Tennessee Valley Authority - Quarter Report: 2008 March (Form 10-Q)
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 March 31, 2008
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ____ to ____
Commission
file number 000-52313
TENNESSEE VALLEY AUTHORITY
(Exact
name of registrant as specified in its charter)
A
corporate agency of the United States created by an act of
Congress
(State
or other jurisdiction of incorporation or organization)
|
62-0474417
(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 [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ X ]
(Do
not check if a smaller reporting company)
|
Smaller
reporting
company [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
[ ] No [ X ]
Page
1
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;
|
•
|
Estimates
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;
|
•
|
Estimates
regarding the reduction of bonds, notes, and other evidences of
indebtedness, lease/leaseback commitments, and power prepayment
obligations;
|
•
|
Estimates
of amounts to be reclassified from other comprehensive income to earnings
over the next year;
|
•
|
TVA’s
plans to continue using short-term debt to meet current obligations;
and
|
•
|
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 and nuclear matters including laws, regulations, and
administrative orders restricting carbon emissions and preferring certain
fuels over others,
|
–
|
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;
|
•
|
Availability
of fuel supplies;
|
•
|
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;
|
•
|
Significant
changes in demand for electricity;
|
•
|
Legal
and administrative proceedings;
|
•
|
Weather
conditions, including drought;
|
•
|
Failure
of transmission facilities;
|
•
|
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, 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, or its
customers;
|
•
|
Rising
pension costs and health care
expenses;
|
•
|
Increases
in TVA’s financial liability for decommissioning its nuclear facilities
and retiring other assets;
|
•
|
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 the market for TVA securities;
and
|
•
|
Unforeseeable
events.
|
Additionally, other risks that may
cause actual results to differ from the predicted results are set forth in Part
I, Item 2, Management’s Discussion and Analysis of Financial Condition and
Results of Operations in this Quarterly Report, in Item 1A, Risk Factors and
Item 7, Management’s Discussion and Analysis of Financial Conditions and Results
of Operations in TVA’s Annual Report on Form 10-K, as amended, for the fiscal
year ended September 30, 2007 (“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
|
Six
months ended
|
|||||||||||||||
March
31
|
March
31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Operating
revenues
|
||||||||||||||||
Sales
of electricity
|
||||||||||||||||
Municipalities
and cooperatives
|
$ | 2,011 | $ | 1,922 | $ | 3,916 | $ | 3,664 | ||||||||
Industries
directly served
|
382 | 301 | 774 | 603 | ||||||||||||
Federal
agencies and other
|
33 | 26 | 58 | 51 | ||||||||||||
Other
revenue
|
28 | 31 | 56 | 66 | ||||||||||||
Total
operating revenues
|
2,454 | 2,280 | 4,804 | 4,384 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Fuel
and purchased power
|
971 | 824 | 1,906 | 1,563 | ||||||||||||
Operating
and maintenance
|
570 | 576 | 1,162 | 1,139 | ||||||||||||
Depreciation,
amortization, and accretion
|
392 | 382 | 782 | 738 | ||||||||||||
Tax
equivalents
|
117 | 109 | 238 | 217 | ||||||||||||
Loss
on asset impairment
|
– | – | – | 22 | ||||||||||||
Total
operating expenses
|
2,050 | 1,891 | 4,088 | 3,679 | ||||||||||||
Operating
income
|
404 | 389 | 716 | 705 | ||||||||||||
Other
(expense) income, net (Note 1)
|
(3 | ) | 15 | (1 | ) | 27 | ||||||||||
Unrealized
gain on derivative contracts, net (Note 1)
|
– | 16 | – | 31 | ||||||||||||
Interest
expense
|
||||||||||||||||
Interest
on debt
|
328 | 339 | 657 | 675 | ||||||||||||
Amortization
of debt discount, issue,
and
reacquisition costs, net
|
5 | 5 | 10 | 10 | ||||||||||||
Allowance
for funds used during construction
and
nuclear fuel expenditures
|
(5 | ) | (50 | ) | (8 | ) | (99 | ) | ||||||||
Net
interest expense
|
328 | 294 | 659 | 586 | ||||||||||||
Net
income
|
$ | 73 | $ | 126 | $ | 56 | $ | 177 | ||||||||
The
accompanying Notes are an integral part of these financial
statements.
BALANCE
SHEETS
(in
millions)
|
||||||||
March
31
|
September
30
|
|||||||
2008
|
2007
|
|||||||
ASSETS
|
||||||||
Current
assets
|
(Unaudited)
|
|||||||
Cash
and cash equivalents
|
$ | 760 | $ | 165 | ||||
Restricted
cash and investments (Note 1)
|
90 | 150 | ||||||
Accounts
receivable, net (Note 1)
|
1,293 | 1,453 | ||||||
Inventories
and other
|
771 | 663 | ||||||
Total
current assets
|
2,914 | 2,431 | ||||||
Property,
plant, and equipment
|
||||||||
Completed
plant
|
39,152 | 38,811 | ||||||
Less
accumulated depreciation
|
(16,441 | ) | (15,937 | ) | ||||
Net
completed plant
|
22,711 | 22,874 | ||||||
Construction
in progress
|
1,513 | 1,282 | ||||||
Nuclear
fuel and capital leases
|
722 | 672 | ||||||
Total
property, plant, and equipment, net
|
24,946 | 24,828 | ||||||
Investment
funds
|
1,054 | 1,169 | ||||||
Regulatory and other long-term
assets (Note 1)
|
||||||||
Deferred
nuclear generating units
|
2,934 | 3,130 | ||||||
Other
regulatory assets
|
2,108 | 1,969 | ||||||
Subtotal
|
5,042 | 5,099 | ||||||
Other
long-term assets
|
817 | 375 | ||||||
Total
regulatory and other long-term assets
|
5,859 | 5,474 | ||||||
Total
assets
|
$ | 34,773 | $ | 33,902 | ||||
LIABILITIES
AND PROPRIETARY CAPITAL
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 902 | $ | 1,199 | ||||
Collateral
funds held
|
115 | 157 | ||||||
Accrued
interest
|
427 | 406 | ||||||
Current
portion of lease/leaseback obligations
|
41 | 43 | ||||||
Current
portion of energy prepayment obligations
|
106 | 106 | ||||||
Short-term
debt, net
|
568 | 1,422 | ||||||
Current
maturities of long-term debt (Note 3)
|
2,631 | 90 | ||||||
Total
current liabilities
|
4,790 | 3,423 | ||||||
Other
liabilities
|
||||||||
Other
liabilities
|
2,241 | 2,067 | ||||||
Regulatory
liabilities (Note 1)
|
648 | 83 | ||||||
Asset
retirement obligations
|
2,249 | 2,189 | ||||||
Lease/leaseback
obligations
|
1,000 | 1,029 | ||||||
Energy
prepayment obligations (Note 1)
|
980 | 1,032 | ||||||
Total
other liabilities
|
7,118 | 6,400 | ||||||
Long-term debt, net
(Note 3)
|
19,897 | 21,099 | ||||||
Total
liabilities
|
31,805 | 30,922 | ||||||
Commitments and
contingencies
|
||||||||
Proprietary
capital
|
||||||||
Appropriation
investment
|
4,733 | 4,743 | ||||||
Retained
earnings
|
1,989 | 1,939 | ||||||
Accumulated
other comprehensive loss (Note 2)
|
(67 | ) | (19 | ) | ||||
Accumulated
net expense of stewardship programs
|
(3,687 | ) | (3,683 | ) | ||||
Total
proprietary capital
|
2,968 | 2,980 | ||||||
Total
liabilities and proprietary capital
|
$ | 34,773 | $ | 33,902 | ||||
The
accompanying Notes are an integral part of these financial
statements.
