Tennessee Valley Authority - Quarter Report: 2008 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended June 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
(State
or other jurisdiction of incorporation or organization)
|
62-0474417
(IRS
Employer Identification No.)
|
400
W. Summit Hill Drive
Knoxville,
Tennessee
(Address
of principal executive offices)
|
37902
(Zip
Code)
|
(865)
632-2101
(Registrant’s
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No o
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 Accelerated
filer o
Non-accelerated
filer x Smaller
reporting company o
(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 Exchange Act).
Yes o No x
Page
1
Explanatory
Note
In this Quarterly Report on Form 10-Q
for the three and nine months ended June 30, 2008 (“Quarterly Report”), the
Tennessee Valley Authority (“TVA”) is restating the financial statements as of
and for the quarter ended June 30, 2007, primarily to restate revenue associated
with an accounting error in the financial statements included in the Quarterly
Report for the quarterly period ended June 30, 2007 (the “Original
10-Q”). The error was discovered during TVA’s review of its unbilled
revenue estimation process.
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 distributors to report their end-use
sales. Because of the delay between the wholesale delivery of power
to the distributor and the report of end-use sales to TVA, TVA must estimate the
unbilled revenue at the end of each financial reporting period. In
September 2006, TVA implemented a change in methodology for estimating unbilled
revenue for electricity sales which resulted in an increase of $232 million in
unbilled revenue (2.6 percent of operating revenue) for 2006.
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.
TVA has used a new process for
estimating unbilled revenue for the three and nine months ended June 30, 2007 in
this Form 10-Q. 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. Due to the new process, an adjustment was made to increase
revenue for the three month and nine month periods ended June 30, 2007, by $26
million and $22 million, respectively.
The restatement of unbilled revenue
also affected TVA’s fuel cost adjustment (“FCA”) calculation. The FCA
is a mechanism by which TVA collects the direct cost of fuel used in its
generating facilities and also the energy costs of purchased power used to serve
power demand. Implementation of the FCA occurred in October 2006 as a
joint effort between TVA and its customers. The goal of the FCA is
timely recovery of fuel-related expenses to reduce the volatility driven by fuel
and purchased power markets. Under TVA’s FCA methodology, adjustments
to rates are based primarily on the difference between forecasted and actual
expenses for the upcoming quarter, as well as the difference between forecasted
and actual revenues for the upcoming quarter. Because the FCA
adjustments are forward-looking, there is typically a difference between what is
collected in rates and what actual expense is realized over the course of the
quarter. This difference is added to or subtracted from a deferred
account on TVA’s balance sheet.
The restatement of unbilled revenue
changed TVA’s forecasted revenues, and since forecasted revenues are a major
component of the FCA calculation, the change in forecasted revenues required a
restatement of the amounts in TVA’s deferred FCA account. The FCA
deferred balance at September 30, 2007, was restated within the filing of the
Amendment No. 2 to TVA’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2007 (the “Annual Report”).
The unbilled revenue error also
affected the application of distributor prepayments. The balance in
the distributors’ unbilled accounts receivable is offset by the advance
collections of those distributors who make prepayments for their
power. As a result of the change in unbilled revenue, the balances in
the unbilled receivable and advance collections accounts were also
adjusted. The adjustment related to distributor prepayments at
September 30, 2007, was restated within the filing of the Annual
Report.
In light of the need for this
restatement, TVA has identified a material weakness in its internal control over
financial reporting related to its unbilled revenue calculation. To
rectify the material weakness, TVA used the new method of calculating the
unbilled revenue estimate described above for all periods presented in this
Quarterly Report. As remediation of the control occurred prior to the
filing of this Quarterly Report, remediation is considered effective as of June
30, 2008. See Part 1, Item 4, Controls and Procedures, for additional
information regarding controls and procedures related to this material
weakness.
TVA has also included in the
appropriate periods in its restated financial statements other miscellaneous
adjustments that were deemed to be not material by management, either
individually or in the aggregate, and therefore were corrected in the period in
which they were identified. These adjustments are described in more
detail in Note 2.
The effects of these restatements and
miscellaneous adjustments on TVA's quarterly financial statements as of and for
the quarter, and nine months ended June 30, 2007, are described in Note
2. The restatements had no impact on TVA’s cash or cash
equivalents.
FORWARD-LOOKING
INFORMATION
|
5
|
GENERAL
INFORMATION
|
6
|
PART
I - FINANCIAL INFORMATION
|
|
Item
1. Financial Statements
|
7
|
Statements
of Income (Unaudited)
|
7
|
Balance
Sheets
|
8
|
Statements
of Cash Flow (Unaudited)
|
9
|
Statements
of Changes in Proprietary Capital
|
10
|
Notes
to Financial Statements (Unaudited)
|
11
|
Item
2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
|
38
|
Business
Overview
|
38
|
Liquidity
and Capital Resources
|
45
|
Results
of Operations
|
48
|
Off-Balance
Sheet Arrangements
|
56
|
Critical
Accounting Policies and Estimates
|
57
|
Changes
in Ratemaking
|
57
|
New
Accounting Standards and Interpretations
|
56
|
Corporate
Governance
|
59
|
Legislative
and Regulatory Matters
|
60
|
Environmental
Matters
|
61
|
Legal
|
64
|
Management
Changes
|
68
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
70
|
Item
4. Controls and Procedures
|
70
|
Disclosure
Controls and Procedures
|
70
|
Changes
in Internal Control over Financial Reporting
|
71
|
PART
II – OTHER INFORMATION
|
|
Item
1. Legal Proceedings
|
72
|
Item
1A. Risk Factors
|
72
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
73
|
Item
3. Defaults upon Senior Securities
|
73
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
73
|
Item
5. Other Information
|
73
|
Item
6. Exhibits
|
73
|
Signatures
|
74
|
Exhibit
Index
|
75
|
This Quarterly Report on Form 10-Q
(“Quarterly Report”) contains forward-looking statements relating to future
events and future performance. All statements other than those that
are purely historical may be forward-looking statements.
In certain cases, forward-looking
statements can be identified by the use of words such as “may,” “will,”
“should,” “expect,” “anticipate,” “believe,” “intend,” “project,” “plan,”
“predict,” “assume,” “forecast,” “estimate,” “objective,” “possible,”
“probably,” “likely,” “potential,” or other similar expressions.
|
Examples
of forward-looking statements include, but are not limited
to
|
|
•
|
Statements
regarding strategic objectives;
|
|
•
|
Projections
regarding potential rate actions;
|
|
•
|
Forecasts
of costs of certain asset retirement
obligations;
|
|
•
|
Estimates
regarding power and energy
forecasts
|
|
•
|
Expectations
about the adequacy of TVA’s funding of its pension plans, nuclear
decommissioning trust, and asset retirement
trust;
|
|
•
|
The
anticipated results of TVA’s Extended Power Uprate project at Browns Ferry
Nuclear Plant;
|
|
•
|
TVA’s
plan to reduce the growth in peak demand by up to 1,400 megawatts by the
end of 2012;
|
|
•
|
TVA’s
plans to borrow under its credit facility with the U.S. Treasury during
2009;
|
|
•
|
TVA’s
plans to continue using short-term debt to meet current
obligations;
|
|
•
|
The
anticipated cost and timetable for placing Watts Bar Unit 2 in
service;
|
Although the Tennessee Valley Authority
(“TVA”) believes that the assumptions underlying the forward-looking statements
are reasonable, TVA does not guarantee the accuracy of these
statements. Numerous factors could cause actual results to differ
materially from those in the forward-looking statements. These
factors include, among other things:
|
•
|
New
laws, regulations, and administrative orders, especially those related
to:
|
|
–
|
TVA’s
protected service area,
|
|
–
|
The
sole authority of the TVA board of directors to set power
rates,
|
|
–
|
Various
environmental matters including laws, regulations, and administrative
orders restricting emissions and preferring certain fuels or generation
sources over others,
|
|
–
|
The
licensing, operation, and decommissioning of nuclear generating
facilities;
|
|
–
|
TVA’s
management of the Tennessee River
system,
|
|
–
|
TVA’s
credit rating, and
|
|
–
|
TVA’s
debt ceiling;
|
|
•
|
Loss
of customers;
|
|
•
|
Performance
of TVA’s generation and transmission
assets;
|
|
•
|
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;
|
|
•
|
Purchased
power price volatility;
|
|
•
|
Events
at facilities not owned by TVA that affect the supply of water to TVA’s
generation facilities;
|
|
•
|
Compliance
with existing environmental laws and
regulations;
|
|
•
|
Significant
delays or cost overruns in construction of generation and transmission
assets;
|
|
•
|
Inability
to obtain regulatory approval for the construction of generation
assets;
|
|
•
|
Significant
changes in demand for electricity;
|
|
•
|
Legal
and administrative proceedings, including awards of damages and amounts
paid in settlements;
|
|
•
|
Weather
conditions, including drought;
|
|
•
|
Failure
of TVA’s transmission facilities or the transmission facilities of other
utilities;
|
|
•
|
Events
at any nuclear facility, even one that is not operated by or licensed to
TVA;
|
|
•
|
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;
|
|
•
|
Reliability
of purchased power providers, fuel suppliers, and other
counterparties;
|
|
•
|
Changes
in the market price of commodities such as coal, uranium, natural gas,
fuel oil, construction materials, electricity, and emission
allowances;
|
|
•
|
Changes
in the prices of equity securities, debt securities, and other
investments;
|
|
•
|
Changes
in interest rates;
|
|
•
|
Creditworthiness
of TVA, its counterparties, and its
customers;
|
|
•
|
Rising
pension costs and health care
expenses;
|
|
•
|
Increases
in TVA’s financial liability for decommissioning its nuclear facilities
and retiring other assets;
|
|
•
|
Unplanned
contributions to TVA’s pension or other postretirement benefit plans or to
TVA’s nuclear decommissioning
trust;
|
|
•
|
Limitations
on TVA’s ability to borrow money;
|
|
•
|
Changes
in the economy;
|
|
•
|
Ineffectiveness
of TVA’s disclosure controls and procedures and its internal control over
financial reporting;
|
|
•
|
Changes
in accounting standards;
|
|
•
|
The
loss of TVA’s ability to use regulatory
accounting;
|
|
•
|
Problems
attracting and retaining skilled
workers;
|
|
•
|
Changes
in technology;
|
|
•
|
Changes
in TVA’s plans for allocating its financial resources among
projects;
|
|
•
|
Differences
between estimates of revenues and expenses and actual revenues and
expenses incurred;
|
|
•
|
Volatility
in financial markets;
|
|
•
|
Changes
in the market for TVA securities;
|
|
•
|
Unforeseeable
events; and
|
Additionally, other risks that may
cause actual results to differ materially from the predicted results are set
forth in Part I, Item 2, Management’s Discussion and Analysis of Financial
Condition and Results of Operations, and in Part II, Item 1A, Risk Factors in
this Quarterly Report, and in Item 1A, Risk Factors and Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations in
TVA’s Annual Report on Form 10-K, as amended, for the fiscal year ended
September 30, 2007 (“Annual Report”), and in other filings TVA makes from time
to time with the Securities and Exchange Commission (“SEC”). New
factors emerge from time to time, and it is not possible for management to
predict all such factors or to assess the extent to which any factor or
combination of factors may impact TVA’s business or cause results to differ
materially from those contained in any forward-looking statement.
TVA undertakes no obligation to update
any forward-looking statement to reflect developments that occur after the
statement is made.
Fiscal Year
Unless otherwise indicated, years
(2008, 2007, etc.) in this Quarterly Report refer to TVA’s fiscal years ended
September 30.
Notes
References to “Notes” are to the Notes
to Financial Statements contained in Part I, Item 1, Financial Statements in
this Quarterly Report.
Available Information
TVA's Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments
to those reports are made available on TVA's web site, free of charge, as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC. TVA's web site is
www.tva.gov. Information contained on TVA’s web site shall not be
deemed to be incorporated into, or to be a part of, this Quarterly
Report. In addition, the public may read and copy any reports or
other information that TVA files with the SEC at the SEC’s Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. TVA's SEC reports are also available to the public
without charge from the web site maintained by the SEC at
www.sec.gov.
ITEM
1. FINANCIAL STATEMENTS
TENNESSEE
VALLEY AUTHORITY
STATEMENTS OF INCOME (UNAUDITED)
(in
millions)
Three
months ended
|
Nine
months ended
|
|||||||||||||||
June
30
|
June
30
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
(As
Restated)
|
(As
Restated)
|
|||||||||||||||
Operating
revenues
|
||||||||||||||||
Sales
of electricity
|
||||||||||||||||
Municipalities
and cooperatives
|
$ | 2,125 | $ | 1,889 | $ | 6,110 | $ | 5,549 | ||||||||
Industries
directly served
|
361 | 304 | 1,135 | 907 | ||||||||||||
Federal
agencies and other
|
31 | 29 | 89 | 80 | ||||||||||||
Other
revenue
|
35 | 43 | 96 | 114 | ||||||||||||
Operating
revenues
|
2,552 | 2,265 | 7,430 | 6,650 | ||||||||||||
Revenue
capitalized during precommercial operations
|
– | (23 | ) | – | (23 | ) | ||||||||||
Net
operating revenues
|
2,552 | 2,242 | 7,430 | 6,627 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Fuel
and purchased power
|
1,013 | 790 | 2,908 | 2,370 | ||||||||||||
Operating
and maintenance
|
575 | 571 | 1,714 | 1,687 | ||||||||||||
Depreciation,
amortization, and accretion
|
394 | 366 | 1,176 | 1,096 | ||||||||||||
Tax
equivalents
|
122 | 109 | 359 | 326 | ||||||||||||
Loss
on asset impairment
|
7 | 1 | 7 | 18 | ||||||||||||
Total
operating expenses
|
2,111 | 1,837 | 6,164 | 5,497 | ||||||||||||
Operating
income
|
441 | 405 | 1,266 | 1,130 | ||||||||||||
Other
income, net (Note 1)
|
7 | 16 | 8 | 51 | ||||||||||||
Unrealized
gain on derivative contracts, net (Note 1)
|
– | 98 | – | 129 | ||||||||||||
Interest
expense
|
||||||||||||||||
Interest
on debt and leaseback obligations
|
347 | 346 | 1,028 | 1,045 | ||||||||||||
Amortization
of debt discount, issue, and reacquisition costs, net
|
5 | 4 | 15 | 14 | ||||||||||||
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(4 | ) | (45 | ) | (12 | ) | (144 | ) | ||||||||
Net
interest expense
|
348 | 305 | 1,031 | 915 | ||||||||||||
Net
income
|
$ | 100 | $ | 214 | $ | 243 | $ | 395 |
The
accompanying Notes are an integral part of these financial
statements.
TENNESSEE
VALLEY AUTHORITY
(in
millions)
June
30
|
September
30
|
|||||||
2008
|
2007
|
|||||||
ASSETS
|
(Unaudited)
|
|||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 300 | $ | 165 | ||||
Restricted
cash and investments (Note 1)
|
122 | 150 | ||||||
Accounts
receivable, net (Note 1)
|
1,383 | 1,458 | ||||||
Inventories
and other, net
|
844 | 663 | ||||||
Total
current assets
|
2,649 | 2,436 | ||||||
Property,
plant, and equipment
|
||||||||
Completed
plant
|
39,823 | 38,811 | ||||||
Less
accumulated depreciation
|
(16,708 | ) | (15,937 | ) | ||||
Net
completed plant
|
23,115 | 22,874 | ||||||
Construction
in progress
|
1,725 | 1,286 | ||||||
Nuclear
fuel and capital leases
|
731 | 672 | ||||||
Total
property, plant, and equipment, net
|
25,571 | 24,832 | ||||||
Investment
funds
|
1,045 | 1,169 | ||||||
Regulatory and other long-term
assets (Note 1)
|
||||||||
Deferred
nuclear generating units
|
2,836 | 3,130 | ||||||
Other
regulatory assets
|
2,080 | 1,790 | ||||||
Subtotal
|
4,916 | 4,920 | ||||||
Other
long-term assets
|
1,357 | 375 | ||||||
Total
regulatory and other long-term assets
|
6,273 | 5,295 | ||||||
Total
assets
|
$ | 35,538 | $ | 33,732 | ||||
LIABILITIES
AND PROPRIETARY CAPITAL
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 1,143 | $ | 1,205 | ||||
Collateral
funds held
|
148 | 157 | ||||||
Accrued
interest
|
311 | 406 | ||||||
Current
portion of leaseback obligations
|
41 | 43 | ||||||
Current
portion of energy prepayment obligations
|
106 | 106 | ||||||
Short-term
debt, net
|
456 | 1,422 | ||||||
Current
maturities of long-term debt (Note 4)
|
2,030 | 90 | ||||||
Total
current liabilities
|
4,235 | 3,429 | ||||||
Other
liabilities
|
||||||||
Other
liabilities
|
2,182 | 2,067 | ||||||
Regulatory
liabilities (Note 1)
|
1,248 | 83 | ||||||
Asset
retirement obligations
|
2,280 | 2,189 | ||||||
Leaseback
obligations
|
990 | 1,029 | ||||||
Energy
prepayment obligations (Note 1)
|
953 | 1,032 | ||||||
Total
other liabilities
|
7,653 | 6,400 | ||||||
Long-term
debt, net (Note 4)
|
20,681 | 21,099 | ||||||
Total
liabilities
|
32,569 | 30,928 | ||||||
Commitments
and contingencies
|
||||||||
Proprietary
capital
|
||||||||
Appropriation
investment
|
4,728 | 4,743 | ||||||
Retained
earnings
|
1,999 | 1,763 | ||||||
Accumulated
other comprehensive loss (Note 3)
|
(67 | ) | (19 | ) | ||||
Accumulated
net expense of stewardship programs
|
(3,691 | ) | (3,683 | ) | ||||
Total
proprietary capital
|
2,969 | 2,804 | ||||||
Total
liabilities and proprietary capital
|
$ | 35,538 | $ | 33,732 |
The
accompanying Notes are an integral part of these financial
statements.
