||||||||||
Ultimate
health care cost trend rate
|
N/A | N/A | 5.00 | % | 5.00 | % | ||||||||||
Ultimate
trend rate is reached in year beginning
|
N/A | N/A | 2014 | 2013 | ||||||||||||
Assumptions
utilized to determine net periodic benefit cost for the years ended
September 30
|
||||||||||||||||
Discount
rate
|
6.25 | % | 5.90 | % | 6.25 | % | 5.90 | % | ||||||||
Expected
return on plan assets
|
8.75 | % | 8.75 | % | N/A | N/A | ||||||||||
Rate
of compensation increase
|
3.3% – 10.1 | % | 3.3% – 10.1 | % | N/A | N/A | ||||||||||
Initial
health care cost trend rate
|
N/A | N/A | 8.00 | % | 8.50 | % | ||||||||||
Ultimate
health care cost trend rate
|
N/A | N/A | 5.00 | % | 5.00 | % | ||||||||||
Ultimate
trend rate is reached in year beginning
|
N/A | N/A | 2013 | 2013 |
Discount Rate. In
the case of selecting an assumed discount rate, TVA reviews market yields on
high-quality corporate debt and long-term obligations of the U.S. Treasury and
endeavors to match, through the use of a proprietary bond portfolio, instrument
maturities with the maturities of its pension obligations in accordance with the
prevailing accounting standards. Additionally, TVA looks at published
pension spot yield curves and applies expected cash flows to the
curve. Based on recent market trends in all these data points, TVA
increased its discount rate from 5.90 percent and 6.25 percent at the end of
2006 and 2007, respectively, to 7.50 percent at the end of 2008.
Rate of Return. In
determining its expected long-term rate of return on pension plan assets, TVA
reviews past long-term performance, asset allocations, and long-term inflation
assumptions. TVA utilized a rate of return of 8.75 percent at the end of
2007. TVA adjusted the expected rate in 2008 based on revisions to
future expected returns as provided by third party professional asset
managers. As of 2008, the expected rate of return was 8.0
percent. The actual rate of return for the year ending September 30,
2008, was a decrease of 19 percent.
Compensation
Increases. This assumption is based on the results obtained
from an actual company experience study performed during the most recent six
years for retirees as well as other plan participants. TVA obtained
an updated study in 2008 and determined that no changes in this assumption were
required.
Mortality. Mortality
assumptions are based on the results obtained from an actual company experience
study performed during the most recent six years for retirees as well as other
plan participants. TVA obtained an updated study in 2008
and, accordingly, adjusted the mortality rates from the 1983 Group
Annuity Mortality Tables to the RP-2000 Mortality Tables.
Health Care Cost Trends. TVA
reviews actual recent cost trends and projected future trends in establishing
health care cost trend rates. Based on this review process, TVA did
not reset its health care cost trend rate assumption used in calculating the
2008 and 2007 accumulated postretirement benefit obligations. The
assumed health care trend rate used for 2008 and 2007 was 8.0
percent. No change was made due to consistent actual performance in
the plan. In addition, an 8.5 percent trend rate was used during
2006. The 2008 health care cost trend rate of 8.0 percent is assumed
to gradually decrease each successive year until it reaches a five percent
annual increase in health care costs in the year beginning October 1, 2014, and
beyond.
Sensitivity of Costs to Changes in
Assumptions. The following chart reflects the sensitivity of
pension cost to changes in certain actuarial assumptions:
Sensitivity
of Costs to Changes in Pension Benefit Assumptions
Actuarial
Assumption
|
Change
in Assumption
|
Impact
on 2009 Pension Cost
|
Impact
on 2008 Projected Benefit Obligation
|
|||||||||
(Increase
in millions)
|
||||||||||||
Discount
rate
|
(0.25 | %) | $ | 14 | $ | 195 | ||||||
Rate
of return on plan assets
|
(0.25 | %) | 17 |
NA
|
Each
fluctuation above assumes that the other components of the calculation are held
constant and excludes any impact for unamortized actuarial gains or
losses.
The
following chart reflects the sensitivity of postretirement benefit cost to
changes in the health care trend rate:
Sensitivity
to Components of Other Postretirement Benefits Plan
As of
September 30, 2008
1%
Increase
|
1%
Decrease
|
|||||||
Effect
on total of service and interest cost components
|
$ | 4 | $ | (5 | ) | |||
Effect
on end-of-year accumulated postretirement benefit
obligation
|
59 | (60 | ) |
Each
fluctuation above assumes that the other components of the calculation are held
constant and excludes any impact for unamortized actuarial gains or
losses.
Plan
Investments
The
qualified defined benefit pension plan, which includes the Original Benefit
Structure and the Cash Balance Benefit Structure, is the only plan that includes
qualified plan assets. The plan assets are primarily stocks and
bonds. TVARS targets an asset allocation of 65 percent equity
securities and 35 percent fixed income securities. Under its asset
allocation policy of 65 percent equity holdings, 25 percent may be non-U.S.
equity holdings, five percent may be private equity holdings or other similar
alternative investments, and five percent may be private real estate
holdings. Of the 35 percent fixed income securities, 15 percent may
be alternative fixed income strategies and five percent may be high yield
securities. The TVARS asset allocation policy includes a permissible three
percent deviation from these target allocations. The TVARS Board can take
action, as appropriate, to rebalance the system’s assets consistent with the
asset allocation policy. For 2008 and 2007, the asset holdings of the
system included the following:
Asset
Holdings of the TVARS
As of
September 30
Plan
Assets at September 30
|
||||||||
2008
|
2007
|
|||||||
Asset Category
|
||||||||
U.S.
equity securities
|
32 | % | 38 | % | ||||
Non-U.S.
equity securities
|
21 | % | 22 | % | ||||
Private
equity holdings or similar alternative investments
|
6 | % | 4 | % | ||||
Private
real estate holdings
|
2 | % | – | |||||
Fixed
income securities
|
32 | % | 30 | % | ||||
High
yield securities
|
7 | % | 6 | % | ||||
Total
|
100 | % | 100 | % |
Cash
Flows
Estimated Future Benefit
Payments. The following table sets forth the estimated future
benefit payments under the benefit plans.
Estimated
Future Benefit Payments
As of
September 30, 2008
Pension
Benefits
|
Other
Postretirement Benefits
|
|||||||
2009
|
$ | 652 | $ | 30 | ||||
2010
|
650 | 34 | ||||||
2011
|
661 | 38 | ||||||
2012
|
670 | 40 | ||||||
2013
|
674 | 42 | ||||||
2014
- 2018
|
3,447 | 222 |
Plan
Contributions. TVA expects to contribute $5 million to its
supplemental executive retirement plan and $30 million to its other
postretirement benefit plans in 2009. TVA made a contribution
to the defined benefit pension plan on September 30, 2008 of $85 million that
constitutes the amount that was expected to be contributed in 2009.
Other
Postemployment Benefits
Postemployment
benefit cost estimates are revised to properly reflect changes in actuarial
assumptions made at the end of the year. In accordance with SEC
recommendations related to the selection of discount rates, TVA utilizes a
discount rate determined by reference to the U.S. Treasury Constant Maturities
rate for a 10-year maturity. For 2008, TVA has determined to utilize
a discount rate of 3.85 percent representing the risk-free rate corresponding to
the U.S. Treasury Constant Maturities rate for a 10-year maturity. Use of the
10-year maturity corresponds to calculated average durations of TVA’s future
estimated postemployment claims payments. The use of a 3.85 percent discount
rate resulted in the recognition of 2008 annual expense of approximately $65
million and an unpaid benefit obligation of about $434 million at year end. TVA
utilized a discount rate of 4.59 percent and 4.64 percent in 2007 and 2006,
respectively. The use of these discount rates resulted in expense and unpaid
benefit obligations of $49 million and $406 million, respectively, for 2007 and
expense and unpaid benefit obligations of $44 million and $413 million,
respectively, for 2006.
Medicare
Prescription Drug, Improvement and Modernization Act of 2003
In 2006,
Medicare began providing prescription drug coverage to Medicare-eligible
beneficiaries under Medicare Part D. Under the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, which created Medicare Part D,
employers that provide retiree prescription drug coverage, which is “actuarially
equivalent” to standard coverage under Medicare Part D, may receive retiree drug
subsidies for retirees who enroll in the employer’s retiree prescription drug
plan instead of Medicare Part D. TVA determined that its retiree prescription
drug coverage did not qualify for retiree drug subsidies and accordingly has not
included or utilized any manner of subsidy in the determination of APBO
or
postretirement benefit cost, for the current or prior periods, in
accordance with the requirements contained within the FSP FAS 106-2, “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003.” After analyzing a number of options available
to plan sponsors for integration with the new Medicare Part D, TVA elected to
provide an employer-sponsored Part D prescription drug plan ("PDP"), with
alternative coverage over and above Medicare standard Part D coverage, for
Medicare-eligible retirees who participate in TVA's Medicare supplement. By
providing an employer-sponsored PDP, any Medicare subsidies will be passed
through to retirees in the form of lower participant premiums and should not
affect TVA's cost of providing prescription drug coverage.
15.
Commitments and Contingencies
Commitments
As of
September 30, 2008, the amounts of contractual cash commitments maturing in each
of the next five years and beyond are shown below:
Commitments
and Contingencies
Payments
due in the year ending September 30
|
||||||||||||||||||||||||||||
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
||||||||||||||||||||||
Debt
|
$ | 2,215 | $ | – | $ | 1,000 | $ | 1,514 | $ | 2,388 | $ | 15,563 | $ | 22,680 | 1 | |||||||||||||
Lease
obligations
|
||||||||||||||||||||||||||||
Capital
|
58 | 58 | 54 | 6 | 3 | 337 | 516 | |||||||||||||||||||||
Non-cancelable
operating
|
64 | 60 | 51 | 43 | 37 | 207 | 462 | |||||||||||||||||||||
Purchase
obligations
|
||||||||||||||||||||||||||||
Power
|
220 | 236 | 249 | 232 | 177 | 6,092 | 7,206 | |||||||||||||||||||||
Fuel
|
1,184 | 787 | 603 | 398 | 327 | 863 | 4,162 | |||||||||||||||||||||
Other
|
121 | 30 | 23 | 25 | 18 | 100 | 317 | |||||||||||||||||||||
Total
|
$ | 3,862 | $ | 1,171 | $ | 1,980 | $ | 2,218 | $ | 2,950 | $ | 23,162 | $ | 35,343 |
Notes
|
(1)
|
Does
not include noncash items of foreign currency valuation loss of $138
million and net discount on sale of Bonds of $199
million.
|
In
addition to the cash requirements above, TVA has contractual obligations in the
form of revenue discounts related to energy prepayments. See Note 1 —
Energy Prepayment
Obligations.
Energy
Prepayment Obligations
Payments
Due in the Year Ending September 30
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
||||||||||||||||||||||
Energy
Prepayment Obligations
|
$ | 105 | $ | 105 | $ | 105 | $ | 105 | $ | 102 | $ | 511 | $ | 1,033 |
Debt. At September
30, 2008, TVA had outstanding discount notes of $185 million and long-term debt
(including current maturities) at varying maturities and interest rates of $22.5
billion for total outstanding indebtedness of $22.7 billion. See Note
11.
Leases. TVA leases
certain property, plant, and equipment under agreements with terms ranging from
one to 30 years. Obligations under capital lease agreements in effect
at September 30, 2008, totaled $58 million for 2009, $58 million for 2010, $54
million for 2011, $6 million for 2012, $3 million for 2013, and an aggregate of
$337 million thereafter, for a total commitment of $516 million. Of
this amount, $55 million represents the cost of
financing. Obligations under non-cancelable operating lease
agreements (primarily related to facilities and equipment) in effect at
September 30, 2008, totaled $64 million for 2009, $60 million for 2010, $51
million for 2011, $43 million for 2012, $37 million for 2013, and an aggregate
of $207 million thereafter for a total commitment of $462
million. TVA’s rental expense for operating leases was $63 million in
2008, $65 million in 2007, and $44 million in 2006.
During
the third quarter of 2007, TVA entered into an operating lease agreement and
various related contracts for the Caledonia combined cycle facility located near
Columbus, Mississippi, with a commencement date of July 1, 2007. The
lease agreement has a 15-year term expiring on February 28, 2022. The
Caledonia facility consists of three combined cycle units with a summer net
capability of 768 megawatts. A conversion services agreement
providing for power purchases from the Caledonia facility was terminated as of
July 1, 2007, the lease commencement date, and dispatch control was shifted to
TVA on July 3, 2007. Under the lease, TVA assumed plant operations in
December 2007. The lease agreement also includes an end-of-term
purchase option.
Purchase of Southaven Combined Cycle
Facility and Subsequent Sale to Seven States Power
Corporation. On May 9, 2008, TVA completed the purchase, as
part of a bankruptcy auction process, of a three-unit, 792-megawatt summer net
capability combined cycle combustion-turbine facility located in Southaven,
Mississippi, owned by Southaven Power. See Note 4 — Asset Acquisitions and
Dispositions.
Power Purchase
Obligations. TVA has contracted with various independent power
producers and power distributor customers for additional capability to be made
available to TVA. In total, these agreements provide 2,789 megawatts
of summer net capability and 27 megawatts of capability from renewable resources
that are not included in the determination of summer net
capability. The total financial commitment for non-renewable power
supply contracts is approximately $7 billion. Costs under TVA’s power
purchase agreements are included in the Statements of Income for 2008, 2007, and
2006 as Fuel and
purchased power expense and are expensed as incurred in accordance with
the normal purchases and sales exemption described in SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended.
Certain
contracts with independent power producers qualify as operating leases in
accordance with the requirements of EITF No. 01-08, “Determining Whether an Arrangement
Contains a Lease.” In accordance with SFAS No. 13, “Accounting for Leases,”
variable costs associated with these contracts meet the definition of contingent
rentals. Amounts under these contracts qualifying as contingent
rentals during 2008 amounted to $96 million. In accordance with the
requirements of EITF No. 98-09, “Accounting for Contingent
Rent”, TVA accrues contingent rentals when the achievement of the event
that triggers the contingent rental expense is probable. Because of
the uncertainty associated with future power demand, TVA accrues contingent
rentals under these arrangements as power is purchased.
Under the
Public Utility Regulatory Policies Act of 1978 as amended by the Energy Policy
Acts of 1992 and 1995, TVA is obligated to purchase power from qualifying
facilities. At September 30, 2008, there were six suppliers, with a
combined capacity of 903 megawatts, which qualify under this
program.
TVA,
along with others, contracted with the Southeastern Power Administration
(“SEPA”) to obtain power from eight U.S. Army Corp of Engineers hydroelectric
facilities on the Cumberland River system. The agreement with SEPA
can be terminated upon three years’ notice, but this notice of termination may
not become effective prior to June 30, 2017. The contract originally
required SEPA to provide TVA an annual minimum of 1,500 hours of power for each
megawatt of TVA’s 405 megawatt allocation, and all surplus power from the
Cumberland River system. Because hydroelectric production has been
reduced at two of the hydroelectric facilities on the Cumberland River System
(Wolf Creek and Center Hill Dams) and because of reductions in the summer stream
flow on the Cumberland River, SEPA declared “force majeure” on February 25,
2007. SEPA then instituted an emergency operating plan
that:
|
•
|
Eliminates
its obligation to provide any affected customer (including TVA) with a
minimum amount of power;
|
|
•
|
Provides
for all affected customers (except TVA) to receive a pro rata share of a
portion of the gross hourly generation from the eight Cumberland River
hydroelectric facilities;
|
|
•
|
Provides
for TVA to receive all of the remaining hourly generation (minus station
service for those facilities);
|
|
•
|
Eliminates
the payment of demand charges by customers (including TVA) since there is
significantly reduced dependable capacity on the Cumberland River system;
and
|
|
•
|
Increases
the rate charged per kilowatt-hour of energy received by SEPA’s customers
(including TVA), because SEPA is legally required to charge rates that
cover its costs.
|
It is
unclear how long the emergency operating plan will remain in
effect.
Fuel Purchase
Obligations. TVA has approximately $1.9 billion in long-term
fuel purchase commitments ranging in terms of up to 11 years primarily for the
purchase and transportation of coal and approximately an additional $2.3 billion
of long-term commitments ranging in terms of up to 10 years for the purchase of
enriched uranium and fabrication of nuclear fuel assemblies.
Other
Obligations. Other obligations of $317 million consist of
contracts as of September 30, 2008, for goods and services primarily related to
capital projects as well as other major recurring operating costs.
Bear Creek
Dam. Bear Creek Dam, a small, non-generating dam in northern
Alabama, is experiencing foundation problems as evidenced by seepage through the
foundation of the dam. An Environmental Impact Statement was
completed in 2007, which concluded the preferred alternative is to repair the
dam. The total estimated cost for repair is $35
million. Site work to mitigate the problem began in 2007 and is
scheduled to be completed in 2009. At September 30, 2008, the repair
work was on schedule and on budget.
Contingencies
Nuclear
Insurance. The Price-Anderson Act provides a layered framework
of protection to compensate for losses arising from a nuclear
event. For the first layer, all NRC nuclear plant licensees,
including TVA, purchase $300 million of nuclear liability insurance from
American Nuclear Insurers for each plant with an operating
license. Funds for the second layer, the Secondary Financial Program,
would come from an assessment of up to $112 million from the licensees of each
of the 104 NRC licensed reactors in the United States. The assessment
for any nuclear accident would be limited to $18 million per year per
reactor. American Nuclear Insurers, under a contract with the NRC,
administers the Secondary Financial Program. With its six licensed
units, TVA could be required to pay a maximum of $671 million per nuclear
incident, but it would have to pay no more than $105 million per incident in any
one year. When the contributions of the nuclear plant licensees are
added to the insurance proceeds of $300 million, over $12 billion (includes a
five percent surcharge for legal expenses) would be available. Under
the Price-Anderson Act, if the first two layers are exhausted, Congress is
required to take action to provide additional funds to cover the additional
losses.
TVA
carries property, decommissioning, and decontamination insurance of $4.6 billion
for its licensed nuclear plants, with up to $2.1 billion available for a loss at
any one site, to cover the cost of stabilizing or shutting down a reactor after
an accident. Some of this insurance, which is purchased from Nuclear Electric
Insurance Limited (“NEIL”), may require the payment of retrospective premiums up
to a maximum of approximately $72 million.
TVA
purchases accidental outage (business interruption) insurance for TVA’s nuclear
sites from NEIL. In the event that an accident covered by this policy
takes a nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA,
after a waiting period, an indemnity (a set dollar amount per week) up to a
maximum indemnity of $490 million per unit. This insurance policy may
require the payment of retrospective premiums up to a maximum of approximately
$30 million.
Decommissioning
Costs. Provision for decommissioning costs of nuclear
generating units is based on options prescribed by NRC procedures to dismantle
and decontaminate the facilities to meet NRC criteria for license
termination.
TVA
recognizes as incurred all obligations related to closure and removal of its
nuclear units. The liability for closure is measured as the present value of the
weighted estimated cash flows required to satisfy the related obligation and
discounted at the credit adjusted rate of interest in effect at the time the
liability was actually incurred or originally accrued. The initial
liability calculation was recorded as a decommissioning liability with an
offsetting decommissioning asset. Subsequent earnings from
decommissioning fund investments, amortization expense of the decommissioning
asset, and accretion expense on the decommissioning liability are deferred in
accordance with SFAS No. 71, “Accounting for the Effects of
Certain Types of Regulation,” and recorded as a change in a corresponding
regulatory asset.
At
September 30, 2008, the present value of the estimated future decommissioning
cost of $1.7 billion was included in Asset retirement
obligations, and the unamortized regulatory asset of $764 million was
included in Other
regulatory assets. The actual decommissioning costs may vary
from the derived estimates because of, among other things, changes in the
assumed dates of decommissioning, changes in regulatory requirements, changes in
technology, and changes in the cost of labor, materials, and equipment.
Utilities that own and operate nuclear plants are required to use different
procedures in calculating nuclear decommissioning costs under SFAS No. 143 than
those that are used in calculating nuclear decommissioning costs when reporting
to the NRC. The two sets of procedures produce different estimates for the costs
of decommissioning primarily because of the difference in the discount rates
used to calculate the present value of decommissioning costs. See Note
5.
TVA
maintains a nuclear decommissioning trust to provide funding for the ultimate
decommissioning of its nuclear power plants. The fund is invested in
securities generally designed to achieve a return in line with overall equity
market performance. The assets of the fund are invested in debt and
equity securities and certain derivative instruments. These
derivative instruments are used across various asset classes to achieve a
desired investment structure and were comprised of 2,652 contracts with market
value losses of $1 million at September 30, 2008. These contracts
include futures, forwards, options, options on futures, swap agreements, and
options on swap agreements. Investments held in the decommissioning fund are
stated at fair value, which is determined by the trustee of the
fund. Futures and options on
futures
positions are marked to market on a daily basis. The swap agreements
are marked to market on a monthly basis. The assets of the fund as of
September 30, 2008, totaled $845 million including total losses of $241 million,
of which $184 million was unrealized. The assets of the fund as of
September 30, 2007, totaled $1.1 billion and reflected total gains of $150
million, of which $80 million was unrealized. The balance as of
September 30, 2008, was less than the present value of the estimated future
nuclear decommissioning costs under the NRC methodology and under SFAS No.
143. TVA monitors the monetary value of its nuclear decommissioning
trust and believes that, over the long term and before cessation of nuclear
plant operations and commencement of decommissioning activities, adequate funds
from investments will be available to support decommissioning. TVA’s
nuclear power units are currently authorized to operate until 2020-2036,
depending on the unit. It may be possible to extend the operating
life of some of the units with approval from the NRC.
Environmental
Matters. TVA’s activities are subject to certain federal,
state, and local environmental statutes and regulations. Major areas of
regulation affecting TVA’s activities include air quality control, water quality
control, and management and disposal of solid and hazardous wastes. Looking to
the future, regulations in all of these areas are expected to become more
stringent along with increased emphasis on dealing with climate change,
expanding renewable generation alternatives, and encouraging efficient use of
electricity
Due to
the increasing level and complexity of environmental requirements and
expectations, TVA completed a new, high-level, environmental policy to align
with and execute the direction in the 2007 TVA Strategic Plan. The final TVA
Environmental Policy was approved by the TVA Board on May 19, 2008 and is an
integrated framework which provides policy-level guidance to carry out TVA's
mission by providing cleaner, affordable energy, sustainable economic
development, and proactive environmental stewardship. The TVA Environmental
Policy sets out environmental objectives and critical success factors in six
environmental dimensions: climate change mitigation, air quality improvement,
water resource protection and improvement, waste minimization, sustainable land
use, and natural resource management.
TVA has
incurred and expects to continue to incur substantial capital and operating and
maintenance costs in order to comply with evolving environmental requirements
primarily associated with, but not limited to, the operation of TVA’s 59
coal-fired 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 Legal
Proceedings.
The total
cost of compliance with future clean air regulations cannot reasonably be
determined at this time because of the unknowns and uncertainties surrounding
emerging EPA regulations, resultant compliance strategies, and the potential for
the development of new emission control technologies, litigation, and future
amendments to the Clean Air Act. However, TVA does estimate that
spending on emission controls for conventional pollutants in the decade
beginning in 2011 could cost between $3.0 billion to $3.7 billion. There could
be other substantial costs if reductions of carbon dioxide (“CO2”) are
mandated. Predicting how and when CO2 may be
regulated is very difficult, even more so than the future regulation of other
substances. TVA will continue to monitor this issue and will assess and respond
to potential financial impacts as they become more certain.
TVA’s
total cost related to emission reduction regulatory programs for sulfur dioxide,
nitrogen oxide, and particulates from 1977 through 2010 is expected to reach
$5.5 billion, $5.1 billion of which had already been spent as of September 30,
2008.
Liability
for releases and cleanup of hazardous substances is primarily regulated by the
federal Comprehensive Environmental Response, Compensation, and Liability Act,
and other federal and parallel state statutes. In a manner similar to many other
industries and power systems, TVA has generated or used hazardous substances
over the years. TVA is aware of alleged hazardous-substance releases at 10
non-TVA areas for which it may have some liability. TVA has reached agreements
with EPA to settle its liability at two of the non-TVA areas for a total of less
than $23,000. There have been no recent assertions of TVA liability for five of
the non-TVA areas, and there is little or no known evidence that TVA contributed
any significant quantity of hazardous substances to these five sites.
There is evidence that TVA sent materials to the remaining three non-TVA areas:
the David Witherspoon site in Knoxville, Tennessee, the Ward Transformer site in
Raleigh, North Carolina, and the General Waste Products Site in Evansville,
Indiana. As discussed below, TVA is not able at this time to estimate its
liability related to these sites.
The
Witherspoon site is contaminated with radionuclides, polychlorinated biphenyls
(“PCBs”), and metals. DOE has admitted to being the main contributor of
materials to the Witherspoon site and is currently performing clean-up
activities. DOE claims that TVA sent equipment to be recycled at this facility,
and there is some supporting evidence for the claim. However, TVA believes it
sent only a relatively small amount of equipment and that none of it was
radioactive. DOE has asked TVA to “cooperate” in completing the cleanup, but it
has not provided to TVA any evidence of TVA’s percentage share of the
contamination.
The Ward
Transformer site is contaminated by PCBs from electrical
equipment. EPA and a working group of potentially responsible parties
(the “PRP Work Group”) have provided documentation showing that TVA sent a
limited amount of equipment containing PCBs to the site in 1974. The
PRP Work Group is cleaning up on-site contamination in accordance with an
agreement with EPA. The cleanup effort has been divided into four areas: two
phases of soil cleanup; cleanup of off-site contamination in the downstream
drainage basin; and supplemental groundwater remediation. The first phase of
soil cleanup is underway, and the high-end cost estimate for this work is about
$66 million. There are no reliable estimates for the second phase of soil
cleanup or the supplemental groundwater remediation. EPA has selected
a cleanup plan for the downstream drainage basin with a present worth cost
estimate of $6.1 million.
TVA
understands that the EPA has incurred approximately $3 million in past response
costs and the PRP Work Group has reimbursed EPA approximately $725,000 of those
costs. The PRP Work Group plans to propose a cost allocation schedule which it
will use as the basis for offering settlements to PRPs for the first phase of
soil cleanup. It plans to sue PRPs who do not settle. There also may be natural
resource damages liability at this site, but TVA is not aware of any estimated
amount for any such damages. TVA has a potential defense that it only sent
useful equipment to Ward and thus is not liable for arranging for disposal of a
hazardous substance at the site. This defense is highly fact specific and not
likely to be accepted by the PRP Work Group or EPA.