STATEMENTS
OF CASH FLOWS (UNAUDITED)
For the
six months ended March 31
(in
millions)
2008
|
2007
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 56 | $ | 177 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||
Depreciation,
amortization, and accretion
|
792 | 748 | ||||||
Nuclear
refueling outage amortization
|
50 | 39 | ||||||
Loss
on asset impairment
|
– | 22 | ||||||
Amortization
of nuclear fuel
|
88 | 59 | ||||||
Non-cash
retirement benefit expense
|
71 | 101 | ||||||
Net
unrealized gain on derivative contracts
|
– | (31 | ) | |||||
Prepayment
credits applied to revenue
|
(53 | ) | (53 | ) | ||||
Fuel
cost adjustment deferral
|
(2 | ) | (36 | ) | ||||
Other,
net
|
23 | (5 | ) | |||||
Changes
in current assets and liabilities
|
||||||||
Accounts
receivable, net
|
347 | 210 | ||||||
Inventories
and other
|
(55 | ) | (110 | ) | ||||
Accounts
payable and accrued liabilities
|
(329 | ) | (97 | ) | ||||
Accrued
interest
|
21 | 9 | ||||||
Pension
contributions
|
(37 | ) | (37 | ) | ||||
Refueling
outage costs
|
(85 | ) | (77 | ) | ||||
Other,
net
|
(6 | ) | 26 | |||||
Net
cash provided by operating activities
|
881 | 945 | ||||||
Cash
flows from investing activities
|
||||||||
Construction
expenditures
|
(656 | ) | (712 | ) | ||||
Combustion
turbine asset acquisitions
|
– | (98 | ) | |||||
Nuclear
fuel expenditures
|
(147 | ) | (83 | ) | ||||
Change
in restricted cash and investments
|
43 | 4 | ||||||
Purchases
of investments, net
|
2 | 2 | ||||||
Loans
and other receivables
|
||||||||
Advances
|
(4 | ) | (4 | ) | ||||
Repayments
|
6 | 8 | ||||||
Proceeds
from sale of receivables/loans
|
– | 2 | ||||||
Other,
net
|
– | 1 | ||||||
Net
cash used in investing activities
|
(756 | ) | (880 | ) | ||||
Cash
flows from financing activities
|
||||||||
Long-term
debt
|
||||||||
Issues
|
1,602 | 28 | ||||||
Redemptions
and repurchases
|
(214 | ) | (464 | ) | ||||
Short-term
debt, net
|
(854 | ) | 262 | |||||
Payments
on lease/leaseback financing
|
(24 | ) | (18 | ) | ||||
Payments
on equipment financing
|
(7 | ) | (7 | ) | ||||
Financing
costs, net
|
(13 | ) | – | |||||
Payments
to U.S. Treasury
|
(20 | ) | (20 | ) | ||||
Net
cash provided by (used in) financing activities
|
470 | (219 | ) | |||||
Net
change in cash and cash equivalents
|
595 | (154 | ) | |||||
Cash
and cash equivalents at beginning of period
|
165 | 536 | ||||||
Cash
and cash equivalents at end of period
|
$ | 760 | $ | 382 | ||||
The
accompanying Notes are an integral part of these financial
statements.
STATEMENTS
OF CHANGES IN PROPRIETARY CAPITAL
(in
millions)
For the
three months ended March 31, 2008 and 2007
Appropriation
Investment
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated
Net Expense of Stewardship Programs
|
Total
|
Comprehensive
Income (Loss)
|
|||||||||||||||||||
Balance at December 31, 2006
(Unaudited)
|
$ | 4,758 | $ | 1,613 | $ | 28 | $ | (3,674 | ) | $ | 2,725 | |||||||||||||
Net
income (loss)
|
– | 128 | – | (2 | ) | 126 | $ | 126 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (5 | ) | – | – | (5 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss (Note 2)
|
– | – | (22 | ) | – | (22 | ) | (22 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(5 | ) | – | – | – | (5 | ) | – | ||||||||||||||||
Balance at March 31, 2007
(Unaudited)
|
$ | 4,753 | $ | 1,736 | $ | 6 | $ | (3,676 | ) | $ | 2,819 | $ | 104 | |||||||||||
Balance at December 31, 2007
(Unaudited)
|
$ | 4,738 | $ | 1,919 | $ | (23 | ) | $ | (3,685 | ) | $ | 2,949 | ||||||||||||
Net
income (loss)
|
– | 75 | – | (2 | ) | 73 | $ | 73 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (5 | ) | – | – | (5 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss (Note 2)
|
– | – | (44 | ) | – | (44 | ) | (44 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(5 | ) | – | – | – | (5 | ) | – | ||||||||||||||||
Balance at March 31, 2008
(Unaudited)
|
$ | 4,733 | $ | 1,989 | $ | (67 | ) | $ | (3,687 | ) | $ | 2,968 | $ | 29 |
For the
six months ended March 31, 2008 and 2007
Appropriation
Investment
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated
Net Expense
of
Stewardship Programs
|
Total
|
Comprehensive
Income (Loss)
|
|||||||||||||||||||
Balance
at September 30, 2006
|
$ | 4,763 | $ | 1,565 | $ | 43 | $ | (3,672 | ) | $ | 2,699 | |||||||||||||
Net
income (loss)
|
– | 181 | – | (4 | ) | 177 | $ | 177 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (10 | ) | – | – | (10 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss (Note 2)
|
– | – | (37 | ) | – | (37 | ) | (37 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(10 | ) | – | – | – | (10 | ) | – | ||||||||||||||||
Balance at March 31, 2007
(Unaudited)
|
$ | 4,753 | $ | 1,736 | $ | 6 | $ | (3,676 | ) | $ | 2,819 | $ | 140 | |||||||||||
Balance
at September 30, 2007
|
$ | 4,743 | $ | 1,939 | $ | (19 | ) | $ | (3,683 | ) | $ | 2,980 | ||||||||||||
Net
income (loss)
|
– | 60 | – | (4 | ) | 56 | $ | 56 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (10 | ) | – | – | (10 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss (Note 2)
|
– | – | (48 | ) | – | (48 | ) | (48 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(10 | ) | – | – | – | (10 | ) | – | ||||||||||||||||
Balance at March 31, 2008
(Unaudited)
|
$ | 4,733 | $ | 1,989 | $ | (67 | ) | $ | (3,687 | ) | $ | 2,968 | $ | 8 |
The
accompanying Notes are an integral part of these financial
statements.
(Dollars
in millions except where noted)
1.
Summary of Significant Accounting Policies
General
The Tennessee Valley Authority (“TVA”)
is a wholly-owned corporate agency and instrumentality of the United
States. TVA was created by the U.S. Congress in 1933 by virtue of the
Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C.
§§ 831-831ee (as amended, the “TVA Act”). TVA was created to
improve navigation on the Tennessee River, reduce flood damage, provide
agricultural and industrial development, and provide electric power to the
Tennessee Valley region. TVA manages the Tennessee River and its
tributaries for multiple river-system purposes, such as navigation; flood damage
reduction; power generation; environmental stewardship; shoreline use; and water
supply for power plant operations, consumer use, recreation, and
industry.