TENNESSEE
VALLEY AUTHORITY
For the
nine months ended June 30
(in
millions)
2008
|
2007
|
|||||||
(As
Restated)
|
||||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 243 | $ | 395 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||
Depreciation,
amortization, and accretion
|
1,191 | 1,126 | ||||||
Nuclear
refueling outage amortization
|
77 | 62 | ||||||
Loss
on asset impairment
|
7 | 18 | ||||||
Amortization
of nuclear fuel
|
136 | 94 | ||||||
Non-cash
retirement benefit expense
|
106 | 151 | ||||||
Net
unrealized gain on derivative contracts
|
– | (129 | ) | |||||
Prepayment
credits applied to revenue
|
(79 | ) | (79 | ) | ||||
Fuel
cost adjustment deferral
|
12 | (111 | ) | |||||
Other,
net
|
67 | 10 | ||||||
Changes
in current assets and liabilities
|
||||||||
Accounts
receivable, net
|
96 | 100 | ||||||
Inventories
and other, net
|
(94 | ) | (162 | ) | ||||
Accounts
payable and accrued liabilities
|
(53 | ) | (31 | ) | ||||
Accrued
interest
|
(95 | ) | (140 | ) | ||||
Pension
contributions
|
(56 | ) | (56 | ) | ||||
Refueling
outage costs
|
(145 | ) | (90 | ) | ||||
Other,
net
|
(2 | ) | 43 | |||||
Net
cash provided by operating activities
|
1,411 | 1,201 | ||||||
Cash
flows from investing activities
|
||||||||
Construction
expenditures
|
(1,552 | ) | (1,151 | ) | ||||
Combustion
turbine asset acquisitions
|
– | (100 | ) | |||||
Nuclear
fuel expenditures
|
(253 | ) | (109 | ) | ||||
Change
in restricted cash and investments
|
10 | 14 | ||||||
Proceeds
from investments, net
|
3 | 2 | ||||||
Loans
and other receivables
|
||||||||
Advances
|
(6 | ) | (7 | ) | ||||
Repayments
|
9 | 13 | ||||||
Proceeds
from sale of receivables/loans
|
– | 2 | ||||||
Other,
net
|
1 | 1 | ||||||
Net
cash used in investing activities
|
(1,788 | ) | (1,335 | ) | ||||
Cash
flows from financing activities
|
||||||||
Long-term
debt
|
||||||||
Issues
|
2,105 | 36 | ||||||
Redemptions
and repurchases
|
(539 | ) | (469 | ) | ||||
Short-term
(redemptions)/borrowings, net
|
(966 | ) | 234 | |||||
Payments
on leaseback financing
|
(34 | ) | (27 | ) | ||||
Payments
on equipment financing
|
(7 | ) | (7 | ) | ||||
Payments
from other financing
|
– | (1 | ) | |||||
Financing
costs, net
|
(17 | ) | (1 | ) | ||||
Payments
to U.S. Treasury
|
(30 | ) | (30 | ) | ||||
Net
cash provided by (used in) financing activities
|
512 | (265 | ) | |||||
Net
change in cash and cash equivalents
|
135 | (399 | ) | |||||
Cash
and cash equivalents at beginning of period
|
165 | 536 | ||||||
Cash
and cash equivalents at end of period
|
$ | 300 | $ | 137 |
The
accompanying Notes are an integral part of these financial
statements.
TENNESSEE
VALLEY AUTHORITY
For the
three months ended June 30, 2008 and 2007
(in
millions)
Appropriation
Investment
|
Retained
Earnings of Power Program
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated
Net Expense of Nonpower Programs
|
Total
|
Comprehensive
Income (Loss)
|
|||||||||||||||||||
Balance
at March 31, 2007 (Unaudited) (Restated)
|
$ | 4,753 | $ | 1,524 | $ | 6 | $ | (3,676 | ) | $ | 2,607 | |||||||||||||
Net
income (loss) (Restated)
|
– | 218 | – | (4 | ) | 214 | $ | 214 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (5 | ) | – | – | (5 | ) | – | ||||||||||||||||
Other
comprehensive income (Note 3)
|
– | – | (25 | ) | – | (25 | ) | (25 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(5 | ) | – | – | – | (5 | ) | – | ||||||||||||||||
Balance
at June 30, 2007 (Unaudited) (Restated)
|
$ | 4,748 | $ | 1,737 | $ | (19 | ) | $ | (3,680 | ) | $ | 2,786 | $ | 189 | ||||||||||
Balance
at March 31, 2008 (Unaudited) (Restated)
|
$ | 4,733 | $ | 1,900 | $ | (67 | ) | $ | (3,687 | ) | $ | 2,879 | ||||||||||||
Net
income (loss)
|
– | 104 | – | (4 | ) | 100 | $ | 100 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (5 | ) | – | – | (5 | ) | – | ||||||||||||||||
Other
comprehensive income (Note 3)
|
– | – | – | – | – | – | ||||||||||||||||||
Return
of Power Facility Appropriation Investment
|
(5 | ) | – | – | – | (5 | ) | – | ||||||||||||||||
Balance
at June 30, 2008 (Unaudited)
|
$ | 4,728 | $ | 1,999 | $ | (67 | ) | $ | (3,691 | ) | $ | 2,969 | $ | 100 |
For the
nine months ended June 30, 2008 and 2007
Appropriation
Investment
|
Retained
Earnings of Power Program
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated
Net Expense of Nonpower Programs
|
Total
|
Comprehensive
Income (Loss)
|
|||||||||||||||||||
Balance
at September 30, 2006 (Restated)
|
$ | 4,763 | $ | 1,349 | $ | 43 | $ | (3,672 | ) | $ | 2,483 | |||||||||||||
Net
income (loss) (Restated)
|
– | 403 | – | (8 | ) | 395 | $ | 395 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (15 | ) | – | – | (15 | ) | – | ||||||||||||||||
Accumulated
other comprehensive income (Note 3)
|
– | – | (62 | ) | – | (62 | ) | (62 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(15 | ) | – | – | – | (15 | ) | – | ||||||||||||||||
Balance
at June 30, 2007 (Unaudited) (Restated)
|
$ | 4,748 | $ | 1,737 | $ | (19 | ) | $ | (3,680 | ) | $ | 2,786 | $ | 333 | ||||||||||
Balance
at September 30, 2007 (Restated)
|
$ | 4,743 | $ | 1,763 | $ | (19 | ) | $ | (3,683 | ) | $ | 2,804 | ||||||||||||
Net
income (loss)
|
– | 251 | – | (8 | ) | 243 | $ | 243 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (15 | ) | – | – | (15 | ) | – | ||||||||||||||||
Accumulated
other comprehensive income (Note 3)
|
– | – | (48 | ) | – | (48 | ) | (48 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(15 | ) | – | – | – | (15 | ) | – | ||||||||||||||||
Balance
at June 30, 2008 (Unaudited)
|
$ | 4,728 | $ | 1,999 | $ | (67 | ) | $ | (3,691 | ) | $ | 2,969 | $ | 195 |
The
accompanying Notes are an integral part of these financial
statements.
(Dollars
in millions except where noted)
1.
Summary of Significant Accounting Policies
General
The Tennessee Valley Authority (“TVA”)
is a wholly-owned corporate agency and instrumentality of the United
States. TVA was created by the U.S. Congress in 1933 by virtue of the
Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C.
§§ 831-831ee (as amended, the “TVA Act”). TVA was created to
improve navigation on the Tennessee River, reduce flood damage, provide
agricultural and industrial development, and provide electric power to the
Tennessee Valley region. TVA manages the Tennessee River and its
tributaries for multiple river-system purposes, such as navigation; flood damage
reduction; power generation; environmental stewardship; shoreline use; and water
supply for power plant operations, consumer use, recreation, and
industry.
Substantially all TVA revenues and
assets are attributable to the power program. TVA provides power in
most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern
Kentucky and in portions of northern Georgia, western North Carolina, and
southwestern Virginia to a population of approximately nine million
people. The power program has historically been separate and distinct
from the stewardship programs. The power program is required to be
self-supporting from power revenues and proceeds from power financings, such as
proceeds from the issuance of bonds, notes, and other evidences of indebtedness
(“Bonds”). Although TVA does not currently receive congressional
appropriations, it is required to make annual payments to the U.S. Treasury in
repayment of, and as a return on, the government’s appropriation investment in
TVA power facilities (the “Power Facility Appropriation
Investment”). Before 2000, most of the funding for TVA’s stewardship
programs was provided by congressional appropriations. These programs
are now funded with power revenues except for certain stewardship activities
that generate various revenues and user fees. These activities
related to stewardship properties do not meet the criteria of an operating
segment pursuant to Statement of Financial Accounting Standards (“SFAS”) No.
131, “Disclosures About
Segments of an Enterprise and Related
Information.” Accordingly, stewardship assets and properties
are included as part of the power program, TVA’s only operating
segment.
Power
rates are established by the TVA board of directors (“TVA Board”) as authorized
by the TVA Act. The TVA Act requires TVA to charge rates for power
that will produce gross revenues sufficient to provide funds for operation,
maintenance, and administration of its power system; payments to states and
counties in lieu of taxes (“tax equivalent payments”); 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. Power rates set by the TVA Board are not subject to the
prior approval of or subsequent review by any state or federal regulatory
body.
Basis
of Presentation
TVA prepares its interim financial
statements in conformity with generally accepted accounting principles (“GAAP”)
accepted in the United States for interim financial
information. Accordingly, TVA’s interim financial statements do not
include all of the information and notes required by GAAP for complete financial
statements. Because the accompanying interim financial statements do not include
all of the information and footnotes required by GAAP for complete financial
statements, they should be read in conjunction with the audited financial
statements for the year ended September 30, 2007, and the notes thereto, which
are contained in TVA’s 10K/A No.2.
The amounts included in the
accompanying interim financial statements are unaudited but, in the opinion of
TVA management, reflect all adjustments, which consist solely of normal
recurring adjustments, necessary to fairly present TVA’s financial position and
results of operations for the interim periods. Due to seasonal
weather variations and the timing of planned maintenance and refueling outages
of electric generating units, the results of operations for interim periods are
not necessarily indicative of amounts expected for the entire year.
Use
of Estimates
In preparing financial statements that
conform to GAAP, management must make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the amounts of
revenues and expenses reflected during the reporting period. Actual results
could differ from those estimates.
Fiscal
Year
TVA’s fiscal year ends September
30. Unless otherwise indicated, years (2008, 2007, etc.) refer to
TVA’s fiscal years.
Restricted
Cash and Investments
As of June 30, 2008, and September 30,
2007, TVA had $122 million and $150 million, respectively, in Restricted cash
and investments on its Balance Sheets primarily related to collateral posted
with TVA by a swap counterparty in accordance with certain credit terms included
in the swap agreement. This resulted in the funds being reported in
Restricted cash and investments.
Accounts
Receivable
Accounts receivable primarily consist
of amounts due from customers for power sales. The table below
summarizes the types and amounts of receivables.
Accounts
Receivable
|
||||||||
At
June 30 2008
|
At
September 30 2007
|
|||||||
Power
receivables billed
|
$ | 229 | $ | 316 | ||||
Power
receivables unbilled
|
973 | 986 | ||||||
Fuel
cost adjustment-current
|
121 | 132 | ||||||
Total
power receivables
|
1,323 | 1,434 | ||||||
Other
receivables
|
62 | 26 | ||||||
Allowance
for uncollectible accounts
|
(2 | ) | (2 | ) | ||||
Net
accounts receivable
|
$ | 1,383 | $ | 1,458 |
Cost-Based
Regulation
Regulatory assets and regulatory
liabilities are classified under the provisions of SFAS No. 71, “Accounting for the Effects of
Certain Types of Regulation” (“SFAS No. 71”), and are included in
Accounts receivable, net, Deferred nuclear generating units, Other regulatory
assets, and Regulatory liabilities and as an offset to Property, plant, and
equipment on the June 30, 2008, and September 30, 2007, Balance
Sheets.
TVA’s regulatory assets and liabilities
are summarized in the table below.
TVA
Regulatory Assets and Liabilities
|
||||||||
At
June 30
2008
|
At
September 30 2007
|
|||||||
Regulatory
Assets:
|
||||||||
Unfunded
benefit costs
|
$ | 907 | $ | 973 | ||||
Nuclear
decommissioning costs
|
611 | 419 | ||||||
Debt
reacquisition costs
|
201 | 210 | ||||||
Deferred
losses relating to TVA’s financial trading program
|
– | 8 | ||||||
Deferred
outage costs
|
164 | 96 | ||||||
Deferred
capital lease asset costs
|
55 | 66 | ||||||
Unrealized
losses on certain swap and swaption contracts
|
125 | – | ||||||
Fuel
cost adjustment: long-term
|
17 | 18 | ||||||
Subtotal
|
2,080 | 1,790 | ||||||
Deferred
nuclear generating units
|
2,836 | 3,130 | ||||||
Subtotal
|
4,916 | 4,920 | ||||||
Fuel
cost adjustment receivable: short-term
|
121 | 132 | ||||||
Total
|
$ | 5,037 | $ | 5,052 | ||||
Regulatory
Liabilities:
|
||||||||
Unrealized
gains on coal purchase contracts
|
$ | 1,080 | $ | 16 | ||||
Capital
lease liabilities
|
52 | 67 | ||||||
Deferred
gains relating to TVA’s financial trading program
|
116 | – | ||||||
Subtotal
|
1,248 | 83 | ||||||
Accrued
tax equivalents
|
24 | 4 | ||||||
Reserve
for future generation
|
71 | 74 | ||||||
Total
|
$ | 1,343 | $ | 161 |
Subsequent
to the third quarter of 2008, commodity prices have become
variable. The following table reflects the effect of market
conditions on natural gas and fuel oil commodities as shown by the changes in
the Deferred gains relating to TVA’s financial trading program and market
conditions on coal commodities as shown by the changes in Unrealized gains on
coal purchase contracts on TVA’s balance sheets at September 30, 2008 and
November 30, 2008:
Market
Conditions on Natural Gas and Fuel Oil Commodities
Regulatory
Liabilities*
|
||||||||||||
June
30
2008
|
September
30
2008
|
November
30
2008
|
||||||||||
Deferred
gains (losses) relating to TVA’s financial trading program
|
$ | 116 | $ | (146 | )* | $ | (218 | )* | ||||
Unrealized
gains on coal purchase contracts
|
1,080 | 813 | 516 |
* As of June
30, 2008, Deferred gains (losses) relating to TVA's financial trading
program were shown in Regulatory liabilities within the Balance Sheet
presentation. Due to market fluctuations, the valuations as of September
30, 2008, and November 30, 2008, are listed as Deferred (losses) relating to TVA
financial trading program, which are shown as Regulatory assets with in the
Balance Sheet presentation.
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 swaps 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 swaps and swaptions was $125 million for the
first three quarters of 2008 and is included as a Regulatory asset on the June
30, 2008, Balance Sheet. See Swaps and Swaptions in this
Note 1.
On February 8, 2008, TVA finalized an
agreement to purchase the Office of Power Complex (the major portion of TVA’s
Chattanooga Office Complex in Chattanooga, Tennessee) upon the expiration of the
existing lease term on January 1, 2011. The purchase price is $22
million, payable on January 3, 2011. In accordance with Financial
Accounting Standards Board (“FASB”) Interpretation (“FIN”) 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,” TVA increased the basis of the capital lease asset by
$14 million, increased the capital lease regulatory asset by $1 million, and
increased the capital lease obligation by $15 million.
TVA established a reserve for future
generation funded by power customers which is also classified as a regulatory
liability. Because of the nature of the reserve, it is considered as
an offset to Property, plant, and equipment on the June 30, 2008, and September
30, 2007, Balance Sheets.
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 portion of the calculation that relates to
a future liability for tax equivalent payments is recorded as a regulatory
liability. The resulting liability of $24 million at June 30, 2008, and $4
million at September 30, 2007, is included in Accounts payable on the respective
Balance Sheets.
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 in TVA’s service
area. Because these amounts were intended to fund future costs, they
were originally deferred as a regulatory liability. The funds were
based on a predetermined rate applied to electricity sales approved as part of
TVA’s 2007 budget. Collections for the three months and nine months
ended June 30, 2007, amounted to $19 million and $53 million,
respectively. Total collections for the year ended September 30,
2007, amounted to $76 million. These amounts were recorded as a
regulatory liability on the June 30, 2007, and September 30, 2007, Balance
Sheets, respectively, as a component of Completed plant. Following
the purchase of two combustion turbine facilities, these funds were applied as
credits to Completed plant and are reflected on the September 30, 2007, Balance
Sheet. The funds collected for future generation are being amortized
to revenue in order to match revenue with the corresponding depreciation expense
of the facilities on the Statement of Income. This revenue
recognition process began when the facilities were placed into
service. The reserve for future generation was not extended beyond
2007. The balance of the reserve for future generation was $71
million at June 30, 2008, and $74 million at September 30, 2007. TVA
recognized revenue of $1 million during each of the first, second, and third
quarters of 2008 consistent with the manner in which the related assets are
being depreciated.
Other
Long-Term Assets
Other long-term assets is comprised of
the following:
Other
Long-Term Assets
June
30
2008
|
September
30
2007
|
|||||||
Loans
receivable, net
|
$ | 78 | $ | 79 | ||||
Currency
swap valuation
|
199 | 280 | ||||||
Coal
contract valuation
|
1,080 | 16 | ||||||
Total
|
$ | 1,357 | $ | 375 |
TVA
enters into coal contracts with volume options to protect against market
prices. The $1,064 million increase in valuation of commodity
contracts is related to increases in the price of this commodity.
Energy
Prepayment Obligations
Prior to 2005, TVA entered into sales
agreements with 36 customers for 54.5 discounted energy units totaling
approximately $55 million. Total credits applied to power billings on
a cumulative basis from these arrangements through June 30, 2008, exceeded $30
million. Of this amount, over $1 million was recognized as revenue
for the three months ended June 30, 2008, and 2007, respectively, and over $4
million was recognized as revenue for the nine months ended June 30, 2008, and
2007, respectively.
In November 2003, TVA, Memphis Light,
Gas, and Water Division (“MLGW”), and the City of Memphis entered into
agreements whereby MLGW prepaid a portion of its power requirements for 15
years. The amount of the prepayment was $1.5 billion. The
prepayment credits are being applied to reduce MLGW’s monthly power bill on a
straight-line basis over the same 15-year period. Total credits
applied to power billings on a cumulative basis through June 30, 2008, exceeded
$465 million. Of this amount, $25 million was recognized as
revenue for the three months ended June 30, 2008, and 2007, respectively, and
$75 million was recognized as revenue for the nine months ended June 30, 2008,
and 2007, respectively. These amounts were based on the ratio
of kilowatt-hours of electricity delivered to the total kilowatt-hours under
contract.
At June 30, 2008, and September 30,
2007, obligations for these energy prepayments were $1,059 million and $1,138
million, respectively. These amounts are included in Energy
prepayment obligations and Current portion of energy prepayment obligations on
the June 30, 2008, and September 30, 2007, Balance Sheets.
Asset
Retirement Obligations
In accordance with the provisions of
SFAS No. 143, “Accounting for
Asset Retirement Obligations,” TVA recognizes the fair value of legal
obligations associated with the retirement of certain tangible long-lived
assets. The fair value of the liability is added to the book value of
the associated asset. The liability increases due to the passage of
time (accretion expense), based on the time value of money, until the
obligations settle. Subsequent to the initial recognition, the future
liability is adjusted for any periodic revisions to the expected cost of the
retirement obligation (changes in estimates to future cash flows) and for
accretion of the liability due to the passage of time.
During the third quarter of 2008, TVA’s
total asset retirement obligation (“ARO”) increased $31 million due to accretion
expense. The nuclear accretion expense of $23 million was deferred
and charged to a regulatory asset in accordance with SFAS No. 71. The remaining
accretion expense of $8 million, related to coal-fired and gas/oil combustion
turbine plants, asbestos, and polychlorinated biphenyls (“PCBs”), was expensed
during the third quarter of 2008. During the third quarter of 2007,
TVA’s total ARO increased $30 million. The increase was comprised of $7 million
in new AROs plus $23 million in ARO expense (accretion of the
liability).
During the first nine months of 2008,
TVA’s total ARO increased $91 million due to accretion expense, $69 million
related to nuclear ARO accretion, and $22 million related to non-nuclear ARO
accretion. For the first nine months of 2007, TVA’s total ARO
increased $157 million. The increase was comprised of $90 million in new AROs
plus $67 million in ARO expense (accretion of the liability).