General
Waste Products was a scrap metal salvage yard that operated from the 1930s until
1998. The original defendants in a CERCLA action have filed a third
party complaint against TVA and others seeking cost contribution for cleanup of
contamination from lead batteries and PCB transformers at the
facility. There is evidence that TVA sent scrap metal to the
facility, but TVA has not found any records indicating that it sent batteries or
PCB equipment. There are two cleanup sites at the
facility. TVA has been informed that the first site has been cleaned
up at a cost of $3.2 million, and cleanup estimates for the second site range
from $2 million to $7 million. TVA’s allocated share of the cleanup
costs, if any, is expected to be relatively small.
TVA
operations at some TVA facilities have resulted in oil spills and other
contamination TVA plans to address, and TVA expects to incur costs of about $15
million for environmental work related to decommissioning of the Watts Bar
Fossil Plant.
As of
September 30, 2008, TVA’s estimated liability for cleanup and similar
environmental work for those sites for which sufficient information is available
to develop a cost estimate (primarily the TVA sites) is approximately $18
million on a non-discounted basis, and is included in Other Liabilities on
the Balance Sheet.
Legal
Proceedings
TVA is
subject to various legal proceedings and claims that have arisen in the ordinary
course of business. These proceedings and claims include the matters
discussed below. In accordance with SFAS No. 5, “Accounting forContingencies,” TVA had
accrued approximately $46 million and $3 million with respect to the
proceedings described below as of September 30, 2008 and 2007, respectively, as
well as approximately $5 million and $4 million as of September 30, 2008, and
2007, respectively, with respect to other proceedings that have arisen in the
normal course of TVA’s business. TVA recognized $20 million, $4
million, and $24 million in 2008, 2007, and 2006, respectively, of expense by
increasing accruals related to legal proceedings. 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, TVA’s results of operations, liquidity, and financial condition could be
materially adversely affected.
Global Warming Cases,
Southern District of New York. 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
CO2
emissions from fossil-fuel electric generating facilities should be ordered
abated because they contribute to causing the nuisance. The first
case was filed by various states (California, Connecticut, Iowa, New Jersey, New
York, Rhode Island, Vermont, and Wisconsin) and the City of New York against TVA
and other power companies. The second case, which alleges both public
and private nuisance, was filed against the same defendants by Open Space
Institute, Inc., Open Space Conservancy, Inc., and the Audubon Society of New
Hampshire. The plaintiffs do not seek monetary damages, but instead
seek a court order requiring each defendant to cap its CO2 emissions
and then reduce these emissions by an unspecified percentage each year for at
least a decade. In September 2005, the district court dismissed both
lawsuits because they raised political questions that should not be decided by
the courts. The plaintiffs appealed to the United States Court of
Appeals for the Second Circuit (“Second Circuit”). Oral argument was
held before the Second Circuit on June 7, 2006. On June 21, 2007, the
Second Circuit directed the parties to submit letter briefs by July 6, 2007,
addressing the impact of the Supreme Court’s decision in Massachusetts v. EPA, 127
S.Ct. 1438 (2007), on the issues raised by the parties. On July 6,
2007, the defendants jointly submitted their letter brief. The Second
Circuit is deliberating on its decision.
Case Involving Alleged
Violations of the New Source Review Regulations at Bull Run Fossil
Plant. The National Parks Conservation Association, Inc.
(“NPCA”), and the Sierra Club, Inc. (“Sierra Club”) filed suit against TVA on
February 13, 2001, in the United States District Court for the Eastern District
of Tennessee, alleging that TVA did not comply with the new source review
(“NSR”) requirements of the CAA when TVA repaired its Bull Run Fossil Plant
(“Bull Run”), a coal-fired electric generating facility located in Anderson
County, Tennessee. In March 2005, the district court granted TVA’s
motion to dismiss the lawsuit on statute of limitation grounds. The
plaintiffs’ motion for reconsideration was denied, and they appealed to the
United States Court of Appeals for the Sixth Circuit (“Sixth
Circuit”). Friend of the court briefs supporting the plaintiffs’
appeal were filed by New York, Connecticut, Illinois, Iowa, Maryland, New
Hampshire, New Jersey, New Mexico, Rhode Island, Kentucky, Massachusetts, and
Pennsylvania. Several Ohio utilities filed a friend of the court
brief supporting TVA. A panel of three judges issued a decision
reversing the district court’s dismissal on March 2, 2007. TVA’s
request that the full Sixth Circuit rehear the appeal was
denied. The district court trial previously scheduled for
September 2, 2008, was postponed, and the district court instead heard oral
arguments on the parties’ motions for summary judgment on that
date. The trial has not yet been rescheduled. TVA is
already installing or has installed the control equipment that the plaintiffs
seek to require TVA to install in this case, and it is unlikely that an adverse
decision will result in substantial additional costs to TVA at Bull
Run. An adverse decision, however, could lead to additional
litigation and could cause TVA to change its emission control strategy and
increase costs. It is uncertain whether there would be significant
increased costs to TVA.
Case Involving Opacity at
Colbert Fossil Plant. 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 Fossil Plant (“Colbert”) between July
1, 1997, and June 30, 2002. The plaintiffs seek a court order that could require
TVA to incur substantial additional costs for environmental controls and pay
civil penalties of up to approximately $250 million. After the court dismissed
the complaint (finding that the challenged emissions were within Alabama’s two
percent de minimis rule, which provided a safe harbor if nonexempt opacity
monitor readings over 20 percent did not occur more than two percent of the time
each quarter), the plaintiffs appealed the district court’s decision to the
United States Court of Appeals for the Eleventh Circuit (“Eleventh
Circuit”). On November 22, 2005, the Eleventh Circuit affirmed the
district court’s dismissal of the claims for civil penalties but held that the
Alabama de minimis rule was not applicable because Alabama had not yet obtained
Environmental Protection Agency (“EPA”) approval of that rule. The
case was remanded to the district court for further proceedings. On
April 5, 2007, the plaintiffs moved for summary judgment. TVA opposed
the motion and moved to stay the proceedings. On April 12, 2007, EPA
proposed to approve Alabama’s de minimis rule subject to certain
changes. On July 16, 2007, the district court denied TVA’s motion to
stay the proceedings pending approval of Alabama’s de minimis
rule. Oral argument on the plaintiffs’ motion for summary judgment
was held on August 16, 2007. On August 27, 2007, the district court
granted the plaintiffs’ motion for summary judgment, finding that TVA had
violated the CAA at Colbert. The district court held that, while TVA
had achieved 99 percent compliance on Colbert Units 1-4 and 99.5 percent
compliance at Colbert Unit 5, TVA had exceeded the 20 percent opacity limit
(measured in six-minute intervals) more than 3,350 times between January 3,
2000, and September 30, 2002. The district court ordered TVA to
submit a proposed remediation plan, which TVA did on October 26,
2007. The
plaintiffs responded to TVA’s proposed plan, and the district court held a
hearing on the plan on December 15, 2008. EPA has
approved Alabama’s de minimis rule, which will become effective in
2009.
In
addition to Colbert, TVA has another coal-fired power plant in Alabama, Widows
Creek Fossil Plant (“Widows Creek”), which has a summer net capability of 1,508
megawatts. Since the operation of Widows Creek must meet the same
opacity requirements, this plant may be affected by the decision in this
case. The recently approved de minimis rule change helps reduce the
chances of an adverse effect on Widows Creek from the district court
decision.
Case Brought by North
Carolina Alleging Public Nuisance. On January 30, 2006, North
Carolina filed suit against TVA in the United States District Court for the
Western District of North Carolina alleging that TVA’s operation of its
coal-fired power plants in the States of Tennessee, Alabama, and Kentucky
constitute public nuisances. North Carolina is asking the court to
impose caps on emissions of certain pollutants from TVA’s coal-fired plants that
North Carolina considers to be equivalent to caps on emissions imposed by North
Carolina law on North Carolina’s two largest electric utilities. The
imposition of such caps could require TVA to install more pollution controls on
a faster schedule than required by federal law. The trial in this
case was completed on July 30, 2008. The parties submitted their
post-trial filings on September 15, 2008, and a decision will follow at a later
time.
Case Arising out of
Hurricane Katrina. In April 2006, TVA was added as a defendant
to a class action lawsuit brought in the United States District Court for the
Southern District of Mississippi by 14 residents of Mississippi allegedly
injured by Hurricane Katrina. The plaintiffs sued seven large oil
companies and an oil company trade association, three large chemical companies
and a chemical trade association, and 31 large companies involved in the mining
and/or burning of coal, including TVA and other utilities. The
plaintiffs allege that the defendants’ greenhouse gas emissions contributed to
global warming and were a proximate and direct cause of Hurricane Katrina’s
increased destructive force. The plaintiffs
are seeking monetary damages among other relief. TVA has moved
to dismiss the complaint on grounds that TVA’s operation of its coal-fired
plants is not subject to tort liability due to the discretionary function
doctrine. The district court dismissed the case on the grounds that
the plaintiffs lacked standing. The plaintiffs appealed the dismissal
to the United States Court of Appeals for the Fifth Circuit, and oral argument
was held before a three judge panel in July 2008. A judge on the
panel subsequently recused himself from the case, and the case was reargued
during the week of November 3, 2008.
East Kentucky Power
Cooperative Transmission Case. In April 2003, Warren Rural
Electric Cooperative Corporation (“Warren”) notified TVA that it was terminating
its power contract with TVA. 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. East Kentucky
asked to interconnect its transmission system with the TVA transmission system
in three places that are currently delivery points through which TVA supplies
power to Warren. TVA did not agree and East Kentucky asked FERC to
order TVA to provide the interconnections. In January 2006, FERC
issued a final order directing TVA to interconnect its transmission facilities
with East Kentucky’s system at three locations. TVA appealed the FERC
order in the United States Court of Appeals for the District of Columbia Circuit
(“D.C. Circuit”) seeking review of this order on the grounds that this order
violated the anti-cherrypicking provision. On January 10, 2007, TVA
and Warren executed an agreement under which Warren rescinded its notice of
termination. FERC terminated the proceeding but did not vacate its
previous order. On January 17, 2008, TVA filed an unopposed motion to
dismiss the D.C. Circuit appeal as moot. The D.C. Circuit dismissed
the case on January 29, 2008.
Case Involving AREVA Fuel
Fabrication. On November 9, 2005, TVA received two invoices
totaling $76 million from Framatome ANP Inc., which subsequently changed its
name to AREVA NP Inc. (“AREVA”). AREVA asserted that it was the
successor to the contract between TVA and Babcock and Wilcox Company (“B&W”)
under which B&W would provide fuel fabrication services for TVA’s Bellefonte
Nuclear Plant. AREVA’s invoices were based upon the premise that the
contract required TVA to buy more fuel fabrication services from B&W than
TVA actually purchased. In September 2006, TVA received a formal
claim from AREVA which requested a Contracting Officer’s decision pursuant to
the Contract Disputes Act of 1978 and reduced the amount sought to $26
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 $26 million claim and alleging that the contract required TVA to
purchase certain amounts of fuel and/or to pay a cancellation
fee. TVA filed its answer to the complaint on June 15,
2007. AREVA subsequently raised its claim to $48
million. Trial on the question of liability was scheduled to begin on
September 22, 2008, but has been reset for April 20, 2009. A second
trial on the question of damages will be held later, if
necessary. TVA and AREVA have negotiated the terms of a settlement
agreement. This agreement is contingent on approval by the TVA
Board. The parties have scheduled a meeting with an independent
third-party on December 16, 2008, to review the proposed settlement
agreement.
Notification of Potential
Liability for Ward Transformer Site. The Ward Transformer site
is contaminated by PCBs from electrical equipment. EPA and a working
group of potentially responsible parties (the “PRP Work Group”) have provided
documentation showing that TVA sent a limited amount of equipment containing
PCBs to the site in 1974. The PRP Work Group is cleaning up on-site
contamination in accordance with an agreement with EPA. The cleanup
effort has been divided into four areas: two phases of soil cleanup; cleanup of
off-site contamination in the downstream drainage basin; and supplemental
groundwater remediation. The first phase of soil cleanup is underway,
and the high-end cost estimate for this work is about $66
million. There are no reliable estimates for the second phase of soil
and cleanup or the supplemental groundwater remediation, although EPA has
selected a cleanup plan for the downstream drainage basin with a present worth
cost estimate of $6 million. TVA understands that EPA has incurred
approximately $3 million in past response costs, and the PRP Work Group has
reimbursed EPA approximately $725,000 of those costs. The PRP Work
Group plans to propose a cost allocation schedule which it will use as the basis
for offering settlements to PRPs for the first phase of soil
cleanup. It plans to sue PRPs who do not settle. There
also may be natural resource damages liability at this site, but TVA is not
aware of any estimated amount for any such damages. TVA has a
potential defense that it only sent useful equipment to Ward and thus is not
liable for arranging for disposal of a hazardous substance at the
site.
Case Involving the General
Waste Products Sites. In July 2008, a third-party complaint
under CERCLA was filed against TVA in the District Court for the Southern
District of Indiana, alleging that TVA, and several other defendants, disposed
of hazardous materials at the General Waste Products sites in Evansville,
Indiana. TVA was named in the complaint based on allegations that TVA
arranged for the disposal of contaminated materials at the sites. The
other third-party defendants are General Waste Products, General Electric
Company, Indianapolis Power and Light, National Tire and Battery, Old Ben Coal
Co., Solar Sources Inc., Whirlpool, White County Coal, PSI, Tell City Electric
Department, Frontier Kemper, Speed Queen, Allan Trockman (the former operator of
the site), and the City of Evansville. This action was
brought by the
Evansville Greenway PRP Group, a group of entities who are currently being sued
in the underlying case for disposing of hazardous materials at the sites, in
order to require the third-party defendants to contribute to, or pay for, the
remediation of the sites. The complaint also includes a claim under
state law against the defendants for the release of hazardous
materials. TVA has found no records indicating that it arranged for
disposal of these types of hazardous substances at the sites. TVA
filed its answer to the complaint on October 29, 2008.
Completion
of Browns Ferry Unit 1, Team Incentive Fee Pool Claims. Under
the contracts for the restart of TVA’s Browns Ferry Unit 1, TVA and two
engineering and construction contractors, Bechtel Power Corporation (“Bechtel”)
and Stone & Webster Construction, Inc. (“Stone and Webster”), are to share
in a team incentive fee pool funded from cost savings based on underruns in the
budgets for their respective work scopes. The contracts provide that the
fee pool could not exceed $100 million regardless of the actual savings
involved, and the savings would be allocated as follows: 90 percent of the
first $40 million would be given to the contractors, and any amount over $40
million would be split equally among TVA and the two contractors. Thus, if
the maximum cost savings of $100 million had been attained, each contractor’s
payment from this pool would have been $38 million, for a total payout under
both contracts of $76 million with the remaining $24 million being credited to
TVA. The contractors have taken the position that they should each receive
the maximum payment. In 2008,
Bechtel agreed to settle its team incentive fee claim for a payment of $15
million, conditioned upon Bechtel receiving an additional payment equal to any
amount over $15 million that Stone and Webster receives in resolution of its
team incentive fee claim. TVA and Stone and Webster
mediated the team incentive fee claim
(as well as other claims) in May 2008 and discussions with Stone and
Webster are continuing. On
August 20, 2008, the TVA Board approved a proposed settlement with Stone and
Webster, contingent on Stone and Webster agreeing to certain
conditions. Stone and Webster has not agreed to the
conditions. It is reasonably possible that TVA could incur some
potential liability in excess of the amount previously calculated by TVA,
and TVA has created a reserve for the additional amount.
Paradise Fossil Plant Clean
Air Act Permit. On December 21, 2007, the Sierra Club, the
Center for Biological Diversity, Kentucky Heartwood, and Hilary Lambert filed a
petition with EPA raising objections to the conditions of TVA’s current CAA
permit at the Paradise Fossil Plant (“Paradise”). Among other things,
the petitioners allege that activities at Paradise triggered the NSR
requirements for NOx and that
the monitoring of opacity at Units 1 and 2 of the plant is
deficient. The current permit continues to remain in
effect. It is unclear whether or how the plant’s permit might be
modified as a result of this proceeding.
Employment
Proceedings. TVA is engaged in various administrative and
legal proceedings arising from employment disputes. These matters are
governed by federal law and involve issues typical of those encountered in the
ordinary course of business of a utility. They may include
allegations of discrimination or retaliation (including retaliation for raising
nuclear safety or environmental concerns), wrongful termination, and failure to
pay overtime under the Fair Labor Standards Act. Adverse outcomes in
these proceedings would not normally be material to TVA’s results of operations,
liquidity, and financial condition, although it is possible that some outcomes
could require TVA to change how it handles certain personnel matters or operates
its plants.
Information Request from
EPA. On April 25, 2008, TVA received a request from EPA under
section 114 of the CAA requesting extensive information about projects at and
the operations of 14 of TVA’s 59 coal-fired units. These 14 units are
located in the States of Alabama, Kentucky, and Tennessee. This request
for information is similar to but broader than section 114 requests that
other companies have received during EPA’s NSR enforcement initiative. TVA
has responded to this request. EPA’s request could be the first step
in an administrative proceeding against TVA that could then result in litigation
in the courts.
Notice of Violation at
Widows Creek Unit 7. On July 16, 2007, TVA received a Notice
of Violation (“NOV”) from EPA alleging that TVA failed to properly maintain
ductwork at Widows Creek Unit 7 and other violations. TVA repaired
the ductwork in 2005. While the NOV does not set out an
administrative penalty, it is likely that EPA may seek a monetary sanction
through giving up emission allowances, paying an administrative penalty, or
both. TVA and the State of Alabama entered into an agreed order in
which TVA agreed to pay the state $100,000. TVA is unable to estimate
the amount of potential monetary sanctions from EPA for which TVA may be liable
in connection with the NOV.
Administrative Proceeding
Regarding Bellefonte Nuclear Plant Units 3 and 4. TVA submitted its COLA
to NRC for Bellefonte Nuclear Plant (“Bellefonte”) Units 3 and 4 in October
2007. If approved, the license to build and operate the plant would
be issued to TVA. Obtaining the necessary license would give TVA more
certainty about the cost and schedule of a nuclear option for future
decisions. The COLA for two AP1000 reactors at Bellefonte was
officially docketed by NRC on January 18, 2008, indicating the NRC found it
complete and technically sufficient to support NRC’s more detailed
reviews.
On June
6, 2008, a joint petition for intervention and a request for a
hearing submitted to the NRC by the
Bellefonte Efficiency and Sustainability Team, the Blue Ridge Environmental
Defense League, and the Southern Alliance for Clean
Energy. The petition raised 19 potential contentions with respect to
TVA’s COLA. Both TVA and the NRC staff opposed the admission of the
petitioners’ proposed contentions, and, as a result, the admission of the
petitioners as parties to the proceeding. Additionally, TVA opposed
the admission of one of the petitioners to the proceeding on the grounds that it
lacked standing. The Atomic Safety and Licensing Board
presiding over the proceeding subsequently denied standing to one of the
petitioners and accepted four of the 19 contentions submitted by the remaining
two petitioners. A hearing on these admitted contentions will be
conducted in the future. The admitted contentions involve questions
about the estimated costs of the new nuclear plant, the storage of low-level
radioactive waste, and the impact of the facility’s operations, in particular
the plant intake, on aquatic species. Other COLA applicants have
received similar petitions raising similar potential
contentions.
The TVA
Board has not made a decision to construct new plant units at the Bellefonte
site, and TVA continues to evaluate all nuclear generation options at the
site.
Significant Litigation to
Which TVA Is Not a Party. On April 2, 2007, the Supreme Court
issued an opinion in the case of United States v. Duke Energy,
vacating the ruling of the United States Court of Appeals for the Fourth Circuit
(“Fourth Circuit”) in favor of Duke Energy and against EPA in EPA’s NSR
enforcement case against Duke Energy. The NSR regulations apply
primarily to the construction of new plants but can apply to existing plants if
a maintenance project (1) is “non-routine” and (2) increases
emissions. The Supreme Court held that under EPA’s Prevention of
Significant Deterioration regulations, increases in annual emissions should be
used for the test, not hourly emissions as utilities, including TVA, have argued
should be the standard. Annual emissions can increase when a project
improves the reliability of plant operations and, depending on the time period
over which emission changes are calculated, it is possible to argue that almost
all reliability projects increase annual emissions. Neither the
Supreme Court nor the Fourth Circuit addressed what the “routine” project test
should be. The United States District Court for the Middle District
of North Carolina had ruled for Duke Energy on this issue, holding that
“routine” must take into account what is routine in the industry and not just
what is routine at a particular plant or unit as EPA has argued. EPA did not
appeal this ruling. On October 5, 2007, EPA filed a motion with the
United States District Court for the Middle District of North Carolina asking
that court to vacate its entire prior ruling, including the portion relating to
the test for “routine” projects.
TVA is
currently involved in an NSR case involving Bull Run, which is discussed in more
detail above. The Supreme Court’s rejection of the hourly standard
for emissions testing could undermine one of TVA’s defenses in the Bull Run
case, although TVA has other available defenses. Environmental groups
and North Carolina have given TVA notice in the past that they may sue TVA for
alleged NSR violations at a number of TVA units. The Supreme Court’s decision
could encourage such suits, which are likely to involve units where emission
control systems such as scrubbers and selective catalytic reduction systems are
not installed, under construction, or planned to be installed in the relatively
near term.
Significant Litigation to
Which TVA Is Not a Party, Case Involving North Carolina’s Petition to
EPA. In 2005, North Carolina petitioned EPA under Section 126
of the CAA to impose additional emission reduction requirements for SO2 and NOx on
coal-fired power plants in 13 states, including the states where TVA’s
coal-fired power plants are located. In March 2006, EPA denied the
North Carolina petition primarily on the basis that CAIR remedies the problem.
In June 2006, North Carolina filed a petition for review of EPA’s decision with
the D.C. Circuit. On October 1, 2007, TVA filed a friend of the court
brief in support of EPA’s decision to deny North Carolina’s Section 126
petition. The D.C. Circuit ordered
the parties, including TVA, to file new briefs in the case and to address what
should happen if the court vacates CAIR.
16.
Related Parties
TVA is a
wholly-owned corporate agency of the federal government, and because of this
relationship, TVA’s revenues and expenses are included as part of the federal
budget. TVA’s purpose and responsibilities as an agency are described
under the “Other Agencies” section of the federal budget.
TVA
currently receives no appropriations from Congress and funds its business using
generated power system revenues, power financings, and other
revenues. TVA is a source of cash to the federal
government. Until TVA meets its remaining obligation to pay $110
million of the Power Facility Appropriation Investment under the TVA Act, TVA
will continue to repay a portion of the Power Facility Appropriation Investment
in the TVA power system. TVA will also continue to pay a return on
the outstanding balance of this investment indefinitely. See Note 9 —
Appropriation
Investment.
TVA has
access to financing arrangements with the U.S. Treasury, whereby the U.S.
Treasury is authorized to accept interim obligations with maturities of one year
or less in an aggregate amount outstanding not to exceed $150
million. There was no outstanding balance at September 30, 2008 or
2007 related to the financing arrangement. In 2009, TVA and the U.S.
Treasury replaced the $150 million note under which TVA previously borrowed from
the U.S. Treasury with a memorandum of understanding under which TVA has a $150
million credit facility.
In the
normal course of business, TVA contracts with other federal agencies for sales
of electricity and other services. Transactions with agencies of the
federal government were as follows:
Related
Party Transactions
For
the years ended, or as of, September 30
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Sales
of electricity services
|
$ | 187 | $ | 188 | $ | 181 | ||||||
Other
revenues
|
42 | 47 | 24 | |||||||||
Other
expenses
|
231 | 237 | 226 | |||||||||
Receivables
at September 30
|
19 | 19 | 21 | |||||||||
Payables
at September 30
|
60 | 126 | 123 | |||||||||
Return
on Power Facility Appropriation Investment
|
20 | 20 | 18 | |||||||||
Repayment
of Power Facility Appropriation Investment
|
20 | 20 | 20 |
17.
Unaudited Quarterly Financial Information
A summary
of the unaudited quarterly results of operations for the years 2008 and 2007
follows. This summary should be read in conjunction with the audited
financial statements appearing herein. Results for interim periods
may fluctuate as a result of seasonal weather conditions, changes in rates, and
other factors. The increased net income in the fourth quarter of 2008
was primarily due to a one-time decrease to depreciation, amortization, and
accretion expense for a change in accounting for non-nuclear asset retirement
obligations of $350 million. See Note 6 — Non-Nuclear Decommissioning
Costs.
Unaudited
Quarterly Financial Information
2008
|
||||||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
Total
|
||||||||||||||||
Operating
revenues
|
$ | 2,360 | $ | 2,518 | $ | 2,552 | $ | 2,952 | $ | 10,382 | ||||||||||
Operating
expenses
|
2,012 | 2,041 | 2,111 | 2,034 | 8,198 | |||||||||||||||
Operating
income
|
348 | 477 | 441 | 918 | 2,184 | |||||||||||||||
Net
income
|
8 | 135 | 100 | 574 | 817 |
2007
|
||||||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
Total
|
||||||||||||||||
Operating
revenues
|
$ | 2,126 | $ | 2,259 | $ | 2,265 | $ | 2,676 | $ | 9,326 | ||||||||||
Revenue
capitalized during pre-commercial plant operations
|
– | – | 23 | 34 | 57 | |||||||||||||||
Operating
expenses
|
1,785 | 1,875 | 1,837 | 2,229 | 7,726 | |||||||||||||||
Operating
income
|
341 | 384 | 405 | 413 | 1,543 | |||||||||||||||
Net
income
|
70 | 111 | 214 | 28 | 423 |
18.
Subsequent Events
Debt
In
October 2008, TVA issued $15 million of electronotes® with
an interest rate of 5.00 percent which mature in 2024 and are callable beginning
in 2012.
In
November 2008, TVA issued $7 million of electronotes® with
an interest rate of 5.25 percent which mature in 2029 and are callable beginning
in 2013.
On
November 13, 2008, TVA redeemed $2 billion of a maturing power bond which had a
coupon of 5.38 percent.