Substantially all TVA revenues and
assets are attributable to the power program. TVA provides power in
most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern
Kentucky, and in portions of northern Georgia, western North Carolina, and
southwestern Virginia to a population of approximately 8.8 million
people. The power program has historically been separate and distinct
from the stewardship programs. The power program is required to be
self-supporting from power revenues and proceeds from power financings, such as
proceeds from the issuance of bonds, notes, and other evidences of indebtedness
(“Bonds”). Although TVA does not currently receive congressional
appropriations, it is required to make annual payments to the U.S. Treasury in
repayment of, and as a return on, the government’s appropriation investment in
TVA power facilities (the “Power Facility Appropriation
Investment”). 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 Standard (“SFAS”) No. 131,
“Disclosures About Segments of
an Enterprise and Related Information.” Accordingly,
stewardship assets and properties are included as part of the power program,
TVA’s only operating segment.
Power
rates are established by the TVA board of directors (“TVA Board”) as authorized
by the TVA Act. The TVA Act requires TVA to charge rates for power
that will produce gross revenues sufficient to provide funds for operation,
maintenance, and administration of its power system; payments to states and
counties in lieu of taxes (“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. Rates set by the TVA Board are not subject to the prior
approval of or subsequent review by any state or federal regulatory
body.
Basis
of Presentation
TVA prepares its interim financial
statements in conformity with generally accepted accounting principles (“GAAP”)
accepted in the United States for interim financial
information. Accordingly, TVA’s interim financial statements do not
include all of the information and notes required by GAAP for complete financial
statements. Because the accompanying interim financial statements do not include
all of the information and footnotes required by GAAP for complete financial
statements, they should be read in conjunction with the audited financial
statements for the year ended September 30, 2007, and the notes thereto, which
are contained in TVA’s Annual Report on Form 10-K, as amended, for the fiscal
year ended September 30, 2007 (“Annual Report”).
TVA recorded a $3 million expense
during the first quarter of 2008 related to litigation pending during the fourth
quarter of 2007. This charge is included in Operating and maintenance
expense on the Statement of Income for the six months ended March 31,
2008.
After the fourth quarter of 2006
closed, TVA reviewed projects related to construction work in progress and
identified errors in classification related primarily to 2006 and prior
periods. Based on the results of the review, TVA recorded project
write-downs of $5 million in the first quarter of 2007. Additionally,
TVA recorded a $4 million expense during the first quarter of 2007 related to
litigation pending during the fourth quarter of 2006. These charges
are included in Operating and maintenance expense on the Statement of Income for
the three months ended December 31, 2006.
TVA adjusted the estimated fuel cost
adjustment (“FCA”) made at September 30, 2007, to the actual amount of the
September 30, 2007, FCA during the first quarter of 2008. The result
of this reconciliation between the estimated amount and the actual amount was an
additional charge of $14 million which is included in Fuel
and purchased power expense on the March 31, 2008, Statement of
Income.
The amounts included in the
accompanying interim financial statements are unaudited but, in the opinion of
TVA management, reflect all adjustments, which consist solely of normal
recurring adjustments, necessary to fairly present TVA’s financial position and
results of operations for the interim periods. Due to seasonal
weather variations and the timing of planned maintenance and refueling outages
of electric generating units, the results of operations for interim periods are
not necessarily indicative of amounts expected for the entire year.
Use
of Estimates
In preparing financial statements that
conform to GAAP, management must make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the amounts of
revenues and expenses reflected during the reporting period. Actual results
could differ from those estimates.
Fiscal
Year
TVA’s fiscal year ends September
30. Unless otherwise indicated, years (2008, 2007, etc.) refer to
TVA’s fiscal years.
Reclassifications
Reclassifications have been made to the
2007 financial statements to conform to the 2008
presentation. Certain activities associated with the operation of
service organizations which provide maintenance and testing services and which
are not directly associated with the revenue derived from power operations were
previously reported as Other revenue. Losses associated with these
activities of approximately $3 million have been reclassified as Other (expense)
income, net for the three and six months ended March 31, 2007. In
addition, asset impairment losses of $22 million for the six months ended March
31, 2007, have been reclassified from Operating and maintenance to Loss on asset
impairment to more accurately reflect the nature of the expenses. See
Note 7.
These reclassifications have no effect
on previously reported net income and net cash flows.
Restricted
Cash and Investments
As of March 31, 2008, and September 30,
2007, TVA had $90 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
March 31
2008
|
At
September 30
2007
|
|||||||
Power
receivables billed
|
$ | 246 | $ | 316 | ||||
Power
receivables unbilled
|
840 | 1,113 | ||||||
Fuel
cost adjustment-current
|
184 | – | ||||||
Total
power receivables
|
1,270 | 1,429 | ||||||
Other
receivables
|
25 | 26 | ||||||
Allowance
for uncollectible accounts
|
(2 | ) | (2 | ) | ||||
Net
accounts receivable
|
$ | 1,293 | $ | 1,453 |
Beginning with the first quarter of
2008, TVA reclassified a portion of the unbilled FCA from a long-term regulatory
asset to accounts receivable to more accurately reflect the nature and timing of
the collection of these costs from its customers. At September 30,
2007, the FCA was $197 million, of which $187 million was to be collected from
customers within one year. The remaining $10 million was to be
collected after the one-year period. See Cost-Based Regulation in this
Note 1.
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 March 31, 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
March 31
2008
|
At
September 30
2007
|
|||||||
|
||||||||
Regulatory Assets: | ||||||||
Unfunded
benefit costs
|
$ | 929 | $ | 973 | ||||
Nuclear
decommissioning costs
|
577 | 419 | ||||||
Debt
reacquisition costs
|
200 | 210 | ||||||
Deferred
losses relating to TVA’s financial trading program
|
– | 8 | ||||||
Deferred
outage costs
|
131 | 96 | ||||||
Deferred
capital lease asset costs
|
57 | 66 | ||||||
Unrealized
losses on certain swap and swaption contracts
|
199 | – | ||||||
Fuel
cost adjustments
|
15 | 197 | ||||||
Subtotal
|
2,108 | 1,969 | ||||||
Deferred
nuclear generating units
|
2,934 | 3,130 | ||||||
Subtotal
|
5,042 | 5,099 | ||||||
Fuel
cost adjustment receivable
|
184 | – | ||||||
Total
|
$ | 5,226 | $ | 5,099 | ||||
Regulatory
Liabilities:
|
||||||||
Unrealized
gains on coal purchase contracts
|
$ | 540 | $ | 16 | ||||
Capital
lease liabilities
|
58 | 67 | ||||||
Deferred
gains relating to TVA’s financial trading program
|
50 | – | ||||||
Subtotal
|
648 | 83 | ||||||
Reserve
for future generation
|
72 | 74 | ||||||
Total
|
$ | 720 | $ | 157 |
During
the first quarter of 2008, TVA reclassified a portion of its FCA regulatory
asset from a long-term to a short-term asset. The reclassification
was due to TVA’s experience that a substantial portion of deferred FCA costs is
billed within a 12-month period. This reclassification more closely
reflects the cash flows related to collection of the FCA. The current
portion of the FCA of $184 million is included in Accounts receivable at March
31, 2008. The remaining FCA balance of $15 million continues to be
reported as a Regulatory asset.
In
the first quarter of 2008, TVA began using regulatory accounting treatment to
defer the unrealized mark-to-market gains and losses on certain swap and
swaption contracts to reflect that the gain or loss is included in the
ratemaking formula when these transactions actually settle. The value
of the swap and swaptions is still recorded on TVA’s balance sheet with realized
gains or losses on these contracts recorded in TVA's income
statement. The deferred unrealized loss on the value of the swaps and
swaptions was $199 million for the first two quarters of 2008 and is included as
a Regulatory asset on the March 31, 2008, Balance Sheet. See Swaps and Swaptions in this
Note 1.