Reconciliation
of Asset Retirement Obligation Liability
|
||||||||||||||||
Three
Months Ended
June
30
|
Nine
Months Ended
June
30
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Balance
at beginning of period
|
$ | 2,249 | $ | 2,112 | $ | 2,189 | $ | 1,985 | ||||||||
Changes
in nuclear estimates to future cash flows
|
– | 7 | – | 89 | ||||||||||||
Non-nuclear
additional obligations
|
– | – | – | 1 | ||||||||||||
– | 7 | – | 90 | |||||||||||||
Add: ARO
(accretion) expense
|
||||||||||||||||
Nuclear
accretion (recorded as a regulatory asset)
|
23 | 16 | 69 | 46 | ||||||||||||
Non-nuclear
accretion (charged to expense)
|
8 | 7 | 22 | 21 | ||||||||||||
31 | 23 | 91 | 67 | |||||||||||||
Balance
at end of period
|
$ | 2,280 | $ | 2,142 | $ | 2,280 | $ | 2,142 |
Other
Income, Net
Other income, net is comprised of the
following:
Other Income, Net
Three
Months Ended
June
30
|
Nine
Months Ended
June
30
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
As
Restated
|
As
Restated
|
|||||||||||||||
Interest
income
|
$ | 3 | $ | 7 | $ | 13 | $ | 26 | ||||||||
External
services
|
5 | 6 | 10 | 14 | ||||||||||||
Unrealized
(losses) gains on investments
|
(2 | ) | 2 | (25 | ) | 4 | ||||||||||
Claims
settlement
|
– | – | 8 | – | ||||||||||||
Miscellaneous
|
1 | 1 | 2 | 7 | ||||||||||||
Total
other income, net
|
$ | 7 | $ | 16 | $ | 8 | $ | 51 |
Allowance
for Funds Used During Construction
TVA
capitalizes interest as an allowance for funds used during construction
("AFUDC"), based on the average interest rate of TVA’s outstanding
debt. The allowance is applicable to construction in progress related
to certain projects and certain nuclear fuel inventories. TVA
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 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
nine months ending June 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 $51 million for the nine months ended June 30,
2008.
Swaps
and Swaptions
From time to time TVA has entered into
call monetization transactions using swaptions to hedge the value of call
provisions on certain of its Bond issues. A swaption essentially
grants a third party an option to enter into a swap agreement with TVA under
which TVA receives a floating rate of interest and pays the third party a fixed
rate of interest equal to the interest rate on the Bond issue whose call
provision TVA monetized.
These call monetization transactions
result in long-term liabilities until such time as TVA repurchases the option or
until the option matures. These liabilities are marked to market each
quarter. In accordance with the accounting policy that was in effect
on September 30, 2007, the changes in the value of these liabilities were
reported as unrealized gains or losses through TVA’s income statement in
accordance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS No. 133”). The volatility of the
valuations resulted in the recognition of sizable amounts of non-cash expense or
income, which affected net income.
The TVA Board approved, beginning in
2008, the utilization of regulatory accounting treatment for swaps and swaptions
related to call monetization transactions. This reflects that the
effects of these transactions are included in ratemaking when they actually
settle. This treatment removes the non-cash impacts to TVA’s earnings
that result from marking the value of these instruments to market each
quarter. The value of the swaps and swaptions will still be recorded
on TVA’s balance sheet, and any interest expense impacts will continue to be
reflected in TVA’s income statement. The deferred unrealized gain on
the value of the swaps and swaptions was $74 million for the third quarter of
2008, and the deferred unrealized loss for the first nine months of 2008 was
$125 million. The deferred unrealized loss of $125 million is
included as a Regulatory asset on the June 30, 2008, Balance Sheet.
Impact
of New Accounting Standards and Interpretations
Accounting for Planned Major
Maintenance Activities. On September 8, 2006, 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.
Page
17
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. Restatement
The
accompanying financial statements as of and for the three and nine months ended
June 30, 2007, have been restated. TVA determined that the method
implemented to estimate unbilled revenues in September 2006 had resulted in
errors in unbilled revenue presented in TVA’s financial statements for the
fiscal years ended September 30, 2006, and 2007, and the quarterly periods ended
December 31, 2006, March 31, 2007, June 30, 2007, December 31, 2007, and March
31, 2008. There was no effect on periods prior to the three months
ended September 30, 2006.
Under
TVA’s end-use billing arrangements with its distributor customers
(“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. In
September 2006, TVA implemented a change in methodology for estimating unbilled
revenue for electricity sales which resulted in an increase of $232 million in
unbilled revenue (or 2.6 percent of operating revenues) for
2006.
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 of days outstanding resulted in an
error in recording unbilled revenue and unbilled receivables. The
previous unbilled method 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.
TVA has used a new process for
estimating unbilled revenues for the three and nine months ended June 30, 2008,
and June 30, 2007. 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, a true-up
component has been added to the unbilled calculation to reflect any timing
differences that occur between the retail and wholesale billing
cycles. Due to the new process, an adjustment was made to increase
revenue for the three month and nine month periods ended June 30, 2007, by $26
million and $22 million, respectively.
The restatement of unbilled revenue
also affected TVA’s fuel cost adjustment (“FCA”) calculation. The FCA
is a mechanism by which TVA collects the direct cost of fuel used in its
generating facilities and also the energy costs of purchased power used to serve
power demand. Implementation of the FCA occurred in October 2006 as a
joint effort between TVA and its customers. The goal of the FCA is
timely recovery of fuel-related expenses to reduce the volatility driven by fuel
and purchased power markets. Under TVA’s FCA methodology, adjustments
to rates are based primarily on the difference between forecasted and actual
expenses for the upcoming quarter, as well as the difference between forecasted
and actual revenues for the upcoming quarter. Because the FCA
adjustments are forward-looking, there is typically a difference between what is
collected in rates and what actual expense is realized over the course of the
quarter. This difference is added to or subtracted from a deferred
account on TVA’s balance sheet.
The restatement of unbilled revenue
changed TVA’s forecasted revenues, and since forecasted revenues are a major
component of the FCA calculation, the change in forecasted revenues required a
restatement of the amounts in TVA’s deferred FCA account. The FCA
deferred balance at September 30, 2007, was restated within the filing of the
Annual Report.
The
unbilled revenue error also affected the application of distributor
prepayments. The balance in the distributors’ unbilled accounts
receivable is offset by a reduction in the advance collections of those
distributors who make prepayments for their power. As a result of the
change in unbilled revenue, the balances in the unbilled receivable and advance
collections accounts were also adjusted. The adjustment related to
distributor prepayments at September 30, 2007, was restated within the filing of
the Annual Report.
TVA has evaluated these errors and
determined that the impact was an overstatement of net income for the fiscal
year ended September 30, 2006, and understatements of net income for the fiscal
year ended September 30, 2007, and the three months ended December 31, 2008, and
2007, the six months ended March 31, 2008, and 2007, and the nine months ended
June 30, 2007. The changes to the financial statements for the
respective years primarily involves accounts receivable and retained earnings on
the balance sheets, and operating revenues and net income on the statements of
income. The errors and restatements have no impact on cash and cash
equivalents.
TVA has also included in the
appropriate periods in its restated financial statements other miscellaneous
adjustments that were previously deemed to be immaterial by management, either
individually or in the aggregate, and therefore were corrected in the period in
which they were identified. These adjustments are described in more
detail below. References in the “Note” column correspond to lines on
the Statements of Income following this table. Accordingly, previously reported
amounts are being restated to properly reflect the accounting for these items as
follows:
Statements
of Income
Summary
of Restatements
For the
Three and Nine Months Ended June 30, 2007
Three
Months
|
Nine
Months
|
||||||||||||
Line
Item
|
Description
of Adjustment
|
2007
|
Note
|
2007
|
Note
|
||||||||
Operating
revenues
|
Unbilled
revenue adjustments
|
$ | 26 | $ | 22 | ||||||||
Revenue
capitalized during pre-commercial plant operation
|
(23 | ) | (23 | ) | |||||||||
Reclassification
of expenses previously netted with revenue
|
3 | 8 | |||||||||||
6 |
I07-1
|
7 |
I07-5
|
||||||||||
Operating
expenses
|
Fuel
cost adjustment
|
6 | 14 | ||||||||||
Revenue
capitalized during pre-commercial plant operation
|
(23 | ) | (23 | ) | |||||||||
Reclassification
of operating expenses to asset impairment (O&M)
|
(1 | ) | (23 | ) | |||||||||
Reclassification
of operating expenses to asset impairment (Asset
Impairment)
|
1 | 23 | |||||||||||
Loss
on asset impairment from audit adjustments
|
– | (5 | ) | ||||||||||
Change
in period for depreciation expense
|
– | (8 | ) | ||||||||||
Intercompany
charges reclassification
|
(14 | ) | (11 | ) | |||||||||
Financing
cost interest reclassification
|
(12 | ) | (36 | ) | |||||||||
Reclassification
of expenses previously netted with revenue
|
4 | 11 | |||||||||||
(39 | ) |
I07-2
|
(58 | ) |
I07-6
|
||||||||
Operating
income
|
45 | 65 | |||||||||||
Other
income/expense
|
Additional
legal reserve
|
– | 3 | ||||||||||
Intercompany
charges reclassification
|
(14 | ) | (11 | ) | |||||||||
Reclassification
of other income previously reported as revenue
|
1 | 3 | |||||||||||
(13 | ) |
I07-3
|
(5 | ) |
I07-7
|
||||||||
Interest
expense
|
Financing
cost interest reclassification
|
12 |
I07-4
|
36 |
I07-8
|
||||||||
Net
income
|
$ | 20 | $ | 24 |
Accordingly, previously reported
amounts are being restated to properly reflect the accounting for these items as
follows:
Statements of
Income
The
following table summarizes the statements of income for the periods indicated,
giving effect to the restatement adjustments described above and showing
previously reported amounts and restated amounts for the three and nine months
ended June 30, 2007.
Statements
of Income
For
the Three Months Ended
June
30, 2007
|
For
the Nine Months Ended
June
30, 2007
|
|||||||||||||||||||||||||||
As
Previously Reported
|
Increase
(Decrease)
|
Note
|
As
Restated
|
As
Previously Reported
|
Increase
(Decrease)
|
Note
|
As
Restated
|
|||||||||||||||||||||
Operating
revenues
|
||||||||||||||||||||||||||||
Sales
of electricity
|
||||||||||||||||||||||||||||
Municipalities
and cooperatives
|
$ | 1,863 | 26 | $ | 1,889 | $ | 5,527 | 22 | $ | 5,549 | ||||||||||||||||||
Industries
directly served
|
304 | – | 304 | 907 | – | 907 | ||||||||||||||||||||||
Federal
agencies and other
|
29 | – | 29 | 80 | – | 80 | ||||||||||||||||||||||
Other
revenue
|
40 | 3 | 43 | 106 | 8 | 114 | ||||||||||||||||||||||
Operating
revenues
|
2,236 | 29 | 2,265 | 6,620 | 30 | 6,650 | ||||||||||||||||||||||
Revenue
capitalized during pre-commercial plant operations
|
– | (23 | ) | (23 | ) | – | (23 | ) | (23 | ) | ||||||||||||||||||
Net
operating revenues
|
2,236 | 6 |
I07-1
|
2,242 | 6,620 | 7 |
I07-5
|
6,627 | ||||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||||||
Fuel
and purchased power
|
779 | 11 | 790 | 2,342 | 28 | 2,370 | ||||||||||||||||||||||
Operating
and maintenance
|
621 | (50 | ) | 571 | 1,782 | (95 | ) | 1,687 | ||||||||||||||||||||
Depreciation,
amortization, and accretion
|
366 | – | 366 | 1,104 | (8 | ) | 1,096 | |||||||||||||||||||||
Tax
equivalents
|
110 | (1 | ) | 109 | 327 | (1 | ) | 326 | ||||||||||||||||||||
Loss
on asset impairment
|
– | 1 | 1 | – | 18 | 18 | ||||||||||||||||||||||
Total
operating expenses
|
1,876 | (39 | ) |
I07-2
|
1,837 | 5,555 | (58 | ) |
I07-6
|
5,497 | ||||||||||||||||||
Operating
income
|
360 | 45 | 405 | 1,065 | 65 | 1,130 | ||||||||||||||||||||||
Other
income (expense), net
|
29 | (13 | ) |
I07-3
|
16 | 56 | (5 | ) |
I07-7
|
51 | ||||||||||||||||||
Unrealized
gain on derivative contracts, net
|
98 | – | 98 | 129 | – | 129 | ||||||||||||||||||||||
Interest
expense
|
||||||||||||||||||||||||||||
Interest
on debt and leaseback obligations
|
334 | 12 | 346 | 1,009 | 36 | 1,045 | ||||||||||||||||||||||
Amortization
of debt discount, issue, and reacquisition costs, net
|
4 | – | 4 | 14 | – | 14 | ||||||||||||||||||||||
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(45 | ) | – | (45 | ) | (144 | ) | – | (144 | ) | ||||||||||||||||||
Net
interest expense
|
293 | 12 |
I07-4
|
305 | 879 | 36 |
I07-8
|
915 | ||||||||||||||||||||
Net
income
|
$ | 194 | $ | 20 | $ | 214 | $ | 371 | $ | 24 | $ | 395 |
Statements
of Cash Flows
The
following table summarizes the statements of cash flows for the periods
indicated, giving effect to the restatement adjustments described above and
showing previously reported amounts and restated amounts for the nine months
ended June 30, 2007.
Statement
of Cash Flows
June
30, 2007
|
||||||||||||
As
Previously Reported
|
Increase
(Decrease)
|
As
Restated
|
||||||||||
Cash
flows from operating activities
|
||||||||||||
Net
income
|
$ | 371 | $ | 24 | $ | 395 | ||||||
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||||
Depreciation,
amortization, and accretion
|
1,134 | (8 | ) | 1,126 | ||||||||
Nuclear
refueling outage amortization
|
62 | – | 62 | |||||||||
Loss
on asset impairment
|
23 | (5 | ) | 18 | ||||||||
Amortization
of nuclear fuel
|
94 | – | 94 | |||||||||
Non-cash
retirement benefit expense
|
151 | – | 151 | |||||||||
Net
unrealized gain on derivative contracts
|
(129 | ) | – | (129 | ) | |||||||
Prepayment
credits applied to revenue
|
(79 | ) | – | (79 | ) | |||||||
Fuel
cost adjustment deferral
|
(126 | ) | 15 | (111 | ) | |||||||
Other,
net
|
13 | (3 | ) | 10 | ||||||||
Changes
in current assets and liabilities
|
||||||||||||
Accounts
receivable, net
|
122 | (22 | ) | 100 | ||||||||
Inventories
and other
|
(162 | ) | – | (162 | ) | |||||||
Accounts
payable and accrued liabilities
|
(119 | ) | 88 | (31 | ) | |||||||
Accrued
interest
|
(140 | ) | – | (140 | ) | |||||||
Pension
contributions
|
(56 | ) | – | (56 | ) | |||||||
Refueling
outage costs
|
(90 | ) | – | (90 | ) | |||||||
Other,
net
|
43 | – | 43 | |||||||||
Net
cash provided by operating activities
|
1,112 | 89 | 1,201 | |||||||||
Cash
flows from investing activities
|
||||||||||||
Construction
expenditures
|
(1,041 | ) | (110 | ) | (1,151 | ) | ||||||
Combustion
turbine asset acquisitions
|
(100 | ) | – | (100 | ) | |||||||
Nuclear
fuel expenditures
|
(130 | ) | 21 | (109 | ) | |||||||
Change
in restricted cash and investments
|
14 | – | 14 | |||||||||
Proceeds
from investments, net
|
2 | – | 2 | |||||||||
Loans
and other receivables
|
– | |||||||||||
Advances
|
(7 | ) | – | (7 | ) | |||||||
Repayments
|
13 | – | 13 | |||||||||
Proceeds
from sale of receivables/loans
|
2 | – | 2 | |||||||||
Other,
net
|
1 | – | 1 | |||||||||
Net
cash used in investing activities
|
(1,246 | ) | (89 | ) | (1,335 | ) | ||||||
Cash
flows from financing activities
|
||||||||||||
Long-term
debt
|
||||||||||||
Issues
|
36 | – | 36 | |||||||||
Redemptions
and repurchases
|
(469 | ) | – | (469 | ) | |||||||
Short-term
borrowings, net
|
234 | – | 234 | |||||||||
Payments
on leaseback financing
|
(27 | ) | – | (27 | ) | |||||||
Payments
on equipment financing
|
(7 | ) | – | (7 | ) | |||||||
Payments
from other financing
|
(1 | ) | – | (1 | ) | |||||||
Financing
costs, net
|
(1 | ) | – | (1 | ) | |||||||
Payments
to U.S. Treasury
|
(30 | ) | – | (30 | ) | |||||||
Net
cash used in financing activities
|
(265 | ) | – | (265 | ) | |||||||
Net
change in cash and cash equivalents
|
(399 | ) | – | (399 | ) | |||||||
Cash
and cash equivalents at beginning of period
|
536 | – | 536 | |||||||||
Cash
and cash equivalents at end of period
|
$ | 137 | – | $ | 137 |
Statements
of Changes in Proprietary Capital
The
following table summarizes the statement of change in proprietary capital for
the periods indicated, giving effect to the restatement adjustments described
above and showing previously reported amounts and restated amounts for the three
months ended June 30, 2007.
Statement
of Changes in Proprietary Capital
Appropriation
Investment
|
Retained
Earnings
(Restated)
|
Accumulated
Other Comprehensive (Loss) Income
|
Accumulated
Net Expense of Stewardship Programs
|
Total
(Restated)
|
Comprehensive
Income
(Loss)
(Restated)
|
|||||||||||||||||||
Balance
at March 31, 2007, as previously reported
|
$ | 4,753 | $ | 1,736 | $ | 6 | $ | (3,676 | ) | $ | 2,819 | |||||||||||||
Increase
(Decrease)
|
– | (212 | ) | – | – | (212 | ) | |||||||||||||||||
Balance
at March 31, 2007, as restated
|
4,753 | 1,524 | 6 | (3,676 | ) | 2,607 | ||||||||||||||||||
Net
income (loss)
|
– | 198 | – | (4 | ) | 194 | $ | 194 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (5 | ) | – | – | (5 | ) | – | ||||||||||||||||
Accumulated
other comprehensive (loss)
|
– | – | (25 | ) | – | (25 | ) | (25 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(5 | ) | – | – | – | (5 | ) | – | ||||||||||||||||
Balance
at June 30, 2007, as previously reported
|
4,748 |
1,929
|
(19 | ) | (3,680 | ) | 2,978 | 169 | ||||||||||||||||
Increase
(Decrease)
|
– | (192 | ) | – | – | (192 | ) | 20 | ||||||||||||||||
Balance
at June 30, 2007, as restated
|
$ | 4,748 | $ | 1,737 | $ | (19 | ) | $ | (3,680 | ) | $ | 2,786 | $ | 189 |
Statements
of Changes in Proprietary Capital restatements are due to changes in net income
and retained earnings resulting from the restatement process. Please refer to
the Statement of Net Income for discussion of the changes in net income. Please
refer to the Balance Sheets for discussion of changes in Retained earnings. All
other components remain consistent with the presentation noted in the original
statement presentation.