In
December 2008, TVA issued $18 million of electronotes® with
an interest rate of 5.00 percent which mature in 2029 and are callable beginning
in 2013.
Credit
Facility Agreements
The $150
million note with U.S. Treasury expired at the end of 2008. In December 2008,
TVA and the U.S. Treasury replaced the $150 million note with a memorandum of
understanding under which TVA will have a $150 million credit facility. TVA
plans to use the U.S. Treasury credit facility as a source of liquidity, but not
as a primary source of liquidity, in 2009.
In
November 2008, TVA renewed the national bank credit facility with the November
10, 2008 maturity date. The new maturity date for this credit
facility is November 9, 2009. When TVA renewed its November maturity
credit facility, TVA reduced the amount of the facility from $1.25 billion to $1
billion. Management believes that TVA’s liquidity position has not
materially changed with the reduced amount of the November maturity credit
facility.
Impacts
of Recent Financial Market Conditions on Investment Portfolios
Financial
markets have experienced significant uncertainty in recent months due to
deteriorating economic conditions. The uncertainty has resulted in
significantly lower market valuations for many investments. TVA's
investment portfolios contain a variety of diversified investments, including
securities directly impacted by these events. The impact of these
events on TVARS and nuclear decommissioning trust investment portfolios is
reflected in changes in these portfolio values from September 30, 2008, to
November 30, 2008, which are outlined in the following table:
Summary
of Impacts of Recent Financial Market Conditions on Investment
Portfolios
2008
|
||||||||||||||||
September
30*
|
October
31*
|
November
30*
|
Percent
Change From November 30, 2008 to
September
30, 2008
|
|||||||||||||
Retirement
System
|
$ | 6,188 | $ | 5,298 | $ | 4,973 | (18 | )% | ||||||||
Nuclear
Decommissioning Trust
|
845 | 688 | 639 | (24 | )% |
|
*
|
Investment
balances at September 30, 2008, as reported in Notes 14 and
15. Investment balances at October 31, 2008, are based on final
trustee statements, and investment balances at November 30, 2008, are
based on preliminary trustee
balances.
|
During
the period of September 30, 2008, through November 30, 2008, the change in the
Standard & Poor’s 500 benchmark index was a decrease of 23
percent.
As a
result of an unprecedented inversion of the swap yield curve and
volatility in global financial markets, coupled with a decrease in swap rates to
historically low rates, beginning December 1, 2008, TVA was required
to post collateral with a counterparty under the terms of the
2003A Swaption agreement. At November 30, 2008, the value of the
2003A Swaption was such that TVA posted $343 million with a custodian for
benefit of the counterparty.
Summary
of Impacts of Recent Commodity Market Conditions
The
commodity markets have also experienced volatility in recent months. The
changes in these prices from September 30, 2008, to November 30, 2008, are
outlined in the following table:
Commodity
Pricing Table
|
||||||||||||
Commodity
|
Prices
As of November 30, 2008
|
Prices
As of
September
30, 2008
|
Percent
Change
|
|||||||||
Natural
Gas (Henry Hub, $/mmBtu)
|
$ | 6.71 | $ | 9.01 | (26 | )% | ||||||
Fuel
Oil (Gulf Coast, $/mmBtu)
|
12.20 | 21.38 | (43 | )% | ||||||||
Coal
(FOB mine $/ton)
|
58.76 | 48.13 | 22 | % | ||||||||
Electricity
(Into-TVA, $/MWh)
|
||||||||||||
On-Peak
(5 days x 16 hours)
|
38.00 | 70.95 | (46 | )% | ||||||||
Off-Peak
(5 days x 8 hours)
|
34.75 | 38.40 | (10 | )% |
Renewable
Energy Request for Proposal
In
December 2008, TVA issued a request for proposal (“RFP”) seeking proposals which
may result in TVA obtaining both dispatchable capacity and as-available energy
from renewable energy sources, clean energy sources, or sources that are
considered to be both renewable and clean energy sources.
|
•
|
The
RFP seeks proposals for the supply to TVA of up to a total of 500
megawatts of dispatchable capacity capable of being delivered by June 1,
2009, increasing to up to a total of 750 megawatts of dispatchable
capacity capable of being delivered as of June 1, 2010, and further
increasing to up to a total of 1,000 megawatts of dispatchable capacity
capable of being delivered as of June 1,
2011.
|
|
•
|
In
addition, the RFP seeks proposals for the supply to TVA of up to a total
of 500 megawatts of as-available energy capable of being delivered by June
1, 2009, increasing to up to a total of 750 megawatts of as-available
energy capable of being delivered as of June 1, 2010, and further
increasing to up to a total of 1,000 megawatts of as-available energy
capable of being delivered as of June 1,
2011.
|
TVA
expects to receive proposals in response to the RFP in January
2009.
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board
of Directors of Tennessee Valley Authority
We have
audited the accompanying balance sheet of Tennessee Valley Authority as of
September 30, 2008, and the related statements of income, changes in proprietary
capital, and cash flows for the year then ended. Our audit also included the
financial statement schedule listed in the Index at Item 15(a) for the year
ended September 30, 2008. These financial statements and schedule are
the responsibility of Tennessee Valley Authority's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Tennessee Valley
Authority at September 30, 2008 and the consolidated results of its operations
and its cash flows for the year then ended, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein for the year ended September 30,
2008.
/s/ Ernst
& Young, LLP
Chattanooga,
Tennessee
December
15, 2008
To the
Board of Directors of Tennessee Valley Authority:
In our
opinion, the accompanying balance sheet and the related statements of income, of
changes in proprietary capital and of cash flows present fairly, in all material
respects, the financial position of Tennessee Valley Authority at September 30,
2007, and the results of its operations and its cash flows for each of the two
years in the period ended September 30, 2007 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements. These financial statements and
financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
As
discussed in Note 1 to the financial statements, effective September 30, 2006,
Tennessee Valley Authority adopted Financial Accounting Standards Board
Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations--an Interpretation of FASB Statement No.
143.
/s/
PricewaterhouseCoopers LLP
Atlanta,
Georgia
|
December
10, 2007, except with respect to the matter disclosed in Note 2 of the
Tennessee Valley Authority Form 10-K/A Amendment No. 2 as to which the
date is November 21, 2008
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE
Not
Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
An
evaluation has been performed under the supervision of TVA management (including
the president and chief executive officer) and members of the disclosure control
committee (including the chief financial officer and the vice president and
controller) of the effectiveness of the design and operation of TVA’s disclosure
controls and procedures as of September 30, 2008. Based on that
evaluation, the president and chief executive officer and members of the
disclosure control committee (including the chief financial officer and the vice
president and controller) concluded that TVA’s disclosure controls and
procedures were not effective as of September 30, 2008, to ensure that
information required to be disclosed in reports TVA files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
and reported within the time periods specified in Securities and Exchange
Commission rules and forms solely because as of September 30, 2008, TVA had not
yet filed its quarterly report on Form 10-Q for the quarter ended June 30,
2008. TVA was unable to file this quarterly report in a timely manner
because at the time the report was due, TVA was in the process of restating
previously filed financial statements to correct errors in TVA’s estimates of
unbilled revenue.
Internal
Control Over Financial Reporting
(a) Management’s
Annual Report on Internal Control Over Financial Reporting
TVA’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Exchange Act Rule 13a-15(f) for
TVA. TVA’s internal control over financial reporting is designed to
provide reasonable, but not absolute, assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance
with generally accepted accounting principles. Because of the
inherent limitations in all control systems, TVA management believes that a
control system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the control system are met and that
all control issues and instances of fraud, if any, within a company can be
detected.
TVA’s
management evaluated the design and effectiveness of TVA’s internal control over
financial reporting as of September 30, 2008 based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, management concluded that
TVA’s internal control over financial reporting was effective as of September
30, 2008.
This
Annual Report does not include an attestation report of TVA’s registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by TVA’s registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit TVA to provide only management’s report in this Annual
Report.
(b) Changes in Internal Control over
Financial Reporting
During
the most recent fiscal quarter, there were changes in TVA’s internal control
over financial reporting that materially affected, or are reasonably likely to
materially affect, TVA’s internal control over financial
reporting. In particular, during the fourth quarter of 2008 and prior
to TVA’s filing of its quarterly report on Form 10-Q for the quarter ended June
30, 2008, TVA both identified and remediated a material weakness in internal
controls related to TVA’s unbilled revenue estimates.
Identification of Material
Weakness. TVA
management identified a material weakness in internal controls related to TVA’s
unbilled revenue estimates. The estimation process implemented in
September 2006 utilized the distributors’ average rates and an estimate of the
number of days of revenue outstanding to reflect the delay in reporting the
end-use sales to TVA (“days outstanding”). The number of days
outstanding was derived using a procedure similar to a cross-correlation
calculation that compared the monthly retail load to the monthly wholesale
load. The intent was to reflect in the unbilled estimate the end-use
sales that would be reported that month by distributors plus any remaining sales
that would not be reported until the following month due to the delay between
wholesale delivery and end-use reporting.
TVA has
determined that the process implemented in September 2006 overestimated the days
outstanding and that this overestimation resulted in an error in recording
unbilled revenue and unbilled receivables. The previous unbilled process also
failed to consider the annual true-up of each distributor’s reported
distribution losses. The annual true-up reconciles total end-use
kilowatt-hour (“kWh”) sales and revenue reported by each distributor with the
kWh sales recorded for each distributor at wholesale.
Remediation of Material
Weakness. TVA has used a new process for estimating unbilled
revenue for periods presented in this Annual Report. This process
carries over only the portion of sales from the distributor’s meter read date to
the month-end. Those sales, along with the current month sales, are
then priced at rates based on each distributor’s customer and product
mix. Additionally, the true-up component has been added to the
unbilled calculation to reflect any timing differences that occur between the
retail and wholesale billing cycles.
ITEM 9B. OTHER INFORMATION
Approval
of 2009 Winning Performance Balanced Scorecard
During
its December 11, 2008, public meeting, the TVA Board approved TVA’s 2009 Winning
Performance Balanced Scorecard, which is used to determine the annual incentive
of all participants in the Executive Annual Incentive Plan (“EAIP”), as well as
all other TVA employees who participate in TVA’s Winning Performance Team
Incentive Plan. EAIP participants include Tom D. Kilgore, Kimberly S.
Greene, William R. Campbell, William R. McCollum, Jr., and Ashok S. Bhatnagar
(the “Named Executive Officers”). The performance measures, weights,
and goals which will be used to determine payouts for the EAIP are set forth
below:
TVA’s
2009 Winning Performance Measures
Goals
|
||||||||||||||||
Performance
Measure
|
Weight
|
Threshold
|
Target
|
Maximum
|
||||||||||||
TVA
Connection Point Interruptions (Interruptions/Connection
Point)
|
20 | % | 1.12 | 0.78 | ||||||||||||
TVA
Net Cash Flow From Operations less Investing ($ Millions)
|
35 | % |
Budget
less Revenue Adjustment
|
Budget
|
Exceed
Budget by $50M
|
|||||||||||
TVA
Demand Reduction ($/kW Reduced)
|
10 | % | 643 | 611 | 582 | |||||||||||
TVA
Equivalent Availability Factor – Coal, Combined Cycle & Nuclear
(Percent)
|
35 | % | 85.8 | 87.1 | 88.0 |
The 2009
TVA Winning Performance Balanced Scorecard represents 30 percent of the
potential payout under the EAIP for 2009 for the Named Executive
Officers. Of the remaining 70 percent, (1) 30 percent is tied, in the
case of Mr. Campbell and Mr. Bhatnagar, to the performance of their respective
business units or, in the case of Mr. Kilgore, Ms. Greene, and Mr.
McCollum, to a composite average of the performance of all TVA business units,
(2) 30 percent is tied to the achievement of individual goals, and (3) 10
percent is tied to the assessment of the executive’s performance during 2009 by
the Chief Executive Officer or, in the case of Mr. Kilgore, by the TVA
Board.
Awards
earned under the EAIP for 2009 will be calculated as the product of (1) base
salary, (2) the annual incentive opportunity, and (3) the percent of opportunity
achieved. For 2009, the base salary and annual incentive opportunity
are $850,000 and 100 percent for Mr. Kilgore, $525,000 and 70 percent for Ms.
Greene, $493,218 and 75 percent for Mr. Campbell, $745,514 and 70 percent for
Mr. McCollum, and $456,246 and 60 percent for Mr. Bhatnagar, and the percent of
opportunity achieved for each Named Executive Officer is determined in
accordance with the methodology described in the preceding
paragraph.
The TVA
Board has reserved to itself the authority to approve an adjustment to payout
levels generated by the 2009 Winning Performance Balanced Scorecard results if
the TVA Board determines such adjustments are warranted.
Changes
to Executive Long Term-Incentive Plan
During
its December 11, 2008, public meeting, the TVA Board revised TVA’s Executive
Long-Term Incentive Plan (the “ELTIP”) by adding a non-fuel operations and
maintenance metric for the performance cycles ending on or after September 30,
2011. This metric deals with non-fuel operations and maintenance
costs, which represent a controllable component of TVA’s costs. The
targets for this metric are as follow:
|
•
|
The
threshold goal will be based on improvement over the last performance
cycle,
|
|
•
|
The
target goal is TVA ranking at or above the 50th percentile of the peer
group utilities’ benchmark performance,
and
|
|
•
|
The
maximum performance goal is TVA ranking at or above the 75th percentile of
the peer group utilities’ benchmark
performance.
|
The other
performance metrics remain unchanged. For a discussion of these
metrics and the general terms of ELTIP (see Item 11, Executive Compensation
— Compensation Discussion and
Analysis).
The TVA
Board has reserved to itself the authority to review TVA results and peer group
comparison at the end of any ELTIP performance cycle and to approve adjustments
in ELTIP payouts if the TVA Board determines such adjustments are
warranted.
PART
III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
TVA is
administered by a board of nine part-time members appointed by the President of
the United States with the advice and consent of the Senate. The
Chairman of the TVA Board is selected by the members of the TVA
Board.
The TVA
Board at December 16, 2008, consisted of the following individuals with their
ages and terms of office provided:
Directors
|
Age
|
Year
Appointed
|
Year
Term Expires
|
||||||
William
B. Sansom, Chairman
|
67 | 2006 | 2009 | ||||||
Bishop
William Graves
|
72 | 2008 | 2012 | ||||||
Donald
R. DePriest
|
69 | 2006 | 2009 | ||||||
Howard
A. Thrailkill
|
69 | 2006 | 2010 | ||||||
Dennis
C. Bottorff
|
64 | 2006 | 2011 | ||||||
Robert
M. Duncan
|
57 | 2006 | 2011 | ||||||
Thomas
C. Gilliland
|
60 | 2008 | 2011 |
There are
currently two vacant positions on the TVA Board, and President Bush has
nominated Susan Richardson Williams and Michael B. Bemis to fill these
positions.
Mr.
Sansom of
Knoxville, Tennessee, joined the TVA Board in March 2006 and was elected
Chairman by the TVA Board in March 2006. He is Chairman and Chief
Executive Officer of The H.T. Hackney Co., a diversified company involved in
wholesale grocery, gas and oil, and furniture manufacturing, and has held that
position since 1983. Since 1995, Mr. Sansom has also been a director
of Astec Industries, Inc., a corporation based in Chattanooga, Tennessee, that
manufactures equipment and components used in road construction, and since 1984,
he has been a director at First Horizon National Corporation, a Memphis,
Tennessee, bank holding company. In 2006, he was named a director of
Mid-America Apartment Communities, Inc., a real estate investment trust with
ownership interests in apartment homes. From 1994 to 2006, he was a
director of Martin Marietta Materials, Inc., a company based in Raleigh, North
Carolina, that supplies minerals, chemicals, and composites for various
industries.
Bishop
Graves of Memphis, Tennessee, served on the TVA Board from October 2006 to
December 2007 and was reappointed to the TVA Board in June 2008. He has
been presiding Bishop of the Christian Methodist Episcopal Church in Memphis,
Tennessee since being elected at the 2006 General Conference
held in June to July 2006. Previously, he was pastor of the Phillips
Temple CME Church of Los Angeles, California. He is the immediate
Past President of the Board of the National Congress of Black Churches, and from
September 1993 to July 2004 Bishop Graves was a member of the Board of Memphis
Light, Gas and Water, a TVA distributor customer.
Mr.
DePriest of
Columbus, Mississippi, joined the TVA Board in March 2006. He is
Chairman of MCT Investors L.P. an Alexandria, Virginia, venture capital firm
that he founded in 1987 and that develops telecommunications and healthcare
ventures. He has founded other companies, including Boundary
Healthcare Products Corporation in 1987, where he served as Chairman until
1992. He also founded Charisma Communications Corporation in 1982, a
telecommunications company, where he served as Chairman and
President.
Mr.
Thrailkill of Huntsville, Alabama, joined the TVA Board in March
2006. He retired in September 2005 as President and Chief Operating
Officer of Adtran, Inc., in Huntsville, which supplies equipment for
telecommunications service providers and corporate end-users. He
joined Adtran, Inc., in 1992.
Mr.
Bottorff of Nashville, Tennessee, joined the TVA Board in March
2006. Since January 2001, he has served as Partner of Council
Ventures, a venture capital firm. He was Chairman of AmSouth
Bancorporation until his retirement in 2001 and from 1991 to 1999 was Chief
Executive Officer of First American Bank. He served as a director of
Dollar General, a variety store company, from 1998 until its sale in
2007. In addition, he is a director of Ingram Industries, a privately
held provider of wholesale distribution, inland marine transportation, and
insurance services; a director of Benefit Informatics, a company which provides
information used to improve the quality and reduce the cost of health care; and
a member of the Board of Trustees of Vanderbilt University.
Mr.
Duncan of Inez, Kentucky, joined the TVA Board in March 2006. He is
the Chairman, Chief Executive Officer, and Director of Inez Deposit Bank, FSB in
Louisa, Kentucky (since April 1984, with a one-year leave of absence from 1989
to 1990 to serve as Assistant Director of Public Liaison in the White House);
Chairman, Chief Executive Officer, and Director of Inez Deposit Bank in Inez,
Kentucky (since September 1974 with a one-year leave of absence); Chairman,
Chief Executive Officer, and Director of Community Holding Company, a
single-bank holding company (since 1984 with a one-year leave of absence);
Chairman, Chief Executive Officer, and Director of Community Thrift Holding
Company, a unitary thrift holding company (since 1999); and Chairman of the
Republican National Committee since (January 2007). From 1998 to
2007, Mr. Duncan was the Chairman of the Big Sandy Regional Industrial
Development Authority, which manages industrial parks in five eastern Kentucky
counties, and he is also the Secretary for the Highlands Regional Medical Center
in Prestonburg, Kentucky, which manages a regional hospital.
Mr.
Gilliland of Blairsville, Georgia, joined the Board in March
2008. From April 1994 to January 2008, Mr. Gilliland served as
Executive Vice President, Secretary, General Counsel, and Director of United
Community Banks, Inc., a bank holding company with assets of approximately $8.0
billion.
Ms.
Williams of
Knoxville, Tennessee, age 63, served on the TVA Board from March 2006 to
December 2007. She has been nominated for a second
term. Since June 2004, she has been the owner of Susan Williams
Public Affairs in Knoxville, Tennessee, and is affiliated with SRW &
Associates, where, along with five other independent contractors involved with
SRW & Associates, she provides public relations consulting services for
various clients. From 1999 to 2004, she managed the Knoxville,
Tennessee, office of the Ingram Group, a statewide public-relations
firm.
Mr. Bemis
of Madison, Mississippi, age 61, has been nominated by the Honorable George W.
Bush, the President of the United States, to a position on the TVA
Board. He is the former president of Exelon Energy Delivery, a
position he held from August 2002 to September 2004. He has also been
a senior vice president of Exelon Corp., and president of Exelon Power. Other
companies at which he has held executive positions include Master Graphics Inc.;
Entergy Corp.; Louisiana Power & Light; and Mississippi
Power & Light.
Executive Officers
TVA’s
executive officers as of December 16, 2008, their titles, their ages, and the
date their employment with TVA commenced are as follows:
Executive
Officers
|
Title
|
Age
|
Employment
Commenced
|
||||
Tom
D. Kilgore
|
President
and Chief Executive Officer
|
60 | 2005 | ||||
Kimberly
S. Greene
|
Chief
Financial Officer & Executive Vice President, Financial
Services
|
42 | 2007 | ||||
William
R. McCollum, Jr.
|
Chief
Operating Officer
|
57 | 2007 | ||||
Maureen
H. Dunn
|
Executive
Vice President and General Counsel
|
59 | 1978 | ||||
William
R. Campbell
|
Chief
Nuclear Officer and Executive Vice President
|
57 | 2007 | ||||
John
E. Long, Jr.
|
Chief
Administrative Officer and Executive Vice President, Administrative
Services
|
56 | 1980 | ||||
Kenneth
R. Breeden
|
Executive
Vice President, Customer Resources
|
60 | 2004 | ||||
Robin
E. Manning
|
Executive
Vice President, Power System Operations
|
52 | 2008 | ||||
Preston
D. Swafford
|
Executive
Vice President, Fossil Power Group
|
48 | 2006 | ||||
Van
M. Wardlaw
|
Executive
Vice President, Power Supply and Fuels
|
48 | 1982 | ||||
Ashok
S. Bhatnagar
|
Senior
Vice President, Nuclear Generation Development and
Construction
|
52 | 1999 | ||||
Peyton
T. Hairston, Jr.
|
Senior
Vice President, Corporate Responsibility and
Diversity
|
53 | 1993 | ||||
Janet
C. Herrin
|
Senior
Vice President, River Operations
|
54 | 1978 | ||||
John
M. Hoskins
|
Senior
Vice President and Treasurer
|
53 | 1978 | ||||
Donald
E. Jernigan
|
Senior
Vice President, Nuclear Operations
|
52 | 2008 | ||||
Anda
A. Ray
|
Senior
Vice President, Office of Environment and Research
|
52 | 1983 | ||||
Emily
J. Reynolds
|
Senior
Vice President, Communications, Government and Valley
Relations
|
52 | 2007 | ||||
John
J. McCormick, Jr.
|
Senior
Vice President, Fossil Operations
|
47 | 2007 | ||||
John
M. Thomas, III
|
Vice
President and Controller
|
45 | 2005 |
Mr.
Kilgore was named President and Chief Executive Officer in October 2006 after
having served as President and Chief Operating Officer since joining TVA in
March 2005. He previously served as President and Chief Executive
Officer of Progress Energy Ventures, a subsidiary of Progress Energy Company
created to manage various operations of Progress Energy Company, including fuel
extraction and energy marketing, from April 2000 to February
2005. Prior to taking that position, Mr. Kilgore had been Senior Vice
President of Power Operations for Carolina Power & Light (which became
Progress Energy) since August 1998. From 1991 to 1998,
Mr. Kilgore was President and Chief Executive Officer of Oglethorpe Power
Corporation in Atlanta, Georgia.
Ms.
Greene was named Chief Financial Officer and Executive Vice President, Financial
Services in September 2007. Ms. Greene previously served as Senior
Vice President, Finance, and Treasurer at Southern Company Services, an energy
company, from July 2003 to September 2007, where she was responsible for
financial planning and analysis, capital markets and leasing, treasury, and
investor relations. From July 2002 to July 2003, Ms. Greene was
director of portfolio management for Southern Company Generation and Energy
Marketing.
Mr.
McCollum joined TVA in May 2007 as Chief Operating Officer. Prior to
joining TVA, Mr. McCollum was Executive Vice President and Chief Regulated
Generation Officer at Duke Energy Corporation, an energy company, from October
2006 to May 2007. Mr. McCollum had been with Duke Energy Corporation
(and its predecessor) since 1974 and held a variety of leadership positions
there, including Group Vice President, Regulated Fossil-Hydro Generation (from
April 2006 to October 2006), Vice President, Strategic Planning and Business
Development (from January 2005 to April 2006), and Vice President, Nuclear
Support (from November 2002 to December 2004).
Ms. Dunn
joined TVA as an attorney in May 1978, assumed the position of Assistant General
Counsel in September 1986, and assumed the position of Executive Vice President
and General Counsel in January 2001.
Mr.
Campbell joined TVA as Chief Nuclear Officer and Executive Vice President in May
2007. Mr. Campbell served as Executive Vice President, Engineering and
Projects for Entergy Operations, Inc. (“Entergy”), an energy company, from
February 2007 to May 2007. In that capacity, he was responsible for
engineering, technical support, and project management functions for all
regulated and non-regulated Entergy nuclear units. Mr. Campbell
served as Senior Vice President and Chief Operating Officer of Entergy from
February 2003 to February 2007, and was responsible for the operation of all
Entergy regulated nuclear units. He also served as Vice President,
Engineering, of Entergy from June 2000 to February 2003.
Mr. Long
was named Executive Vice President, Administrative Services as well as Chief
Administrative Officer in September 2005. From October 2000 to
September 2005, he was Executive Vice President, Human Resources. Mr.
Long joined TVA in 1980 as a Personnel Officer in the Engineering Design
Organization and has held various Human Resources positions within
TVA. From 1992 to 2005, he served on the TVA Retirement System
Board.
Mr.
Breeden was named Executive Vice President, Customer Resources in September 2006
after having served as Executive Vice President, Customer Service and Marketing
since joining TVA in August 2004. From March 2002 to August 2004, he
was the Program Executive for Executive Conversation, Inc., where he was
responsible for executive training programs. From September 1997 to
March 2002, he was President of TXU Energy Services, Enterprise Division, in
Dallas, Texas, where he was responsible for a new venture created to address
customers’ changing energy needs. Mr. Breeden had joined TXU
Corporation in May 1995 as Senior Vice President of TXU Electric & Gas,
where he was responsible for marketing and sales.
Mr.
Manning joined TVA in August 2008 as Executive Vice President, Power System
Operations. From April 2006 to August 2008, Mr. Manning served as
Vice President of Field Operations for Duke Energy Corporation, an energy
company, where he was responsible for the operation of all transmission and
distribution system activity in Duke Energy Corporation’s Carolinas
Region. Mr. Manning joined Duke Energy Corporation in 1978 and held a
variety of leadership positions there, including Vice President, Central Region
for Duke Energy Power Delivery (from January 2004 to April 2006), Vice President
of Engineering Standards and Process Management for Duke Energy Electric
Transmission (from May 2003 to January 2004), and Vice President of Engineering
for Duke Energy Gas Transmission (now Spectra Corporation) (from September 2000
to June 2003).