TVA
established a reserve for future generation funded by power customers which is
also classified as a regulatory liability. Because of the nature of
the reserve, it is considered as an offset to Property, plant, and equipment on
the March 31, 2008, and September 30, 2007, 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 six months
ended March 31, 2007, amounted to $13 million and $21 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 March 31, 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 $72
million at March 31, 2008, and $74 million at September 30, 2007. TVA
recognized revenue of $1 million during both the first and second quarters of
2008 consistent with the manner in which the related assets are being
depreciated.
Energy
Prepayment Obligations
Prior to
2005, TVA entered into sales agreements with 36 customers for 54.5 discounted
energy units totaling $54.5 million. Total credits applied to power
billings on a cumulative basis from these arrangements through March 31, 2008,
exceeded $28.6 million. Of this amount, over $1 million was
recognized as revenue for each of the six month periods ended March 31, 2008,
and 2007.
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 March 31, 2008, exceeded
$440 million. Of this amount, $25 million was recognized as
revenue for each of the six month periods ended March 31, 2008, and
2007. These amounts were based on the ratio of kilowatt-hours of
electricity delivered to the total kilowatt-hours under contract.
At March 31, 2008, and September 30,
2007, obligations for these energy prepayments were $1,086 million and $1,138
million, respectively. These amounts are included in Energy
prepayment obligations and Current portion of energy prepayment obligations on
the March 31, 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 second quarter of 2008, TVA’s total asset retirement obligation (“ARO”)
increased $30 million due to accretion expense. The nuclear accretion
expense of $23 million was deferred and charged to a regulatory asset in
accordance with SFAS No. 71. The remaining
accretion expense of $7 million, related to coal-fired and gas/oil combustion
turbine plants, asbestos, and polychlorinated biphenyls (“PCBs”), was expensed
during the second quarter of 2008. During the second quarter of 2007,
TVA’s total ARO increased $105 million. The increase was comprised of $83
million in new AROs plus $22 million in ARO expense (accretion of the
liability).
During
the first six months of 2008, TVA’s total ARO increased $60 million due to
accretion expense, $46 million related to nuclear ARO accretion and $14 million
related to non-nuclear ARO accretion. For the first six months of
2007, TVA’s total ARO increased $127 million. The increase was comprised of $83
million in new AROs plus $44 million in ARO expense (accretion of the
liability).
Reconciliation
of Asset Retirement Obligation Liability
Three
Months Ended
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Balance
at beginning of period
|
$ | 2,219 | $ | 2,007 | $ | 2,189 | $ | 1,985 | ||||||||
Changes
in nuclear estimates to future cash flows
|
– | 82 | – | 82 | ||||||||||||
Non-nuclear
additional obligations
|
– | 1 | – | 1 | ||||||||||||
– | 83 | – | 83 | |||||||||||||
Add: ARO
(accretion) expense
|
||||||||||||||||
Nuclear
accretion (recorded as a regulatory asset)
|
23 | 15 | 46 | 30 | ||||||||||||
Non-nuclear
accretion (charged to expense)
|
7 | 7 | 14 | 14 | ||||||||||||
30 | 22 | 60 | 44 | |||||||||||||
Balance
at end of period
|
$ | 2,249 | $ | 2,112 | $ | 2,249 | $ | 2,112 |
Other
(Expense) Income, Net
Other
(expense) income, net is comprised of the following:
Other
(Expense) Income, Net
Three
Months Ended
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Interest
income
|
$ | 5 | $ | 9 | $ | 10 | $ | 20 | ||||||||
External
services
|
3 | – | 3 | 3 | ||||||||||||
Unrealized
(losses) gains on investments
|
(11 | ) | – | (23 | ) | 1 | ||||||||||
Claims
settlement
|
– | – | 8 | – | ||||||||||||
Miscellaneous
|
– | 6 | 1 | 3 | ||||||||||||
Total
other (expense) income, net
|
$ | (3 | ) | $ | 15 | $ | (1 | ) | $ | 27 |
Allowance
for Funds Used During Construction
TVA
capitalizes interest as an allowance for funds used during construction
("AFUDC"), based on the average interest rate of TVA’s outstanding
debt. The allowance is applicable to construction in progress related
to certain projects and certain nuclear fuel inventories. TVA will
continue to capitalize a portion of current interest costs associated with funds
invested in most nuclear fuel inventories, but interest on funds invested in
construction projects will be capitalized beginning in 2008 only if (1) the
expected total cost of a project is $1 billion or more and (2) the
estimated construction period is at least three years in duration. The adoption
of this new criteria has greatly reduced the number of qualifying projects,
which was approximately 800 at September 30, 2007. During the first six
months of 2008, only one project — Watts Bar Nuclear Plant Unit 2 — met the new
AFUDC criteria. The project base for the year ending September 30,
2007, averaged approximately $2.7 billion. By contrast, the project
base for the six months ending March 31, 2008, averaged approximately $26
million.
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 in order to better match the income
statement recognition of gain and loss with the economic reality of when these
transactions actually settle. This treatment removes the non-cash impacts to
TVA’s earnings that result from marking the value of these instruments to market
each quarter. The value of the swaps and swaptions will still be
recorded on TVA’s balance sheet, and any interest expense impacts will continue
to be reflected in TVA’s income statement. The deferred unrealized
loss on the value of the swaps and swaptions was $100 million and $199 million
for the second quarter and first six months of 2008,
respectively. The deferred loss of $199 million is included as a
Regulatory asset on the March 31, 2008, Balance Sheet.
Impact
of New Accounting Standards and Interpretations
Accounting for Defined
Benefit Pension and Other Postretirement Plans. On September
30, 2007, TVA adopted the provisions contained within SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158
requires employers to fully recognize within their financial statements the
obligations associated with single-employer defined benefit pension, retiree
healthcare, and other postretirement plans. Specifically, SFAS No.
158 requires an employer to recognize in its statement of financial position an
asset for a plan’s overfunded status or a liability for a plan’s underfunded
status; measure a plan’s assets and its obligations that determine its funded
status as of the end of the employer’s fiscal year (with limited exceptions);
and recognize changes in the funded status of a defined benefit postretirement
plan in the year in which the changes occur. Such changes are to be
reported within comprehensive income of a business entity (except that regulated
entities may report such changes as regulatory assets and/or liabilities in
accordance with the provisions of SFAS No. 71), and within changes in net assets
of a not-for-profit organization.
TVA’s 2007 adoption of SFAS No. 158
resulted in the recognition of the following amounts on its Balance Sheet at
September 30, 2007: additional regulatory assets of $475 million (including the
reclassification of $246 million in unamortized prior service cost previously
classified as intangible assets) resulting in post-SFAS No. 158 benefit
regulatory assets of $973 million; and additional pension and postretirement
obligations of $330 million and $143 million, and $2 million classified as
accumulated other comprehensive gain, resulting in post-SFAS No. 158 benefit
obligations of $1,128 million. The recognition of such amounts
increased total assets and liabilities by $475 million at September 30,
2007.
Fair Value
Measurements. In September 2006, the Financial Accounting
Standards Board (“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. The standard also responds to investors’ requests for
expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. SFAS No. 157 applies
whenever other standards require (or permit) assets or liabilities to be
measured at fair value but does not expand the use of fair value in any new
circumstances. SFAS No. 157 establishes a fair value hierarchy that
prioritizes the information used to develop measurement
assumptions. 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, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, "Effective Date of FASB Statement
No. 157” 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 defers 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 is currently evaluating the
requirements of SFAS No. 157 and has not yet determined the impact of its
implementation, which may or may not be material to TVA’s results of operations
or financial position.