The
following table summarizes the statement of change in proprietary capital for
the periods indicated, giving effect to the restatement adjustments described
above and showing previously reported amounts and restated amounts for the nine
months ended June 30, 2007.
Statement
of Changes in Proprietary Capital
Appropriation
Investment
|
Retained
Earnings
(Restated)
|
Accumulated
Other Comprehensive (Loss) Income
|
Accumulated
Net Expense of Stewardship Programs
|
Total
(Restated)
|
Comprehensive
Income
(Loss)
(Restated)
|
|||||||||||||||||||
Balance
at September 30, 2006, as previously reported
|
$ | 4,763 | $ | 1,565 | $ | 43 | $ | (3,672 | ) | $ | 2,699 | |||||||||||||
Increase
(Decrease)
|
– | (216 | ) | – | – | (216 | ) | |||||||||||||||||
Balance
at September 30, 2006, as restated
|
4,763 | 1,349 | 43 | (3,672 | ) | 2,483 | ||||||||||||||||||
Net
income (loss)
|
– | 379 | – | (8 | ) | 371 | $ | 371 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (15 | ) | – | – | (15 | ) | – | ||||||||||||||||
Accumulated
other comprehensive (loss)
|
– | – | (62 | ) | – | (62 | ) | (62 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(15 | ) | – | – | – | (15 | ) | – | ||||||||||||||||
Balance
at June 30, 2007, as previously reported
|
4,748 | 1,929 | (19 | ) | (3,680 | ) | 2,978 | 309 | ||||||||||||||||
Increase
(Decrease)
|
– | (192 | ) | – | – | (192 | ) | 24 | ||||||||||||||||
Balance
at June 30, 2007, as restated
|
$ | 4,748 | $ | 1,737 | $ | (19 | ) | $ | (3,680 | ) | $ | 2,786 | $ | 333 | ||||||||||
Statements
of Changes in Proprietary Capital restatements are due to changes in net income
and retained earnings resulting from the restatement process. Please refer to
the Statement of Net Income for discussion of the changes in net income. Please
refer to the Balance Sheets for discussion of changes in Retained earnings. All
other components remain consistent with the presentation noted in the original
statement presentation.
3. Accumulated
Other Comprehensive Income (Loss)
SFAS No. 130, “Reporting Comprehensive
Income,” requires the disclosure of other comprehensive income to reflect
changes in capital that result from transactions and economic events from
non-owner sources. The decrease in other comprehensive income
for the three months and nine months ended June 30, 2008, and 2007, was
primarily due to unrealized losses related to mark-to-market valuation
adjustments for certain derivative instruments.
Total
Other Comprehensive Income (Loss) Activity
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
June
30
|
June
30
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Accumulated
other comprehensive (loss) income at beginning of period
|
$ | (67 | ) | $ | 6 | $ | (19 | ) | $ | 43 | ||||||
Changes
in fair value:
|
||||||||||||||||
Foreign
currency swaps
|
– | (25 | ) | (48 | ) | (71 | ) | |||||||||
Inflation
swap
|
– | − | – | 9 | ||||||||||||
Accumulated
other comprehensive (loss) at end of period
|
$ | (67 | ) | $ | (19 | ) | $ | (67 | ) | $ | (19 | ) | ||||
Note:
Foreign
currency swap changes are shown net of reclassifications from other
comprehensive income to earnings. The amounts reclassified from other
comprehensive income resulted in a charge to earnings of $33 million for
the first three quarters of 2008 and an increase to earnings of $81
million for the first three quarters of 2007.
|
4.
Debt Securities
Debt
Outstanding
The TVA Act authorizes TVA to issue
Bonds in an amount not to exceed $30 billion outstanding at any time. Debt
outstanding at June 30, 2008, and September 30, 2007, including translation
losses of $266 million and $299 million, respectively, related to Bonds
denominated in foreign currencies, consisted of the following:
Debt
Outstanding
|
||||||||
At
June 30
2008
|
At
September 30 2007
|
|||||||
Short-term
debt
|
||||||||
Discount
notes (net of discount)
|
$ | 456 | $ | 1,422 | ||||
Current
maturities of long-term debt
|
2,030 | 90 | ||||||
Total
short-term debt, net
|
2,486 | 1,512 | ||||||
Long-term
debt
|
||||||||
Long-term
|
20,880 | 21,288 | ||||||
Unamortized
discount
|
(199 | ) | (189 | ) | ||||
Total
long-term debt, net
|
20,681 | 21,099 | ||||||
Total
outstanding debt
|
$ | 23,167 | $ | 22,611 |
Debt
Securities Activity
The table below summarizes TVA’s
long-term Bond activity for the period from October 1, 2007, to June 30,
2008.
Debt
Securities Activity
|
||||||||||||
Date
|
Amount
|
Interest
Rate
|
Maturity
|
Callable
|
||||||||
Issuances:
|
||||||||||||
electronotes®
|
October
2007
|
$ | 24 | 5.50 | % |
October
2022
|
October
2008
|
|||||
November
2007
|
17 | 4.80 | % |
November
2014
|
November
2008
|
|||||||
First
Quarter 2008
|
41 | |||||||||||
January
2008
|
36 | 4.75 | % |
January
2028
|
January
2012
|
|||||||
March
2008
|
25 | 4.50 | % |
March
2018
|
March
2010
|
|||||||
Second
Quarter 2008
|
61 | |||||||||||
April
2008 (Third Quarter 2008)
|
3 | 3.50 | % |
April
2013
|
April
2009
|
|||||||
2008
Series A
|
January
2008
|
500 | 4.88 | % |
January
2048
|
|||||||
2008
Series B
|
March
2008
|
1,000 | 4.50 | % |
April
2018
|
|||||||
2008
Series C
|
June
2008
|
500 | 5.50 | % |
June
2038
|
|||||||
Total
|
$ | 2,105 | ||||||||||
Redemptions/Maturities:
|
||||||||||||
electronotes®
|
First
Quarter 2008
|
$ | – |
NA
|
||||||||
Second
Quarter 2008
|
197 | 5.11 | % | |||||||||
Third
Quarter 2008
|
115 | 3.80 | % | |||||||||
1998
Series D
|
March
2008
|
7 | 5.49 | % | ||||||||
1999
Series A
|
March
2008
|
10 | 5.62 | % | ||||||||
1999
Series A
|
May
2008
|
102 | 5.62 | % | ||||||||
1998
Series D
|
June
2008
|
108 | 5.49 | % | ||||||||
Total
|
$ | 539 | ||||||||||
Note:
electronotes®
interest rate is a weighted average
rate.
|
On May 1, 2008, the rate on the 1999
Series A Putable Automatic Rate Reset Securities (“1999 Series A Bonds”) was
reset from 5.62 percent to 5.17 percent. In conjunction with the
reset, $102 million of the entire principal amount of $400 million of 1999
Series A Bonds was redeemed by investors. On June 1, 2008, the rate
on the 1998 Series D Putable Automatic Rate Reset Securities (“1998 Series D
Bonds”) was reset from 5.49 percent to 5.46 percent. In conjunction
with the reset, $108 million of the entire principal amount of $459 million of
1998 Series D Bonds was redeemed by investors.
5.
Asset Acquisitions
New
Generation
On May 9, 2008, TVA completed the
purchase, of a three-unit, 891-megawatt combined cycle, combustion-turbine
facility located in Southaven, Mississippi, owned by Southaven Power, LLC
(“Southaven”). 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 aggregate purchase price was $466
million, including a base purchase price of $461 million and a $5 million
payment to Southaven in connection with the termination of an
operation-and-maintenance agreement held by a Southaven
affiliate. The fair value of the assets acquired at the date of
acquisition was booked to Property, plant and equipment within Completed
plant.
Buildings
On February 8, 2008, TVA finalized an
agreement to purchase the Office of Power Complex (the portion of TVA’s
Chattanooga Office Complex in Chattanooga, Tennessee, leased from Chattanooga
Valley Associates) upon the expiration of the existing lease 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.”
6.
Risk Management Activities and Derivative Transactions
TVA is exposed to various market
risks. These market risks include risks related to commodity prices,
investment prices, interest rates, currency exchange rates, inflation, and
counterparty credit risk. To help manage certain of these risks, TVA
has entered into various derivative transactions, principally commodity option
contracts, forward contracts, swaps, swaptions, futures, and options on
futures. It is TVA’s policy to enter into derivative transactions
solely for hedging purposes and not for speculative purposes.
TVA has recorded the following amounts
for its derivative instruments:
Mark-to-Market
Values of Derivative Instruments
|
||||||||
At
June 30
2008
|
At
September 30
2007
|
|||||||
Interest
rate swaps:
|
||||||||
$476
million notional
|
$ | (151 | ) | $ | (115 | ) | ||
$28
million notional
|
(4 | ) | (3 | ) | ||||
$14
million notional
|
(2 | ) | (1 | ) | ||||
Currency
swaps:
|
||||||||
Sterling
|
32 | 63 | ||||||
Sterling
|
112 | 148 | ||||||
Sterling
|
55 | 69 | ||||||
Swaption
- $1 billion notional
|
(353 | ) | (269 | ) | ||||
Coal
contracts with volume options
|
1,080 | 16 | ||||||
Futures
and options on futures:
|
||||||||
Margin
Cash Account*
|
45 | 18 | ||||||
Unrealized
gains/(losses)
|
116 | (8 | ) | |||||
Note
* In
accordance with certain credit terms, TVA used leveraging to trade
financial instruments under the financial trading program. Therefore,
the margin cash account balance does not represent 100 percent of the net
market value of the derivative positions outstanding as shown in the
Financial Trading Program Activity table below.
|
TVA has a
financial trading program under which TVA uses various physical and financial
instruments, such as futures, swaps, options on futures, and options on swaps,
to hedge TVA’s exposure to natural gas, fuel oil, and electricity
prices. At June 30, 2008, TVA had derivative positions outstanding
under the program equivalent to 4,020 natural gas contracts. This was
comprised of 1,875 futures contracts, 1,005 swap contracts, and 1,140 option
contracts. See Derivative Positions
Outstanding table below. The derivative positions outstanding
under the program had an approximate net market value of $535 million at June
30, 2008. See Financial Trading Program
Activity table below.
For the
nine months ended June 30, 2008, TVA recognized realized gains of $34 million,
which were recorded as a decrease to purchased power
expense. Unrealized gains at June 30, 2008, were $116 million,
representing an increase of $124 million for the nine months ended June 30,
2008. TVA deferred the $116 million as a regulatory liability 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 June
30, 2007, TVA’s derivative positions outstanding under the program had an
approximate net market value of $201 million. See Financial Trading Program Activity
table below. For the nine months ended June 30, 2007, TVA
recognized realized losses of $10 million, which were recorded as an increase to
purchased power expense. Unrealized losses at June 30, 2007, were $22 million,
representing an increase of $16 million for the quarter ended June 30, 2007. TVA
deferred the $22 million as a regulatory asset in accordance with the FCA rate
mechanism.
Derivative Positions
Outstanding
At
June 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
|
1,875 | 10,000 | 18,750,000 | 1,915 | 10,000 | 19,150,000 | ||||||||||||||||||
Natural
gas swaps
|
||||||||||||||||||||||||
Bilateral
swaps (daily)
|
858 | 7,733 | 6,635,000 | – | – | – | ||||||||||||||||||
Bilateral
swaps (monthly)
|
147 | 99,184 | 14,580,000 | 925 | 10,000 | 9,245,000 | ||||||||||||||||||
Subtotal
|
1,005 | 21,215,000 | 925 | 9,245,000 | ||||||||||||||||||||
Natural
gas options
|
||||||||||||||||||||||||
Bilateral
options
|
– | – | – | – | – | – | ||||||||||||||||||
Exchange
traded options
|
1,140 | 10,000 | 11,400,000 | – | – | – | ||||||||||||||||||
Subtotal
|
1,140 | 10,000 | 11,400,000 | – | – | – | ||||||||||||||||||
Total
|
4,020 | 51,365,000 | 2,840 | 28,395,000 | ||||||||||||||||||||
Financial
Trading Program Activity
For
the Nine Months Ended June 30
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
Notional
Amount
|
Contract
|
Notional
Amount
|
Contract
|
|||||||||||||
(in
mmBtu)
|
Value
|
(in
mmBtu)
|
Value
|
|||||||||||||
Natural
gas futures contracts
|
||||||||||||||||
Financial
positions, beginning of period, net
|
16,230,000 | $ | 131 | 4,290,000 | $ | 35 | ||||||||||
Purchased
|
30,770,000 | 277 | 32,050,000 | 251 | ||||||||||||
Settled
|
(28,250,000 | ) | (272 | ) | (17,190,000 | ) | (125 | ) | ||||||||
Realized
gains/(losses)
|
– | 33 | – | (8 | ) | |||||||||||
Net
positions-long
|
18,750,000 | 169 | 19,150,000 | 153 | ||||||||||||
Natural
gas swaps contracts
|
||||||||||||||||
Financial
positions, beginning of period, net
|
1,970,000 | 12 | 1,822,500 | 11 | ||||||||||||
Fixed
portion
|
27,710,000 | 301 | 9,632,500 | 73 | ||||||||||||
Floating
portion - realized
|
(8,465,000 | ) | (71 | ) | (2,210,000 | ) | (12 | ) | ||||||||
Realized
gains/(losses)
|
– | 2 | – | (2 | ) | |||||||||||
Net
positions-long
|
21,215,000 | 244 | 9,245,000 | 70 | ||||||||||||
Natural
gas options contracts
|
||||||||||||||||
Financial
positions, beginning of period, net
|
5,600,000 | 1 | – | – | ||||||||||||
Calls
purchased
|
6,150,000 | 8 | – | – | ||||||||||||
Puts
sold
|
3,150,000 | (2 | ) | – | – | |||||||||||
Positions
closed or expired
|
(3,500,000 | ) | (1 | ) | – | – | ||||||||||
Net
positions-long
|
11,400,000 | 6 | – | – | ||||||||||||
Holding
(losses)/gains
|
||||||||||||||||
Unrealized
(losses) at beginning of period, net
|
– | (8 | ) | – | (6 | ) | ||||||||||
Unrealized
gains/(losses) for the period
|
– | 124 | – | (16 | ) | |||||||||||
Unrealized
gains/(losses) at end of period, net
|
– | 116 | – | (22 | ) | |||||||||||
Financial
positions at end of period, net
|
51,365,000 | $ | 535 | 28,395,000 | $ | 201 |
7. Benefit
Plans
TVA
sponsors a defined benefit pension plan that covers most of its full-time
employees, a defined contribution plan that covers most of its full-time
employees, a Supplemental Executive Retirement Plan (“SERP”) to provide
additional benefits to specified individuals in addition to those available
under the defined benefit pension plan, and an unfunded postretirement medical
plan that provides for non-vested contributions toward the cost of certain
retirees' medical coverage.
The following table provides the
components of net periodic benefit cost for the plans.
TVA
Benefit Plans
Pension
Benefits
|
Other
Benefits
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||||||||||||||||
Three
Months Ended
June
30
|
Three
Months Ended
June
30
|
Nine
Months Ended
June
30
|
Nine
Months Ended
June
30
|
|||||||||||||||||||||||||||||
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||||
Service
cost
|
$ | 28 | $ | 30 | $ | 1 | $ | 1 | $ | 83 | $ | 91 | $ | 4 | $ | 4 | ||||||||||||||||
Interest
cost
|
131 | 124 | 7 | 8 | 392 | 371 | 21 | 20 | ||||||||||||||||||||||||
Expected
return on plan assets
|
(152 | ) | (142 | ) | – | – | (456 | ) | (428 | ) | – | – | ||||||||||||||||||||
Amortization
of prior service cost
|
9 | 9 | 2 | 2 | 28 | 27 | 4 | 4 | ||||||||||||||||||||||||
Recognized
net actuarial loss
|
10 | 21 | 1 | 0 | 31 | 63 | 4 | 4 | ||||||||||||||||||||||||
Net
periodic benefit cost
|
$ | 26 | $ | 42 | $ | 11 | $ | 11 | $ | 78 | $ | 124 | $ | 33 | $ | 32 | ||||||||||||||||
The TVA Board approved $75 million in
pension contributions for 2008 with contributions of $37 million and $38 million
made in March and September, respectively. In addition, TVA made a $6
million contribution to the SERP in September 2008. During the nine
months ended June 30, 2008, TVA made $37 million in contributions to its pension
plans. TVA does not separately set aside assets to fund other benefit
costs, but rather funds such costs on an as-paid basis. TVA provided
approximately $17 million during the nine months ended June 30, 2008, to fund
other benefit costs.
8.
Workers’ Compensation
TVA provides workers’ compensation
benefits in accordance with the requirements of the Federal Employees’
Compensation Act. TVA recognizes the obligations related to these
benefits on an actuarial basis as determined at the end of each fiscal
year. The discount rate utilized to value these benefits corresponds
to the actuarial duration of the annual claims paid for all active cases,
including compensation and medical benefits. TVA has determined that
such durations are best represented by an accumulation of claims which are
concentrated around a particular 10-year period. Accordingly, TVA
utilizes a discount rate at the end of each fiscal year which corresponds to the
U.S. Treasury 10-Year constant maturities rate as published by the Federal
Reserve Bank. At the end of 2007, TVA utilized a discount rate of
4.59 percent to actuarially value its 2007 workers’ compensation
obligations. During the six months ended March 31, 2008, the rate
declined more than 100 basis points. TVA, therefore, revised its 2008
estimated workers’ compensation expense utilizing the published rate of 3.44
percent for March 14, 2008. As a result of this revision,
TVA recorded additional workers' compensation expense of $23
million for the six months ended March 31, 2008 and an additional $12
million of workers' compensation expense for the three months ended June
30, 2008. As of June 30, 2008, the U.S. Treasury 10-Year constant
maturities rate as published by the Federal Reserve Bank had not changed
materially from its March 14, 2008 level. Going forward, TVA will
continue to monitor the U.S. Treasury 10-Year constant maturities rate as
published by the Federal Reserve Bank, and will make any necessary revisions to
expense in future periods as material changes occur.
9.
Asset Impairment
During the third quarter of 2008, TVA
recognized a total of $7 million in asset impairment losses related to its
Property, plant, and equipment. The $7 million Loss on asset
impairment included partial write-downs of scrubber projects at TVA’s Bull Run
Fossil Plant (“Bull Run”) and John Sevier Fossil Plant (“John Sevier”) due to
modifications made in the chosen technology needed to implement a more cost
effective solution for sulfur dioxide (“SO2”)
removal.
During the first quarter of 2007 and
the third quarter of 2007, TVA recognized a total of $17 million and
$1million,
respectively, in asset impairment losses related to its Property, plant, and
equipment. The $18 million Loss on asset impairment included a $17
million write-off of a scrubber project at TVA’s Colbert Fossil Plant
(“Colbert”) and a $1 million write-off due to re-valuation of other
projects.
TVA elected to recognize the impairment losses in 2007 and 2008 and not include
the losses in its rate base.
10.
Legal Proceedings
TVA is subject to various legal
proceedings and claims that have arisen in the ordinary course of business.