Mr.
Swafford joined TVA in May 2006 and was named Executive Vice President, Fossil
Power Group, in June 2007. From May 2006 until May 2007, he was
Senior Vice President, Nuclear Support of TVA. From December 1995 to
April 2006, Mr. Swafford held various positions at Exelon Corporation, an energy
company based in Illinois, and its subsidiaries. From 2002 to 2006,
he served as Senior Vice President, Exelon Energy Delivery, and was responsible
for transmission and distribution of electricity. From 2002 to 2003,
he was Vice President, Exelon Power, and was responsible for its fleet of gas,
coal-fired, and hydroelectric generating facilities. From 2000 to
2002, he was Vice President, Dresden Nuclear Station.
Mr.
Wardlaw was named Executive Vice President of Power Supply and Fuels in July
2008. Prior to this appointment, Mr. Wardlaw served as Senior Vice
President Commercial Operations and Fuels from January 2007 to June 2008, and
Vice President, Bulk Power Trading from September 2006 to December
2006. From December 2000 to September 2006, he served as Vice
President of Transmission and Reliability where he was responsible for real time
control of TVA’s generation fleet and transmission system. Mr.
Wardlaw began his career with TVA in January 1982 as an electrical engineer, and
has also worked in customer service, marketing, and field services.
Mr.
Bhatnagar is the Senior Vice President of Nuclear Generation Development and
Construction, a position he has held since April 2007. He joined TVA
in August 1999 as Site Support Manager at Browns Ferry and was subsequently
appointed Browns Ferry Plant Manager in July 2000, Browns Ferry Site Vice
President in July 2001, and Senior Vice President, Nuclear Operations, in June
2004.
Mr.
Hairston was named Senior Vice President, Corporate Responsibility and
Diversity, in April 2007, and was additionally named TVA’s Chief Ethics and
Compliance Officer in July 2007. He previously served as Senior Vice
President, Communications, a position he assumed in March 2006. From
October 2002 to March 2006, he held the position of Senior Vice President,
Employee Relations and Diversity. Mr. Hairston served as Senior Vice
President, Labor Relations, from October 2000 to October 2002, and had held that
position previously from June 1994 to June 1998. From August 1998 to
October 2000, he was Senior Vice President, Strategic
Initiatives. Mr. Hairston also served as Senior Manager, Strategic
Planning and Support, from May 1993 to June 1994.
Ms.
Herrin is the Senior Vice President, River Operations, a position she has held
since February 1999. Ms. Herrin is responsible for establishing river
operations policies, procedures, and standards for TVA and serves as TVA’s Dam
Safety Officer. She began her career at TVA in 1978 as a Civil
Engineer. She has served on the TVA Retirement System Board since
2005.
Mr.
Hoskins, Senior Vice President and Treasurer, joined TVA in 1978 and worked in
several areas of TVA business including accounting, audit, and revenue before
joining the Treasurer’s office in 1987. He was named Vice President
and Treasurer in 1994 and Senior Vice President and Treasurer in
2000. He has served on the TVA Retirement System Board of Directors
since 2003. Mr. Hoskins also served as Interim Chief Financial
Officer of TVA from November 2006 to September 2007.
Mr.
Jernigan was named Senior Vice President, Nuclear Operations, in September
2008. From November 2004 until August 2008, he served as Site Vice
President of Surry Nuclear Power Station and from November 2003 to November
2004, he served as Director of Operations and Maintenance at North Anna Nuclear
Power Station for Dominion Resources, Inc. (“Dominion”), an energy
company. Before joining Dominion, Mr. Jernigan worked for Florida
Power & Light Company, serving as Site Vice President at St. Lucie Nuclear
Station from June 2001 to April 2004 and as General Manager at Turkey Point
Nuclear Station from 1994 to 2001.
Ms. Ray
was named the Senior Vice President of the Office of Environment and Research in
August 2008. In this role she serves as the agency’s Environmental
Executive responsible for development of the agency’s environmental policy and
strategy. She served as the Vice President of Environmental
Stewardship and Policy from August 2007 to July 2008 where she was responsible
for management of 293,000 acres of public land. Prior to this, Ms.
Ray served as the Vice President of Enterprise Performance and Analysis, and was
the Director of TVA’s Public Power Institute where she focused on new energy
technologies. Ms. Ray began her career with TVA in 1983 with the
nuclear power organization, and worked in several other TVA functions including
fossil generation, customer groups, and strategic planning.
Ms.
Reynolds joined TVA in April 2007 as Senior Vice President of Communications,
Government and Valley Relations. Ms. Reynolds served as the 31st
secretary of the U.S. Senate (from January 2003 to January 2007), where she
managed the legislative, financial, and administrative operations of the
Senate. She also served as a consultant to the subsequent secretary
of the U.S. Senate from January 2007 to April 2007. She previously
served as chief of staff for Senator Frist (from January 2001 to January 2003),
where she had overall responsibility for the management and coordination of
staffing, legislative activity, communications, constituent relations, and
scheduling.
Mr.
McCormick joined TVA as Vice President, Fossil Operations, in December 2007 and
was later named Senior Vice President in October 2008. Prior to that, Mr.
McCormick served in various roles at Exelon Corporation, an energy company,
including General Manager of Eddystone Generation Station, General Manager of
Conowingo and Muddy Run Hydro Facilities, and Director of Operations from
September 2004 to February 2007 responsible for supervising power plant general
managers of more than 10,000 megawatts of fossil and hydro
generation. Mr. McCormick began his career with Exelon in
1982.
Mr.
Thomas was named Vice President and Controller and Chief Accounting Officer in
January 2008. Prior to being named Controller, he was the General
Manager, Operations Business Services, where he was responsible for financial
and performance support to TVA’s operating organizations. Prior to
joining TVA, Mr. Thomas was Chief Financial Officer for Benson Security Systems.
He was also the Controller of Progress Fuels Corporation and Controller of
Progress Ventures, Inc., both subsidiaries of Progress Energy, where he was
responsible for accounting operations, financial reporting, forecasting, and
risk management.
Disclosure and Financial Code of Ethics
TVA has a
Disclosure and Financial Ethics Code (“Financial Ethics Code”) that applies to
all executive officers and directors of TVA as well as to all employees who
certify information contained in quarterly reports, annual reports, or
information statements or who have responsibility for internal control
self-assessments. The Financial Ethics Code includes provisions
covering conflicts of interest, ethical conduct, compliance with applicable
laws, rules, and regulations, responsibility for full, fair, accurate, timely,
and understandable disclosures, and accountability for adherence to the
Financial Ethics Code. TVA will provide a current copy of the
Financial Ethics Code to any person, without charge, upon
request. Requests may be made by calling 888-882-4975 or by sending
an e-mail to: investor@tva.com. Any waivers of or changes to
provisions of the Financial Ethics Code will be promptly disclosed to the
public, subject to limitations imposed by law, on TVA’s website
at: www.tva.gov. Information contained on TVA’s website
shall not be deemed incorporated into, or to be a part of, this Annual
Report.
Committees of the TVA Board
TVA does
not have a Nominating Committee. Each member of the TVA Board is
appointed by the President of the United States with the advice and consent of
the U.S. Senate. The TVA Act provides that to be eligible to be
appointed as a member of the TVA Board, an individual must (1) be a citizen of
the United States, (2) have management expertise relative to a large for-profit
or nonprofit corporate, government, or academic structure, (3) not be an
employee of TVA, (4) make full disclosure to
Congress of any investment or other financial interest that the individual holds
in the energy industry, and (5) affirm support for the objectives and missions
of TVA, including being a national leader in technological innovation, low-cost
power, and environmental stewardship. No more than two of the TVA
Board members may be legal residents outside of TVA’s service area.
The TVA
Board has an Audit, Governance, and Ethics Committee established in accordance
with the TVA Act. TVA’s Audit, Governance, and Ethics Committee
consists of Thomas C. Gilliland (chair), Robert M. Duncan, and Howard A.
Thrailkill. None of the members of the Audit, Governance, and Ethics
Committee has been determined to be an “audit committee financial expert” under
applicable SEC rules, as none of the appointed TVA Board members was required by
the TVA Act to meet the criteria of an “audit committee financial expert” under
applicable SEC rules.
TVA is
exempted by section 37 of the Exchange Act from complying with section 10A(m)(3)
of the Exchange Act, which requires each member of a listed issuer’s audit
committee to be an independent member of the board of directors of the
issuer. The TVA Act contains certain provisions that are similar
to the considerations for independence under section 10A(m)(3) of the Exchange
Act, including that to be eligible for appointment to the TVA Board, an
individual shall not be an employee of TVA and shall make full disclosure to
Congress of any investment or other financial interest that the individual holds
in the energy industry. These provisions became applicable to TVA
Board members on March 31, 2006.
Under
section 10A(m)(2) of the Exchange Act, which applies to TVA, the audit
committee is directly responsible for the appointment, compensation, and
oversight of the external auditor; however, the TVA Act assigns the
responsibility for engaging the services of the external auditor to the TVA
Board.
The TVA
Board has also established the following committees in addition to the Audit,
Ethics, and Governance Committee:
•
|
Finance,
Strategy, Rates, and Administration
Committee
|
•
|
Operations,
Environment and Safety
Committee
|
•
|
Community
Relations and Energy Efficiency
Committee
|
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
This
Compensation Discussion and Analysis provides information about TVA’s
compensation philosophy and strategy, as well as the policies and decisions that
guided TVA in 2008 in establishing the level and nature of the compensation
provided to the President and Chief Executive Officer (“CEO”), the Chief
Financial Officer and Executive Vice President, Financial Services (“CFO”), and
the three most highly compensated executive officers other than the CEO and
CFO. References to the “Named Executive Officers” or “NEOs”
throughout this section refer to the executive officers listed in the Summary
Compensation Table.
Executive
Summary
The TVA
Board has established a compensation plan for all TVA employees (the
“Compensation Plan”) based on the requirements of the TVA Act. The
Compensation Plan is designed to support TVA’s mission and Strategic Plan and to
fulfill the following purposes:
|
•
|
Provide a competitive level of
compensation that enables TVA to attract, retain, and motivate highly
competent employees. Total
compensation for each position in TVA is determined by market pricing
based on a level needed to attract, retain, and motivate employees
critical to TVA’s success in achieving its mission. Accordingly,
total compensation levels are targeted at the median (50th
percentile) of the relevant labor market for most
positions. However, for positions affected by market scarcity,
recruitment and retention issues, and other business reasons, total
compensation levels are targeted above the median (typically between the
50th
and 75th
percentile).
|
|
•
|
Encourage and reward
executives for their performance and contributions to the successful
achievement of financial and operational goals. A
key component of the Compensation Plan is “pay for performance,” which
rewards executives for improvement in TVA’s overall performance, as well
as that of individual business units and individual
employees. The TVA Board believes that the portion of total
direct compensation placed at-risk should increase as an employee’s
position and level of responsibility within TVA
increases. Accordingly, a significant percentage of total direct
compensation for the Named Executive Officers (40 percent to 65 percent)
is performance-based
compensation.
|
|
•
|
Provide executives with the
focus to achieve short-term and long-term business goals that are
important to TVA, TVA’s customers, and the people TVA serves. TVA
seeks to hire and retain executives who are focused on both the short-term
and long-term success of TVA. The Compensation Plan is designed
to achieve this goal by providing a mix of salary and at-risk annual and
long-term incentive compensation.
|
|
•
|
Improve overall company
performance through productivity enhancement. An
executive cannot help meet TVA’s goals and improve performance without the
work of others. For this reason, the performance goals set at
the TVA level and business unit level are the same for both executives and
all non-executive employees. In this way, all TVA employees
receive compensation in a manner that aligns their work with the same
goals and encourages and rewards them for the successful achievement of
TVA’s goals.
|
Under the
Compensation Plan, the compensation programs for the Named Executive Officers
consist of the components identified in the following table:
Compensation
Program Components for Named Executive Officers
Compensation
Component
|
Objective
|
Key
Features
|
||
Annual
Salary
|
Fixed
and paid biweekly to executives
|
Total
annual cash compensation (salary plus annual and long-term incentive
compensation plus long-term deferred compensation) is targeted at the
median (50th
percentile) for similar positions at other companies in TVA’s peer group,
or above the median (50th
to 75th
percentile) for positions affected by market scarcity, recruitment and
retention issues, and other business reasons
Reviewed
annually to consider changes in peer group benchmark salaries, changes in
percentage of performance-based compensation, and/or exceptional
individual merit performances in past years
|
||
Annual
Incentive Compensation
|
At-risk
and based on the attainment of certain pre-established performance goals
for the year
|
Annual
incentive opportunities increase with position and responsibility and are
based on the opportunities other companies in TVA’s peer group provide to
those in similar positions
Annual
incentive payouts are based on the results of performance goals at the TVA
level, business unit level, and the individual level
Reviewed
annually to consider changes in peer group benchmark short-term
incentives, changes in percentage of performance-based compensation,
and/or exceptional individual merit performances in past
years
|
||
Long-Term
Incentive Compensation
|
At-risk
and based on the attainment of certain pre-established performance goals
for a performance cycle, typically three years
|
Long-term
incentive payouts are based on the results of performance goals for a
specific performance cycle
Reviewed
annually to consider changes in peer group benchmark long-term incentives,
changes in percentage of performance-based compensation, and/or
exceptional individual merit performances in past years
|
||
Long-Term
Deferred Compensation
|
Awarded
in the form of annual credits that vest after a specified period of time,
typically three to five years
|
Awarded
to provide a benefit similar to restricted stock and to provide retention
incentives to executives
Executives
generally must remain at TVA for the entire length of the agreement in
order to receive compensation credits
Annual
credit amounts targeted such that long-term deferred compensation
comprises 20 percent of total long-term compensation (in conjunction with
long-term incentive compensation described above)
|
||
Pension
Plans
|
Both
qualified and supplemental, which provide compensation beginning with
retirement or termination of employment
|
Broad-based
plans available to full-time employees of TVA that are qualified under IRS
rules and that are similar to the qualified plans provided by other
companies in TVA’s peer group
Certain
executives in critical positions also participate in a non-qualified
pension plan that provides supplemental pension
benefits
|
Authority
for the Executive Compensation Program
The TVA
Act is the authority for establishing the compensation of all TVA employees,
including the Named Executive Officers, and places responsibility for doing so
with the TVA Board. Under section 2 of the TVA Act, the TVA Board is
directed to establish a compensation plan for all TVA employees
which:
|
•
|
Specifies
all compensation (including salary or any other pay, bonuses, benefits,
incentives, and any other form of remuneration) for the CEO and TVA
employees;
|
|
•
|
Is
based on an annual survey of the prevailing compensation for similar
positions in private industry, including engineering and electric utility
companies, publicly owned electric utilities, and federal, state, and
local governments; and
|
|
•
|
Provides
that education, experience, level of responsibility, geographic
differences, and retention and recruitment needs will be taken into
account in determining compensation of
employees.
|
The TVA
Act also provides that:
|
•
|
The
TVA Board will annually approve all compensation (including salary or any
other pay, bonuses, benefits, incentives, and any other form of
remuneration) of all managers and technical personnel who report directly
to the CEO (including any adjustment to
compensation);
|
|
•
|
On
the recommendation of the CEO, the TVA Board will approve the salaries of
employees whose salaries would be in excess of Level IV of the Executive
Schedule ($149,000 in 2008); and
|
|
•
|
The
CEO will determine the salary and benefits of employees whose annual
salary is not greater than Level IV of the Executive Schedule ($149,000 in
2008).
|
The
philosophy of the Compensation Plan approved by the TVA Board for all TVA
employees, including the Named Executive Officers, is based on the TVA
Act. The philosophy recognizes that many employees, including
executives, are called on to accomplish specialized aspects of TVA’s mission
safely, reliably, and efficiently, and must have the requisite education,
experience, and professional qualifications. These requirements make it
necessary for TVA to offer compensation to its specialized employees that makes
it possible for TVA to attract highly qualified candidates for positions similar
to those in relevant industries and motivates them to stay with
TVA.
Board
Committee Oversight
For 2008,
the Human Resources Committee of the TVA Board was responsible for oversight of
executive compensation and was charged with various duties under the
Compensation Plan. In May 2008, the TVA Board reduced the number of
Board committees and the duties and responsibilities of the Human Resources
Committee under the Compensation Plan were assumed by the Finance, Strategy,
Rates, and Administration (“FSRA”) Committee of the TVA Board. In
this Compensation Discussion and Analysis, the Human Resources Committee will be
referenced with regard to matters involving the establishment of compensation
for 2008; however, the FSRA Committee is responsible for the review of this
Compensation Discussion and Analysis, for the review of performance goal
achievement for 2008, and for oversight of executive compensation pursuant to
the Compensation Plan after May 2008.
Use
of Market Data and Benchmarking
TVA seeks
to set total compensation for executives at a competitive level with respect to
the relevant labor market. Market information for total compensation,
as well as each element of compensation, for the Named Executive Officers in
2008 was obtained from:
|
•
|
Published
and customized compensation surveys reflecting the relevant labor markets
identified for designated positions,
and
|
|
•
|
Publicly
disclosed information from the proxy statements and annual reports on Form
10-K of energy services companies with revenues of $3 billion and
greater.
|
After the
competitive market compensation was compiled for the positions, the Human
Resources department, with the assistance of its compensation consultant, Towers
Perrin, analyzed the data, and provided its analysis to the Human Resources
Committee. The Human Resources Committee, with the assistance of its
independent compensation consultant, Watson Wyatt, used this information
to:
|
•
|
Test
compensation level and incentive opportunity
competitiveness,
|
|
•
|
Serve
as a point of reference for establishing pay packages for recruiting
executives, and
|
|
•
|
Determine
appropriate adjustments to compensation levels and incentive opportunities
to maintain the desired degree of market
competitiveness.
|
TVA’s
relevant labor market for most executives, including the Named Executive
Officers, was comprised of both private and publicly owned companies in the
energy services industry of similar revenue and scope to TVA. For the
survey-based analysis, TVA looked at the following energy services companies
with annual revenues of $3 billion and greater from the 2007 Towers Perrin
Energy Services Executive Compensation Database:
Allegheny
Energy, Inc.
|
Entergy
Corp.*
|
Pinnacle
West Capital Corp.
|
||
Alliant
Energy Corp.
|
Exelon
Corp.*
|
PPL
Corp.*
|
||
Ameren
Corp.*
|
FirstEnergy
Corp.*
|
Progress
Energy, Inc.*
|
||
American
Electric Power Co., Inc.*
|
FPL
Group, Inc.*
|
Public
Service Enterprise Group, Inc.*
|
||
Calpine
Corp.
|
Integrys
Energy Group, Inc. *
|
Reliant
Energy, Inc.*
|
||
CenterPoint
Energy, Inc.
|
MDU
Resources, Inc
|
SCANA
Corp.
|
||
CMS
Energy Corp.*
|
Mirant
Corp.
|
Sempra
Energy *
|
||
Consolidated
Edison, Inc.*
|
Northeast
Utilities System *
|
The
Southern Company *
|
||
Constellation
Energy Group, Inc.*
|
NRG
Energy, Inc.
|
SUEZ
Energy North America
|
||
Dominion
Resources, Inc.*
|
NSTAR
Electric Co.
|
TXU
Corp.
|
||
DTE
Energy Co.*
|
OGE
Energy Corp.
|
Wisconsin
Energy Corp.
|
||
Duke
Energy Corp.*
|
Pacific
Gas & Electric Co.*
|
Xcel
Energy, Inc.*
|
||
Edison
International*
|
PacifiCorp
|
|||
El
Paso Corp.
|
Pepco
Holdings, Inc.*
|
For the
analysis of proxy statements and annual reports on Form 10-K, TVA looked at a
subset of the peer group above, identified with asterisks, as well as two
additional companies in the energy services industry (AES Corp. and NiSource
Inc.), as recommended by Watson Wyatt.
Executive
Compensation Program Components
Total
compensation (salaries, annual and long-term incentive compensation, and
long-term deferred compensation) for Mr. Kilgore, Ms. Greene, and Mr. McCollum
for 2008 was reviewed by the Human Resources Committee, and the recommended
compensation packages were submitted by the Human Resources Committee to the TVA
Board for approval. Total compensation for Mr. Campbell and Mr. Bhatnagar for
2008 was reviewed and approved by Mr. Kilgore as CEO.
Salary. The salaries received
by the Named Executive Officers were based on their levels of responsibility,
their individual merit performances in past years, and the competitive levels of
compensation for executives in similar positions in the energy services
industry.
For 2008,
the TVA Board approved a salary of $500,000 for Ms. Greene, unchanged from 2007,
and a salary of $721,000 for Mr. McCollum, a 3 percent increase over
2007. For 2008, Mr. Kilgore as CEO approved a salary of $477,000 for
Mr. Campbell, a 6 percent increase over 2007, and a salary of $434,520 for Mr.
Bhatnagar, a 2 percent increase over 2007. The salaries approved for
Ms. Greene and Mr. McCollum for 2008 kept both of them near the 50th
percentile of the benchmark salaries for similar positions in TVA’s peer
group. The salaries approved for Mr. Campbell and Mr. Bhatnagar for
2008 kept both of them near the 75th
percentile of the benchmark salaries for similar positions in TVA’s peer
group. The salaries for Mr. Campbell and Mr. Bhatnagar were targeted
at a higher percentile because their positions as Chief Nuclear Officer and
Senior Vice President, Nuclear Generation Development and Construction, are
subject to high demand and scarcity and recruitment and retention issues within
the nuclear industry. Information about the approval of Mr. Kilgore’s
salary for 2008 is provided below under the heading “Considerations Specific to
Mr. Kilgore.”
Annual Incentive Compensation.
All
executives, including the Named Executive Officers, participate in the Executive
Annual Incentive Plan (“EAIP”). The EAIP is designed to encourage and
reward executives for their contributions to successfully achieving short-term
financial and operational goals of TVA and applicable business units, as well as
individual goals. Under the EAIP, an executive’s annual incentive
payment is calculated as follows:
EAIP
Payout
|
=
|
Salary
|
X
|
Annual
Incentive
Opportunity
|
X
|
Percent
of Opportunity
Achieved
|
Annual
incentive opportunities increase with position and
responsibility. The annual incentive opportunity was established for
each of the Named Executive Officers based on the opportunities other companies
provide to those in comparable positions in the energy services
industry. For 2008, the TVA Board approved a 65 percent annual
incentive opportunity for Ms. Greene and a 70 percent annual incentive
opportunity for Mr. McCollum, both unchanged from 2007. For 2008, Mr.
Kilgore as CEO approved a 75 percent annual incentive opportunity for Mr.
Campbell and a 60 percent annual incentive opportunity for Mr. Bhatnagar, both
unchanged from 2007. The annual incentive opportunities were approved
for Ms. Greene and Mr. McCollum for 2008 at a level such that 100% target payout
(together with salary, 100% target payout of long-term incentive opportunities,
and long-term compensation credits) would place their total compensation near
but below the 50th
percentile of the benchmark total compensation for similar positions in TVA’s
peer group. The annual incentive opportunities were approved for Mr.
Campbell and Mr. Bhatnagar for 2008 at a level such that 100 percent target
payout (together with salary, 100 percent target payout of long-term incentive
opportunities, and long-term compensation credits) would place their total
compensation near but below the 75th
percentile of the benchmark total compensation for similar positions in TVA’s
peer group. The total compensation for Mr. Campbell and Mr. Bhatnagar
was targeted at a higher percentile because their positions as Chief Nuclear
Officer and Senior Vice President, Nuclear Generation Development and
Construction, are subject to high demand and scarcity and recruitment and
retention issues within the nuclear industry. Information about the
approval of Mr. Kilgore’s EAIP incentive opportunity for 2008 is provided below
under the heading “Considerations Specific to Mr. Kilgore.”
The
percent of opportunity achieved, as used in the formula above, was determined in
2008 by a weighted average of the results of a combination of performance goals
at the TVA level, the business unit level, and the individual
level. Performance goals at the TVA level and their weights were
identified in TVA’s Winning Performance Balanced Scorecard (the “TVA
Scorecard”). Three of the performance goals identified in the TVA
Scorecard (connection point interruptions, non-fuel operation and maintenance
expense, and equivalent availability factor) were used in determining annual
incentive payouts for the Named Executive Officers and all other participants in
the EAIP, as well as all other non-executive TVA employees who participate in
TVA’s Winning Performance Team Incentive Plan. These three
performance measures, their weights, and the goals approved by the TVA Board for
the 2008 TVA Scorecard, as well as the results for 2008, are set forth
below:
2008
TVA Scorecard
Goals | ||||||||||||||||||||
Performance Metric
|
Weight
|
Results
Achieved
|
Threshold
(75%)
|
Target
(100%)
|
Maximum
(125%)
|
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Customers
|
||||||||||||||||||||
Connection
Point Interruptions
(Interruptions
per Connection Point)
|
30 | % | 0.81 | 0.90 | 0.85 | 0.80 | ||||||||||||||
Financial
|
||||||||||||||||||||
Non-Fuel
O&M 1
($/MWh Sales)
|
40 | % | 13.31 | 13.45 | 13.20 | 12.95 | ||||||||||||||
Assets/Operations
|
||||||||||||||||||||
Equivalent
Availability Factor (%) 2
|
30 | % | 87.3 | 89.0 | 89.5 | 90.0 |
1
|
Operation
and Maintenance
|
2
|
The
equivalent availability factor for 2008 included all of TVA's primary
generation components. For 2009, the calculation of equivalent
availability factor has been adjusted to include only nuclear, coal, and
combined cycle generation assets. The availability for combustion
turbines and hydroelectric generation has been excluded beginning in
2009. This adjustment will focus TVA’s performance on the
equivalent availability of base load facilities
which are needed nearly all times of the year.
Combustion turbine and hydroelectric generation performance will be
measured during critical periods of the year, and separate metrics will be
utilized to monitor this performance. If the
2009 calculation methodology had been in place for 2008, the
equivalent availability factor would have been
84.
|
Performance
levels between threshold and target achievement levels, and between target and
maximum achievement levels, were calculated using straight line
interpolation. The TVA Scorecard represented 30 percent of the
potential payout for the Named Executive Officers.