Fair Value
Option. In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement No.
115” (“SFAS No. 159”). SFAS No. 159 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 elects to apply the provisions of SFAS No. 157. At this time, TVA is
evaluating the requirements of SFAS No. 159 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” (“FIN No. 39-1”), which addresses certain
modifications to FASB Interpretation No. 39, “Offsetting of Amounts Related to
Certain Contracts.” FIN No. 39-1 replaces the terms “conditional
contracts” and “exchange contracts” with the term “derivative instruments” as
defined in SFAS No. 133. FIN No. 39-1 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 FIN No. 39-1 is effective for fiscal years beginning after November 15, 2007,
with early application permitted. At this time, TVA is evaluating the
requirements of FIN No. 39-1 and has not yet determined the potential impact of
its implementation, which may or may not be material to TVA’s financial
position.
Derivative Instruments and
Hedging Activities. In March 2008, FASB issued SFAS 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. TVA currently
includes many of the disclosures now required by SFAS No. 161 but does not plan
to early adopt the requirements of the new standard. The effective
date of adoption for TVA is the second quarter of 2009.
2. Accumulated
Other Comprehensive Income (Loss)
SFAS No. 130, “Reporting Comprehensive
Income,” requires the disclosure of other comprehensive income to reflect
changes in capital that result from transactions and economic events from
non-owner sources. The decrease in other comprehensive income
for the three months and six months ended March 31, 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
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Accumulated
other comprehensive (loss) income at beginning of period
|
$ | (23 | ) | $ | 28 | $ | (19 | ) | $ | 43 | ||||||
Changes
in fair value:
|
||||||||||||||||
Foreign
currency swaps
|
(44 | ) | (30 | ) | (48 | ) | (46 | ) | ||||||||
Inflation
swap
|
– | 8 | – | 9 | ||||||||||||
Accumulated
other comprehensive (loss) income at end of period
|
$ | (67 | ) | $ | 6 | $ | (67 | ) | $ | 6 | ||||||
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 $37 million for
the first two quarters of 2008 and an increase to earnings of $57 million
for the first two quarters of 2007.
|
3.
Debt Securities
Debt
Outstanding
The TVA Act authorizes TVA to issue
Bonds in an amount not to exceed $30 billion at any time. Debt outstanding at
March 31, 2008, and September 30, 2007, including translation losses of $262
million and $299 million, respectively, related to Bonds denominated in foreign
currencies, consisted of the following:
Debt
Outstanding
|
||||||||
At
March 31
2008
|
At
September 30
2007
|
|||||||
Short-term
debt
|
||||||||
Discount
notes (net of discount)
|
$ | 568 | $ | 1,422 | ||||
Current
maturities of long-term debt
|
2,631 | 90 | ||||||
Total
short-term debt, net
|
3,199 | 1,512 | ||||||
Long-term
debt
|
||||||||
Long-term
|
20,098 | 21,288 | ||||||
Unamortized
discount
|
(201 | ) | (189 | ) | ||||
Total
long-term debt, net
|
19,897 | 21,099 | ||||||
Total
outstanding debt
|
$ | 23,096 | $ | 22,611 |
Debt
Securities Activity
The table below summarizes TVA’s
long-term Bond activity for the period from October 1, 2007, to March 31,
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 | |||||||||
2008
Series A
|
January
2008
|
500 | 4.88 | % |
January
2048
|
|||||
2008
Series B
|
March
2008
|
1,000 | 4.50 | % |
April
2018
|
|||||
Total
|
$ | 1,602 | ||||||||
Redemptions/Maturities:
|
||||||||||
electronotes®
|
First
Quarter 2008
|
$ | – |
NA
|
||||||
Second
Quarter 2008
|
197 | 5.11 | % | |||||||
1998
Series D
|
March
2008
|
7 | 5.49 | % | ||||||
1999
Series A
|
March
2008
|
10 | 5.62 | % | ||||||
Total
|
$ | 214 | ||||||||
Note:
electronotes®
interest rate is a weighted average
rate.
|
As of March 31, 2008, the 2008 reset
rates on the 1998 Series D Putable Automatic Rate Reset Securities (“1998 Series
D Bonds”) and the 1999 Series A Putable Automatic Rate Reset Securities (“1999
Series A Bonds”) were expected to be lower than the current rates on those
issues. The entire principal amount of $459 million of the 1998
Series D Bonds outstanding as of March 31, 2008, has been classified as current
maturities of long-term debt. It was determined in April 2008, that
TVA would redeem only $102 million of the entire principal amount of $400
million of 1999 Series A Bonds. TVA classified the $102 million
amount as current maturities of long-term debt and the remaining $298 million
continues to be classified as long-term debt on TVA’s March 31, 2008, Balance
Sheet.
4.
Risk Management Activities and Derivative Transactions
TVA is exposed to various market
risks. These market risks include risks related to commodity prices,
investment prices, interest rates, currency exchange rates, inflation, and
counterparty credit risk. To help manage certain of these risks, TVA
has entered into various derivative transactions, principally commodity option
contracts, forward contracts, swaps, swaptions, futures, and options on
futures. It is TVA’s policy to enter into derivative transactions
solely for hedging purposes and not for speculative purposes.
TVA has recorded the following amounts
for its derivative instruments:
Mark-to-Market
Values of Derivative Instruments
|
||||||||
At
March 31
2008
|
At
September 30
2007
|
|||||||
Interest
rate swaps:
|
||||||||
$476
million notional
|
$ | (194 | ) | $ | (115 | ) | ||
$28
million notional
|
(5 | ) | (3 | ) | ||||
$14
million notional
|
(3 | ) | (1 | ) | ||||
Currency
swaps:
|
||||||||
Sterling
|
35 | 63 | ||||||
Sterling
|
113 | 148 | ||||||
Sterling
|
47 | 69 | ||||||
Swaption
- $1 billion notional
|
(383 | ) | (269 | ) | ||||
Coal
contracts with volume options
|
540 | 16 | ||||||
Futures
and options on futures:
|
||||||||
Margin
Cash Account*
|
27 | 18 | ||||||
Unrealized
gains/(losses)
|
50 | (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 March 31, 2008, TVA had derivative positions outstanding
under the program equivalent to about 3,506 natural gas contracts, made up of
2,207 futures contracts, 594 swaps contracts, and 705 options
contracts. See Derivative Positions Outstanding table
below. The derivative positions outstanding under the program had an
approximate net market value of $269 million at March 31, 2008. See
Financial Trading Program Activity table below.
For the
three months ended March 31, 2008, TVA recognized realized gains of $1 million,
which were recorded as a decrease to purchased power expense. For the
six months ended March 31, 2008, TVA recognized realized losses of $5 million,
which were recorded as an increase to purchased power
expense. Unrealized gains at March 31, 2008, were $50 million,
representing an increase of $53 million for the quarter, which TVA deferred 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 March 31, 2007, TVA’s derivative
positions outstanding under the program had an approximate net market value of
$33 million. See Financial Trading Program Activity table
below. For the three and six months ended March 31, 2007, TVA
recognized realized losses of about $3 million and $6 million, respectively,
which were recorded as increases to purchased power
expense. Unrealized gains at March 31, 2007, were $2 million,
representing an increase of $10 million for the quarter, which TVA deferred as a
regulatory liability in accordance with the FCA rate mechanism.