These proceedings and claims include the matters discussed below. In accordance
with SFAS No. 5, “Accounting
for Contingencies,” TVA had accrued approximately $61 million with
respect to the proceedings described below as of June 30, 2008, as well as
approximately $5 million with respect to other proceedings that have arisen in
the normal course of TVA’s business. No assurance can be given that TVA will not
be subject to significant additional claims and liabilities. If actual
liabilities significantly exceed the amounts accrued, TVA’s results of
operations, liquidity, and financial condition could be materially adversely
affected.
Global Warming Cases,
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 has set a hearing on the plan for 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 the Clean Air Interstate
Rule 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.
11.
Subsequent Events
New
Generation and Subsequent Disposition
On September 30, 2008, Seven States
Power Corporation (“SSPC”) exercised an option and bought an undivided 69.69
percent interest in TVA’s Southaven Power Plant, a combined-cycle, electric
generating facility (“the facility”) located in Southaven,
Mississippi. SSPC bought this interest in the facility through its
wholly-owned subsidiary, Seven States Southaven, LLC (“SSSL”) and paid TVA
approximately $325 million. 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.
As part of the transaction with SSSL,
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 the loan(s) SSSL obtained in connection with the
purchase, with such 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. Because of TVA’s continued ownership interest in the facility,
as well as the buy-back provisions, the transaction does not meet the criteria
for a sale and accordingly has been recorded as a leaseback
obligation. Subsequent to the September 30, 2008, closing, TVA
recognized the $325 million buy-back obligation on its September 30, 2008,
Balance Sheet as a long-term liability, which (plus the cost of SSSL's share of
any capital improvements) is also the maximum potential amount of future
payments TVA could be obligated to pay. 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.
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 the Balance
Sheet. 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 the 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.
(Dollars
in millions except where noted)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (“MD&A”) explains the results
of operations and general financial condition of the Tennessee Valley Authority
(“TVA”). The MD&A should be read in conjunction with the accompanying
financial statements and TVA’s Annual Report on Form 10-K, as amended, for the
fiscal year ended September 30, 2007 (“Annual Report”).
Financial
Outlook
Net income. Net
income for the nine months ended June 30, 2008, was $243 million compared to net
income of $395 million for the same period of 2007. This change in net income
was primarily due to changes in accounting for capitalized interest on
construction projects which had the effect of making net interest expense $132
million higher. See Note 1 — Allowance for Funds Used During
Construction. The increase was partially offset by a decrease in interest
on debt and leaseback obligations of $17 million, resulting from redemption of
generally higher interest rate debt, issuance of generally lower interest rate
debt, and other activities which collectively had the effect of reducing
interest expense. Additionally, TVA changed its policy for accounting for gains
and losses on swap and swaption contracts to defer unrealized gains and losses
for ratemaking purposes, which contributed to a $129 million unrealized gain in
the first nine months of 2007.
Partially offsetting the effects of the
accounting changes was an increase in operating income of $136 million from
$1,130 million for the nine months ended June 30, 2007, to $1,266 million for
the nine months ended June 30, 2008. Operating income (defined herein
as operating revenues less operating expenses) is a measurement of a company’s
earning power from ongoing operations. See Results of
Operations.
Investment
Performance. Market conditions can affect the value of TVA’s
short-term financial investments, and investments held in TVA’s pension, asset
retirement trust, and nuclear decommissioning trust funds. TVA has held
investments in asset backed securities, including mortgage-related securities,
in these funds. Like all securities held, these securities are marked to market
each period. The markets in which the securities held by TVA are
traded have deteriorated significantly.
The performance of debt, equity, and
other markets in 2008 has negatively impacted the asset values of investments
held in TVA’s pension and decommissioning trust funds. TVA does not
recognize investment gains and losses from these portfolios within earnings, but
rather defers all such investment gains and losses within a regulatory asset in
accordance with its regulatory accounting policy. The nuclear
decommissioning trust portfolio declined in value $115 million, of which $85
million was unrealized, for the nine months ended June 30, 2008. See
Note 1--Cost-Based
Regulation. 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.
At June 30, 2008, TVA’s retirement
system (“TVARS”) was approximately 94 percent funded. 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, or 18 percent. Because of these declines,
TVA may be required to make additional contributions to the retirement system in
the future.
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.
Rate
Actions
On August 20, 2008, management briefed
the TVA Board on conditions it believes TVA will face in 2009 and
beyond. In 2009, management anticipates that its employees will
increase their productivity and that TVA’s fossil and nuclear plants will
generally meet performance expectations in terms of output and
availability. If asset performance is different than anticipated,
TVA’s operating costs could be impacted. In addition, management
expects TVA to face the following challenges during 2009:
|
•
|
Continuing
effects from drought conditions (described in greater detail
below);
|
|
•
|
Flat
energy demand resulting from economic slowdown in conjunction with TVA’s
promotion of energy efficiency; and
|
|
•
|
Rising
fuel costs.
|
TVA also has a continuing need for
investment in generation and transmission facilities, clean air technology,
energy efficiency and peak reduction initiatives, and information technology
systems.
To meet these challenges, the TVA Board
approved a base rate increase for 2009 which was effective October 1,
2008. It is anticipated that the increase of the base charges would
produce approximately $310 million of additional accrued revenue which would
have an estimated $275 million cash impact during fiscal year
2009. The increase, combined with the fuel cost adjustment (“FCA”)
increase that became effective at the same time, will result in an average total
increase in wholesale charges of 20 percent from the previous
charges.
Fuel
Cost Adjustment
As of June 30, 2008, TVA had recognized
a regulatory asset of $17 million and a current receivable of $121 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 primarily on the difference between forecasted and actual
expenses for the upcoming quarter, as well as the difference between forecasted
and actual revenues for the upcoming quarter. Because the FCA adjustments
are forward-looking, there is typically a difference between what is collected
in rates and what actual expense is realized over the course of the
quarter. This difference is added to or subtracted from a
deferred account 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. The FCA amount implemented July 1, 2008, was 0.686 cents
per kilowatt-hour and was expected to produce $305 million in revenue during the
fourth quarter of 2008. See Note 1 — Accounts Receivable and Cost-Based
Regulation.
Weather
Conditions
The amount of electricity that TVA is
able to generate from its hydroelectric plants depends on a number of factors
outside TVA's control, including the amount of precipitation, runoff, initial
water levels, competing water-management objectives, and the availability of its
hydroelectric generation plants. When these factors are unfavorable,
TVA must increase its reliance on more expensive sources of power, such as other
types of generation plants and purchased power. TVA continued to be
impacted by drought conditions during the third quarter of
2008. Although rainfall totals from October 1, 2007, through June 30,
2008, were 75 percent of normal, runoff totals were far less at 48 percent of
normal. For the period October 1, 2007, through September 30, 2008, rainfall
totals were at 76 percent of normal and runoff totals were at 47 percent of
normal. TVA is scheduling minimum flows through the system to
conserve water in the tributary projects while meeting downstream flow
requirements, maintaining water quality, protecting aquatic habitat, and
providing for commercial navigation.
Market
Conditions
Due
to rising commodity prices across domestic and international markets during the
nine months ended June 30, 2008, TVA and other major utilities have experienced
increased costs in short-term markets for fuel oil, natural gas, coal and
electricity. For TVA, the problem of rising fuel prices is worsened
by an ongoing drought in parts of the Tennessee Valley region. Due to
weather conditions, TVA is generating less hydroelectric power, which is the
cheapest form of generation. This lost generation must be replaced
with more expensive power produced from other sources, or purchased from
suppliers, which is typically generated from oil or natural gas (see Weather
Conditions). The following describes market conditions for
natural gas, fuel oil, coal, and electricity during the quarter ended June 30,
2008.
Natural Gas. Prices were
higher in the quarter ended June 30, 2008, as compared to the same period in
2007, including physical and financial markets. TVA expects continued volatility
in the natural gas markets.
Fuel Oil. The
spikes in fuel prices during the quarter ended June 30, 2008 were due to
continued price increases in crude oil seen in 2008. Crude oil prices
had record-high volatility in 2008 and are expected to continue experiencing
similar volatility trends.
Coal. Coal prices increased
during the quarter ended June 30, 2008, and prices will likely remain volatile
through the end of calendar year 2009.
Electricity. On-peak
power prices, which are increasingly determined by natural gas-fired power
plants, increased during the quarter ended June 30, 2008, along with natural gas
prices. Electricity prices were higher in the summer due to demand driven by air
conditioning load, but cooler temperatures in August lightened demand and
allowed prices to ease with falling natural gas prices.
Off-peak power prices increased during
the quarter ended June 30, 2008, as a result of higher coal prices and strong
demand in the off-peak periods. Prices are expected to remain at
higher levels for the balance of the year.
Pricing Table. The
following table illustrates approximate changes in commodity pricing for the
quarter ended June 30, 2008, and the same quarter in the prior fiscal
year.
Commodity
Pricing Table
As of
June 30, 2008
Commodity
|
Price
Increases: Fiscal year
3rd
Quarter 2008 vs.
3rd
Quarter 2007
|
3rd
Quarter 2008
Percent
Change vs.
3rd
Quarter 2007
|
||||||
Henry
Hub Natural Gas ($/mmBtu)
|
$ | 3.78 | 50 | % | ||||
Gulf
Coast Fuel Oil ($/mmBtu)
|
11.43 | 84 | % | |||||
Composite
Coal (FOB Mine $/ton)
weighted
average from FY budget plan
|
26.36 | 90 | % | |||||
Into
TVA Electricity ($/MWh)
|
||||||||
On-Peak
(5 days x 16 hours)
|
17.50 | 27 | % | |||||
Off-Peak
(5 days x 8 hours)
|
4.40 | 14 | % |
Market
prices for these commodities at November 30, 2008, and September 30, 2008, are
shown below. Market prices for these commodities have fallen during the
first quarter of 2009.
Commodity
Pricing Table
|
||||||||||||
As
of November 30, 2008
|
||||||||||||
Commodity
|
Prices
As of November 30, 2008
|
Average
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 | )% |
Performance
of TVA Assets
Nuclear production increased by 16
percent for the nine months ended June 30, 2008, as compared to the nine months
ended June 30, 2007, primarily due to the addition of Browns Ferry Nuclear Plant
Unit 1 (“Browns Ferry Unit 1”) to the generation fleet during the summer of
2007. Hydroelectric generation decreased 34 percent during the same
period as a result of the drought conditions discussed in Financial Outlook and Weather
Conditions.
The
following table summarizes by generation source TVA’s net generation in millions
of kilowatt-hours, and the percentage of all electric power generated by TVA for
the periods indicated:
Power
Supply from TVA-Owned and Contracted Generation Facilities
|
||||||||||||||||
For
the nine months ended June 30
|
||||||||||||||||
(millions
of kWh)
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
Coal-fired
|
72,858 | 63 | % | 73,413 | 65 | % | ||||||||||
Nuclear
|
37,701 | 32 | % | 32,612 | 29 | % | ||||||||||
Hydroelectric
|
4,854 | 4 | % | 7,335 | 6 | % | ||||||||||
Combined
Cycle
|
628 | 1 | % | 201 |
<1
|
% | ||||||||||
Renewable
resources
|
27 |
<1
|
% | 23 |
<1
|
% | ||||||||||
Total
|
116,068 | 100 | % | 113,584 | 100 | % |
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 (“Browns Ferry Unit 3”) experienced an unplanned
automatic shutdown due to a main generator trip. As part of the
recovery from this generator trip, a secondary problem was discovered which
required repairs that extended the duration of this outage by 21
days. The duration of a planned outage scheduled at Watts Bar Nuclear
Plant Unit 1 (“Watts Bar Unit 1”), was extended nine days due to emergent issues
and complications associated with completion of identified outage
work.
The cost
of replacement power related to the operating issues described above will be
recovered through subsequent fuel cost adjustments.
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 Southeast Power Administration (“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 in the southeast has resulted in less water flow and above normal water
temperatures. TVA has been impacted in two ways.
The first impact is a reduction in the
amount of power TVA receives from SEPA. TVA, along with others, has
contracted with SEPA for the power produced from the Corps’ Cumberland River
hydroelectric facilities. Under the contract, SEPA was to provide TVA
an annual minimum of 1,500 hours of power for each megawatt of TVA's 405
megawatt allocation and all surplus power from the Corps’ hydroelectric
facilities on the Cumberland River. Due to the drought and the need
to repair the Wolf Creek and Center Hill Dams, SEPA has instituted an emergency
operation plan which:
|
•
|
Eliminates
its obligation to provide TVA (and any affected customer) with a minimum
amount of power;
|
|
•
|
Provides
for all affected customers (except TVA) to receive a specified share of a
portion of the gross hourly generation from the eight Cumberland River
hydroelectric facilities, with TVA receiving the
remainder;
|
|
•
|
Eliminates
the payment of demand charges by customers (including TVA) since there is
significantly reduced dependable capacity on the Cumberland River system;
and
|
|
•
|
Increases
the rate charged per kilowatt-hour of energy received by SEPA's customers
(including TVA).
|
It is likely that an easing of the
drought will not eliminate the need for the emergency operating plan because it
is unclear how long it will take the Corps to repair these
facilities.
During
the summer of 2007, reduced flow through the Cumberland River system, combined
with higher than normal upstream river temperatures, forced TVA to derate its
Cumberland and Gallatin Fossil Plants to remain in compliance with discharge
temperature limits contained in the plants’ discharge permits. To
mitigate the risk of summer of 2008 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. Since early July 2008, 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. Gallatin experienced a few minor derates during the third
quarter. Gallatin thermal derates are expected to continue due to
reduced river flow resulting from low rainfall, compounded by ongoing dam safety
work at two Corps’ dams. 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 in the southeast, there has been significantly less
rainfall and runoff in the Tennessee River system. The result is that
less water is available for cooling purposes, and the water that is available
may be higher in temperature. In order not to exceed thermal limits
in plant discharge permits during the summer of 2007, TVA derated two fossil
plants, took one unit at Browns Ferry Nuclear Plant temporarily offline, and
reduced the output of the other two units. The hot weather and low
rainfall were also significant factors in causing TVA to reduce power output at
a few generating plants during the period of early-June 2008 through present
day. Additionally, TVA used its cooling towers at Browns Ferry and
Sequoyah Nuclear Plants. Using the cooling towers requires a
substantial amount of power that TVA would have otherwise
sold. During the summer of 2008, temperatures on the Tennessee River
reached levels that required near constant use of cooling towers at Sequoyah and
Browns Ferry Nuclear Plants to keep the permitted thermal limits for the river
from being exceeded. After Browns Ferry lost the use of cooling
towers, due to equipment malfunction in early August, 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 (lower 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.
Clean Air Initiatives
In 2007, TVA began operating the High
Energy Reagent Technology (“HERT”) on Unit 1 of its John Sevier Fossil Plant
(“John Sevier”) located near Rogersville, TN and on Unit 4 of its Johnsonville
Fossil Plant (“Johnsonville”) located in western Tennessee. TVA plans
to add similar systems to reduce nitrogen oxide (“NOx”)
emissions on John Sevier Units 2-4 and Johnsonville Units 2 and 3 by the 2009
ozone season. On April 3, 2008, the TVA Board approved the
installation of additional emissions control equipment at John Sevier with an
estimated cost of $597 million. The additional equipment includes a flue
gas desulfurization system (“scrubber”) to reduce sulfur dioxide (“SO2”)
emissions from the four-unit, 712-megawatt plant, a baghouse for particulate
control, and Selective Catalytic Reduction (“SCR”) technology to further reduce
NOx
emissions. Pending completion of an environmental review, the
scrubber is expected to be in operation in 2012. The SCRs are
expected to be in operation on all four units by 2015.
Meeting
the Power Needs in TVA’s Service Area
Combustion Turbine
Facilities. In November
2007, the TVA Board approved the purchase of a four-unit, 494-megawatt
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.
TVA also purchased a three-unit,
891-megawatt 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.
The purchase of these plants fits with
the goals of TVA’s Strategic Plan adopted by the TVA Board on May 31, 2007
(“Strategic Plan”), to diversify TVA’s generation facilities by acquiring
natural gas plants. With the acquisition of the Brownsville and
Southaven plants, TVA now owns or leases 93 combustion-turbine peaking
units.
New Nuclear
Generation. TVA submitted its
combined license application to NRC for Bellefonte Nuclear Plant (“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. Obtaining the necessary
license would give TVA more certainty about the cost and schedule of a nuclear
option for future decisions. On June 6, 2008, following a 120-day
notice for a hearing period, a combined petition containing 19 contentions was
filed by the Blue Ridge Environmental Defense League, Bellefonte Efficiency and
Sustainability Team, and Southern Alliance for Clean Energy. The
Atomic Safety and Licensing Board 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 involved 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. Based on progress to date in support of
the NRC review of Bellefonte site hydrology, being performed as a part of the
TVA/NuStart Combined Construction and Operating License ("COLA") application,
the NRC has informed TVA that a delay to its review schedule is
likely. The NRC will complete an evaluation of its COLA application
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.
Preliminary project activities began at
Watts Bar Nuclear Plant Unit 2 (“Watts Bar Unit 2”) in October
2007. TVA began to engage in unrestricted construction activities at
the end of December 2007. The project is planned to be completed in
the fall of 2012. When completed, Watts Bar Unit 2 is expected to
provide 1,180 megawatts of capacity.
TVA
will continue to consider other opportunities to add new generation to meet its
increasing customer demand. Market conditions, including continued
upward pressure on the price of commodities and construction materials, as well
as potential shortages of skilled craft labor, will continue to add to the
uncertainties of both cost and schedule of new construction.
Purchased Power. Purchasing power from
others will likely remain a part of how TVA meets the power needs of its service
area. The Strategic Plan establishes a goal of balancing production
capabilities with power supply requirements by promoting the conservation and
efficient use of electricity and, when necessary, buying, building, and/or
leasing assets or entering into economical purchased power
agreements. Achieving this goal will allow TVA to reduce its reliance
on purchased power. The power purchases during the first nine months of 2008
represent a 12 percent increase over the amount of power purchased during the
same period of 2007, due mostly to lower than expected hydroelectric
generation. A return to normal weather patterns would likely increase
hydroelectric generation and reduce reliance on purchased power. See
Performance of TVA
Assets.
Energy Efficiency
Plan. Early in 2008, the TVA Board charged TVA staff to
develop a long-term energy efficiency plan and to develop and implement new
programs under a program known as the Energy Efficiency and Demand Response
(“EEDR”) plan. A core team has been drawn together from organizations
across TVA to develop the implementation plan for EEDR. The proposed
plan will be the result of a collaborative effort with TVA’s customers and will
contain input from numerous regional and national stakeholders, including state
and federal agencies, national energy efficiency experts, environmental advocacy
groups, and residents of the Tennessee Valley. A draft of the EEDR
plan was presented to the TVA Board at its April 3, 2008,
meeting. The guiding principles of the plan and the goal of a 1,400
megawatt reduction by the end of fiscal year 2012 were approved by the TVA Board
at its May 19, 2008 meeting. TVA conducted a series of
stakeholder briefings throughout the region in April and May 2008 and
received additional public input on its energy efficiency proposal. In
addition, the EEDR plan will be subject to environmental review. The
goal of the EEDR project is to slow the current rate of power demand growth by
providing short- and long-term energy efficiency opportunities to residential,
business, and industrial consumer groups.