Another
30 percent of the potential payout was tied to business unit
performance. Mr. Campbell’s business unit performance was measured by
the results of the Nuclear Power Group, Central Office and Staff
scorecard. The performance measures for the scorecard are: Nuclear
Power Group (“NPG”) Site Unit Capability; NPG Forced Loss Rate; Central Office
Safe Workplace; NPG Collective Radiation Exposure; NPG Site Production Expense;
NPG INPO Performance Indicator; and NPG Unplanned Automatic Scrams.
Mr.
Bhatnagar’s business unit performance was measured by the results of the Nuclear
Generation Development & Construction scorecard. The performance
measures for this scorecard are: Nuclear Generation Development and
Construction (“NGD&C”) No Significant Plant Events; NGD&C Safe
Workplace; NGD&C Capital Budget; and NGD&C Major Milestones
Met.
As
executives who oversee all business aspects of the company, the business unit
performance of Mr. Kilgore, Ms. Greene, and Mr. McCollum was measured by a
composite average of the results of all of TVA’s 27 business unit
scorecards.
A further
30 percent of the potential payout was tied to the achievement of personal goals
established for each of the Named Executive Officers. Personal goals
for Mr. Kilgore were not finalized and documented, and therefore no payment has
been made. Ms. Greene’s personal goals, as approved by Mr. Kilgore as
CEO, included pricing programs to promote peak production, improving long-range
financial forecasting, and financial statement and reporting
controls. Mr. McCollum’s personal goals, as approved by Mr. Kilgore
as CEO, included meeting non-fuel operation and maintenance expense targets,
succession planning, and improvement of generation fleet. Mr.
Campbell’s personal goals, as approved by Mr. Kilgore as CEO, included CHI
improvement, meeting non-fuel operation and maintenance expense targets, and
injury prevention. Mr. Bhatnagar’s personal goals, as approved by Mr.
Kilgore as CEO, included meeting licensing milestones for Watts Bar Unit 2 and
Bellefonte, succession planning, and meeting non-fuel operation and maintenance
expense targets.
The
remaining 10 percent of the potential payout for Mr. Kilgore was based on the
subjective assessment by the TVA Board of Mr. Kilgore’s overall performance and
contribution to TVA during 2008, the remaining 10 percent of the potential
payout for Ms. Greene and Mr. McCollum was based on the subjective assessment by
Mr. Kilgore of each of their overall individual performances and contributions
to TVA during 2008, and the remaining 10 percent of the potential payout for Mr.
Campbell and Mr. Bhatnagar was based on the subjective assessment by Mr.
McCollum of each of their overall individual performances and contributions to
their respective business units during 2008.
The
following table shows for each of the Named Executive Officers for 2008 the
performance goals and weighting, the percent of opportunity achieved, the target
payout, and the actual payout:
Performance
Goals, Percent of Opportunity Achieved, and Target and Actual
Payout
NEO
|
Salary
|
Annual
Incentive Opportunity
|
Target
EAIP Payout
|
Performance
Goals
|
Weight
|
Percent
of Opportunity Achieved
|
EAIP
Payout
|
||||||||||||||||||
Tom
D. Kilgore
|
$ | 650,000 | 125 | % | $ | 812,500 | 46.13 | % | $ | 374,806 | |||||||||||||||
TVA
Scorecard
|
30 | % | 21.48 | % | |||||||||||||||||||||
Composite
average of all TVA business unit scorecards
|
30 | % | 16.65 | % | |||||||||||||||||||||
Personal
Goals and Subjective Assessment
|
40 | % | 8.00 | % 1 | |||||||||||||||||||||
Kimberly
S. Greene
|
$ | 500,000 | 65 | % | $ | 325,000 | 77.63 | % | $ | 252,298 | |||||||||||||||
TVA
Scorecard
|
30 | % | 21.48 | % | |||||||||||||||||||||
Composite
average of all TVA business unit scorecards
|
30 | % | 16.65 | % | |||||||||||||||||||||
Personal
Goals and Subjective Assessment
|
40 | % | 39.50 | % | |||||||||||||||||||||
William
R. McCollum, Jr.
|
$ | 721,000 | 70 | % | $ | 504,700 | 74.63 | % | $ | 376,658 | |||||||||||||||
TVA
Scorecard
|
30 | % | 21.48 | % | |||||||||||||||||||||
Composite
average of all TVA business unit scorecards
|
30 | % | 16.65 | % | |||||||||||||||||||||
Personal
Goals and Subjective Assessment
|
40 | % | 36.50 | % | |||||||||||||||||||||
William
R. Campbell
|
$ | 477,000 | 75 | % | $ | 357,750 | 43.72 | % | $ | 156,408 | |||||||||||||||
TVA
Scorecard
|
30 | % | 21.48 | % | |||||||||||||||||||||
Results
of scorecard for Nuclear Power Group, Central Office and Staff
|
30 | % | 3.49 | % | |||||||||||||||||||||
Personal
Goals and Subjective Assessment
|
40 | % | 18.75 | % | |||||||||||||||||||||
Ashok
S. Bhatnagar
|
$ | 434,520 | 60 | % | $ | 260,712 | 99.09 | % | $ | 258,340 | |||||||||||||||
TVA
Scorecard
|
30 | % | 21.48 | % | |||||||||||||||||||||
Results
of scorecard for Nuclear Generation Development and Construction
|
30 | % | 36.36 | % | |||||||||||||||||||||
Personal
Goals and Subjective Assessment
|
40 | % | 41.25 | % |
|
1
|
Because
personal goals for Mr. Kilgore were not finalized and documented, Mr.
Kilgore was not evaluated, and no award was made on 30
percent.
|
Overall
EAIP awards may be adjusted based on the evaluation of individual achievements
and performance results. In 2008, no adjustment was made to the
amount of the calculated payout for any Named Executive Officer.
Awards to
the Named Executive Officers under the EAIP for 2008 are reported in the
“Non-Equity Incentive Plan Compensation” column in the Summary Compensation
Table. Additional information regarding the basis of the payouts
under the EAIP is presented in the narrative that accompanies the Grants of
Plan-Based Awards Table.
Long-Term Incentive
Compensation. In addition to the EAIP, certain executives in
critical positions, including the Named Executive Officers, participate in the
Executive Long-Term Incentive Plan (“ELTIP”). Executives in critical
positions are those who make decisions that significantly influence the
development and execution of TVA’s long-term strategic objectives. In
2008, the TVA Board approved certain revisions to the design of the ELTIP in
order to strengthen the pay-for-performance orientation and overall
effectiveness of the plan by:
|
•
|
Using
performance criteria that are directly aligned with TVA’s Strategic
Plan;
|
|
•
|
Shifting
from a “last year of cycle” performance approach to a “cumulative”
performance approach to measure performance achieved for the three-year
performance cycles (i.e., making the ELTIP function more as a long-term
than an annual incentive);
|
|
•
|
Targeting
award opportunities at levels that approximate median levels of
competitiveness with TVA’s peer group and incorporating the Human Resource
Committee’s policy of having (i) approximately 80 percent of each
executive’s total long-term incentive opportunity be performance based
(under the ELTIP) and approximately 20 percent of each executive’s total
long-term incentive opportunity be retention and security-oriented (under
the Long-Term Deferred Compensation Plan (“LTDCP”) as described below
under the heading “Long-Term Deferred Compensation”), while allowing for a
reasonable period of time to transition to the median levels of
opportunity; and
|
|
•
|
Expanding
the award opportunity range from the range of 75 percent to 125 percent of
salary to a broader range of 50 percent to 150 percent of salary to enable
payment of awards that are commensurate with performance
achievements.
|
As a part
of implementing the revised ELTIP plan design, the TVA Board approved two
initial overall measures of TVA performance to be applied to all participants in
the ELTIP: connection point interruptions (the number of interruptions of power
at connection points caused by TVA’s transmission system) and retail rates (the
quotient of distributor reported retail power revenue divided by distributor
reported retail power sales). Since transition to the new structure
was required, the TVA Board approved the performance measures of connection
point interruptions and retail rates for the one-year cycle ended September 30,
2008, the two-year cycle ending September 30, 2009, and the three-year cycle
ending September 30, 2010. The TVA performance criteria may be
adapted for future performance cycles, and the number of criteria used may vary
from cycle to cycle.
The goals
associated with the two performance measures are generally based on a comparison
of TVA’s performance to the performance of surveyed transmission providers and
regional utilities, and rolling three-year target comparisons for the surveyed
group are utilized. The goals approved for the connection point
interruptions performance measure for each of the one-, two-, and three-year
performance cycles described above are as follows:
|
•
|
The
target goal (which will also serve as the threshold goal that must be met
before there is any incentive payment under this measure) is TVA ranking
at or above the 75th
percentile of the performance of the surveyed transmission providers (the
“ELTIP CPI Comparison Group”), and
|
|
•
|
The
maximum goal is TVA ranking at or above the 90th
percentile of the ELTIP CPI Comparison Group’s
performance.
|
The goals
approved for the retail rates performance measure for each of the one-, two-,
and three-year performance cycles described above are as follows:
|
•
|
The
threshold goal is based on improvement over the last performance
cycle,
|
|
•
|
The
target goal is TVA ranking at or above the 75th
percentile of the performance of a comparison group of regional utilities
with annual revenues greater than $3 billion (the “ELTIP Retail Rates
Comparison Group”), and
|
|
•
|
The
maximum goal is TVA ranking at or above the 90th
percentile of the ELTIP Retail Rates Comparison Group’s
performance.
|
For 2008,
connection point interruptions performance data came from data provided by SGS
Statistical Services based on an analysis of voluntary survey responses
solicited from 30 electric utilities (not all of which provided
data). Retail rate data (retail sales and retail revenue) for the
ELTIP Retail Rates Comparison Group was obtained from the EIA-826 Monthly
Electric Utility Database. The ELTIP Retail Rates Comparison Group
was composed of 22 utilities, which are subsidiaries of holding companies with
annual revenues greater than $3 billion, in the regional proximity of the TVA
service territory.
Under the
revised ELTIP plan design, an executive’s incentive payment continues to be
calculated as follows:
ELTIP
Payout
|
=
|
Salary
|
X
|
ELTIP
Incentive
Opportunity
|
X
|
Percent
of Opportunity
Achieved
|
The
objective of the revised ELTIP plan design is to establish incentive
opportunities for each of the Named Executive Officers, based on a percentage of
his or her base salary rate at the end of the performance period, to approximate
80 percent of each Named Executive Officer’s total long-term compensation (in
conjunction with long-term deferred compensation described below).
Accordingly, for the performance period ended September 30, 2008, the TVA Board
approved a 65 percent long-term incentive opportunity for Ms. Greene and a 70
percent long-term incentive opportunity for Mr. McCollum, both unchanged from
2007, and Mr. Kilgore as CEO approved an 80 percent long-term incentive
opportunity for Mr. Campbell and a 45 percent long-term incentive opportunity
for Mr. Bhatnagar, both unchanged from 2007. Information about the
approval of Mr. Kilgore’s ELTIP incentive opportunity for the performance period
ended September 30, 2008, is provided below under the heading “Considerations
Specific to Mr. Kilgore.”
The
following table shows the performance goals and weighting and percent of
opportunity achieved for the ELTIP for the one-year cycle ended September 30,
2008:
ELTIP
Performance Goals, Weighting, and Percent of Opportunity
Goals
|
Percent
Achieved
|
|||||||||||||||
Performance
Measure
|
Threshold
(50%)
|
Target
(100%)
|
Maximum
(150%)
|
Performance
Result
|
Actual
(%)
|
X
|
Weight
(%)
|
= |
Result
(%)
|
|||||||
Retail
Rate
|
Improvement
Over Last Performance Cycle
|
Top
25% of Comparison Companies
|
Top
10% of Comparison Companies
|
Below
Threshold
|
0.00 | % X | 50 | % | 0.00 | % | ||||||
Connection
Point Interruption
|
Top
25% of Comparison Companies
|
Top
25% of Comparison Companies
|
Top
10% of Comparison Companies
|
Between
Target and Maximum
|
148.65 | % X | 50 | % | 74.32 | % | ||||||
Overall
Percent of Opportunity Achieved
|
74.32 | % |
As a part
of the revised ELTIP plan design, the TVA Board reserved discretion to review
results and peer group comparison at the end of each performance cycle and to
approve adjustments in payouts, if appropriate, given the
circumstances. In 2008, no discretion was exercised to adjust the
amount of the payout for the Named Executive Officers based on the performance
criteria described above.
As a
result, the Named Executive Officers were awarded the following ELTIP payouts
for 2008 in comparison to the 2008 target payouts:
2008
ELTIP payouts
NEO
|
Salary
|
ELTIP
Incentive Opportunity
|
Target
ELTIP Payout
|
Percent
of Opportunity Achieved
|
ELTIP
Payout
|
|||||||||||||||
Tom
D. Kilgore
|
$ | 650,000 | 150 | % | $ | 975,000 | 74.32 | % | $ | 724,620 | ||||||||||
Kimberly
S. Greene
|
$ | 500,000 | 65 | % | $ | 325,000 | 74.32 | % | $ | 241,540 | ||||||||||
William
R. McCollum, Jr.
|
$ | 721,000 | 70 | % | $ | 504,700 | 74.32 | % | $ | 375,093 | ||||||||||
William
R. Campbell
|
$ | 477,000 | 80 | % | $ | 381,600 | 74.32 | % | $ | 283,605 | ||||||||||
Ashok
S. Bhatnagar
|
$ | 434,520 | 45 | % | $ | 195,534 | 74.32 | % | $ | 145,321 |
Awards
provided to the Named Executive Officers under the ELTIP for the performance
period that ended on September 30, 2008, are reported in the “Non-Equity
Incentive Plan Compensation” column in the Summary Compensation
Table. Additional information regarding the basis of the payouts
under the ELTIP is presented in the narrative that accompanies the Grants of
Plan-Based Awards Table.
Long-Term Deferred
Compensation. Unlike
private sector companies in the energy services industry, TVA is a corporate
agency and instrumentality of the United States and thus does not have equity
securities to provide stock awards or options as a form of compensation for its
employees. Although TVA cannot and does not seek to replicate the
type of equity-based compensation available at companies in TVA’s peer group,
TVA does enter into agreements with certain executives, including the Named
Executive Officers, that are administered under TVA’s LTDCP, which provides a
retention incentive similar to restricted stock. The LTDCP agreements
are designed to provide retention incentives to executives to encourage them to
remain with TVA and to provide, in combination with salary and EAIP and ELTIP
incentive awards, a competitive level of total compensation. Under
these agreements, credits (which may be vested or unvested) are made to an
account in an executive’s name (typically on an annual basis) for a
predetermined period. If the executive remains employed at TVA until
the end of this period (typically three to five years), the executive becomes
vested in the balance of the account, including any return on investment on the
credits in the account, and receives a distribution in accordance with a
deferral election made at the time the LTDCP agreement was entered
into. Annual credits provided to the Named Executive Officers under
LTDCP agreements in 2008 are reported in the “All Other Compensation” column in
the Summary Compensation Table. These credits are also reported in
the “Registrant Contributions in Last FY” column in the Nonqualified Deferred
Compensation Table since the credits were placed in deferred compensation
accounts in the Named Executives Officers’ names.
Descriptions
of all the LTDCP agreements with the Named Executive Officers are found
following the Grants of Plan-Based Awards Table.
Considerations Specific to Mr.
Kilgore. Since selecting Mr. Kilgore as President and CEO in
October 2006, the TVA Board had not adjusted Mr. Kilgore’s compensation leading
into 2008. Accordingly, at the beginning of 2008, the Human Resources Committee,
in consultation with its independent executive compensation consultant, Watson
Wyatt, evaluated Mr. Kilgore’s current compensation relative to TVA’s
Compensation Plan and peer group to determine whether to recommend adjustments
to Mr. Kilgore’s compensation to the TVA Board for 2008.
In 2007,
Mr. Kilgore received an annual salary of $650,000, an EAIP incentive opportunity
of 70 percent of salary, and an ELTIP incentive opportunity of 60 percent of
salary, plus a $300,000 credit under an LTDCP agreement. After
considering information on chief executive officer compensation at the median of
the relevant marketplace (TVA’s peer group) provided by Watson Wyatt, the Human
Resources Committee recommended that the TVA Board increase Mr. Kilgore’s
potential total compensation in 2008 by keeping his salary and LTDCP credit the
same and increasing his EAIP and ELTIP incentive opportunities to 125 percent
and 150 percent of salary, respectively. The Human Resources
Committee’s recommendation was lower than that recommended by Watson Wyatt, and
the Human Resources Committee made its recommendation taking into account the
special place and mission of TVA, Mr. Kilgore’s preference that his base salary
not be increased, and the belief that his total compensation should be placed at
greater risk than any other TVA executive (65 percent of overall compensation)
given the special challenges facing TVA in 2008 and his overall responsibility
for the company as President and CEO. At its November 29, 2007,
meeting, the TVA Board reviewed and approved the recommendation of the Human
Resources Committee.
Below is
a chart comparing the chief executive officer median compensation data provided
by Watson Wyatt based on TVA’s peer group with the compensation approved by the
TVA Board for Mr. Kilgore for 2008:
CEO
Peer Group Compensation Comparison
Watson
Wyatt Chief Executive Officer Median Market Data Range (TVA Peer
Group)
|
TVA
Board Approved Compensation for 2008
|
|
Base
Salary
|
$1,000,000
- $1,020,000
|
$650,000
|
Annual
Incentive %
|
128%
- 138%
|
125%
|
Total
Cash Compensation
|
$2,323,000
- $2,427,000
|
$1,462,500
|
Long-Term
Incentive %
|
297%
- 343%
|
150%
|
Total
Direct Compensation
|
$5,357,000
- $5,922,000
|
$2,737,500
|
Pension
Benefits. All of the Named Executive Officers are eligible to
participate in the following qualified plans available to all annual TVA
employees:
|
•
|
Defined
benefit plan
|
|
–
|
Cash
Balance Benefit Structure (“CBBS”) for employees first hired on or after
January 1, 1996, with a pension based on an account that receives pay
credits equal to six percent of compensation plus
interest
|
|
•
|
401(k)
plan
|
|
–
|
For
CBBS members, TVA provides matching contributions of 75 cents on every
dollar up to 4.5 percent of annual
salary.
|
The
availability of these qualified plans is consistent with similar qualified plans
provided by other companies in TVA’s peer group.
In
addition, certain executives in critical positions, including each of the Named
Executive Officers, as determined by TVA on an individual basis, are eligible to
participate in a supplemental executive retirement plan (“SERP”). The
SERP is a non-qualified pension plan that provides supplemental pension benefits
tied to compensation levels that exceed limits imposed by IRS regulations
applicable to TVA’s qualified plans. The availability of this
supplemental pension plan helps TVA to remain competitive in attracting and
retaining top-level executives.
More
information regarding these retirement and pension plans is found following the
Pension Benefits Table.
Perquisites. In
2008, TVA provided certain executives, including Ms. Greene, Mr. McCollum, Mr.
Campbell, and Mr. Bhatnagar, a flat-dollar biweekly vehicle allowance that may
be applied toward the purchase or lease of a vehicle, operating fees, excess
mileage, maintenance, repairs, and insurance. Vehicle allowances are
granted on a “business need” basis to a very limited number of
executives. The amount of the vehicle allowances granted to the Named
Executive Officers is reported in the “All Other Compensation” column in the
Summary Compensation Table.
In
connection with their moves to Tennessee in 2007, Ms. Greene and
Mr. McCollum received in 2008 certain relocation reimbursements
and payments. These relocation reimbursements and payments are
reported in the “All Other Compensation” column in the Summary Compensation
Table.
TVA did
not provide any other perquisites to the Named Executive Officers in
2008.
Health and Other Benefits.
TVA
offers a group of health and other benefits (medical, dental, vision, life and
accidental death and disability insurance, and long-term disability insurance)
that are available to a broad group of employees. The Named Executive
Officers are eligible to participate in TVA’s health benefit plans and other
non-retirement benefit plans on the same terms and at the same contribution
rates as other TVA employees.
Executive Compensation Tables and Narrative Disclosures
Summary
Compensation and Grants of Plan-Based Awards
The
following table sets forth information regarding compensation earned by each of
the Named Executive Officers in 2008 (and 2007 and 2006 as
applicable).
Summary
Compensation Table
Name
and Principal Position
(a)
|
Year
(b)
|
Salary
($)
(c)
|
Bonus
1
($)
(d)
|
Stock
Awards
($)
(e)
|
Option
Awards
($)
(f)
|
Non-Equity
Incentive Plan Compensation
($)
(g)
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
2
($)
(h)
|
All
Other Compensation
($)
(i)
|
Total
($)
(j)
|
|||||||||||||||||||||||||
Tom
D. Kilgore
President
and
Chief
Executive Officer
|
2008
|
$
|
655,000
|
–
|
–
|
–
|
$
|
1,099,426
|
3
|
$
|
406,152
|
4
|
$
|
310,125
|
5
|
$
|
2,470,703
|
|||||||||||||||||
2007
|
$
|
308,693
|
$
|
341,293
|
–
|
–
|
$
|
890,507
|
6
|
$
|
138,274
|
7
|
$
|
309,900
|
$
|
1,988,667
|
||||||||||||||||||
2006
|
$
|
140,000
|
$
|
511,984
|
–
|
–
|
$
|
627,861
|
8
|
$
|
98,172
|
9
|
$
|
306,300
|
$
|
1,684,317
|
||||||||||||||||||
Kimberly
S. Greene
Chief
Financial Officer and
Executive
Vice President,
Financial
Services
|
2008
|
$
|
503,847
|
–
|
–
|
–
|
$
|
493,838
|
10
|
$
|
223,707
|
11
|
$
|
78,797
|
12
|
$
|
1,300,189
|
|||||||||||||||||
2007
|
$
|
38,462
|
–
|
–
|
–
|
$
|
36,159
|
13
|
$
|
242,752
|
14
|
$
|
370,900
|
$
|
688,273
|
|||||||||||||||||||
2006
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
||||||||||||||||||||||||||
William
R. McCollum, Jr.
Chief
Operating Officer
|
2008
|
$
|
726,547
|
–
|
–
|
–
|
$
|
751,751
|
15
|
$
|
126,440
|
16
|
$
|
223,237
|
17
|
$
|
1,827,975
|
|||||||||||||||||
2007
|
$
|
293,461
|
–
|
–
|
–
|
$
|
1,042,132
|
18
|
$
|
2,026,417
|
19
|
$
|
468,727
|
$
|
3,830,737
|
|||||||||||||||||||
2006
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
||||||||||||||||||||||||||
William
R. Campbell
Chief
Nuclear Officer and
Executive
Vice President,
TVA
Nuclear
|
2008
|
$
|
480,669
|
–
|
–
|
–
|
$
|
440,013
|
20
|
$
|
161,975
|
21
|
$
|
222,113
|
22
|
$
|
1,304,770
|
|||||||||||||||||
2007
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
||||||||||||||||||||||||||
2006
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
||||||||||||||||||||||||||
Ashok
S. Bhatnagar
Senior
Vice President,
Nuclear
Generation Development
and
Construction
|
2008
|
$
|
437,863
|
–
|
–
|
–
|
$
|
403,661
|
23
|
$
|
29,226
|
24
|
$
|
165,612
|
25
|
$
|
1,036,362
|
|||||||||||||||||
2007
|
$
|
236,608
|
$
|
189,384
|
–
|
–
|
$
|
470,668
|
26
|
$
|
154,937
|
27
|
$
|
165,405
|
$
|
1,217,002
|
||||||||||||||||||
2006
|
$
|
140,000
|
$
|
276,070
|
–
|
–
|
$
|
390,648
|
28
|
$
|
160,615
|
29
|
$
|
158,655
|
$
|
1,125,988
|
||||||||||||||||||
Notes:
(1)
|
Represents
additional annual compensation paid in quarterly installments through May
31, 2007. Prior to March 31, 2006, the TVA Act provided that
salaries for TVA employees, including the Named Executive Officers, could
match but not exceed the salary of a TVA Board member. Although
the TVA Act, as amended by the Consolidated Appropriations Act, removed
this limitation, salaries were limited to $145,400 for a portion of
2007. Accordingly, additional annual compensation, which was
paid in quarterly installments, was used in conjunction with salaries to
provide a competitive level of base
compensation.
|
(2)
|
Represents
the aggregate change in pension value under TVA’s qualified defined
benefit plan and TVA’s SERP.
|
(3)
|
Includes
$374,806 awarded under the EAIP and $724,620 awarded under the
ELTIP.
|
(4)
|
Includes
increases of $12,232 under TVA’s qualified defined benefit plan and
$393,920 under the SERP.
|
(5)
|
Includes
an unvested annual credit in the amount of $300,000 provided under a LTDCP
agreement with Mr. Kilgore, and $10,125 in 401(k) employer matching
contributions. Mr. Kilgore will become vested in the $300,000
credit in accordance with the terms of the LTDCP agreement. See
information regarding the details of the LTDCP agreement under “Long-Term
Deferred Compensation Plan
Agreements.”
|
(6)
|
Includes
$427,382 awarded under the EAIP and $463,125 awarded under the
ELTIP.
|
(7)
|
Includes
increases of $11,088 under TVA’s qualified defined benefit plan and
$127,186 under the SERP.
|
(8)
|
Includes
$334,152 awarded under the EAIP and $293,709 awarded under the
ELTIP.
|
(9)
|
Includes
increases of $8,882 under TVA’s qualified defined benefit plan and $89,290
under the SERP.
|
(10)
|
Includes
$252,298 awarded under the EAIP and $241,540 awarded under the
ELTIP.
|
(11)
|
Includes
increases of $9,529 under TVA’s qualified defined benefit plan and
$214,178 under the SERP.
|
(12)
|
Includes
$11,764 in vehicle allowance payments, $44,384 in relocation assistance
payments, and $15,101 in tax reimbursements associated with relocation
assistance payments.
|
(13)
|
Includes
$25,439 awarded under the EAIP and $10,720 awarded under the
ELTIP. Ms. Greene joined TVA on September 1, 2007, and both the
EAIP and ELTIP incentive awards were prorated based on the number of
months she participated in the performance
cycles.
|
(14)
|
Includes
increases of $5,598 under TVA’s qualified defined benefit plan and
$237,154 under the SERP.
|
(15)
|
Includes
$376,658 awarded under the EAIP and $375,093 awarded under the
ELTIP.
|
(16)
|
Includes
increases of $10,821 under TVA’s qualified defined benefit plan and
$115,619 under the SERP.
|
(17)
|
Includes
an unvested annual credit in the amount of $200,000 provided under a LTDCP
agreement with Mr. McCollum, $11,764 in vehicle allowance payments, $114
in relocation assistance payments, and $1,233 in tax reimbursements
associated with relocation assistance payments, and $10,125 in 401(k)
employer matching contributions. Mr. McCollum will become
vested in the $200,000 credit in accordance with the terms of the LTDCP
agreement. See information regarding the details of the LTDCP
agreement under “Long-Term Deferred Compensation Plan
Agreements.”
|
(18)
|
Includes
$460,257 awarded under the EAIP and $581,875 awarded under the
ELTIP.
|
(19)
|
Includes
increases of $5,385 under TVA’s qualified defined benefit plan and
$2,021,032 under the SERP. The $2,026,417 amount represents a
correction of the $1,430,162 amount reported in TVA’s 2007 Annual Report
on Form 10-K, as amended, which included increases of $5,385 under TVA’s
qualified defined benefit plan and $1,424,777 under the
SERP.
|
(20)
|
Includes
$156,408 awarded under the EAIP and $283,605 awarded under the
ELTIP.
|
(21)
|
Includes
increases of $14,049 under TVA’s qualified defined benefit plan and
$147,926 under the SERP.
|
(22)
|
Includes
an unvested annual credit in the amount of $200,000 provided under a LTDCP
agreement with Mr. Campbell, $11,764 in vehicle allowance payments, $224
in tax reimbursements associated with relocation assistance payments, and
$10,125 in 401(k) employer matching contributions. Mr.