Derivative
Positions Outstanding
At
March 31
|
|||||||||||||||||||
2008
|
2007
|
||||||||||||||||||
Number
of Contracts
|
Notional
Amount
per
Contract
(in
mmBtu)
|
Total
Notional Amount
(in
mmBtu)
|
Number
of Contracts
|
Notional
Amount
per
Contract
(in
mmBtu)
|
Total
Notional Amount
(in
mmBtu)
|
||||||||||||||
Natural
gas futures
|
2,207 | 10,000 | 22,070,000 | 409 | 10,000 | 4,090,000 | |||||||||||||
Natural
gas swaps
|
|||||||||||||||||||
Bilateral
swaps (daily)
|
214 | 2,500 | 535,000 | – | – | – | |||||||||||||
Bilateral
swaps (daily)
|
305 | 5,000 | 1,525,000 | – | – | – | |||||||||||||
Bilateral
swaps (daily)
|
38 | 10,000 | 380,000 | – | – | – | |||||||||||||
Bilateral
swaps (daily)
|
30 | 30,000 | 900,000 | – | – | – | |||||||||||||
Bilateral
swaps (monthly)
|
7 | 100,000 | 700,000 | – | – | – | |||||||||||||
Subtotal
|
594 | 4,040,000 | – | – | |||||||||||||||
Natural
gas options
|
|||||||||||||||||||
Bilateral
options
|
95 | 10,000 | 950,000 | – | – | – | |||||||||||||
Exchange
traded options
|
610 | 10,000 | 6,100,000 | – | – | – | |||||||||||||
Subtotal
|
705 | 10,000 | 7,050,000 | – | – | – | |||||||||||||
Total
|
3,506 | 33,160,000 | 409 | 4,090,000 |
Financial
Trading Program Activity
For
the Six Months Ended March 31
|
||||||||||||||
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
|
22,620,000 | 188 | 6,580,000 | 49 | ||||||||||
Settled
|
(16,780,000 | ) | (135 | ) | (6,780,000 | ) | (49 | ) | ||||||
Realized
(losses)
|
– | (5 | ) | – | (4 | ) | ||||||||
Net
positions-long
|
22,070,000 | 179 | 4,090,000 | 31 | ||||||||||
Natural
gas swaps contracts
|
||||||||||||||
Financial
positions, beginning of period, net
|
1,970,000 | 12 | 1,822,500 | 11 | ||||||||||
Fixed
portion
|
7,580,000 | 65 | 387,500 | 3 | ||||||||||
Floating
portion - realized
|
(5,510,000 | ) | (39 | ) | (2,210,000 | ) | (12 | ) | ||||||
Realized
gains/(losses)
|
– | 1 | – | (2 | ) | |||||||||
Net
positions-long
|
4,040,000 | 39 | – | – | ||||||||||
Natural
gas options contracts
|
||||||||||||||
Financial
positions, beginning of period, net
|
5,600,000 | 1 | – | – | ||||||||||
Calls
purchased
|
3,300,000 | 2 | – | – | ||||||||||
Puts
sold
|
1,150,000 | (1 | ) | – | – | |||||||||
Positions
closed or expired
|
(3,000,000 | ) | (1 | ) | – | – | ||||||||
Net
positions-long
|
7,050,000 | 1 | – | – | ||||||||||
Holding
(losses)/gains
|
||||||||||||||
Unrealized
(loss) at beginning of period, net
|
– | (8 | ) | – | (6 | ) | ||||||||
Unrealized
gains for the period
|
– | 58 | – | 8 | ||||||||||
Unrealized
gains at end of period, net
|
– | 50 | – | 2 | ||||||||||
Financial
positions at end of period, net
|
33,160,000 | $ | 269 | 4,090,000 | $ | 33 |
5. 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, an unfunded postretirement medical plan
that provides for non-vested contributions toward the cost of certain retirees’
medical coverage, and other postemployment benefits such as workers’
compensation.
The following table provides the
components of net periodic benefit cost for the plans.
TVA
Benefit Plans
Pension
Benefits
|
Other
Benefits
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||||||||||||||||
Three
Months Ended
March
31
|
Three
Months Ended
March
31
|
Six
Months Ended
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||||||||||||||||
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||||
Service
cost
|
$ | 27 | $ | 30 | $ | 2 | $ | 2 | $ | 55 | $ | 61 | $ | 3 | $ | 3 | ||||||||||||||||
Interest
cost
|
130 | 123 | 7 | 6 | 261 | 247 | 14 | 12 | ||||||||||||||||||||||||
Expected
return on plan assets
|
(152 | ) | (143 | ) | – | – | (304 | ) | (286 | ) | – | – | ||||||||||||||||||||
Amortization
of prior service cost
|
10 | 9 | 1 | 1 | 19 | 18 | 2 | 2 | ||||||||||||||||||||||||
Recognized
net actuarial loss
|
11 | 22 | 1 | 2 | 21 | 42 | 3 | 4 | ||||||||||||||||||||||||
Net
periodic benefit cost
|
$ | 26 | $ | 41 | $ | 11 | $ | 11 | $ | 52 | $ | 82 | $ | 22 | $ | 21 | ||||||||||||||||
The TVA Board approved $75 million in
pension contributions for 2008 with scheduled contributions of $37 million and
$38 million in March and September, respectively. In addition, TVA is
planning to make a $6 million contribution to the SERP in September
2008. During the six months ended March 31, 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 $11 million
during the six months ended March 31, 2008, to fund other benefits
costs.
6.
Workers’ Compensation
TVA provides workers’ compensation
benefits in accordance with the requirements of the Federal Employers
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. TVA recognized an additional $23 million
in workers’ compensation expense during the second quarter of 2008 and will make
any necessary revisions to expense in future periods based on material changes
that occur related to the rate of interest used by TVA to value such
benefits.
7.
Asset Impairment
During the first quarter of 2007, TVA
recognized a total of $22 million in asset impairment losses related to its
Property, plant, and equipment. The $22 million Loss on asset impairment
included a $17 million write-off of a scrubber project at TVA’s Colbert Fossil
Plant (“Colbert”), and write-downs of $5 million related to other Construction
in progress assets related to new pollution-control and other technologies that
had not been proven effective and a re-valuation of other projects due to
funding limitations.
8.
Legal Proceedings
TVA
is subject to various legal proceedings and claims that have arisen in the
ordinary course of business. These proceedings and claims include the matters
discussed below. In accordance with SFAS No. 5, “Accounting for
Contingencies,” TVA had accrued approximately $27 million with respect to
the proceedings described below as of March 31, 2008, as well as approximately
$4 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.
Case Involving Alleged
Violations of the New Source Review and New Source Performance Standard
Regulations at Colbert Fossil Plant. The National Parks
Conservation Association, Inc. (“NPCA”), and Sierra Club, Inc. (“Sierra Club”),
filed suit on February 13, 2001, in the United States District Court for the
Northern District of Alabama, alleging that TVA violated the Clean Air Act
(“CAA”) and various Nonattainment New Source Review (“NNSR”) implementing
regulations at Colbert, a coal-fired electric generating facility located in
Tuscumbia, Alabama. The plaintiffs allege that TVA made major
modifications to Colbert Unit 5 without obtaining a preconstruction permit and
without complying with NNSR and New Source Performance Standard (“NSPS”)
emission limits. The plaintiffs seek injunctive relief and civil
penalties. The district court held that sovereign immunity precluded
the plaintiffs from recovering civil penalties against TVA and also dismissed
the lawsuit on statute of limitations grounds, and the United States Court of
Appeals for the Eleventh Circuit (“Eleventh Circuit”) affirmed. In
January 2008, the plaintiffs filed a petition, asking the Supreme Court to
review the Eleventh Circuit’s dismissal of the case.