Customers
On January 1, 2008, Bristol Virginia
Utilities (“BVU”) became the 159th municipal supplier or electric cooperative to
connect with TVA’s power grid. The new contract has a minimum 15-year
term, and a five-year termination notice may not be given until January
2018. The rates under this contract are intended to recover the cost
of reintegrating BVU into TVA’s power-supply plan and serving its customer
load. BVU is a 16,000-customer distributor that was previously served
by TVA from 1945 to 1997, and sales to BVU accounted for approximately 0.4
percent of TVA’s annual operating revenues in 1997. Sales to BVU were
approximately 0.4 percent of TVA’s operating revenue for the six months ended
June 30, 2008. On November 20, 2008, Monticello Electric Plant
Board’s (“MEPB”) power contract with TVA expired reducing the number of
distributor customers to 158. MEPB accounted for approximately 0.1
percent of TVA’s operating revenue.
Service
Reliability
On
January 25, 2008, TVA met a service area record winter demand of 32,027
megawatts without any customer interruptions. During the hour of peak
supply, purchased power constituted approximately 12 percent of TVA's
load.
In November 2007, TVA hosted a
formative meeting of regional transmission planning stakeholders for the Central
Region Public Power Partners, which includes Associated Electric Cooperative,
Inc., Big Rivers EC, East Kentucky Power Cooperative, and
TVA. Stakeholders participating included Tennessee Valley Public
Power Association (“TVPPA”), as well as representatives of independent power
producers, utility marketing organizations, peer transmission planners, and the
Kentucky Public Service Commission. This new planning and stakeholder
process is another step in TVA's efforts to better coordinate TVA transmission
operations with neighboring systems and to involve stakeholder groups in the
planning of TVA's bulk transmission facilities. The stakeholder
process is being voluntarily implemented by TVA as part of TVA's effort to
comply with Federal Energy Regulatory Commission (“FERC”) Order 890, which
revises the FERC pro-forma tariff applicable to jurisdictional public
utilities.
Buildings
On February 8, 2008, TVA finalized an
agreement to purchase the Office of Power Complex (the portion of TVA's
Chattanooga Office Complex in Chattanooga, Tennessee, leased from Chattanooga
Valley Associates) upon the expiration of the existing lease term on
January 1, 2011. The purchase price is $22 million, payable on
January 3, 2011. See Note 1 — Asset
Acquisitions.
Automated
Controls
On
May 21, 2008, the U.S. Government Accountability Office issued a public report
discussing the security of control systems at TVA in view of cyber security
threats. This report was discussed at a May 21, 2008, House
subcommittee hearing. The report made a number of recommendations to
TVA. TVA reviewed the report and has either remediated, or is in the
process of taking remedial action on, the issues that needed remedial
action.
Sources
of Liquidity
TVA’s current liabilities exceed
current assets because of the continued use of short-term debt to fund cash
needs as well as scheduled maturities of long-term debt. To meet short-term cash
needs and contingencies, TVA depends on various sources of liquidity. TVA’s
primary sources of liquidity are cash on hand and cash from operations, and
proceeds from the issuance of short-term and long-term debt. Other
sources of liquidity at June 30, 2008, include two $1.25 billion credit
facilities with a national bank and occasional proceeds from other financing
arrangements including call monetization transactions and sales of receivables
and loans and proceeds from borrowings under TVA’s $150 million note with
the U.S. Treasury. As a result of the restatement related to the
error in estimating unbilled revenue and the related delay in filing this
Quarterly Report, TVA was unable to provide the administrative agent under its
credit facilities with interim financial statements within the time specified in
the credit facilities. TVA has received waivers that will allow it to
borrow under the credit facilities until December 29, 2008, notwithstanding this
failure. In addition, as long as TVA files its annual report on Form
10-K for the year ended September 30, 2008, with the SEC by December 29, 2008,
which TVA anticipates doing, TVA will be able to continue borrowing under the
credit facilities once the waivers expire. TVA has never borrowed
under the credit facilities. See Note 11 – Credit Facility
Agreements.
The
majority of TVA’s balance of cash on hand is typically invested in short-term
investments. The daily balance of cash and cash equivalents
maintained is based on near-term expectations for cash expenditures and funding
needs. TVA’s cash and cash equivalents at June 30, 2008, was $300
million, an increase of $135 million from the cash balance at September 30,
2007. The increase in cash was primarily due to proceeds from the
issuance of Bonds.
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 nine months
ended June 30, 2008, and 2007, follows:
Summary
Cash Flows
For
the Nine Months Ended June 30
|
||||||||
2008
|
2007
|
|||||||
Cash
provided by (used in)
|
||||||||
Operating
activities
|
$ | 1,411 | $ | 1,201 | ||||
Investing
activities
|
(1,788 | ) | (1,335 | ) | ||||
Financing
activities
|
512 | (265 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
$ | 135 | $ | (399 | ) |
Issuance of Debt. TVA issued $41 million
of electronotes® during
the first quarter of 2008, $61 million during the second quarter of 2008 and $3
million during the third quarter of 2008. TVA also issued $1.0
billion of power bonds with an interest rate of 4.50 percent, $500 million of
power bonds with an interest rate of 4.88 percent and $500 million of power
bonds with an interest rate of 5.50 percent during the first nine months of
2008. See Note 4 for more information about TVA's debt
activities.
Credit Facilities. In the event of
shortfalls in cash resources, TVA has short-term funding available in the form
of two short-term revolving credit facilities, one of which is a $1 billion
facility that matures on November 9, 2009, and the other of which is a $1.25
billion facility that matures on May 13, 2009. The interest rate on any
borrowing under either of these facilities is variable and based on market
factors and the rating of TVA’s senior unsecured long-term non-credit enhanced
debt. TVA is required to pay an unused facility fee on the portion of the total
against which it 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 June 30, 2008. TVA anticipates
renewing each credit facility from time to time.
Call Option
Monetization. In May 2005, TVA
entered into certain swaption contracts to hedge the value of call options
contained in two of its bond issues (see Note 10, Risk Management Activities and
Derivative Transactions in Part II of the Annual Report). In February
2008, the counterparty to the 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
London Interbank Offered Rate (“LIBOR”). These payments are based on
a combined notional amount of $42 million and began on April 15,
2008.
Comparative
Cash Flow Analysis
Net cash provided by operating
activities increased $210 million from $1,201 million to $1,411 million for the
nine months ended June 30, 2007, and 2008, respectively. This increase was
primarily due to:
|
•
|
An
increase in cash from operating revenues of $777 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;
and
|
|
•
|
A
$87 million reduction in cash used by changes in working capital resulting
primarily from a $68 million smaller increase in inventories and other, a
$45 million smaller decrease in interest payable, and a $22 million
greater reduction in accounts payable and accrued liabilities, partially
offset by a $4 million smaller decrease in accounts
receivable.
|
|
These
items were partially offset by:
|
|
•
|
An
increase in cash paid for fuel and purchased power of $371 million due to
higher volume and increased market prices for purchased
power;
|
|
•
|
An
increase in cash paid for interest of $119
million;
|
|
•
|
An
increase in cash paid for refueling outage costs of $55
million;
|
|
•
|
Cash
used by deferred items of $3 million in the first nine months of 2008
compared to $43 million of cash provided by deferred items in the same
period of 2007. This change is primarily due to funds collected
in rates during the first nine months of 2007 that were used to fund
future generation. See Note 1 — Reserve for Future
Generation; and
|
|
•
|
An
increase in tax equivalent payments of $33
million.
|
Cash used in investing activities
increased $453 million from the first nine months of 2007 to the first nine
months of 2008. The increase is primarily due to:
|
•
|
An
increase in expenditures for capital projects of $401 million primarily
due to the purchase of a three-unit, 891-megawatt combined cycle,
combustion-turbine facility located in Southaven, Mississippi;
and
|
|
•
|
A
$144 million increase in expenditures primarily for the enrichment and
fabrication of nuclear fuel related to a buildup of fuel for strategic
inventory purposes.
|
These items were partially offset by
the use of $100 million in the first nine months of 2007 to acquire two
combustion turbine facilities.
Net cash provided by financing
activities was $512 million during the first nine months of 2008 as compared to
net cash used by financing activities of $265 million during the same period of
2007. The change was primarily the result of an increase in long-term
debt issues of $2,069 million as a result of the issuance of $2,105 million of
long-term debt.
|
This
increase was partially offset by:
|
|
•
|
The
net redemption of $966 million of short-term debt during the first nine
months of 2008 as compared to the net issuance of $234 million of
short-term debt during the same period of the prior year;
and
|
|
•
|
An
increase in redemptions and repurchases of long-term debt of $70 million,
with long-term debt of $539 million retired in the first nine months of
2008.
|
Cash
Requirements and Contractual Obligations
The estimated cash requirements and
contractual obligations for TVA as of June 30, 2008, are detailed in the
following table.
Commitments
and Contingencies
|
||||||||||||||||||||||||||||
Total
|
2008
(1)
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||||||||
Debt
|
$ | 23,100 | (2) | $ | 456 | $ | 2,030 | $ | – | $ | 1,000 | $ | 1,514 | $ | 18,100 | |||||||||||||
Interest
payments relating to debt
|
21,932 | 197 | 1,251 | 1,195 | 1,167 | 1,138 | 16,984 | |||||||||||||||||||||
Lease
obligations
|
||||||||||||||||||||||||||||
Capital
|
168 | 1 | 56 | 56 | 51 | 4 | – | |||||||||||||||||||||
Non-cancelable
operating
|
403 | 16 | 56 | 44 | 34 | 30 | 223 | |||||||||||||||||||||
Purchase
obligations
|
||||||||||||||||||||||||||||
Power
|
7,252 | 73 | 200 | 213 | 225 | 225 | 6,316 | |||||||||||||||||||||
Fuel
|
3,396 | 672 | 670 | 659 | 294 | 400 | 701 | |||||||||||||||||||||
Other
|
457 | 105 | 212 | 33 | 24 | 23 | 60 | |||||||||||||||||||||
Payments
on other financings
|
1,402 | 19 | 85 | 89 | 95 | 97 | 1,017 | |||||||||||||||||||||
Payment
to U.S. Treasury
|
||||||||||||||||||||||||||||
Return
of Power Facilities Appropriation
Investment
|
130 | 20 | 20 | 20 | 20 | 20 | 30 | |||||||||||||||||||||
Return
on Power Facilities Appropriation
Investment
|
292 | 19 | 22 | 23 | 23 | 22 | 183 | |||||||||||||||||||||
Retirement
plans (3)
|
44 | 44 | – | – | – | – | – | |||||||||||||||||||||
Total
|
$ | 58,576 | $ | 1,622 | $ | 4,602 | $ | 2,332 | $ | 2,933 | $ | 3,473 | $ | 43,614 |
|
Notes
|
|
(1)
|
Period
July 1 - September 30, 2008.
|
|
(2)
|
Does
not include noncash items of foreign currency valuation loss of $266
million and net discount on sale of Bonds of $199
million.
|
|
(3)
|
The
TVA Board plans to evaluate the need for future funding on an annual basis
through the ratemaking process.
|
In addition to the cash requirements
above, TVA has contractual obligations in the form of revenue discounts related
to energy prepayments. See Note 1 — Energy Prepayment
Obligations.
Energy
Prepayment Obligations
Total
|
2008
(1)
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||||||||
Energy
Prepayment Obligations
|
$ | 1,059 | $ | 26 | $ | 105 | $ | 105 | $ | 105 | $ | 105 | $ | 613 |
Note
(1) Period
July 1 - September 30, 2008.
During the first quarter of 2008, TVA
executed certain contracts related to the resumption of construction activities
at Watts Bar Unit 2. As of June 30, 2008, expenditures against these
contracts are forecasted to be approximately $1.4 billion through
2012.
Financial
Results
The following table compares operating
results and selected statistics for the three and nine months ended June 30,
2008, and 2007:
Summary
Statements of Income
Three
Months Ended
June
30
|
Nine
Months Ended
June
30
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
As
Restated
|
As
Restated
|
|||||||||||||||
Operating
revenues
|
$ | 2,552 | $ | 2,265 | $ | 7,430 | $ | 6,650 | ||||||||
Revenue
capitalized during pre-commercial plant operations
|
– | (23 | ) | – | (23 | ) | ||||||||||
Operating
expenses
|
(2,111 | ) | (1,837 | ) | (6,164 | ) | (5,497 | ) | ||||||||
Operating
income
|
441 | 405 | 1,266 | 1,130 | ||||||||||||
Other
income, net
|
7 | 16 | 8 | 51 | ||||||||||||
Unrealized
gain on derivative contracts, net
|
– | 98 | – | 129 | ||||||||||||
Interest
expense, net
|
(348 | ) | (305 | ) | (1,031 | ) | (915 | ) | ||||||||
Net
income
|
$ | 100 | $ | 214 | $ | 243 | $ | 395 | ||||||||
Sales
(millions of kWh)
|
41,927 | 42,147 | 130,485 | 126,093 | ||||||||||||
Heating
degree days (normal 222 and 3,391, respectively)
|
223 | 264 | 3,109 | 3,123 | ||||||||||||
Cooling
degree days (normal 577 and 651, respectively)
|
607 | 735 | 768 | 861 | ||||||||||||
Combined
degree days (normal 799 and 4,042, respectively)
|
830 | 999 | 3,877 | 3,984 | ||||||||||||
Net income for the third quarter of
2008 was $100 million compared to net income of $214 million for the same period
in 2007. The $114 million decrease in net income was primarily
attributable to:
•
|
A
$274 million increase in operating
expenses;
|
•
|
A
$98 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;
|
•
|
A
$43 million increase in net interest expense resulting mainly from the
change in ratemaking methodology relating to allowance for funds used
during construction (“AFUDC”); and
|
•
|
An
$9 million decrease in net other
income.
|
These items were partially offset
by:
•
|
A
$287 million increase in operating revenues; and
|
•
|
A
reduction of $23 million in revenue capitalized during pre-commercial
plant operations.
|
Net income through the first three
quarters of 2008 was $243 million compared to net income of $395 million for the
same period in 2007. The $152 million decrease in net income was
primarily attributable to:
•
|
A
$667 million increase in operating
expenses;
|
•
|
A
$129 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;
|
•
|
A
$116 million increase in net interest expense resulting mainly from the
change in ratemaking methodology relating to AFUDC;
and
|
•
|
A
$43 million decrease in net other
income.
|
These items were partially offset
by:
•
|
A
$780 million increase in operating revenues; and
|
•
|
A
reduction of $23 million in revenue capitalized during pre-commercial
plant operations.
|
Operating
Revenues. Below is a detailed table of operating revenues for
the three and nine months ended June 30, 2008, and 2007.
Operating
Revenues
Three
Months Ended
June
30
|
Nine
Months Ended
June
30
|
|||||||||||||||||||||||
2008
|
2007
|
Percent
Change
|
2008
|
2007
|
Percent
Change
|
|||||||||||||||||||
(As
Restated)
|
(As
Restated)
|
|||||||||||||||||||||||
Sales
of Electricity
|
||||||||||||||||||||||||
Municipalities
and cooperatives
|
$ | 2,125 | $ | 1,889 | 12.5 | % | $ | 6,110 | $ | 5,549 | 10.1 | % | ||||||||||||
Industries
directly served
|
361 | 304 | 18.8 | % | 1,135 | 907 | 25.1 | % | ||||||||||||||||
Federal
agencies and other
|
31 | 29 | 6.9 | % | 89 | 80 | 11.3 | % | ||||||||||||||||
Other
revenue
|
35 | 43 | (18.6 | %) | 96 | 114 | (15.8 | %) | ||||||||||||||||
Total
operating revenues
|
$ | 2,552 | $ | 2,265 | 12.7 | % | $ | 7,430 | $ | 6,650 | 11.7 | % |
Significant items contributing to the
$287 million increase in operating revenues for the third quarter of 2008 as
compared to the same period in 2007 included:
•
|
A
$236 million increase in revenue from Municipalities and cooperatives
primarily due to the FCA, which provided $151 million in additional
revenue. Fluctuations in rates related to certain types of
energy programs and credits provided $135 million in additional
revenue. Rates increased on average 7.9 percent in the third
quarter of 2008 from the third quarter of 2007 primarily due to a firm
wholesale rate increase effective April 1, 2008 of 7.0
percent. This increase was partially offset by decreased sales,
which reduced revenue by $57
million;
|
|
•
|
A
$57 million increase in revenue from Industries directly served mainly
attributable to increased sales of 13.1 percent, the FCA, and fluctuations
in rates related to certain types of energy programs and
credits. Increased sales, the FCA, and fluctuations in rates
related to certain types of energy programs and credits provided $37
million, $13 million, and $7 million, respectively, in additional revenue;
and
|
|
•
|
A
$2 million increase in revenue from Federal agencies and other due to a $4
million increase in revenue from federal agencies directly served mainly
attributable to an average increase in rates of 7.0 percent and the
FCA. Fluctuations in rates and the FCA each provided $2 million
in additional revenue. This increase was partially offset by a
decrease in off system sales of $2
million.
|
These items were partially offset by a
$8 million decrease in Other revenue primarily as a result of a decrease in
transmission revenues from wheeling activity and a decrease in revenues from
activities not directly related to TVA’s power program.
Significant items contributing to the
$780 million increase in operating revenues for the first three quarters of 2008
as compared to the same period in 2007 included:
|
•
|
A
$561 million increase in revenue from Municipalities and cooperatives
largely reflecting the FCA, which yielded $373 million in additional
revenue. Fluctuations in rates contributed to $176 million of
the increase primarily due to the base rate increase on firm wholesale
products effective during the third quarter of 2008. A slight
increase in sales provided an additional $12 million in
revenue.
|
|
•
|
A
$228 million increase in revenue from Industries directly served primarily
as a result of increased sales of 17.6 percent, the FCA, and fluctuations
in rates related to certain types of energy programs and
credits. Increased sales, the FCA, and fluctuations in rates
related to certain types of energy programs and credits yielded $153
million, $50 million, and $25 million, respectively, in additional
revenue; and
|
|
•
|
A
$9 million increase in revenue from Federal agencies and other is due to
an $11 million increase in revenue from federal agencies directly served
mainly attributable to the FCA, increased sales of 6.5 percent, and
fluctuation in rates related to certain types of energy programs and
credits which yielded $5 million, $4 million, and $2 million in revenues.
The increase in revenues was partially offset by a decrease in off system
sales of $2 million.
|
These items were partially offset by a
$18 million decrease in Other revenue largely reflecting a $4 million decrease
in transmission revenues from wheeling activity and a decrease in revenues from
activities not directly related to TVA’s power program.
A detailed table of sales of
electricity for the three and nine months ended June 30, 2008, and 2007, is
below.