Campbell will become vested in the $200,000 credit in accordance with the
terms of the LTDCP agreement. See information regarding the details
of the LTDCP agreement under “Long-Term Deferred Compensation Plan
Agreements.”
|
(23)
|
Includes
$258,340 awarded under the EAIP and $145,321 awarded under the
ELTIP.
|
(24)
|
Includes
increases of $14,284 under TVA’s qualified defined benefit plan and
$14,942 under the SERP.
|
(25)
|
Includes
an unvested annual credit in the amount of $150,000 provided under a LTDCP
agreement with Mr. Bhatnagar, and $11,764 in vehicle allowance payments.
Mr. Bhatnagar will become vested in the $150,000 credit in
accordance with the terms of the LTDCP agreement. See
information regarding the details of the LTDCP agreement under “Long-Term
Deferred Compensation Plan
Agreements.”
|
(26)
|
Includes
$199,572 awarded under the EAIP, $227,644 awarded under the ELTIP, and a
credit in the amount of $43,452 made to Mr. Bhatnagar’s deferred
compensation account provided under a LTDCP agreement with Mr. Bhatnagar
for achievement of major milestones in 2007 associated with the Browns
Ferry Unit 1 Recovery Project. See information regarding the
details of the LTDCP agreement under “Long-Term Deferred Compensation Plan
Agreements.”
|
(27)
|
Includes
increases of $16,030 under TVA’s qualified defined benefit plan and
$138,907 under the SERP.
|
(28)
|
Includes
$210,007 awarded under the EAIP, $140,641 awarded under the ELTIP, and a
credit in the amount of $40,000 made to Mr. Bhatnagar’s deferred
compensation account provided under a LTDCP agreement with Mr. Bhatnagar
for achievement of major milestones in 2006 associated with the Browns
Ferry Unit 1 Recovery Project. See information regarding the
details of the LTDCP agreement under “Long-Term Deferred Compensation Plan
Agreements.”
|
(29)
|
Includes
increases of $12,945 under TVA’s qualified defined benefit plan and
$147,670 under the SERP.
|
The
following table provides information regarding non-equity incentive plan awards
and the possible range of payouts associated with incentives the Named Executive
Officers were eligible to receive for performance in the performance cycles
ending in 2008.
Grants
of Plan-Based Awards Table
Estimated
Possible Payouts Under
Non-Equity
Incentive Plan Awards 1
|
||||
Name
(a)
|
Grant
Date
(b)
|
Threshold
($)
(c)
|
Target
($)
(d)
|
Maximum
($)
(e)
|
Tom
D. Kilgore
|
EAIP
2
ELTIP
3
|
$609,375
$487,500
|
$812,500
$975,000
|
$1,015,625
$1,462,500
|
Kimberly
S. Greene
|
EAIP
2
ELTIP
3
|
$243,750
$162,500
|
$325,000
$325,000
|
$406,250
$487,500
|
William
R. McCollum, Jr.
|
EAIP
2
ELTIP
3
|
$378,525
$252,350
|
$504,700
$504,700
|
$630,875
$757,050
|
William
R. Campbell
|
EAIP
2
ELTIP
3
|
$268,313
$190,800
|
$357,750
$381,600
|
$447,188
$572,400
|
Ashok
S. Bhatnagar
|
EAIP
2
ELTIP
3
|
$195,534
$97,767
|
$260,712
$195,534
|
$325,890
$293,301
|
Notes
(1) TVA
does not have any equity securities and has no equity-based awards.
(2) Actual
awards earned for performance in 2008 are reported for each of the Named
Executive Officers under “Non-Equity Incentive Plan Compensation” in the Summary
Compensation Table.
(3) Actual
awards earned for the performance cycle ended on September 30, 2008, are
reported for each of the Named Executive Officers under “Non-Equity Incentive
Plan Compensation” in the Summary Compensation Table.
Executive Annual Incentive Plan
Awards. Incentive
opportunities under the EAIP for 2008 were as follows:
Executive
Annual Incentive Plan
Name
|
EAIP
Incentive
Opportunity 1
|
|||
Tom
D. Kilgore
|
125 | % | ||
Kimberly
S. Greene
|
65 | % | ||
William
R. McCollum, Jr.
|
70 | % | ||
William
R. Campbell
|
75 | % | ||
Ashok
S. Bhatnagar
|
60 | % |
Note
(1) Represents a percentage of each
participant’s salary.
Awards
earned under the EAIP for 2008 were calculated as the product of salary times
the annual incentive opportunity times the percent of opportunity achieved for
each Named Executive Officer. Based on this calculation, the EAIP
payouts were $374,806 (57.66 percent of salary) for Mr. Kilgore; $252,298 (50.46
percent of salary) for Ms. Greene; $376,658 (52.24 percent of salary) for Mr.
McCollum; $156,408 (32.79 percent of salary) for Mr. Campbell; and $258,340
(59.45 percent of salary) for Mr. Bhatnagar. All awards will be paid
in cash during the first quarter of 2009 with a deferral option. Mr. McCollum
elected to defer 100 percent of his EAIP award earned for 2008.
Executive Long-Term Incentive Plan
Awards. Incentive opportunities for the one-year performance
cycle ended on September 30, 2008, were as follows:
Executive
Long-Term Incentive Plan
Name
|
ELTIP
Incentive
Opportunity 1
|
|||
Tom
D. Kilgore
|
150 | % | ||
Kimberly
S. Greene
|
65 | % | ||
William
R. McCollum, Jr.
|
70 | % | ||
William
R. Campbell
|
80 | % | ||
Ashok
S. Bhatnagar
|
45 | % |
Note
(1)
Represents a percentage of each participant’s salary.
Awards
earned under the ELTIP for the one-year performance cycle ended on September 30,
2008, were calculated as the product of salary times the ELTIP incentive
opportunity times the percent of opportunity achieved for each Named Executive
Officer. Based on this calculation, and a 74.32 percent of
opportunity achieved, the ELTIP payouts were $724,620 (111.48 percent of salary)
for Mr. Kilgore; $241,540 (48.31 percent of salary) for Ms. Greene; $375,093
(52.02 percent of salary) for Mr. McCollum; $283,605 (59.46 percent of salary)
for Mr. Campbell; and $145,321 (33.44 percent of salary) for Mr.
Bhatnagar. All awards will be paid in cash during the first quarter
of 2009 with a deferral option. Mr. McCollum elected to defer 100
percent of his ELTIP award earned for the performance cycle ended on September
30, 2008.
Long-Term
Deferred Compensation Plan Agreements.
In March
2005, TVA entered into a LTDCP agreement with Mr. Kilgore. Under
the terms of the agreement, Mr. Kilgore received deferred compensation credits
of $300,000 on March 31, 2005, October 1, 2005, October 1, 2006, October 1,
2007, and October 1, 2008. Pursuant to the agreement, Mr. Kilgore was
vested in the first credit of $300,000 at the time the credit was made in March
2005 and will be vested in any earnings on this amount. Mr. Kilgore
will vest in the remaining balance of his account only if he remains employed by
TVA until the expiration of the agreement on September 30, 2009, after
which the account will be distributed to him in a lump sum following the
termination
of his
employment with TVA. In the event TVA terminates Mr. Kilgore’s
employment during the term of the LTDCP agreement through no act or delinquency
of his own, any credits and earnings on those credits in Mr. Kilgore’s account
at the time of termination will become vested and distributed to him in a lump
sum. If Mr. Kilgore voluntarily terminates his employment or TVA
terminates Mr. Kilgore’s employment for cause prior to the expiration of the
agreement, all credits in Mr. Kilgore’s account, except the initial $300,000
credit and any earnings on this amount, will be forfeited.
In
September 2007, TVA entered into a LTDCP agreement with
Ms. Greene. Under the terms of the agreement, Ms. Greene
received a deferred compensation credit of $280,000 on September 4, 2007, and a
deferred compensation credit of $100,000 on October 1, 2008. Ms.
Greene will also receive deferred compensation credits in the amount of $100,000
each on October 1, 2009, and October 1, 2010, if she remains employed by TVA on
these dates. Pursuant to the agreement, Ms. Greene was vested in the
first credit of $280,000 at the time the credit was made and will be vested in
any earnings on this amount. Ms. Greene will vest in the remaining
balance of her account only if she remains employed by TVA until the expiration
of the agreement on September 30, 2011. All vested credits
in her account under this LTDCP agreement will be distributed to her in five
annual installments following the termination of her employment with
TVA. In the event TVA terminates Ms. Greene’s employment during the
term of the LTDCP agreement through no act or delinquency of her own, any
credits and earnings on those credits in Ms. Greene’s account at the time of
termination will become vested and distributed to her in five annual
installments. If Ms. Greene voluntarily terminates her employment or
TVA terminates Ms. Greene’s employment for cause prior to the expiration of the
agreement, all credits in Ms. Greene’s account, except the initial $280,000
credit and any earnings on this amount, will be forfeited.
In May
2007, TVA entered into a LTDCP agreement with
Mr. McCollum. Under the terms of the agreement, Mr. McCollum
received a deferred compensation credit of $350,000 on May 1, 2007, and deferred
compensation credits of $200,000 on October 1, 2007, and October 1,
2008. Mr. McCollum will also receive deferred compensation credits in
the amount of $200,000 each on October 1, 2009, and October 1, 2010, if he
remains employed by TVA on these dates. Pursuant to the agreement,
Mr. McCollum was vested in the first credit of $350,000 at the time the credit
was made and will be vested in any earnings on this amount. Mr.
McCollum will vest in the remaining balance of his account only if he remains
employed by TVA until the expiration of the agreement on
September 30, 2011. All vested credits in his account under
this LTDCP agreement will be distributed to him in five annual installments
following the termination of his employment with TVA. In the event
TVA terminates Mr. McCollum’s employment during the term of the LTDCP agreement
through no act or delinquency of his own, any credits and earnings on those
credits in Mr. McCollum’s account at the time of termination will become vested
and distributed to him in five annual installments. If Mr. McCollum
voluntarily terminates his employment or TVA terminates Mr. McCollum’s
employment for cause prior to the expiration of the agreement, all credits in
Mr. McCollum’s account, except the initial $350,000 credit and any earnings on
this amount, will be forfeited.
In March
2007, TVA entered into a LTDCP agreement with
Mr. Campbell. Under the terms of the agreement, Mr. Campbell
received a deferred compensation credit of $70,000 on May 14, 2007, and deferred
compensation credits of $200,000 on October 1, 2007, and October 1,
2008. Mr. Campbell will also receive deferred compensation credits in
the amount of $200,000 each on October 1, 2009, October 1, 2010, and October 1,
2011, if he remains employed by TVA on these dates. Pursuant to the
agreement, Mr. Campbell was vested in the first credit of $70,000 at the time
the credit was made and will be vested in any earnings on this
amount. Mr. Campbell will vest in the remaining balance of his
account only if he remains employed by TVA until the expiration of the agreement
on September 30, 2012. All vested credits in his account
under this LTDCP agreement will be distributed to him in five annual
installments following the termination of his employment with TVA. In
the event TVA terminates Mr. Campbell’s employment during the term of the LTDCP
agreement through no act or delinquency of his own, any credits and earnings on
those credits in Mr. Campbell’s account at the time of termination will become
vested and distributed to him in five annual installments. If Mr.
Campbell voluntarily terminates his employment or TVA terminates Mr. Campbell’s
employment for cause prior to the expiration of the agreement, all credits in
Mr. Campbell’s account, except the initial $70,000 credit and any earnings on
this amount, will be forfeited.
In
September 2004, TVA entered into a LTDCP agreement with Mr.
Bhatnagar. Under the terms of the agreement, Mr. Bhatnagar received
deferred compensation credits of $150,000 on October 1, 2004, October 1, 2005,
October 1, 2006, October 1, 2007, and October 1, 2008. Mr. Bhatnagar
will vest in his account only if he remains employed by TVA until the expiration
of the agreement on September 30, 2009, after which the account will
be distributed to him in a lump sum. In the event TVA terminates Mr.
Bhatnagar’s employment during the term of the LTDCP agreement through no act or
delinquency of his own, any credits and earnings on those credits in Mr.
Bhatnagar’s account at the time of termination will become vested and
distributed to him in a lump sum. If Mr. Bhatnagar voluntarily
terminates his employment or TVA terminates Mr. Bhatnagar’s employment for cause
prior to the expiration of the agreement, all credits in Mr. Bhatnagar’s account
will be forfeited.
In
addition to the LTDCP agreement with Mr. Bhatnagar described above, TVA has
entered into a second LTDCP agreement with Mr. Bhatnagar that provides annual
credits of up to $50,000 for a period of four years based on the accomplishment
of major milestones associated with the Browns Ferry Unit 1 Recovery
Project. The actual amount credited each year is based on the
achievement of specific milestones established at the beginning of each
year. Under this agreement, credits earned were vested and credited
to a deferred compensation account in Mr. Bhatnagar’s name at the end of each
year. For 2007, the milestone objective established for Mr.
Bhatnagar’s agreement was the successful restart date of Browns Ferry Unit 1
with a 100 percent payout for restart by May 22, 2007, 75 percent payout for
restart by June 15, 2007, and no payout for restart after June 15,
2007. The payout percentage for a successful restart date between May
22, 2007, and June 15, 2007 was determined by straight-line
interpolation. For purposes of the agreement, Browns Ferry Unit 1 was
considered successfully restarted on June 2, 2007. As a result, Mr.
Bhatnagar was awarded a credit of $43,452 for 2007, which, under the terms of
the agreement, has been placed in a deferred compensation account in his name to
be distributed in a lump sum upon termination of employment.
Retirement
and Pension Plans
The
following table provides the actuarial present value of the Named Executive
Officer’s accumulated benefits, including the number of years of credited
service, under TVA’s retirement and pension plans as of September 30, 2008,
determined using a methodology and interest rate and mortality rate assumptions
that are consistent with those used in the financial statements contained in
this Annual Report as set forth in Note 14.
Pension
Benefits Table
Name
(a)
|
Plan
Name
(b)
|
Number
of
Years
of Credited Service 1
(#)
(c)
|
Present
Value of Accumulated Benefit
($)
(d)
|
Payments
During Last Year
($)
(e)
|
||
Tom
D. Kilgore
|
(1)
Qualified Plan – CBBS
(2)
Non-Qualified – SERP Tier 1
|
3.58
8.00
2
|
$36,809
$1,978,804
|
$0
$0
|
||
Kimberly
S. Greene
|
(1)
Qualified Plan – CBBS
(2)
Non-Qualified – SERP Tier 1
|
1.08
16.08
3
|
$15,127
$451,332
|
$0
$0
|
||
William
R. McCollum, Jr.
|
(1)
Qualified Plan – CBBS
(2)
Non-Qualified – SERP Tier 1
|
1.42
11.42
4
|
$16,206
$2,136,651
|
$0
$0
|
||
William
R. Campbell
|
(1)
Qualified Plan – CBBS
(2)
Non-Qualified – SERP Tier 1
|
1.33
6.33
5
|
$15,599
$870,414
|
$0
$0
|
||
Ashok
S. Bhatnagar
|
(1)
Qualified Plan – CBBS
(2)
Non-Qualified – SERP Tier 1
|
9.08
9.08
|
$112,561
$569,930
|
$0
$0
|
||
Notes:
(1)
|
Limited
to 24 years when determining supplemental benefits available under SERP
Tier 1, described below.
|
(2)
|
Mr.
Kilgore has been granted three additional years of credited service for
pre-TVA employment following five years of actual TVA
service. In the event his employment is terminated during the
first five years (other than for cause), the five-year vesting requirement
will be waived and he will receive credit for eight years of
service. In addition, the offset for prior employer pension
benefits will be waived, and the offset for benefits provided under TVA’s
defined benefit plan will be calculated based on the actual pension
benefit he will receive as a participant in the CBBS. Without
waiving the vesting requirement and the additional years of credited
service, the present value of Mr. Kilgore’s accumulated benefit would be
$0.
|
(3)
|
Ms.
Greene has been granted 15 additional years of credited service for
pre-TVA employment and the offset for prior employer pension benefits has
been waived. The offset for benefits provided under TVA’s
defined benefit plan will be calculated based on the benefit she will be
eligible to receive as a participant in the CBBS taking into account the
additional years of credited service being used for SERP benefit
calculation purposes. In the event that Ms. Greene voluntarily
terminates her employment with TVA or is terminated for cause prior to
satisfying the minimum five-year vesting requirement, no benefits will be
provided to her under the SERP. In the event of termination for
any other reason, prior to five years of employment, the five-year vesting
requirement will be waived and the benefit Ms. Greene will be eligible to
receive will be payable no earlier than age 55. As of September
30, 2008, the present value of this benefit is
$451,332. Without the additional years of credited service, the
present value of Ms. Greene’s accumulated benefit would be
$0.
|
(4)
|
Mr.
McCollum has been granted 10 additional years of credited service for
pre-TVA employment and the offset for prior employer pension benefits has
been waived. The additional years of credited service will be
used for SERP benefit calculation purposes only and will not count toward
the minimum five-year vesting requirement. In the event Mr.
McCollum voluntarily terminates his employment with TVA or is terminated
for cause prior to satisfying the minimum five-year vesting requirement,
no benefits will be provided under the SERP. In the event of
termination for any other reason, prior to five years of employment, the
five-year vesting requirement will be waived as long as the termination is
considered acceptable to TVA, and Mr. McCollum would be eligible to
receive benefits payable in five annual installments following
termination. The present value of this benefit as of September
30, 2008, is $2,136,651. Without the additional years of
credited service, the present value of Mr. McCollum’s accumulated benefit
would be $0.
|
(5)
|
Mr.
Campbell has been granted five additional years of credited service for
pre-TVA employment and the offsets for prior employer pension benefits and
social security benefits have been waived. The additional years
of credited service will be used for SERP benefit calculation purposes
only and will not count toward the minimum five-year vesting
requirement. In addition, the offset for benefits provided
under TVA’s defined benefit plan will be calculated based on the actual
pension benefit he will receive as a participant in the
CBBS. In the event Mr. Campbell voluntarily terminates his
employment with TVA or is terminated for cause prior to satisfying the
minimum five-year vesting requirement, no benefits will be provided under
the SERP. In the event of termination (other than for cause)
following the required five years of vesting service, his termination will
be considered an approved termination under TVA’s SERP and a benefit equal
to that calculated for an “Approved Termination” will be payable upon
termination as long as the termination is considered acceptable to
TVA. The present value of this benefit as of September 30,
2008, is $870,414. Without the additional years of credited
service, the present value of Mr. Campbell’s accumulated benefit would be
$0.
|
Qualified Defined Benefit
Plan. TVA sponsors a qualified defined benefit plan with two
structures for employees, including the Named Executive Officers, which is
administered by the TVA Retirement System. The structures are the
Original Benefit Structure (“OBS”) and the CBBS. Participation in the
OBS is limited to employees who were covered under the plan prior to January 1,
1996. All employees first hired by TVA on or after January 1, 1996,
participate in the CBBS. As with any other qualified retirement plan,
there are limits on employee and employer contributions and compensation that
can be counted for benefit calculations set by the TVA Retirement System rules
and IRS regulations.
All of
the Named Executive Officers are members of the CBBS. Under the CBBS,
each member has a cash balance account that receives pay credits equal to six
percent of his/her compensation each pay period (every two
weeks). For executives who are members of the CBBS, compensation is
defined as annual salary only for benefit calculation purposes and is shown
under the column titled “Salary” in the Summary Compensation Table, although
compensation could not exceed $225,000 in 2008 pursuant to the IRS annual
compensation limit applicable to qualified plans. The account is
credited with interest each month, and interest is compounded on an annual
basis. The annual interest rate used for interest credits is
determined each January 1. The interest rate is 3 percent greater
than the percentage increase in the 12-month average of the Consumer Price Index
for the period ending on the previous October 31. The minimum
interest rate is 6 percent and the maximum interest rate is 10 percent
unless the TVARS Board, with TVA’s approval, selects a higher interest
rate. When a member elects to begin receiving retirement benefits,
the cash balance account is converted to a monthly pension payment by dividing
the ending value of the cash balance account by a conversion factor set forth in
the plan based on the member’s actual age in years and months.
Members
with at least five years of CBBS service are eligible to receive an immediate
benefit. CBBS service is the length of time spent as a member of the
TVA Retirement System and does not include credit for unused sick leave,
forfeited annual leave, or pre-TVA employment military service. The
CBBS does not provide early retirement benefits to any Named Executive Officer
or any other member in the CBBS.
Supplemental Executive Retirement
Plan. The SERP is a non-qualified defined benefit pension plan similar to
those typically found in other companies in TVA’s peer group and is provided to
a limited number of executives, including the Named Executive
Officers. TVA’s SERP was created to recruit and retain key
executives. The plan is designed to provide a competitive level of
retirement benefits in excess of the limitations on contributions and benefits
imposed by TVA’s qualified defined benefit plan and IRS code section 415 limits
on qualified retirement plans.
The SERP
provides two distinct levels of participation, Tier 1 and Tier
2. Each employee is assigned to one of the two tiers at the time he
or she is approved to participate in the SERP. The level of
participation (“Tier”) defines the level of retirement benefits provided under
the SERP at the time of retirement.
Under the
SERP, normal retirement eligibility is age 62 with five years of vesting
service. No vested and accrued benefits are payable prior to age 55,
and benefits are reduced for retirements prior to age 62. The level
of reduction in benefits for retirements prior to age 62 depends on whether a
participant’s termination is “approved” or “unapproved.” In the event
of an approved termination of TVA employment, any vested and accrued benefits
are reduced by 5/12 percent for each month that the date of benefit commencement
precedes the participant’s 62nd birthday up to a maximum reduction of 35
percent. In the event of an unapproved termination of TVA employment,
the participant’s accrued benefits are first subject to a reduced percentage of
vesting if the participant’s years of service are between five and
ten. At five years of vesting service, the vested percentage of
retirement benefits is 50 percent and increases thereafter by 10 percent for
each full additional year of service, reaching 100 percent vesting for ten or
more years of vesting service. Thereafter, any vested and accrued
benefits are reduced by 10/12 percent for each month that the date of benefit
commencement precedes the participant’s 62nd birthday up to a maximum reduction
of 70 percent.
For
purposes of the SERP, an “approved” termination means termination of employment
with TVA due to (i) retirement on or after the participant’s 62nd birthday, (ii)
retirement on or after attainment of actual age 55, if such retirement has the
approval of the TVA Board or its delegatee, (iii) death in service as an
employee, (iv) disability (as such term is defined under TVA’s long-term
disability plan), or (v) any other circumstances approved by the TVA Board or
its delegatee. For purposes of the SERP, an “unapproved” termination
means a termination of employment with TVA when such termination does not
constitute an “approved” termination as defined in the preceding
sentence.
SERP Tier 1.
All of the Named Executive Officers are participants in Tier 1. The
Tier 1 structure is designed to replace 60 percent of the amount of a
participant’s compensation at the time the participant reaches age 62 and has
accrued 24 years of service at TVA.
Tier 1
benefits are based on a participant’s highest average compensation during three
consecutive SERP years and a pension multiple of 2.5 percent for each year of
credited service up to a maximum of 24 years. Compensation is defined
as salary, additional annual compensation, and EAIP for benefit calculation
purposes. Tier 1 benefits are offset by Social Security benefits,
benefits provided under TVA’s defined benefit plan, and prior employer pension
benefits when applicable. All of the Named Executive Officers are
participants in Tier 1.
SERP Tier 2.
None of the Named Executive Officers participates in Tier 2.
The TVA Sponsored 401(k)
Plan. Members
of the TVA Retirement System, including the Named Executive Officers, may elect
to participate in the TVA Retirement System’s 401(k) plan on a before- and/or
after-tax basis. For CBBS members, TVA provides a matching
contribution of 75 cents on every dollar contributed on a before- and/or
after-tax basis up to 4.5 percent of the participant’s annual
salary.
Nonqualified
Deferred Compensation
The
following table provides information regarding deferred contributions, earnings,
and balances for each of the Named Executive Officers. The amounts
reported under this table do not represent compensation in addition to the
compensation that was earned in 2008 and already reported in the Summary
Compensation Table but rather the amounts of compensation earned by the Named
Executive Officers in 2008 or prior years that was or has been
deferred.