Case Involving Alleged
Violations of the New Source Review Regulations at Bull Run Fossil
Plant. The NPCA and the Sierra Club filed suit 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. The district court dismissed the lawsuit on statute of
limitations grounds. The plaintiffs appealed to the United States
Court of Appeals for the Sixth Circuit (“Sixth Circuit”), and the Sixth Circuit
reversed the lower court. The district court has set the case for
trial on September 2, 2008. TVA is already installing or has
installed the control equipment that the plaintiffs seek to require TVA to
install in this case, and it is unlikely that an adverse decision will result in
substantial additional costs to TVA at Bull Run. An adverse decision,
however, might influence similar litigation, if filed, in the future, and it is
uncertain whether TVA would bear significant increased costs.
Case Involving Opacity at
Colbert. On September 16, 2002, the Sierra Club and the
Alabama Environmental Council filed suit in the United States District Court for
the Northern District of Alabama alleging that TVA violated CAA opacity limits
applicable to Colbert between July 1, 1997, and June 30, 2002. The
plaintiffs seek a court order that could require TVA to incur substantial
additional costs for environmental controls and pay civil penalties of up to
approximately $250 million. After the district court dismissed the
complaint (finding that the challenged emissions were within Alabama’s two
percent de minimis rule, which provided a safe harbor if nonexempt opacity
monitor readings over 20 percent did not occur more than two percent of the time
each quarter), the plaintiffs appealed the district court’s decision to the
Eleventh Circuit. On November 22, 2005, the Eleventh Circuit affirmed
the district court’s dismissal of the civil penalty demands, held that the
Alabama de minimis rule was not applicable because Alabama had not yet obtained
Environmental Protection Agency (“EPA”) approval of that rule, and remanded the
case to the district court. On August 27, 2007, 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, and the district court has decided to
conduct a hearing on the matter. EPA is considering Alabama’s de
minimis rule, and, if it approves the rule, the lawsuit will become
moot.
In
addition to Colbert, TVA has another coal-fired power plant in Alabama, Widows
Creek Fossil Plant (“Widows Creek”), which has a winter net dependable
generating capacity of 1,628 megawatts. Since the operation of Widows
Creek must meet the same opacity requirements as Colbert, this plant will likely
be affected by the decision in this case. The proposed Alabama de
minimis rule would help reduce or eliminate the chances of an adverse effect on
Widows Creek from the district court decision.
Global Warming Cases,
Southern District of New York. On July 21, 2004, two lawsuits
were filed against TVA and certain other utilities in the United States District
Court for the Southern District of New York alleging that global warming is a
public nuisance and that carbon dioxide (“CO2”)
emissions from fossil-fuel electric generating facilities should be ordered
abated because they contribute to causing the nuisance. The first
case was filed by various states (California, Connecticut, Iowa, New Jersey, New
York, Rhode Island, Vermont, and Wisconsin) and the City of New York against TVA
and other power companies. The second case, which alleges both public
and private nuisance, was filed against the same defendants by Open Space
Institute, Inc., Open Space Conservancy, Inc., and the Audubon Society of New
Hampshire. The plaintiffs do not seek monetary damages but rather 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. Both lawsuits were dismissed and are currently on
appeal to the United States Court of Appeals for the Second
Circuit.
Global Warming 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. The district court
dismissed the case, and the plaintiffs have appealed to the United States Court
of Appeals for the Fifth Circuit.
Case Brought by North
Carolina Alleging Public Nuisance. On January 30, 2006, North
Carolina filed suit against TVA in the United States District Court for the
Western District of North Carolina alleging that TVA’s operation of its
coal-fired power plants in Tennessee, Alabama, and Kentucky constitute public
nuisances. North Carolina is asking the district court to impose caps
on emissions 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 district court has set a trial date
of July 14, 2008. TVA appealed the district court’s failure to
dismiss this case to the full United States Court of Appeals for the Fourth
Circuit (“Fourth Circuit”). The full Fourth Circuit denied TVA’s
appeal, and TVA is considering whether to request that the Supreme Court hear
the appeal.
East Kentucky Power
Cooperative Transmission Case. In April 2003, Warren Rural
Electric Cooperative Corporation (“Warren”) notified TVA that it was terminating
its TVA power contract. Warren then entered into an arrangement with
East Kentucky Power Cooperative, Inc. (“East Kentucky”) under which Warren would
become a member of East Kentucky, and East Kentucky would supply power to Warren
after its power contract with TVA expires in 2009. East Kentucky
asked TVA to provide transmission service to East Kentucky for its service to
Warren. TVA denied the request on the basis that, under the
anti-cherrypicking provision, it was not required to provide the requested
transmission service. East Kentucky then asked to interconnect its
transmission system with the TVA transmission system in three places that are
currently delivery points through which TVA supplies power to
Warren. TVA did not agree, and East Kentucky asked the Federal Energy
Regulatory Commission (“FERC”) to order TVA to provide the
interconnections. In January 2006, FERC issued a final order
directing TVA to interconnect its transmission facilities with East Kentucky’s
system at three locations on the TVA transmission system. On August
11, 2006, TVA filed an appeal in the United States Court of Appeals for the
District of Columbia Circuit (the “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. On December
12, 2007, FERC terminated the proceeding but did not vacate its previous
orders. 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. On April 19, 2007, AREVA filed suit in the
United States District Court for the Eastern District of Tennessee seeking $25.8
million and alleging that the contract required TVA to purchase certain amounts
of fuel and/or to pay a cancellation fee. On June 15, 2007, AREVA
raised its claim for damages to $47.9 million. Trial on the question
of liability is scheduled to begin on September 29, 2008. A second
trial on the question of damages will be held later, if necessary.
Notification of Potential
Liability for Ward Transformer Site. EPA and a working group
of potentially responsible parties (“PRPs”) have provided documentation showing
that TVA sent electrical equipment containing PCBs to the Ward Transformer site
in Raleigh, North Carolina. Under the Comprehensive Environmental
Response, Compensation, and Liability Act (“CERCLA”), any entity which arranges
for disposal of a CERCLA hazardous substance at a site may bear liability for
the cost of cleaning up the site. The working group is cleaning up
on-site contamination in accordance with an agreement with EPA and plans to sue
non-participating PRPs for contribution. The estimated cost of the
cleanup is $20 million. In addition, EPA likely has incurred several
million dollars in response costs, and the working group has reimbursed EPA
approximately $725,000 of those costs. EPA has also proposed a
cleanup plan for off-site contamination. The present worth cost
estimate for performing the proposed plan is about $5 million, which would be
shared by the participants. In addition, there may be natural
resource damages liability related to this site, but TVA is not aware of any
estimated amount for any such damages.
Completion of Browns Ferry
Unit 1, Team Incentive Fee Pool Claims. Under the
contracts for the restart of TVA’s Browns Ferry Unit 1, TVA and the engineering
and construction contractors, Bechtel Power Corporation and Stone & Webster
Construction, Inc., respectively, are to share in a team incentive fee pool
funded from cost savings 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.
Currently, TVA has calculated each contractor’s share at $12,371,405, for
a total payout under both contracts of $24,742,810. The parties have
submitted this matter to nonbinding mediation which is scheduled for May
2008. It is reasonably possible that TVA could incur some potential
liability in excess of the amount previously calculated by TVA, but TVA is
unable to estimate any such amount at this time.