Sales
of Electricity
(Millions
of kWh)
Three
Months Ended
June
30
|
Nine
Months Ended
June
30
|
|||||||||||||||||||||||
2008
|
2007
|
Percent
Change
|
2008
|
2007
|
Percent
Change
|
|||||||||||||||||||
(As
Restated)
|
(As
Restated)
|
|||||||||||||||||||||||
Sales
of electricity
|
||||||||||||||||||||||||
Municipalities
and cooperatives
|
33,088 | 34,254 | (3.4 | %) | 101,146 | 100,934 | 0.2 | % | ||||||||||||||||
Industries
directly served
|
8,352 | 7,384 | 13.1 | % | 27,830 | 23,667 | 17.6 | % | ||||||||||||||||
Federal
agencies and other
|
487 | 509 | (4.3 | %) | 1,509 | 1,492 | 1.1 | % | ||||||||||||||||
Total
sales of electricity
|
41,927 | 42,147 | (0.5 | %) | 130,485 | 126,093 | 3.5 | % |
Significant items contributing to the
220 million kilowatt-hour decrease in sales of electricity for the third quarter
of 2008 as compared to the same period in 2007 included:
|
•
|
A
1,166 million kilowatt-hour decrease in sales to Municipalities and
cooperatives. Sales to municipalities and cooperatives react
more to weather than other categories of sales, because residential demand
is more weather sensitive. For the third quarter of 2008, there
was a decrease in combined degree days of 169 days, or 16.9
percent. The unfavorable weather effects were partially offset
by the addition of Bristol Virginia Utilities (BVU) as a customer in
January 2008.
|
|
•
|
A
22 million kilowatt-hour decrease in sales to Federal agencies and
other.
|
|
o
|
This
decrease was due to a 37 million kilowatt-hour decrease in off-system
sales primarily reflecting decreased generation available for
sale.
|
|
o
|
This
item was partially offset by a 15 million kilowatt-hour increase in sales
to federal agencies directly served attributable largely to an increase in
demand by several directly served federal agencies as a result of change
in the nature and scope of their
loads.
|
|
•
|
These
decreases were partially offset by a 968 million kilowatt-hour increase in
sales to Industries directly served. Eighty-four percent of the
increase was attributable to increased demand from three of TVA’s largest
industrial customers to accommodate higher production levels at their
facilities
|
Significant items contributing to the
4,392 million kilowatt-hour increase in sales of electricity for the first three
quarters of 2008 as compared to the same period in 2007 included:
|
•
|
A
4,163 million kilowatt-hour increase in sales to Industries directly
served. Eighty-three percent of the increase was attributable
to increased demand from three of TVA’s largest industrial customers to
accommodate higher production levels at their facilities. In
addition, aggregate demand from a few other large directly served
industrial customers increased as a result of changes in product mix and
higher production levels at their
facilities.
|
|
•
|
A
212 million kilowatt-hour increase in sales to Municipalities and
cooperatives due to the addition of a customer and an extra day of sales
due to leap year. These increases were partially offset by a
decrease in combined degree days of 107 days, or 2.7
percent.
|
|
•
|
A
17 million kilowatt-hour increase in sales to Federal agencies and
other.
|
|
o
|
This
increase was due to a 82 million kilowatt-hour increase in sales to
federal agencies directly served attributable largely to an increase in
demand by several directly served federal agencies as a result of a change
in the nature and scope of their
loads.
|
|
o
|
This
item was partially offset by a 65 million kilowatt-hour decrease in
off-system sales primarily reflecting decreased generation available for
sale.
|
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. As economic
conditions have deteriorated, TVA has experienced roughly a five 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.
Operating Expenses. Operating expenses for
the three and nine months ended June 30, 2008, and 2007, consisted of the
following:
Operating
Expenses
Three
Months Ended
June
30
|
Nine
Months Ended
June
30
|
|||||||||||||||||||||||
2008
|
2007
|
Percent
Change
|
2008
|
2007
|
Percent
Change
|
|||||||||||||||||||
(As
Restated)
|
(As
Restated)
|
|||||||||||||||||||||||
Fuel
and purchased power
|
$ | 1,013 | $ | 790 | 28.2 | % | $ | 2,908 | $ | 2,370 | 22.7 | % | ||||||||||||
Operating
and maintenance
|
575 | 571 | 0.7 | % | 1,714 | 1,687 | 1.6 | % | ||||||||||||||||
Depreciation,
amortization, and accretion
|
394 | 366 | 7.7 | % | 1,176 | 1,096 | 7.3 | % | ||||||||||||||||
Tax
equivalents
|
122 | 109 | 11.9 | % | 359 | 326 | 10.1 | % | ||||||||||||||||
Loss
on asset impairment
|
7 | 1 | 600.0 | % | 7 | 18 | (61.1 | %) | ||||||||||||||||
Total
operating expenses
|
$ | 2,111 | $ | 1,837 | 14.9 | % | $ | 6,164 | $ | 5,497 | 12.1 | % |
Significant drivers contributing to the
$274 million increase in total operating expenses for the third quarter of 2008
as compared to the same period in 2007 included:
|
•
|
A
$223 million increase in Fuel and purchased power
expense.
|
|
o
|
This
increase was due to a $215 million increase in fuel expense and an $8
million increase in purchased power
expense.
|
|
–
|
The
increase in fuel expense was attributable
to:
|
|
•
|
An
increase in the aggregate fuel cost per kilowatt-hour net thermal
generation of 26.9 percent, which resulted in $149 million in additional
expense;
|
|
•
|
A
decrease in the FCA net deferral and amortization of $59 million;
and
|
|
•
|
An
increase in the net commercial generation of 1.0 percent, which resulted
in $6 million in additional
expense.
|
|
–
|
The
increase in purchased power expense was due
to:
|
|
•
|
A
decrease in the FCA net deferral and amortization for purchased power
expense of $35 million; and
|
|
•
|
An
increase in the average purchase price of 5.5 percent, which resulted in
$15 million in additional expense.
|
|
–
|
The
increase in purchased power expense was partially offset by a decrease in
volume of purchased power of 13.7 percent resulting in a $42 million
reduction in expense.
|
|
•
|
A
$28 million increase in Depreciation, amortization, and accretion
expense.
|
|
o
|
This
increase was a result of a $28 million increase in depreciation expense
due to:
|
|
–
|
An
increase in depreciation rates at several of TVA’s facilities;
and
|
|
–
|
An
increase in completed plant accounts due to net plant
additions.
|
|
–
|
This
trend did not carry into the fourth quarter due to a change in regulatory
accounting.
|
|
•
|
A
$13 million increase in Tax equivalent payments reflecting increased gross
revenues from the sale of power (excluding sales or deliveries to other
federal agencies and off-system sales with other utilities) during 2007
compared to 2006.
|
|
•
|
A
$6 million increase in Loss on asset impairment from $1 million in the
third quarter of 2007 to $7 million in the third quarter of
2008. See Note 9.
|
|
o
|
This
$7 million Loss on asset impairment in the third quarter of 2008 was
recorded as a result of partial write-downs for scrubber projects at TVA’s
Bull Run Fossil Plant (“Bull Run”) and John Sevier Fossil Plant (“John
Sevier”) related to Construction in progress
assets.
|
|
o
|
The
$1 million Loss on asset impairment for the third quarter of 2007 resulted
from write-downs of Construction in progress assets related to a
revaluation of projects due to funding
limitations.
|
|
•
|
A
$4 million increase in Operating and maintenance
expense.
|
|
o
|
This
increase was a result of:
|
|
–
|
Increased
workers’ compensation expense of $12 million primarily due to a lower
discount rate used by TVA to estimate workers’ compensation expense during
the third quarter of 2008.
|
–
|
Increased
operating and maintenance costs at nuclear plants of $10 million primarily
attributable to:
|
•
|
The
addition of Browns Ferry Unit 1 which was not in commercial operation
during the third quarter of 2007;
|
•
|
Increased
costs for labor, materials, equipment, and contracts due to various forced
maintenance outages in 2008; and
|
•
|
Timing
of midcycle and forced outages.
|
–
|
Increased
benefit expense of $2 million largely reflecting increased costs of $6
million related to Federal Insurance Contributions Act
contributions. This increase was partially offset by decreased
health care and dental costs of $4 million during the third quarter of
2008.
|
|
o
|
These
items were partially offset by:
|
–
|
Decreased
pension costs of $16 million mainly as a result of a 0.35 percent higher
discount rate used during the third quarter of 2008;
and
|
–
|
Decreased
operating and maintenance costs at coal-fired and combustion turbine
plants of $8 million primarily due to projects at Cumberland Fossil Plant
in the third quarter of 2007 that did not reoccur in the third quarter of
2008 and lower staff and contractor costs at Johnsonville Fossil Plant,
partially offset by an increase due to the expense of operating an
additional combined cycle, combustion turbine unit not operated during the
third quarter of 2007.
|
Significant drivers contributing to the
$667 million increase in total operating expenses for the first three quarters
of 2008 as compared to the same period in 2007 included:
|
•
|
A
$538 million increase in Fuel and purchased power
expense.
|
|
o
|
This
increase was due to a $226 million increase in purchased power expense and
a $312 million increase in fuel
expense.
|
|
–
|
The
increase in purchased power expense was due
to:
|
|
•
|
An
increase in the average purchase price of 11.0 percent, which resulted in
$98 million in additional expense;
|
|
•
|
An
increase in the volume of purchased power of 11.5 percent, which resulted
in $92 million in additional expense;
and
|
|
•
|
A
decrease in the FCA net deferral and amortization for purchased power
expense of $36 million.
|
–
|
The
increase in fuel expense was attributable
to:
|
|
•
|
An
increase in the aggregate fuel cost per kilowatt-hour net thermal
generation of 9.5 percent, which resulted in $165 million in additional
expense;
|
|
•
|
An
increase in the net commercial generation of 4.7 percent, which resulted
in $78 million in additional expense;
and
|
|
•
|
A
decrease in the FCA net deferral and amortization for fuel expense of $69
million.
|
|
•
|
An
$80 million increase in Depreciation, amortization, and accretion
expense.
|
|
o
|
This
increase was a result of a $79 million increase in depreciation expense
and a $1 million increase in accretion expense due
to:
|
|
–
|
An
increase in depreciation rates at several of TVA’s
facilities;
|
|
–
|
An
increase in completed plant accounts due to net plant additions;
and
|
|
–
|
Accretion
on the asset retirement obligation.
|
|
–
|
This
trend did not carry into the fourth quarter due to a change in regulatory
accounting.
|
|
•
|
A
$33 million increase in Tax equivalent payments reflecting increased gross
revenues from the sale of power (excluding sales or deliveries to other
federal agencies and off-system sales with other utilities) during 2007
compared to 2006.
|
|
•
|
A
$27 million increase in Operating and maintenance
expense.
|
|
o
|
This
increase was largely a result of:
|
–
|
Increased routine operating and maintenance costs at nuclear plants of $37
million primarily attributable to:
|
•
|
The
operation in the first three quarters of 2008 of Browns Ferry Unit 1,
which was not commercially operated during the first three quarters of
2007, and
|
•
|
Increased
costs for labor, materials, equipment, and contracts due to various forced
maintenance outages in 2008.
|
–
|
Increased workers’ compensation expense of $36 million primarily due to a
lower discount rate used by TVA to estimate workers’ compensation expense
during the first nine months of
2008.
|
–
|
Increased routine operating and maintenance cost at coal-fired and
combustion turbine plants of $12 million largely due
to:
|
|
•
|
Significant
repair work at Paradise Fossil Plant not present in 2007;
and
|
|
•
|
The
operation of two additional combustion turbine units for all three
quarters in 2008, and the operation of one additional combined cycle,
combustion turbine in the third quarter of 2008 not operated during the
third quarter of 2007.
|
|
o
|
These
items were partially offset by:
|
–
|
Decreased
pension costs of $45 million mainly as a result of a 0.35 percent higher
discount rate used during the first three quarters of 2008;
and
|
–
|
Decreased
operating and maintenance costs of $8 million related to power systems
operations due to timing and a change in the nature and scope of the
projects during the first three quarters of 2008 and lower headcount;
and
|
The increases in Fuel and purchased
power expense, Depreciation, amortization, and accretion expense, Tax equivalent
payments, and Operating and maintenance expense during the first three quarters
of 2008 were partially offset by:
|
•
|
An
$11 million decrease in Loss on asset impairment from $18 million during
the first three quarters of 2007 to $7 million for the same period in
2008. See Note 9.
|
|
o
|
The
$7 million Loss on asset impairment in the first three quarters of 2008
was recorded as a result of partial write-downs for scrubber projects at
Bull Run and John Sevier related to Construction in progress
assets.
|
|
o
|
The
$18 million Loss on asset impairment in the first three quarters of 2007
included a $17 million write-off of a scrubber project at Colbert Fossil
Plant and a $1 million write-down related to other construction projects
assets.
|
Other Income, Net. The $9
million decrease in Other income, net for the third quarter of 2008 as compared
to the same period in 2007 was largely attributable to unrealized losses on
TVA’s Supplemental Executive Retirement Plan funds and restricted investments
related to the collateral held by TVA, decreased interest income from short-term
investments, and decreases in external business for the quarter primarily due to
differences in timing and recognition of maintenance and testing
revenues.
The $43 million decrease in Other
income, net for the first three quarters of 2008 as compared to the same
period in 2007 was largely attributable to unrealized losses on TVA’s
Supplemental Executive Retirement Plan funds and restricted investments related
to the collateral held by TVA, decreased interest income from short-term
investments, and decreases in external business primarily due to differences in
timing and recognition of maintenance and testing revenues. These
items contributed to a decrease in income of $29 million, $13 million, and $4
million, respectively.
Unrealized Gain on Derivative
Contracts, Net. The decreases in
Unrealized gain on derivative contracts, net were attributable to the change in
ratemaking methodology. 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 $98 million and $129 million
as Unrealized gain on derivative contracts, net for the third quarter of 2007
and the first three quarters of 2007, respectively. See Changes in
Ratemaking.
Interest Expense. Interest
expense, outstanding debt, and interest rates for the three and nine months
ended June 30, 2008, and 2007, consisted of the following:
Interest
Expense
Three
Months Ended
June
30
|
Nine
Months Ended
June
30
|
|||||||||||||||||||||||
2008
|
2007
|
Percent
Change
|
2008
|
2007
|
Percent
Change
|
|||||||||||||||||||
(As
Restated)
|
(As
Restated)
|
|||||||||||||||||||||||
Interest
on debt and leaseback obligations
|
$ | 347 | $ | 346 | 0.3 | % | $ | 1,028 | $ | 1,045 | (1.6 | %) | ||||||||||||
Amortization
of debt discount, issue, and reacquisition
costs,
net
|
5 | 4 | 25.0 | % | 15 | 14 | 7.1 | % | ||||||||||||||||
Allowance
for funds used during construction and nuclear
fuel
expenditures
|
(4 | ) | (45 | ) | (91.1 | %) | (12 | ) | (144 | ) | (91.7 | %) | ||||||||||||
Net
interest expense
|
$ | 348 | $ | 305 | 14.1 | % | $ | 1,031 | $ | 915 | 12.7 | % | ||||||||||||
(percent)
|
(percent)
|
|||||||||||||||||||||||
2008
|
2007
|
Percent
Change
|
2008
|
2007
|
Percent
Change
|
|||||||||||||||||||
Interest
rates (average)
|
||||||||||||||||||||||||
Long-term
|
6.27 | 5.98 | 4.8 | % | 6.21 | 5.98 | 3.8 | % | ||||||||||||||||
Discount
notes
|
2.04 | 5.22 | (60.9 | %) | 3.83 | 5.21 | (26.5 | %) | ||||||||||||||||
Blended
|
6.18 | 5.89 | 4.9 | % | 6.11 | 5.90 | 3.6 | % |
Significant items contributing to the
$43 million increase in net interest expense for the third quarter of 2008 as
compared to the same period in 2007 included:
|
•
|
A
$41 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 will be recovered in current year rates as a
component of interest expense;
|
|
•
|
An
increase of $1.4 billion in the average balance of long-term debt
outstanding in the third quarter of 2008 as compared to the same period of
2007; and
|
|
•
|
An
increase in the average long-term interest rate from 5.98 percent during
the third quarter of 2007 to 6.27 percent during the same period of
2008.
|
These items were partially offset
by:
|
•
|
A
decrease in the average discount notes interest rate from 5.22 percent
during the third quarter of 2007 to 2.04 percent during the same period of
2008; and
|
|
•
|
A
decrease of $2.0 billion in the average balance of discount notes
outstanding in the third quarter of 2008 as compared to the same period of
2007.
|
Significant items contributing to the
$116 million increase in net interest expense for the first three quarters of
2008 as compared to the same period of 2007 included:
|
•
|
A
$132 million decrease in AFUDC and nuclear fuel expenditures primarily due
to the previously described change in ratemaking
methodology;
|
|
•
|
An
increase in the average long-term interest rate from 5.98 percent during
the first three quarters of 2008 to 6.21 during the same period of 2008;
and
|
|
•
|
An
increase of $554 million in the average balance of long-term outstanding
debt in the first three quarters of 2008 as compared to the same period of
2007.
|
These items were partially offset
by:
|
•
|
A
decrease in the average discount notes interest rate from 5.21 percent
during the first three quarters of 2007 to 3.83 percent during the same
period in 2008; and
|
|
•
|
A
decrease of $1.5 billion in the average balance of discount notes
outstanding in the first three quarters of 2008 as compared to the same
period of 2007.
|
TVA entered into one transaction that
could constitute an off-balance sheet arrangement. In February 1997,
TVA entered into a purchase power agreement with Choctaw Generation, Inc.
(subsequently assigned to Choctaw Generation Limited Partnership) to purchase
all the power generated from its facility located in Choctaw County,
Mississippi. The facility had a committed capacity of 440 megawatts
and the term of the agreement was 30 years. Under the accounting
guidance provided by Financial Accounting Standards Board (“FASB”)
Interpretation No. 46, “Consolidation of Variable Interest
Entities,” as amended by FASB Interpretation No. 46R (as amended, “FIN
46R”), TVA may be deemed to be the primary beneficiary under the contract;
however, TVA does not have access to the financial records of Choctaw Generation
Limited Partnership. As a result, TVA was unable to determine whether
FIN 46R would require TVA to consolidate Choctaw Generation Limited
Partnership’s balance sheet, results of operations, and cash flows for the nine
months ended June 30, 2008. Power purchases for the first nine months
of 2008 under the agreement amounted to $83 million, and the remaining financial
commitment under this agreement is $6.8 billion. TVA has no
additional financial commitments beyond the purchase power agreement with
respect to the facility.
The preparation of financial statements
requires TVA to estimate the effects of various matters that are inherently
uncertain as of the date of the financial statements. Although the
financial statements are prepared in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the amounts of revenues and expenses
reported during the reporting period. Each of these estimates varies
in regard to the level of judgment involved and its potential impact on TVA’s
financial results. Estimates are deemed critical either when a
different estimate could have reasonably been used, or where changes in the
estimate are reasonably likely to occur from period to period, and such use or
change would materially impact TVA’s financial condition, changes in financial
position, or results of operations. See Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and
Estimates in the Annual Report for a discussion of TVA’s critical
accounting policies. TVA’s critical accounting policies are also
discussed in Note 1 of the Notes to the Annual Report and in Note 1 of the Notes
to this Quarterly Report.