Nonqualified
Deferred Compensation Table
Name
(a)
|
Executive
Contributions
in
Last
FY
($)
(b)
|
Registrant
Contributions
in
Last
FY
($)
(c)
|
Aggregate
Earnings
in
Last
FY 1
($)
(d)
|
Aggregate
Withdrawals/
Distributions
($)
(e)
|
Aggregate
Balance
at
Last
FYE 2
($)
(f)
|
|||||||||||||||
Tom
D. Kilgore
|
$ | 0 | $ | 300,000 | 3 | $ | (9,578 | ) | $ | 0 | $ | 3,031,630 | 4 | |||||||
Kimberly
S. Greene
|
$ | 0 | $ | 0 | $ | 14,093 | $ | 0 | $ | 295,069 | ||||||||||
William
R. McCollum, Jr.
|
$ | 751,751 | 5 | $ | 200,000 | 6 | $ | (145,695 | ) | $ | 0 | $ | 1,193,092 | 7 | ||||||
William
R. Campbell
|
$ | 0 | $ | 200,000 | 8 | $ | 13,580 | $ | 0 | $ | 284,893 | 9 | ||||||||
Ashok
S. Bhatnagar
|
$ | 0 | $ | 150,000 | 10 | $ | (433,599 | ) | $ | 0 | $ | 2,145,527 | 11 |
Notes
(1)
|
Includes
vested and unvested earnings. None of these amounts are included in the
Summary Compensation Table.
|
(2)
|
Includes
vested and unvested amounts.
|
(3)
|
Represents
an unvested annual credit in the amount of $300,000 provided under a LTDCP
agreement with Mr. Kilgore (reported in the “All Other Compensation”
column in the Summary Compensation
Table).
|
(4)
|
Represents
the balance of Mr. Kilgore’s account, including unvested credits and
earnings totaling $990,564, as of September 30, 2008. The
amount in the “Aggregate Balance at Last FYE” column includes $783,661
(EAIP and ELTIP deferrals) reported in the Summary Compensation Table for
2007.
|
(5)
|
Mr.
McCollum elected to defer 100 percent of the $376,658 to be awarded under
the EAIP for 2008 and 100 percent of the $375,093 to be awarded under the
ELTIP for the performance period that ended on September 30,
2008. These amounts are reported in the “Non-Equity Incentive
Plan Compensation” column in the Summary Compensation
Table.
|
(6)
|
Represents
an unvested annual credit in the amount of $200,000 provided under a LTDCP
agreement with Mr. McCollum (reported in the “All Other Compensation”
column in the Summary Compensation
Table).
|
(7)
|
Represents
the balance of Mr. McCollum’s account, including unvested credits and
earnings totaling $179,036, as of September 30, 2008. The
amount in the “Aggregate Balance at Last FYE” column includes $781,599
(EAIP and ELTIP deferrals) reported in the Summary Compensation Table for
2007. The amount reported in “Executive Contributions in Last
FY” column will be credited to his account in the first quarter of 2009
and is not included in the balance.
|
(8)
|
Represents
an unvested annual credit in the amount of $200,000 provided under a LTDCP
agreement with Mr. Campbell (reported in the “All Other Compensation”
column in the Summary Compensation
Table).
|
(9)
|
Represents
the balance of Mr. Campbell’s account, including unvested credits and
earnings totaling $210,003, as of September 30,
2008.
|
(10)
|
Represents
an unvested annual credit in the amount of $150,000 provided under a LTDCP
agreement with Mr. Bhatnagar (reported in the “All Other Compensation”
column in the Summary Compensation
Table).
|
(11)
|
Represents
the balance of Mr. Bhatnagar’s account, including unvested credits and
earnings totaling $627,348, as of September 30,
2008.
|
TVA
allows participants in the EAIP, ELTIP, and LTDCP to elect to defer all or a
portion of the compensation earned under those plans that is eligible for
deferral under applicable IRS regulations. All deferrals are credited
to each participant in a deferred compensation account, and the deferral amounts
are then funded into a rabbi trust. Each participant may elect one or
more of several notional investment options made available by TVA or allow some
or all funds to accrue interest at the rate established at the beginning of each
fiscal year. Participants may elect to change from either one
notional investment option or the TVA interest bearing option to another at any
time. Upon termination, funds are distributed pursuant to elections
made in accordance with applicable IRS regulations.
No
executives, including the Named Executive Officers, were permitted to defer any
portion of their annual salary in 2008. Participants in the EAIP and
ELTIP, including the Named Executive Officers, are permitted to elect annually
to defer all or a portion of their awards (25, 50, 75 or 100 percent) received
under the plans.
Severance Agreements
In
January 2005, TVA entered into an agreement with Mr. Kilgore that provides a
lump-sum payment equal to one year’s annual compensation if (1) his duties,
responsibilities, or compensation is substantially reduced, and he terminates
his employment with TVA, or (2) his employment is terminated for any reason
other than “for cause.” For purposes of this agreement, “annual
compensation” is defined as annual salary plus additional annual compensation
plus the amount of the annual and long-term incentive awards he would have been
eligible to receive based on 100 percent achievement of target performance
goals. As of September 30, 2008, this lump-sum payment would have
been equal to $2,437,500. In addition, if his employment had been
terminated on September 30, 2008, other than for cause or as a result of a
voluntary resignation, Mr. Kilgore would have received $990,564 under his LTDCP
agreement payable in a lump sum following termination, and SERP benefits payable
in five annual installments, which as of September 30, 2008, had a present value
of $1,978,804. Upon termination of employment for any reason, Mr. Kilgore
would be eligible to receive any amounts in his 401(k) plan account, subject to
plan rules, and any amounts that he earned in past years but elected to
defer.
In August
2007, TVA entered into an agreement with Ms. Greene that provides a lump-sum
payment in an amount equal to two years’ annual compensation in the event that
TVA’s current Chief Executive Officer no longer occupies that position and Ms.
Greene is asked to leave TVA employment for any reason other than for cause or
she terminates her employment because she is asked to take a position with TVA
other than her then current position as Chief Financial Officer and Executive
Vice President, Financial Services. For purposes of this agreement,
“annual compensation” is defined as annual salary plus the amount of the annual
incentive award based on 100 percent achievement of target performance
goals. As of September 30, 2008, this lump-sum payment would have
been equal to $1,650,000. In addition, if her employment had been
terminated on September 30, 2008, other than for cause or as a result of a
voluntary resignation, Ms. Greene would have been eligible to receive SERP
benefits payable in five annual installments beginning no earlier than age
55. As of September 30, 2008, the present value of these SERP
benefits was $451,332. Upon termination of employment for any reason,
Ms. Greene would be eligible to receive any amounts in her 401(k) plan account
that she contributed and any earnings on these amounts, subject to plan rules,
and any amounts that she earned in past years but elected to defer.
Neither
Mr. McCollum, Mr. Campbell, nor Mr. Bhatnagar has a severance agreement with
TVA. However, had Mr. McCollum’s employment been terminated on
September 30, 2008, other than for cause or as a result of a voluntary
resignation, Mr. McCollum would have received $179,036 under his LTDCP agreement
payable in five annual installments following termination, and SERP benefits
payable in five annual installments, which as of September 30, 2008, had a
present value of $2,136,651, assuming the termination was deemed an approved
termination under the SERP. In addition, upon termination of
employment for any reason, Mr. McCollum would be eligible to receive any amounts
in his 401(k) plan account that he contributed and any earnings on these
amounts, subject to plan rules, and any amounts that he earned in past years but
elected to defer. Had Mr. Campbell’s employment been terminated on
September 30, 2008, other than for cause or as a result of a voluntary
resignation, Mr. Campbell would have received $210,003 under his LTDCP agreement
payable in five annual installments following termination, and SERP benefits
payable in five annual installments, which as of September 30, 2008, had a
present value of $870,414, assuming the termination was deemed an approved
termination under the SERP. In addition, upon termination of
employment for any reason, Mr. Campbell would be eligible to receive any amounts
in his 401(k) plan account that he contributed and any earnings on these
amounts, subject to plan rules, and any amounts that he earned in past years but
elected to defer. Had Mr. Bhatnagar’s employment been terminated on
September 30, 2008, other than for cause or as a result of a voluntary
resignation, Mr. Bhatnagar would have received $627,348 under his LTDCP
agreement payable in a lump sum following termination, and SERP benefits payable
in five annual installments beginning no earlier than age 55, which as of
September 30, 2008, had a present value of $569,561, assuming the termination
was deemed an approved termination under the SERP. In addition, upon
termination of employment for any reason, Mr. Bhatnagar would be eligible to
receive $112,561 under TVA’s qualified defined benefit plan payable in the form
of an actuarial equivalent lifetime annuity, any amounts in his 401(k) plan
account, subject to plan rules, and any amounts that he earned in past years but
elected to defer.
Other Agreements
Except as
described above, there are no other agreements between TVA and any of the Named
Executive Officers.
Director Compensation
The TVA
Act provides for nine directors on the TVA Board. The TVA Board is
currently composed of seven directors with two vacant positions to be filled
upon nomination by the President of the United States and confirmation by the
Senate. Under the TVA Act, each of TVA’s directors receives certain
stipends that are increased annually by the same percentage increase applicable
to adjustments under 5 U.S.C. § 5318, which provides for adjustments in the
annual rates of pay of employees on the Executive Schedule of the United States
Government. As of September 30, 2008, the base stipend amounted to
$46,900 per year unless (1) the director is the chair of a TVA Board committee,
in which case the stipend is $48,000 per year, or (2) the director is the
chairman of the TVA Board, in which case the stipend is $53,200 per
year. Directors are also reimbursed under federal law for travel,
lodging, and related expenses that they incur in attending meetings and for
other official TVA business in the same manner as other persons employed
intermittently in federal government service.
The
annual stipends provided by the TVA Act for each director and to the chairman of
the TVA Board as of September 30, 2008, were as follows:
TVA
Board Annual Stipends
|
||||
Name
|
Annual
Stipend
($)
|
|||
Dennis
C. Bottorff
|
$ | 48,000 | ||
Donald
R. DePriest
|
$ | 48,000 | ||
Robert
M. Duncan
|
$ | 46,900 | ||
Thomas
C. Gilliland
|
$ | 48,000 | ||
Bishop
William H. Graves
|
$ | 46,900 | ||
William
B. Sansom
|
$ | 52,200 | ||
Howard
A. Thrailkill
|
$ | 48,000 |
The
following table set outs the compensation received by TVA’s directors during
2008.
Director
Compensation
Name
(a)
|
Fees
Earned or Paid in Cash
($)
(b)
|
Stock
Awards
($)
(c)
|
Option
Awards
($)
(d)
|
Non-Equity
Incentive
Plan
Compensation
($)
(e)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings 1
($)
(f)
|
All
Other Compensation
($)
(g)
|
Total
($)
(h)
|
|||||||||
Dennis
C. Bottorff
|
$ | 48,631 |
|
|
|
|
$ | 869 | $ | 49,500 | ||||||
Donald
R. DePriest
|
$ | 48,631 |
|
|
|
|
$ | 2,301 | $ | 50,932 | ||||||
Robert
M. Duncan
|
$ | 48,631 |
|
|
|
|
$ | 869 | $ | 49,500 | ||||||
Thomas
Chandler Gilliland 2
|
$ | 24,554 |
|
|
|
|
$ | 435 | $ | 24,989 | ||||||
Bishop
William H. Graves 3
|
$ | 24,433 |
|
|
|
|
$ | 574 | $ | 25,007 | ||||||
Skila
S. Harris 4
|
$ | 30,908 |
|
|
|
|
$ | 1,735 | $ | 32,643 | ||||||
William
B. Sansom
|
$ | 52,909 |
|
|
|
|
$ | 945 | $ | 53,854 | ||||||
Howard
A. Thrailkill
|
$ | 48,631 |
|
|
|
|
$ | 2,445 | $ | 51,076 | ||||||
Susan
Richardson Williams 5
|
$ | 11,677 |
|
|
|
|
$ | 669 | $ | 12,346 | ||||||
Notes
(1) TVA
directors do not participate in the TVA Retirement System, TVA’s SERP, or any
non-qualified deferred compensation plan available to TVA
employees. However, as appointed officers of the United States
government, the directors are members of the Federal Employees Retirement System
(“FERS”). FERS is administered by the federal Office of Personnel
Management (“OPM”), and information regarding the value of FERS pension benefits
is not available to TVA.
(2) Mr.
Gilliland did not become a director until March 28, 2008.
(3) Bishop
Graves served on the TVA Board from October 10, 2006 to December 31, 2007, and
was reappointed to the TVA Board on June 24, 2008.
(4) Ms.
Harris ended her service as a director on May 19, 2008.
(5) Ms.
Williams served on the TVA Board from March 31, 2006 to December 31,
2007. Although Ms. Williams has been nominated for a second term, she
has not been confirmed by the Senate.
Directors
are eligible to participate in TVA’s health benefit plans and other
non-retirement benefit plans on the same terms and at the same contribution
rates as other TVA employees. The directors are not eligible to
participate in any incentive programs available to TVA employees. The
directors do not participate in the TVA Retirement System and do not participate
in TVA’s SERP. However, as appointed officers of the United States
government, the directors are members of the Federal Employees Retirement System
(“FERS”). FERS is a tiered retirement plan that includes three
components: (1) Social Security benefits, (2) the Basic Benefit Plan, and (3)
the Thrift Savings Plan. Each director pays full Social Security
taxes and makes a small contribution (0.8 percent of salary or stipend) to the
Basic Benefit Plan.
The FERS
Basic Benefit Plan is a qualified defined benefit plan that provides a
retirement benefit based on a final average pay formula that includes age,
highest average salary during any three consecutive years of service, and years
of creditable service. A director must have at least five years of
creditable service in order to be eligible to receive retirement
benefits. Directors are eligible for immediate, unreduced retirement
benefits once (1) they reach age 62 and have five years of creditable service,
(2) they reach age 60 and have 20 years of creditable service, or (3) they
attain the minimum retirement age and accumulate the specified years of
service. Generally, benefits are calculated by multiplying 1.0
percent of the highest average salary during any three consecutive years of
service by the number of years of creditable service. Directors who
retire at age 62 or later with at least 20 years of service receive an enhanced
benefit (a factor of 1.1 percent is used rather than 1.0 percent).
Directors
may also retire with an immediate benefit under FERS if they reach their minimum
retirement age and have accumulated at least 10 years of creditable
service. For directors who reach the minimum retirement age and have
at least 10 years of creditable service, the annuity will be reduced by five
percent for each year the director is under age 62.
Each
director is also eligible to participate in the Thrift Savings
Plan. The Thrift Savings Plan is a tax-deferred retirement savings
and investment plan that offers the same type of savings and tax benefits
offered under 401(k) plans. Once a director becomes eligible, after a
mandatory waiting period, TVA contributes an amount equal to one percent of the
director’s stipend into a Thrift Savings Plan account for the
director. These contributions are made automatically every two weeks
regardless of whether the director makes a contribution of his or her own
money. Directors are eligible to contribute up to the Internal
Revenue Service (“IRS”) elective deferral limit. Directors receive a
matching contribution according to the following
schedule: 100 percent of each dollar for the first three percent
of the director’s stipend, 50 percent of each dollar for the next two percent of
the director’s stipend, and zero percent for contributions above five percent of
the director’s stipend.
Compensation Committee Interlocks and Insider
Participation
The FSRA
Committee consists of the following three directors: Dennis C. Bottorff, Chair,
Donald R. DePriest, and William B. Sansom. Pursuant to the
Compensation Plan, the FSRA Committee will review the compensation of the CEO
and his direct reports, monitor the process for approving compensation for TVA
employees compensated in excess of the federal government’s Executive Schedule
Level IV ($149,000 as of September 30, 2008), monitor TVA executive compensation
programs, and periodically review the compensation and benefits programs for all
TVA employees.
Under the
TVA Act, the TVA Board has the authority to approve the compensation of the CEO
and his direct reports as well as the salaries of employees whose salaries
exceed Executive Schedule Level IV. While the FSRA Committee can
recommend that the TVA Board approve the compensation of the CEO and his direct
reports and the salaries of employees whose salaries exceed Executive Schedule
Level IV, the FSRA Committee has no approval authority.
No
executive officer of TVA serves on the board of an entity which in turn has an
executive officer of the entity serving as a director of TVA.
Compensation Committee Report
The FSRA
Committee has reviewed and discussed the Compensation Discussion and Analysis
with management, and based on the review and discussions, the FSRA Committee
recommended to the TVA Board that the Compensation Discussion and Analysis be
included in this Annual Report.
THE
FINANCE, STRATEGY, RATES, AND ADMINISTRATION COMMITTEE
Dennis C.
Bottorff, Chair
Donald R.
DePriest
William
B. Sansom
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Not
applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Director Independence
The
composition of the TVA Board is governed by the TVA Act. The TVA Act
contains certain provisions that are similar to the considerations for
independence under section 10A(m)(3) of the Exchange Act, including that to be
eligible for appointment to the TVA Board, an individual shall not be an
employee of TVA and shall make full disclosure to Congress of any investment or
other financial interest that the individual holds in the energy
industry. These provisions became applicable to TVA Board members on
March 31, 2006.
Related Party Transactions
Conflict
of Interest Provisions
All TVA
employees, including directors and executive officers, are subject to the
conflict of interest laws and regulations applicable to employees of the federal
government. Accordingly, the general federal conflict of interest
statute (18 U.S.C. § 208) and the Standards of Ethical Conduct for Employees of
the Executive Branch (5 C.F.R. part 2635) (“Standards of Ethical Conduct”)
form the basis of TVA’s policies and procedures for the review, approval, or
ratification of related party transactions. The general federal
conflict of interest statute, subject to certain exceptions, prohibits each
government employee, including TVA’s directors and executive officers, from
participating personally and substantially (by advice, decision, or otherwise)
as a government employee in any contract, controversy, proceeding, request for
determination, or other official particular matter in which, to his or her
knowledge, he or she (or his or her spouse, minor child, general partner,
organization with which he or she serves as officer, director, employee,
trustee, or general partner, or any person or organization with which he or she
is negotiating, or has an arrangement, for future employment) has a financial
interest. Exceptions to the statutory prohibition relevant to TVA
employees are (1) financial interests which have been deemed by the Office of
Government Ethics, in published regulations, to be too remote or inconsequential
to affect the integrity of the employee’s services, or (2) interests which
are determined in writing, after full disclosure and on a case by case basis, to
be not so substantial as to be deemed likely to affect the integrity of the
employee’s services for TVA. In accordance with the statute,
individual waiver determinations are made by the official responsible for the
employee’s appointment. In the case of TVA directors, the
determination may be made by the Chairman of the TVA Board, and in the case of
the Chairman of the TVA Board, the determination may be made by the Counsel to
the President of the United States.
More
broadly, Subpart E of the Standards of Ethical Conduct provides that where an
employee (1) knows that a particular matter involving specific parties is likely
to have a direct and predictable effect on the financial interests of a member
of his or her household, or that a person with whom the employee has a “covered
relationship” (which includes, but is not limited to, persons with whom the
employee has a close family relationship and organizations in which the employee
is an active participant) is or represents a party to the matter, and
(2) determines that the circumstances would cause a reasonable person with
knowledge of relevant facts to question his or her impartiality in the matter,
the employee should not participate in the matter absent agency
authorization. This authorization may be given by the employee’s
supervising officer, as agency designee, in consultation with the TVA Designated
Agency Ethics Official, upon the determination that TVA’s interest in the
employee’s participation in the matter outweighs the concern that a reasonable
person may question the integrity of TVA’s programs and operations.
The
previously described restrictions are reflected in TVA’s Employment Practice 1,
Business Ethics, which
requires employees, including TVA’s directors and executive officers, to comply
with the guidelines outlined in the Standards of Ethical Conduct and which
restates the standard of the conflict of interest statute.
Additionally,
on November 30, 2006, the TVA Board approved a written conflict of interest
policy that applies to all TVA employees, including TVA’s directors and
executive officers. The conflict of interest policy reaffirms the
requirement that all TVA employees must comply with applicable federal
conflict of interest laws, regulations, and policies. It also
establishes an additional policy that is applicable to TVA’s directors and Chief
Executive Officer, which provides as follows:
In
addition to the law and policy applicable to all TVA employees, TVA Directors
and the Chief Executive Officer shall comply with the following additional
policy restricting the holding of certain financial interests:
|
1.
|
For
purposes of this policy, “financial interest” means an interest of a
person, or of a person’s spouse or minor child, arising by virtue of
investment or credit relationship, ownership, employment, consultancy, or
fiduciary relationship such as director, trustee, or partner. However,
financial interest does not include an interest in TVA or any
interest:
|
|
•
|
comprised
solely of a right to payment of retirement benefits resulting from former
employment or fiduciary
relationship,
|
|
•
|
arising
solely by virtue of cooperative membership or similar interest as a
consumer in a distributor of TVA power,
or
|
|
•
|
arising
by virtue of ownership of publicly traded securities in any single entity
with a value of $25,000 or less, or within a diversified mutual fund
investment in any amount.
|
|
2.
|
Directors
and the Chief Executive Officer shall not hold a financial interest in any
distributor of TVA power.
|
|
3.
|
Directors
and the Chief Executive Officer shall not hold a financial interest in any
entity engaged in the wholesale or retail generation, transmission, or
sale of electricity.
|
|
4.
|
Directors
and the Chief Executive Officer shall not hold a financial interest in any
entity that may reasonably be perceived as likely to be adversely affected
by the success of TVA as a producer or transmitter of electric
power.
|
|
5.
|
Any
action taken or interest held that creates, or may reasonably be perceived
as creating, a conflict of interest restricted by this additional policy
applicable to TVA Directors and the Chief Executive Officer should
immediately be disclosed to the Chairman of Board of Directors and the
Chairman of the Audit Governance, and Ethics Committee. The
Audit, Governance, and Ethics Committee shall be responsible for initially
reviewing all such disclosures and making recommendations to the entire
Board on what action, if any, should be taken. The entire
Board, without the vote of any Director(s) involved, shall determine the
appropriate action to be taken.
|
|
6.
|
Any
waiver of this additional policy applicable to TVA Directors and the Chief
Executive Officer may be made only by the Board, and will be disclosed
promptly to the public, subject to the limitations on disclosure imposed
by law.
|
TVA
relies on the policies, practices, laws, and regulations discussed above to
regulate conflicts of interest involving employees, including directors and
executive officers. TVA has no other written or unwritten policy for
the approval or ratification of any transactions in which TVA was or is to be a
participant and in which any director or executive officer of TVA (or any
child, stepchild, parent, stepparent, spouse, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of
any director or executive officer of TVA) had or will have a direct or indirect
material interest.
U.S.
Treasury Interim Obligations
TVA has
access to a financing arrangement with the U.S. Treasury under which the U.S.
Treasury is authorized to accept interim obligations with maturities of one year
or less in an aggregate amount outstanding not to exceed $150
million. TVA may draw any portion of the authorized $150
million. 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 2008, the daily average outstanding balance was
approximately $74 million. See Note 11 — Short-Term Debt.
Power
Facility Appropriation Investment
In
addition, TVA makes payments to the U.S. Treasury as a repayment of and a return
on the Power Facility Appropriation Investment. Under the TVA Act,
TVA is required to repay $1 billion of the Power Facility Appropriation
Investment, and $110 million of this amount remained unpaid as of September
30, 2008. Once TVA repays this $110 million, there will still be an
outstanding balance on the Power Facility Appropriation Investment, and TVA is
obligated under the TVA Act to pay the U.S. Treasury a return on this remaining
balance indefinitely. See Notes 9 and 16.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The
following table shows the fees billed (after applicable adjustments) for the
audit and other services provided by Ernst and Young LLP, for the year ended
September 30, 2008, and PricewaterhouseCoopers LLP, for the year ended September
30, 2007.
Principal
Accountant Fees and Services
(in
actual dollars)
Year
|
Principal
Accountant
|
Audit
Fees1
|
Audit-Related
Fees2
|
Other
Fees3
|
Total
|
|||||||||||||
2008
|
Ernst
and Young LLP
|
$ | 1,603,016 | $ | 517,090 | $ | – | $ | 2,120,106 | |||||||||
2007
|
PricewaterhouseCoopers
LLP
|
1,723,508 | 77,881 | 1,960 | 1,803,349 |
|
(1)
|
Audit
fees consist of fees for professional services rendered for the audit of
TVA's annual financial statements, fees for review of the interim
financial statements included in TVA's quarterly reports, and fees for
Bond offering comfort letters.
|
|
(2)
|
Audit-related
fees include professional
services rendered in connection with Sarbanes-Oxley Act of 2002
Section 404 readiness
assistance.
|
|
(3)
|
Other
fees include transition services related to the change in
auditors.
|
The TVA
Board has an Audit, Governance, and Ethics Committee. Under the TVA
Act, the Audit, Governance, and Ethics Committee, in consultation with the
Inspector General, recommends to the TVA Board the selection of an external
auditor. TVA’s Audit, Governance, and Ethics Committee in
consultation with the Inspector General recommended that the TVA Board select
Ernst and Young LLP as TVA’s external auditor for the 2008 and 2009 audits and
other related services, and the TVA Board approved these
recommendations.
At the
Audit, Governance, and Ethics Committee’s August 6, 2007, meeting, the Audit,
Governance, and Ethics Committee approved a policy on audit and permissible
non-audit services (the “Policy”). The Policy provides that all
auditing services and permissible non-audit services shall be pre-approved by
the Audit, Governance, and Ethics Committee unless:
|
•
|
The
aggregate amount of all such non-audit services provided to TVA does not
exceed five percent of the total amount TVA pays the external auditor
during the fiscal year in which the non-audit services are
provided;
|
|
•
|
Such
services were not recognized by TVA at the time of the engagement to be
non-audit services or non-audit related services;
and
|
|
•
|
Such
services are promptly brought to the attention of the Audit, Governance,
and Ethics Committee and approved at the next scheduled Audit, Governance,
and Ethics Committee meeting or by one or more members of the Audit,
Governance, and Ethics Committee to whom the authority to grant such
approvals has been delegated.
|
The
Policy also lists the following services as ones the external auditor is not
permitted to perform. The prohibited non-audit services
are:
|
•
|
Bookkeeping
or other services related to the accounting records or financial
statements of TVA;
|
|
•
|
Financial
information system design and
implementation;
|
|
•
|
Appraisal
or valuation services, fairness opinions, and contribution-in-kind
reports;
|
|
•
|
Actuarial
services;
|
|
•
|
Internal
audit outsourcing services;
|
|
•
|
Management
functions or human resources;
|
|
•
|
Broker
or dealer, investment adviser, or investment banking
services;
|
|
•
|
Legal
services and expert services unrelated to the audit;
and
|
|
•
|
Any
other services that the Public Company Accounting Oversight Board
determines, by regulation, is
impermissible.
|
The
Policy also delegates to the Chairman of the Audit, Governance, and Ethics
Committee the authority to pre-approve a permissible service so long as the
amount of the service does not exceed $100,000 and the Chairman reports for
informational purposes the services pre-approved at the Audit, Governance, and
Ethics Committee’s next meeting.
The
Audit, Governance, and Ethics Committee pre-approved all of the audit and
audit-related services for 2008.
PART
IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
(a)
|
The
following documents have been filed as part of this Annual
Report:
|
(1)
|
Financial
Statements. The following documents are provided in Item 8
herein.
|
Statements
of Income
Balance
Sheets
Statements
of Cash Flow
Statements
of Changes in Proprietary Capital
Notes to
Financial Statements
Report of
Independent Registered Public Accounting Firm (Ernst and Young LLP)
(2)
|
Financial
Statement Schedules.
|
Schedules
not included are omitted because they are not required or because the required
information is provided in the financial statements, including the notes
thereto.
Schedule
II — Valuation and Qualifying Accounts
(in
millions)
|
||||||||||||||||
Description
|
Balance
at beginning of year
|
Additions
charged to expense
|
Deductions
|
Balance
at end of year
|
||||||||||||
For
the year ended September 30, 2008
|
||||||||||||||||
Allowance
for doubtful accounts
|
||||||||||||||||
Receivables
|
$ | 2 | $ | 1 | $ | (1 | ) | $ | 2 | |||||||
Loans
|
15 | 4 | (6 | ) | 13 | |||||||||||
Inventories
|
43 | 7 | (3 | ) | 47 | |||||||||||
Total
allowances deducted from assets
|
$ | 60 | $ | 12 | $ | (10 | ) | $ | 62 | |||||||
For
the year ended September 30, 2007
|
||||||||||||||||
Allowance
for doubtful accounts
|
||||||||||||||||
Receivables
|
$ | 10 | $ | – | $ | (8 | ) | $ | 2 | |||||||
Loans
|
15 | – | – | 15 | ||||||||||||
Inventories
|
38 | 7 | (2 | ) | 43 | |||||||||||
Total
allowances deducted from assets
|
$ | 63 | $ | 7 | $ | (10 | ) | $ | 60 | |||||||
For
the year ended September 30, 2006
|
||||||||||||||||
Allowance
for doubtful accounts
|
||||||||||||||||
Receivables
|
$ | 7 | $ | 3 | $ | – | $ | 10 | ||||||||
Loans
|
15 | 1 | (1 | ) | 15 | |||||||||||
Inventories
|
36 | 13 | (11 | ) | 38 | |||||||||||
Total
allowances deducted from assets
|
$ | 58 | $ | 17 | $ | (12 | ) | $ | 63 |
(3)
|
List
of Exhibits
|
Exhibit No.
|
Description
|
3.1
|
Tennessee
Valley Authority Act of 1933, as amended , 16 U.S.C.
§§ 831-831ee (Incorporated by reference to Exhibit 3.1 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended December 31, 2007,
File No. 000-52313)
|
3.2
|
Bylaws
of Tennessee Valley Authority Adopted by the TVA Board of Directors on May
18, 2006, as Amended on April 3, 2008, and May 19, 2008 (Incorporated by
reference to Exhibit 3.1 to TVA’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008, File No. 000-52313)
|
4.1
|
Basic
Tennessee Valley Authority Power Bond Resolution Adopted by the TVA Board
of Directors on October 6, 1960, as Amended on September 28, 1976, October
17, 1989, and March 25, 1992 (Incorporated by reference to Exhibit 4.1 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
10.1
|
Fall
Maturity Credit Agreement Dated as of May 17, 2006, Among TVA, Bank of
America, N.A., as Administrative Agent, Bank of America, N.A., as a
Lender, and the Other Lenders Party Thereto (Incorporated by reference to
Exhibit 10.1 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.2
|
Spring
Maturity Credit Agreement Dated as of May 17, 2006, Among TVA, Bank of
America, N.A., as Administrative Agent, Bank of America, N.A., as a
Lender, and the Other Lenders Party Thereto (Incorporated by reference to
Exhibit 10.2 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.3
|
Amendment
Dated as of November 2, 2006, to the Fall Maturity Credit Agreement
Dated as of May 17, 2006, Among TVA, Bank of America, N.A., as
Administrative Agent, Bank of America, N.A., as a Lender, and the Other
Lenders Party Thereto (Incorporated by reference to Exhibit 10.1 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended December 31, 2006,
File No. 000-52313)
|
10.4
|
Amendment
Dated as of May 11, 2007, to the Spring Maturity Credit Agreement
Dated as of May 17, 2006, Among TVA, Bank of America, N.A., as
Administrative Agent, Bank of America, N.A., as a Lender, and the Other
Lenders Party Thereto (Incorporated by reference to Exhibit 10.1 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, File
No. 000-52313)
|
10.5
|
Second
Amendment Dated as of November 2, 2007, to the Fall Maturity Credit
Agreement Dated as of May 17, 2006, and Amended as of November 2,
2006, Among TVA, Bank of America, N.A., as Administrative Agent, Bank of
America, N.A., as a Lender, and the Other Lenders Party Thereto
(Incorporated by reference to Exhibit 10.5 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.6*
|
Second
Amendment Dated as of May 9, 2008, to the Spring Maturity Credit
Agreement Dated as of May 17, 2006, and Amended as of May 11, 2007,
Among TVA, Bank of America, N.A., as Administrative Agent, Bank of
America, N.A., as a Lender, and the Other Lenders Party Thereto
(Incorporated by reference to Exhibit 10.1 to TVA’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2008, File No.
000-52313)
|
10.7*
|
Third
Amendment Dated as of November 10, 2008, to the Fall Maturity Credit
Agreement Dated as of May 17, 2006, and Amended as of November 2, 2006,
and November 2, 2007, Among TVA, Bank of America, N.A., as Administrative
Agent, Bank of America, N.A., as a Lender, and the Other Lenders Party
Thereto (Incorporated by reference to Exhibit 99.1 to TVA’s Current Report
on Form 8-K filed on November 13, 2008, File No.
000-52313)
|
10.8
|
TVA
Discount Notes Selling Group Agreement (Incorporated by reference to
Exhibit 10.2 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2008, File No. 000-52313)
|
10.9
|
Electronotes®
Selling Agent Agreement Dated as of June 1, 2006, Among TVA, LaSalle
Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global
Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank
National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, and Wachovia Securities, LLC (Incorporated by reference to
Exhibit 10.4 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.10
|
Assumption
Agreement Between TVA and Incapital LLC Dated as of February 29, 2008,
Relating to the electronotes®
Selling Agent Agreement Dated as of June 1, 2006, Among TVA, LaSalle
Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global
Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank
National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, and Wachovia Securities, LLC (Incorporated by reference to
Exhibit 10.1 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008, File No. 000-52313)
|
10.11
|
Commitment
Agreement Among Memphis Light, Gas and Water Division, the City of
Memphis, Tennessee, and TVA Dated as of November 19, 2003 (Incorporated by
reference to Exhibit 10.5 to TVA’s Annual Report on Form 10-K for the year
ended September 30, 2006, File No. 000-52313)
|
10.12
|
Power
Contract Supplement No. 95 Among Memphis Light, Gas and Water Division,
the City of Memphis, Tennessee, and TVA Dated as of November 19, 2003
(Incorporated by reference to Exhibit 10.6 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.13
|
Void
Walk Away Agreement Among Memphis Light, Gas and Water Division, the City
of Memphis, Tennessee, and TVA Dated as of November 20, 2003 (Incorporated
by reference to Exhibit 10.7 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.14
|
Power
Contract Supplement No. 96 Among Memphis Light, Gas and Water Division,
the City of Memphis, Tennessee, and TVA Dated as of November 20, 2003
(Incorporated by reference to Exhibit 10.8 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.15*
|
Joint
Ownership Agreement Dated as of April 30, 2008, Between Seven States Power
Corporation and TVA (Incorporated by reference to Exhibit 10.3 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, File
No. 000-52313)
|
10.16
|
Supplement
No. 1 Dated as of September 2, 2008, to the Joint Ownership Agreement
Dated as of April 30, 2008, Between Seven States Power Corporation and
TVA
|
10.17
|
Supplement
No. 2 Dated as of September 30, 2008, to the Joint Ownership Agreement
Dated as of April 30, 2008, Between Seven States Power Corporation and
TVA
|
10.18
|
Lease
Agreement Dated September 30, 2008, Between TVA and Seven States
Southaven, LLC
|
10.19*
|
Buy-Back
Arrangements Dated as of September 30, 2008, Among TVA, JPMorgan Chase
Bank, National Association, as Administrative Agent, Lead Arranger, and a
Lender, and the Other Lenders Referred to Therein
|
10.20
|
Overview
of TVA’s September 26, 2003, Lease and Leaseback of Control, Monitoring,
and Data Analysis Network with Respect to TVA’s Transmission System in
Tennessee, Kentucky, Georgia, and Mississippi (Incorporated by reference
to Exhibit 10.9 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.21*
|
Participation
Agreement Dated as of September 22, 2003, Among (1) TVA, (2) NVG Network I
Statutory Trust, (3) Wells Fargo Delaware Trust Company, Not in Its
Individual Capacity, Except to the Extent Expressly Provided in the
Participation Agreement, But as Owner Trustee, (4) Wachovia Mortgage
Corporation, (5) Wilmington Trust Company, Not in Its Individual Capacity,
Except to the Extent Expressly Provided in the Participation Agreement,
But as Lease Indenture Trustee, and (6) Wilmington Trust Company, Not in
Its Individual Capacity, Except to the Extent Expressly Provided in the
Participation Agreement, But as Pass Through Trustee (Incorporated by
reference to Exhibit 10.10 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.22*
|
Network
Lease Agreement Dated as of September 26, 2003, Between NVG Network I
Statutory Trust, as Owner Lessor, and TVA, as Lessee (Incorporated by
reference to Exhibit 10.11 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.23*
|
Head
Lease Agreement Dated as of September 26, 2003, Between TVA, as Head
Lessor, and NVG Network I Statutory Trust, as Head Lessee (Incorporated by
reference to Exhibit 10.12 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.24*
|
Leasehold
Security Agreement Dated as of September 26, 2003, Made by NVG Network I
Statutory Trust to TVA (Incorporated by reference to Exhibit 10.13 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
10.25†
|
TVA
Compensation Plan Approved by the TVA Board on May 31, 2007 (Incorporated
by reference to Exhibit 99.3 to TVA’s Current Report on Form 8-K filed on
December 11, 2007, File No. 000-52313)
|
10.26†
|
TVA
Vehicle Allowance Guidelines, Effective April 1, 2006 (Incorporated by
reference to Exhibit 10.18 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2007, File No. 000-52313)
|
10.27†
|
Tennessee
Valley Authority Supplemental Executive Retirement Plan, Effective as of
October 1, 1995 (Incorporated by reference to Exhibit 10.15 to TVA’s
Annual Report on Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.28†
|
Tennessee
Valley Authority Executive Annual Incentive Plan, Effective in Fiscal Year
1999 (Incorporated by reference to Exhibit 10.16 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.29†
|
Tennessee
Valley Authority Executive Long-Term Incentive Plan, Effective in Fiscal
Year 1999 (Incorporated by reference to Exhibit 10.17 to TVA’s Annual
Report on Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.30†
|
Tennessee
Valley Authority Long Term Deferred Compensation Plan (Incorporated by
reference to Exhibit 10.18 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.31†
|
TVA
Merit Incentive Supplemental Retirement Income Plan, Effective January
1996 (Incorporated by reference to Exhibit 10.23 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.32†
|
Offer
Letter to Tom D. Kilgore Accepted as of January 19, 2005 (Incorporated by
reference to Exhibit 10.19 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.33†
|
Offer
Letter to William R. McCollum, Jr., Accepted as of March 9, 2007
(Incorporated by reference to Exhibit 10.26 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.34†
|
Offer
Letter to Kimberly S. Greene Accepted as of August 3, 2007 (Incorporated
by reference to Exhibit 10.27 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2007, File No. 000-52313)
|
10.35†
|
Offer
Letter to William R. Campbell Accepted as of April 4,
2007
|
10.36†
|
Deferral
Agreement Between TVA and Tom D. Kilgore Dated as of March 29, 2005
(Incorporated by reference to Exhibit 10.24 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.37†
|
First
Deferral Agreement Between TVA and Ashok S. Bhatnagar Dated as of
September 28, 2004 (Incorporated by reference to Exhibit 10.21 to TVA’s
Annual Report on Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.38†
|
Second
Deferral Agreement Between TVA and Ashok S. Bhatnagar Dated as of
September 28, 2004 (Incorporated by reference to Exhibit 10.22 to TVA’s
Annual Report on Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.39†
|
Deferral
Agreement Between TVA and William R. McCollum, Jr., Dated as of May 3,
2007 (Incorporated by reference to Exhibit 10.33 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.40†
|
Deferral
Agreement Between TVA and Kimberly S. Greene Dated as of September 4, 2007
(Incorporated by reference to Exhibit 10.34 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.41†
|
Deferral
Agreement Between TVA and William R. Campbell Dated as of June 15,
2007
|
14
|
Disclosure
and Financial Ethics Code (Incorporated by reference to Exhibit 14 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification Executed by the Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification Executed by the Chief Financial
Officer
|
32.1
|
Section
1350 Certification Executed by the Chief Executive
Officer
|
32.2
|
Section
1350 Certification Executed by the Chief Financial
Officer
|
†
Management contract or compensatory arrangement.
* Certain
schedule(s) and/or exhibit(s) have been omitted. The Tennessee Valley
Authority hereby undertakes to furnish supplementally copies of any of the
omitted schedules and/or exhibits upon request by the Securities and Exchange
Commission.
Pursuant
to the requirements of Section 13, 15(d), or 37 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: December
16, 2008
|
TENNESSEE
VALLEY AUTHORITY
|
|
(Registrant)
|
||
By:
|
/s/
Tom
D. Kilgore
|
|
Tom
D. Kilgore
|
||
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/
Tom
D. Kilgore
|
President
and Chief Executive Officer
|
December
16, 2008
|
||
Tom
D. Kilgore
|
(Principal
Executive Officer)
|
|||
/s/
Kimberly
S. Greene
|
Chief
Financial Officer and Executive Vice
|
December
16, 2008
|
||
Kimberly
S. Greene
|
President,
Financial Services
|
|||
(Principal
Financial Officer)
|
||||
/s/
John
M. Thomas
|
Vice
President and Controller
|
December
16, 2008
|
||
John
M. Thomas
|
(Principal
Accounting Officer)
|
|||
/s/
William
B. Sansom
|
Chairman
and Director
|
December
16, 2008
|
||
William
B. Sansom
|
||||
/s/
Dennis
C. Bottorff
|
Director
|
December
16, 2008
|
||
Dennis
C. Bottorff
|
||||
/s/ Donald
R. DePriest
|
Director
|
December
16, 2008
|
||
Donald
R. DePriest
|
||||
/s/
Robert
M. Duncan
|
Director
|
December
16, 2008
|
||
Robert
M. Duncan
|
||||
/s/
Thomas
C. Gilliland
|
Director
|
December
16, 2008
|
||
Thomas
C. Gilliland
|
||||
/s/
Bishop
William H. Graves
|
Director
|
December
16, 2008
|
||
Bishop
William H. Graves
|
||||
/s/ Howard
A. Thrailkill
|
Director
|
December
16, 2008
|
||
Howard
A. Thrailkill
|
EXHIBIT INDEX
Exhibit No.
|
Description
|
3.1
|
Tennessee
Valley Authority Act of 1933, as amended , 16 U.S.C.
§§ 831-831ee (Incorporated by reference to Exhibit 3.1 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended December 31, 2007,
File No. 000-52313)
|
3.2
|
Bylaws
of Tennessee Valley Authority Adopted by the TVA Board of Directors on May
18, 2006, as Amended on April 3, 2008, and May 19, 2008 (Incorporated by
reference to Exhibit 3.1 to TVA’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008, File No. 000-52313)
|
4.1
|
Basic
Tennessee Valley Authority Power Bond Resolution Adopted by the TVA Board
of Directors on October 6, 1960, as Amended on September 28, 1976, October
17, 1989, and March 25, 1992 (Incorporated by reference to Exhibit 4.1 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
10.1
|
Fall
Maturity Credit Agreement Dated as of May 17, 2006, Among TVA, Bank of
America, N.A., as Administrative Agent, Bank of America, N.A., as a
Lender, and the Other Lenders Party Thereto (Incorporated by reference to
Exhibit 10.1 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.2
|
Spring
Maturity Credit Agreement Dated as of May 17, 2006, Among TVA, Bank of
America, N.A., as Administrative Agent, Bank of America, N.A., as a
Lender, and the Other Lenders Party Thereto (Incorporated by reference to
Exhibit 10.2 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.3
|
Amendment
Dated as of November 2, 2006, to the Fall Maturity Credit Agreement
Dated as of May 17, 2006, Among TVA, Bank of America, N.A., as
Administrative Agent, Bank of America, N.A., as a Lender, and the Other
Lenders Party Thereto (Incorporated by reference to Exhibit 10.1 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended December 31, 2006,
File No. 000-52313)
|
10.4
|
Amendment
Dated as of May 11, 2007, to the Spring Maturity Credit Agreement
Dated as of May 17, 2006, Among TVA, Bank of America, N.A., as
Administrative Agent, Bank of America, N.A., as a Lender, and the Other
Lenders Party Thereto (Incorporated by reference to Exhibit 10.1 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, File
No. 000-52313)
|
10.5
|
Second
Amendment Dated as of November 2, 2007, to the Fall Maturity Credit
Agreement Dated as of May 17, 2006, and Amended as of November 2,
2006, Among TVA, Bank of America, N.A., as Administrative Agent, Bank of
America, N.A., as a Lender, and the Other Lenders Party Thereto
(Incorporated by reference to Exhibit 10.5 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.6*
|
Second
Amendment Dated as of May 9, 2008, to the Spring Maturity Credit
Agreement Dated as of May 17, 2006, and Amended as of May 11, 2007,
Among TVA, Bank of America, N.A., as Administrative Agent, Bank of
America, N.A., as a Lender, and the Other Lenders Party Thereto
(Incorporated by reference to Exhibit 10.1 to TVA’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2008, File No.
000-52313)
|
10.7*
|
Third
Amendment Dated as of November 10, 2008, to the Fall Maturity Credit
Agreement Dated as of May 17, 2006, and Amended as of November 2, 2006,
and November 2, 2007, Among TVA, Bank of America, N.A., as Administrative
Agent, Bank of America, N.A., as a Lender, and the Other Lenders Party
Thereto (Incorporated by reference to Exhibit 99.1 to TVA’s Current Report
on Form 8-K filed on November 13, 2008, File No.
000-52313)
|
10.8
|
TVA
Discount Notes Selling Group Agreement (Incorporated by reference to
Exhibit 10.2 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2008, File No. 000-52313)
|
10.9
|
Electronotes®
Selling Agent Agreement Dated as of June 1, 2006, Among TVA, LaSalle
Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global
Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank
National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, and Wachovia Securities, LLC (Incorporated by reference to
Exhibit 10.4 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.10
|
Assumption
Agreement Between TVA and Incapital LLC Dated as of February 29, 2008,
Relating to the electronotes®
Selling Agent Agreement Dated as of June 1, 2006, Among TVA, LaSalle
Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global
Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank
National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, and Wachovia Securities, LLC (Incorporated by reference to
Exhibit 10.1 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008, File No. 000-52313)
|
10.11
|
Commitment
Agreement Among Memphis Light, Gas and Water Division, the City of
Memphis, Tennessee, and TVA Dated as of November 19, 2003 (Incorporated by
reference to Exhibit 10.5 to TVA’s Annual Report on Form 10-K for the year
ended September 30, 2006, File No. 000-52313)
|
10.12
|
Power
Contract Supplement No. 95 Among Memphis Light, Gas and Water Division,
the City of Memphis, Tennessee, and TVA Dated as of November 19, 2003
(Incorporated by reference to Exhibit 10.6 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.13
|
Void
Walk Away Agreement Among Memphis Light, Gas and Water Division, the City
of Memphis, Tennessee, and TVA Dated as of November 20, 2003 (Incorporated
by reference to Exhibit 10.7 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.14
|
Power
Contract Supplement No. 96 Among Memphis Light, Gas and Water Division,
the City of Memphis, Tennessee, and TVA Dated as of November 20, 2003
(Incorporated by reference to Exhibit 10.8 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.15*
|
Joint
Ownership Agreement Dated as of April 30, 2008, Between Seven States Power
Corporation and TVA (Incorporated by reference to Exhibit 10.3 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, File
No. 000-52313)
|
10.16
|
Supplement
No. 1 Dated as of September 2, 2008, to the Joint Ownership Agreement
Dated as of April 30, 2008, Between Seven States Power Corporation and
TVA
|
10.17
|
Supplement
No. 2 Dated as of September 30, 2008, to the Joint Ownership Agreement
Dated as of April 30, 2008, Between Seven States Power Corporation and
TVA
|
10.18
|
Lease
Agreement Dated September 30, 2008, Between TVA and Seven States
Southaven, LLC
|
10.19*
|
Buy-Back
Arrangements Dated as of September 30, 2008, Among TVA, JPMorgan Chase
Bank, National Association, as Administrative Agent, Lead Arranger, and a
Lender, and the Other Lenders Referred to Therein
|
10.20
|
Overview
of TVA’s September 26, 2003, Lease and Leaseback of Control, Monitoring,
and Data Analysis Network with Respect to TVA’s Transmission System in
Tennessee, Kentucky, Georgia, and Mississippi (Incorporated by reference
to Exhibit 10.9 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.21*
|
Participation
Agreement Dated as of September 22, 2003, Among (1) TVA, (2) NVG Network I
Statutory Trust, (3) Wells Fargo Delaware Trust Company, Not in Its
Individual Capacity, Except to the Extent Expressly Provided in the
Participation Agreement, But as Owner Trustee, (4) Wachovia Mortgage
Corporation, (5) Wilmington Trust Company, Not in Its Individual Capacity,
Except to the Extent Expressly Provided in the Participation Agreement,
But as Lease Indenture Trustee, and (6) Wilmington Trust Company, Not in
Its Individual Capacity, Except to the Extent Expressly Provided in the
Participation Agreement, But as Pass Through Trustee (Incorporated by
reference to Exhibit 10.10 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.22*
|
Network
Lease Agreement Dated as of September 26, 2003, Between NVG Network I
Statutory Trust, as Owner Lessor, and TVA, as Lessee (Incorporated by
reference to Exhibit 10.11 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.23*
|
Head
Lease Agreement Dated as of September 26, 2003, Between TVA, as Head
Lessor, and NVG Network I Statutory Trust, as Head Lessee (Incorporated by
reference to Exhibit 10.12 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.24*
|
Leasehold
Security Agreement Dated as of September 26, 2003, Made by NVG Network I
Statutory Trust to TVA (Incorporated by reference to Exhibit 10.13 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
10.25†
|
TVA
Compensation Plan Approved by the TVA Board on May 31, 2007 (Incorporated
by reference to Exhibit 99.3 to TVA’s Current Report on Form 8-K filed on
December 11, 2007, File No. 000-52313)
|
10.26†
|
TVA
Vehicle Allowance Guidelines, Effective April 1, 2006 (Incorporated by
reference to Exhibit 10.18 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2007, File No. 000-52313)
|
10.27†
|
Tennessee
Valley Authority Supplemental Executive Retirement Plan, Effective as of
October 1, 1995 (Incorporated by reference to Exhibit 10.15 to TVA’s
Annual Report on Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.28†
|
Tennessee
Valley Authority Executive Annual Incentive Plan, Effective in Fiscal Year
1999 (Incorporated by reference to Exhibit 10.16 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.29†
|
Tennessee
Valley Authority Executive Long-Term Incentive Plan, Effective in Fiscal
Year 1999 (Incorporated by reference to Exhibit 10.17 to TVA’s Annual
Report on Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.30†
|
Tennessee
Valley Authority Long Term Deferred Compensation Plan (Incorporated by
reference to Exhibit 10.18 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.31†
|
TVA
Merit Incentive Supplemental Retirement Income Plan, Effective January
1996 (Incorporated by reference to Exhibit 10.23 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.32†
|
Offer
Letter to Tom D. Kilgore Accepted as of January 19, 2005 (Incorporated by
reference to Exhibit 10.19 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.33†
|
Offer
Letter to William R. McCollum, Jr., Accepted as of March 9, 2007
(Incorporated by reference to Exhibit 10.26 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.34†
|
Offer
Letter to Kimberly S. Greene Accepted as of August 3, 2007 (Incorporated
by reference to Exhibit 10.27 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2007, File No. 000-52313)
|
10.35†
|
Offer
Letter to William R. Campbell Accepted as of April 4,
2007
|
10.36†
|
Deferral
Agreement Between TVA and Tom D. Kilgore Dated as of March 29, 2005
(Incorporated by reference to Exhibit 10.24 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.37†
|
First
Deferral Agreement Between TVA and Ashok S. Bhatnagar Dated as of
September 28, 2004 (Incorporated by reference to Exhibit 10.21 to TVA’s
Annual Report on Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.38†
|
Second
Deferral Agreement Between TVA and Ashok S. Bhatnagar Dated as of
September 28, 2004 (Incorporated by reference to Exhibit 10.22 to TVA’s
Annual Report on Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.39†
|
Deferral
Agreement Between TVA and William R. McCollum, Jr., Dated as of May 3,
2007 (Incorporated by reference to Exhibit 10.33 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.40†
|
Deferral
Agreement Between TVA and Kimberly S. Greene Dated as of September 4, 2007
(Incorporated by reference to Exhibit 10.34 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.41†
|
Deferral
Agreement Between TVA and William R. Campbell Dated as of June 15,
2007
|
14
|
Disclosure
and Financial Ethics Code (Incorporated by reference to Exhibit 14 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification Executed by the Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification Executed by the Chief Financial
Officer
|
32.1
|
Section
1350 Certification Executed by the Chief Executive
Officer
|
32.2
|
Section
1350 Certification Executed by the Chief Financial
Officer
|
†
Management contract or compensatory arrangement.
* Certain
schedule(s) and/or exhibit(s) have been omitted. The Tennessee Valley
Authority hereby undertakes to furnish supplementally copies of any of the
omitted schedules and/or exhibits upon request by the Securities and Exchange
Commission.
Page
192