TVA’s power rates are not subject to
regulation through a public service commission or other similar
entity. The TVA Board is authorized by the TVA Act to set rates for
power sold to its customers. This rate-setting authority meets the
“self-regulated” provisions of Statement of Financial Accounting Standard
(“SFAS”) No. 71, “Accounting
for the Effects of Certain Types of Regulation” (“SFAS No. 71”), and TVA
meets the remaining criteria of SFAS No. 71 because (1) TVA’s self-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 self-regulated ratemaking process that would
not be recorded under generally accepted accounting principles for non-regulated
entities. Regulatory assets generally represent incurred costs that
have been deferred because such costs are likely to be recovered in customer
rates. Regulatory liabilities generally represent obligations to make
refunds to customers for previous collections for costs that are not likely to
be incurred. Management assesses whether the regulatory assets are
likely to be recovered by considering factors such as applicable regulatory
changes, potential legislation, and changes in technology. Based on
these assessments, management believes the existing regulatory assets are likely
to be recovered. This determination reflects the current regulatory,
commercial, and political environment and is subject to change in the
future. If future recovery of regulatory assets ceases to be
probable, TVA would be required to write-off these costs under the provisions of
SFAS No. 101, “Regulated
Enterprises–Accounting for the Discontinuation of Application of FASB Statement
No. 71.” Any asset write-offs would be required to be
recognized in earnings in the period in which future recoveries cease to be
probable.
TVA continues to capitalize a portion
of current interest costs associated with funds invested in most nuclear fuel
inventories, but 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 will be recovered in future periods through
depreciation expense. In addition, AFUDC continues to be a reduction
to interest expense as costs are incurred. The interest cost
associated with funds invested in construction projects that do not satisfy the
$1 billion and three-year criteria is no longer capitalized as AFUDC and will be
recovered in current year rates as a component of interest
expense. As a result of the new policy, TVA recorded a total of $12
million in AFUDC during the first nine months of 2008 compared to $144 million
for the first nine months of 2007.
The TVA Board approved, beginning in
2008, the utilization of regulatory accounting treatment for swaps and swaptions
related to call monetization transactions. This reflects that the effects of
these transactions are included in ratemaking when they actually settle. This
treatment removes the non-cash impacts to TVA’s earnings that result from
marking the value of these instruments to market each quarter. The value of the
swaps and swaptions will still be recorded on TVA’s balance sheet, and any
interest expense impacts will continue to be reflected in TVA’s income
statement. The deferred unrealized gain on the value of the swaps and swaptions
was $74 million for the third quarter of 2008, and the deferred unrealized loss
for the first nine months of 2008 was $125 million. The deferred unrealized loss
of $125 million is included as a Regulatory asset on the June 30, 2008, Balance
Sheet.
Accounting for Planned Major
Maintenance Activities. On September 8, 2006, 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.
TVA
Board
On June 24, 2008, Bishop William
Graves, a former member of the TVA Board, was sworn in for a second term on the
TVA Board. His second term will expire in 2012.
In May 2008, Michael Bemis from
Madison, Mississippi was nominated by the President of the United States to be a
member of the TVA Board. If confirmed by the U.S. Senate, his term would end in
2013. Mr. Bemis has held a number of executive positions in the
electric-utility industry, and earlier in his career he was a certified public
accountant. Also awaiting action by the U.S. Senate is the nomination
of Ms. Susan Richardson Williams, a former member of the TVA Board, who has been
re-nominated for a new term.
Departure
of Director
On May 19, 2008, Director Skila S.
Harris concluded her service on the TVA Board.
Bylaw
Changes
On May 19, 2008, the TVA Board modified
section 2.1 of the TVA Bylaws to reflect the fact that the functions of the
Governance Committee were being performed by another committee, the Audit,
Governance, and Ethics Committee, and that the Governance Committee ceased to
exist.
On April 3, 2008, the TVA Board
approved the following changes to TVA’s Bylaws:
Section 1.6 was added to provide that
when TVA Board vacancies result in there being less than a quorum (less than
five members), the TVA Board may continue to exercise such powers as are
necessary to assure continuity of operations along the lines established by the
TVA Board when it had a quorum, but may not direct TVA into new areas of
activity, embark on new programs, or change TVA’s existing
direction.
Section 1.9 (formerly Section 1.8) was
replaced with a more specific statement that the principal responsibilities of
the TVA Board are to establish “the broad strategies, goals, objectives,
long-range plans, and policies” of TVA in a manner consistent with the missions
set forth in the TVA Act and to ensure “that those are achieved by the Chief
Executive Officer.”
Section 1.10 was added to specify that
the authorities of the Chairman of the TVA Board are those necessary or
appropriate to carry out the responsibilities vested in the Chairman under the
Bylaws.
Section 3.2 was revised to specify that
the principal responsibilities of the Chief Executive Officer (“CEO”) are to
achieve the broad strategies, goals, objectives, long-range plans, and policies
established by the Board, as well as to ensure the continuity and reliability of
TVA’s operations.
Section 3.3 was added to provide that
the CEO is TVA’s primary spokesperson in communications with external
individuals and entities.
Section 3.5 was added to specify that
the CEO would identify to the TVA Board which TVA executive officer, or
succession of executive officers, would serve in the CEO’s stead in the event
the CEO became unable to carry out his or her duties and responsibilities for
any reason. Such executive officer would serve as CEO until such time
as the Board decided otherwise.
Article IV was added to specify that
the TVA Board Practices system is the means used by the TVA Board to (i) define
TVA Board and TVA Board Committee processes beyond what is specified in the
Bylaws, (ii) interpret Bylaw provisions, and (iii) provide guidance or
delegate additional authorities to the CEO.
Section 6.3 (formerly Section 5.3) was
modified to recognize that (i) the TVA Board has already approved and provided
to Congress (as information) a conflict-of-interest policy applicable to TVA
Board members, the CEO, and all TVA employees and (ii) any subsequent changes to
that policy adopted by the TVA Board shall also be provided to
Congress.
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.
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 further
congressional action has taken place on this bill since the date of its
introduction.
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, Lieberman and Warner re-introduced 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 action is expected for
this year.
As is the case across the utility
industry and in other sectors, TVA’s activities are subject to certain federal,
state, and local environmental statutes and regulations. Major areas of
regulation affecting TVA’s activities include air quality control, water quality
control, and management and disposal of solid and hazardous wastes. These
activities are described in further detail under Item 1, Business — Environmental Matters and Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Environmental
Matters in the Annual Report.
As discussed in the Annual
Report, 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 Air Act (“CAA”), the Environmental Protection
Agency (“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 remanded the
Phase II Rule, holding, among other things, that costs cannot be compared to
benefits in picking the best technology available 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 Clean
Water Act 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 commensurate with but do not exceed the benefits to
be derived. The case will be argued in the upcoming term of the U.S. Supreme
Court. TVA is unable to predict the outcome.
In May 2007, the TVA Board approved a
Strategic Plan. Due to the increasing level and complexity of
environmental requirements and expectations, TVA has completed a new,
high-level, environmental policy to align with and execute the direction in the
2007 TVA Strategic Plan. TVA’s 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, still
affordable energy, sustainable economic development, and proactive environmental
stewardship. The 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.
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 staff recommendations 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. Under the
Renewable and Clean Energy Assessment, TVA will strive to have at least 50
percent of TVA’s generation portfolio be from low-carbon and zero-carbon sources
by 2020.
Section 303d of the Clean Water Act
requires states to develop and report to EPA on a two-year cycle a list of
waters that are "water quality limited" or are expected to not meet water
quality standards in the next two years and need additional pollution controls.
The Tennessee Department of Environment and Conservation (“TDEC”) has placed a
portion of Barkley Reservoir downstream of TVA's Cumberland Fossil Plant on its
2008 list of impaired streams (“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 Corps and TDEC
to minimize the impacts to TVA's generating plants and improve the conditions
observed in the river in 2007. TVA began operating and is continuing
to install additional temporary cooling towers at the Cumberland Fossil Plant to
reduce summer derates and to improve both instream river temperatures and
dissolved oxygen levels.
On February 8, 2008, the U.S. Court of
Appeals for the D.C. Circuit (“D.C. Circuit”) vacated the EPA’s delisting rule
to remove coal- and oil-fired Electric Generating Units (“EGU”) from the list of
stationary sources whose hazardous air pollutant emissions are subject to the
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 delist EGUs in accordance with the D.C. Circuit’s remand instructions, EPA
will have to regulate utilities under section 112(d), setting MACT standards for
emissions regulated under Section 112 based on command and control type
requirements for EGU's. The cost to comply with the MACT standards is not known,
but is expected to be higher than the cost 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 by more
than 35 percent, primarily as a result of the co-benefits received from the
controls TVA is installing to reduce sulfur dioxide (“SO2”) and
nitrogen oxides (“NOx”).
On March 12, 2008, EPA issued final
rules adopting new, more stringent, National Ambient Air Quality Standards 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” with the new
standards. In 2010, EPA will finalize attainment designations using
2006-2008 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 through 2030) depending on the
severity of the ozone problem.
TVA contributes to ambient ozone levels
primarily as a result of NOx emissions
from fossil fuel-fired power plants. As a result of its emission reduction
program, TVA’s summertime (when ozone levels increase) NOx emissions
have declined by 81 percent since 1995.
Based on
2005 through 2007 monitoring data, virtually all counties in the Tennessee
Valley area with an ozone monitor or that are in a Metropolitan Statistical Area
with a monitor will likely be designated as non-attainment for the new standard.
This includes most of the urban areas in Tennessee including
Nashville.
This
action is likely to create pressure on TVA to reduce NOx emissions
sooner than planned, especially at Gallatin and/or Johnsonville Fossil Plants
due to their proximity to Nashville. In anticipation of the need for
future reductions, TVA is using more stringent planning targets for emission
budgets in its Clean Air Plan.
In a
similar action, 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 fine
particles (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 and the Tennessee counties
of Humphreys, Montgomery, and Stewart as well as the counties in the Knoxville
area. TVA will continue efforts to reduce emissions and engage regional and
national stakeholders to further understand and improve regional air quality. In
2006 EPA revised its national ambient air quality standards for PM2.5 by
lowering the 24-hour
standard from 65 micrograms per cubic meter (μg/m3) to 35 μg/m3. EPA
plans to make final designations in December 2008 using air quality monitoring
data from 2005, 2006, and 2007.
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 also impacts transportation
planning since loss of federal highway funds can occur unless projects
demonstrate “conformity” with the new standards.
In March
2007, TDEC, responding to information and pressure from the EPA, 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 issuing 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 other rivers in
the Tennessee Valley (Buffalo, Emory, Hiwassee, and Holston) as well as the
Loosahatchie, Wolf, and Mississippi rivers in the State of Tennessee that are
not in the Tennessee Valley.
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 of Tennessee 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 Valley (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.
On July 11, 2008, the 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 EPA to promulgate a new rule that is
consistent with the D.C. Circuit’s opinion. EPA promulgated CAIR in 2005 and the
rule required significant additional utility reductions of emissions of SO2 and
NOx in
the eastern half of the United States including all of TVA’s operating
area. The requirements of CAIR formed the basis for TVA (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, other regulatory drivers under the CAA such as ozone and fine
particulate non-attainment areas in the various states, the Regional Haze Rule
and provisions in the CAA (Section 126 Petitions) covering interstate transport
of pollutants will continue to drive installation of additional controls on
electric generating units across the industry, including at TVA. TVA will
continue its previously announced emissions reduction program, including
completion of scrubbers for SO2 control at
Bull Run, Kingston, and John Sevier Fossil Plants and installation of SCRs at
John Sevier. TVA will also begin operation of the 21 SCR's and other
NOx
controls year-round beginning in October 2008 (except for required maintenance
outages), and remains committed to the goal in the Environmental Policy to
control over 80 percent of fossil fuel generation in the next 10
years.
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
carbon dioxide (“CO2
”).
As reported in the 2007 Annual Report,
EPA and a working group of potentially responsible parties (the "PRP Work
Group") have provided documentation showing that TVA sent a limited amount of
electrical equipment containing PCBs to the Ward Transformer site in North
Carolina in 1974. The PRP Work Group is cleaning up on-site
contamination in accordance with an agreement with EPA. The estimated cost of
the on-site removal has increased significanlty from the $20 million estimate
reported in the Annual Report. 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 $6.13 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. This defense is highly fact specific
and not likely to be accepted by the PRP Work Group or EPA.
TVA is subject to various legal
proceedings and claims that have arisen in the ordinary course of business.
These proceedings and claims include the matters discussed below. In accordance
with SFAS No. 5, “Accounting
for Contingencies,” TVA had accrued approximately $61 million with
respect to the proceedings described below as of June 30, 2008, as well as
approximately $5 million with respect to other proceedings that have arisen in
the normal course of TVA’s business. No assurance can be given that TVA will not
be subject to significant additional claims and liabilities. If actual
liabilities significantly exceed the amounts accrued, TVA’s results of
operations, liquidity, and financial condition could be materially adversely
affected.
Global Warming Cases,
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 has set a hearing on the plan for 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 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 the Clean Air Interstate
Rule 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.
New
Executive Vice President of Power Systems Operations Group Named
On July 23, 2008, TVA announced the
appointment of Robin (Rob) Edwin Manning as Executive Vice President of TVA’s
Power System Operations (“PSO”) organization, effective August 18,
2008. PSO is the TVA organization responsible for designing,
building, operating, and maintaining TVA’s electric power transmission
network. Mr. Manning has over 30 years of experience in the electric
industry and most recently was the vice president of Field Operations for Duke
Energy’s Power Delivery business, where he was responsible for all transmission
and distribution system activities in Duke’s Carolinas Region.
Executive
of New Power Supply & Fuels Organization Named
On July 22, 2008, TVA announced the
appointment of Van M. Wardlaw as the Executive Vice President of the newly
organized Power Supply & Fuels organization, which combines TVA’s Commercial
Operations & Fuels (“CO&F”) and System Planning
organizations. Prior to his appointment, Mr. Wardlaw was Senior Vice
President of CO&F.
New
Senior Vice President of Office of Environment & Research Named
On July 28, 2008, TVA announced the
appointment of Anda A. Ray as Senior Vice President of TVA's Office of
Environment & Research ("OE&R"), effective August 4,
2008. Prior to her appointment, Ms. Ray was Vice President of TVA's
Environmental Stewardship & Policy organization. The position of
Senior Vice President OE&R had previously been held by Bridgette K. Ellis
who is retiring from TVA.
New
Chief Risk Officer Named
On August 11, 2008, TVA announced that
Chris S. Mitchell, TVA’s Vice President of Risk Management and Chief Risk
Officer, would be retiring from TVA later this year and that Kimberly S. Greene,
TVA’s Chief Financial Officer and Executive Vice President, Financial Services,
would be taking on the title and responsibility of Chief Risk Officer effective
September 1, 2008.
New
Senior Vice President of Nuclear Operations
On August 13, 2008, TVA announced the
appointment of Donald Jernigan as Senior Vice President of Nuclear
Operations. Mr. Jernigan has 25 years experience in the commercial
nuclear power industry following his service in the U.S. Navy's nuclear power
program. Prior to his appointment, Mr. Jernigan was site Vice
President of Dominion's Surry Nuclear Power Station.
New
Senior Vice President of Fossil Operations
In October 2008, TVA announced the
appointment of John McCormick, Jr. as Senior Vice President of Fossil
Operations. He has over 25 years experience in the electric utility
industry.
There are no material changes related
to market risk from the market risks disclosed under Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Activities in
the Annual Report other than the item noted below.
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. Investment managers for TVA’s
pension and NDT funds have broad, diversified holdings, and held minimal amounts
of Lehman securities.
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
TVA’s disclosure controls and procedures as of June 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, as a result of a material weakness
identified (described below), TVA’s disclosure controls and procedures were not
effective as of June 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. To assess the financial statement impact of this material
weakness, TVA performed additional analyses, interim supplemental procedures,
and monitoring activities subsequent to quarter end. Also, subsequent
to June 30, 2008 and prior to filing this Quarterly Report, the material
weakness (described below) was remediated. As a result of these
additional activities, the president and chief executive officer, the chief
financial officer, and the vice president and controller have determined that
there is reasonable assurance that the financial statements included in this
Quarterly Report fairly present, in all material respects, TVA’s financial
condition, results of operations, and cash flows as of, and for, the periods
presented.
Subsequent to June 30, 2008, TVA
management identified a material weakness in internal controls related to TVA’s
unbilled revenue calculation. 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.
TVA has used a new process for estimating unbilled revenue for the periods
presented in this Quarterly 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.
TVA
management believes that a control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company can be
detected.
TVA’s controls and procedures are
designed to provide reasonable, but not absolute, assurance that the objectives
will be met. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, 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.
During
the most recent fiscal quarter ended June 30, 2008 there were no changes in
TVA’s internal control over financial reporting that materially affected, or are
reasonably likely to materially affect TVA’s internal control over financial
reporting.
See Note 10 in this Quarterly Report
for a discussion of legal proceedings affecting TVA.
The discussion below supplements the
disclosure contained in Item 1A, Risk Factors in the Annual Report. The
factors described in Item 1A, Risk Factors in the Annual Report, together
with the risk factors discussed below and the other information contained in the
Quarterly Report, could materially affect TVA’s business, financial condition,
and operating results and should be carefully considered. Further,
the risks described in this Quarterly Report and in the Annual Report are not
the only risks facing TVA. Additional risks and uncertainties not
currently known to TVA management or that TVA management currently deems to be
immaterial also may materially adversely affect TVA’s business, financial
condition, and operating results.
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•
|
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.
• TVA
could become subject to Renewable Energy Portfolio Standards.
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 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 Part I, Item 2, Management’s Discussion and Analysis
of Financial Condition and Results of Operations— Environmental
Matters.
• 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.
None.
None.
None.
None
Exhibit
No.
|
Description
|
|
3.1
|
TVA’s
Bylaws adopted by the Board on May 18, 2006, as amended on April 3, 2008,
and May 19, 2008
|
|
10.1
*
|
Second
Amendment Dated as of May 9, 2008, to $1,250,000,000 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
|
|
10.2
|
TVA
Discount Notes Selling Group Agreement
|
|
10.3
*
|
Joint
Ownership Agreement Dated as of April 30, 2008, Between Seven States Power
Corporation and TVA
|
|
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
|
*
|
The
schedule has been omitted from Exhibit 10.1, and the exhibits have been
omitted from Exhibit 10.3. TVA hereby undertakes to furnish
supplementally copies of the omitted schedule or exhibits upon request by
the Securities and Exchange
Commission.
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
Date: December 15 , 2008
TENNESSEE VALLEY
AUTHORITY
(Registrant)
By:
|
/s/ Tom
D. Kilgore
|
Tom D. Kilgore
|
|
President and Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
By:
|
/s/ Kimberly
S. Greene
|
Kimberly S. Greene
|
|
Chief Financial Officer and Executive
|
|
Vice President, Financial Services
|
|
(Principal Financial
Officer)
|
Exhibit
No.
|
Description
|
|
3.1
|
TVA’s
Bylaws adopted by the Board on May 18, 2006, as amended on April 3, 2008,
and May 19, 2008
|
|
10.1
*
|
Second
Amendment Dated as of May 9, 2008, to $1,250,000,000 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
|
|
10.2
|
TVA
Discount Notes Selling Group Agreement
|
|
10.3
*
|
Joint
Ownership Agreement Dated as of April 30, 2008, Between Seven States Power
Corporation and TVA
|
|
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
|
*
|
The
schedule has been omitted from Exhibit 10.1, and the exhibits have been
omitted from Exhibit 10.3. TVA hereby undertakes to furnish
supplementally copies of the omitted schedule or exhibits upon request by
the Securities and Exchange
Commission.
|
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