Notice of Violation at
Widows Creek Unit 7. On July 16, 2007, TVA received a Notice
of Violation (“NOV”) from EPA as a result of TVA’s failure to properly maintain
ductwork at Widows Creek Unit 7. From 2002 to 2005, the unit’s ducts
allowed sulfur dioxide (“SO2”) and
nitrogen oxides (“NOx”) to
escape into the air. TVA repaired the ductwork in 2005, and the
problem has been resolved. TVA is reviewing the NOV. While
the NOV does not set out an administrative penalty, it is likely that TVA will
face a monetary sanction through giving up emission allowances, paying an
administrative penalty, or both. TVA 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 for which it may be liable in connection with the NOV from
EPA.
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 Clean Air Act 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 New Source Review enforcement
initiative. TVA plans to respond to this request.
Significant Litigation to
Which TVA Is Not a Party, United
States v. Duke Energy. On April 2, 2007, the Supreme Court
issued an opinion in the case of United States v. Duke Energy,
vacating the ruling of the Fourth Circuit in favor of Duke Energy and
against EPA in EPA’s NSR enforcement case against Duke Energy. The
NSR regulations apply primarily to the construction of new plants but can apply
to existing plants if a maintenance project (1) is “non-routine” and (2)
increases emissions. The Supreme Court held that the test for
emission increases under the NSR program does not have to be the same as the
test under the NSPS program. In light of the decision, it appears
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 on this issue, holding that “routine” must take into account what is
routine in the industry and not just what is routine at a particular plant or
unit as EPA has argued. EPA did not appeal this ruling. On October 5,
2007, EPA filed a motion with the United States District Court for the Middle
District of North Carolina asking that court to vacate its entire prior ruling,
including the portion relating to the test for “routine” projects.
TVA is currently involved in two NSR
cases (one involving Bull Run, the dismissal of which was recently reversed on
appeal) and another at Colbert (the dismissal of which was recently affirmed on
appeal but may be reviewed by the Supreme Court). These cases are
discussed in more detail above. The Supreme Court’s holding could
undermine one of TVA’s defenses in these cases, although TVA has other available
defenses. Environmental groups and North Carolina have given TVA
notice in the past that they may sue TVA for alleged NSR violations at a number
of TVA units. The Supreme Court’s decision in Duke Energy 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 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
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.
9.
Subsequent Events
Debt
In April 2008, TVA issued $3 million of
electronotes® with an
interest rate of 3.50 percent which mature in April 2013. The notes
are callable beginning in April 2009.
The
interest rate on TVA’s 1999 Series A Bonds reset from 5.62 percent to 5.17
percent on May 1, 2008. Also on May 1, 2008, TVA redeemed $102
million of the 1999 Series A Bonds at par value. The remaining 1999
Series A Bonds mature on May 1, 2029.
On May 1,
2008, TVA issued a notice that the interest rate on the 1998 Series D Bonds will
reset from 5.49 percent to 5.46 percent on June 1, 2008. In
conjunction with the reset, holders of the 1998 Series D Bonds may request
redemption of the Bonds at par value through May 22, 2008, for redemption on
June 1, 2008.
On
May 7, 2008, TVA redeemed four electronotes® issues:
all $11 million of its 2002 4.38 percent electronotes® due
September 15, 2012, all $42 million of its 2005 4.13 percent electronotes® due June
15, 2010, all $10 million of its 2005 5.38 percent electronotes® due
December 15, 2015, and all $8 million of its 2006 5.38 percent electronotes® due
March 15, 2016. Each of the issues was redeemed at 100 percent of par
value.
Credit
Facility Agreement
In May 2008, TVA renewed the credit
facility with the May 14, 2008, maturity date. The new maturity date
for this credit facility is May 13, 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 for the six months ended March 31, 2008, was $56 million compared to net
income of $177 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 resulted in higher net interest expense of $91
million. See Note 1 — Allowance for Funds Used During
Construction. This increase was partially offset by a decrease
in interest on debt of $18 million, resulting from debt redemption, debt
issuance, and other activities which collectively had the effect of reducing
expense. Additionally, TVA changed its policy for accounting for
gains and losses on certain derivative instruments used in call monetization
transactions which increased income by $31 million in the first six months of
2007. The effects of the accounting policy changes were partially
offset by an increase in operating income of $11 million from $705 million for
the six months ended March 31, 2007, to $716 million for the six months ended
March 31, 2008. Operating income (operating revenues less operating
expenses) is a measurement of the money generated from a company’s own
operations and is a measure of earning power from ongoing
operations. See Results of
Operations.
Financial markets continue to
experience increased volatility due to a variety of factors, including
deteriorating conditions associated with increased default rates on sub-prime
mortgages. The uncertainty has resulted in significantly lower market
valuations for many asset-backed investments. TVA’s investment
portfolios contain a variety of investments, including securities directly
impacted by these events.
For the six months ended March 31,
2008, TVA recognized a $23 million unrealized loss primarily attributable to
losses on restricted investments related to collateral posted with
TVA. The loss compares to an unrealized gain of $1 million for the
six months ended March 31, 2007. See Note 1 — Restricted Cash and Investments
and Other (Expense)
Income, Net.
TVA experienced losses related to its
nuclear decommissioning trust investment portfolio for the six months ended
March 31, 2008. TVA does not recognize investment gains and losses
from this portfolio within earnings but rather defers all such investment gains
and losses within a regulatory asset in accordance with its nuclear
decommissioning accounting policy. For the six months ended March 31,
2008, the portfolio declined in value $103 million, of which $76 million was
unrealized. See Note 1 — Cost-Based
Regulation. Even with the decline in investment value,
however, TVA’s nuclear decommissioning trust funding as of March 31, 2008, was
130 percent of the Nuclear Regulatory Commission’s (“NRC”) funding
requirements.
The Standard & Poor’s 500 benchmark
index fell by 12.46 percent during the period September 30, 2007, through March
31, 2008. Despite the recent market downturn, TVA continues its
long-term investment strategy by investing with the expectation of encountering
markets such as this from time to time.
TVA still faces challenges related to
fuel, purchased power, hydroelectric generation, and capacity during the
remainder of the year. Long-term demand projections indicate upward pressure on
capacity and the need for additional capacity to be built or purchased over
TVA's planning horizon. On February 15, 2008, TVA’s board of directors (“TVA
Board”) approved a seven percent increase in firm wholesale electric rates
effective April 1, 2008, to help fund new power generation and energy efficiency
initiatives needed to meet the growing power demand of the Tennessee Valley as
well as other capital projects. It is anticipated that the rate
increase will generate an additional $300 million of revenue during
2008.
Fuel
Cost Adjustment
As of March 31, 2008, TVA had
recognized a regulatory asset of $15 million and a current receivable of $184
million representing deferred fuel and purchased power costs to be recovered
through the fuel cost adjustments (“FCA”) in future periods. Under
TVA’s FCA methodology, adjustments to rates are based on the difference between
forecasted and baseline (budgeted) costs for the upcoming quarter. Because
the FCA adjustments are forward-looking, there is typically a difference between
what is collected in rates and FCA-eligible expenses that are actually incurred
over the course of the quarter. This difference is added to or
deducted from certain accounts on TVA’s balance sheet. The higher or
lower costs added to or deducted from the balance sheet accounts are then
amortized to expense in the periods in which they are to be collected in
revenues. This methodology allows better matching of the
revenues with associated expenses. The FCA amount implemented April
1, 2008, is 0.550 cents per kilowatt-hour and is expected to produce an
estimated $201 million in revenue during the third 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 generation plants and purchased power. TVA
continued to be impacted by drought conditions during the second quarter of
2008. Although rainfall totals from October 1, 2007, through March
31, 2008, were 80 percent of normal, runoff totals were far less at 49 percent
of normal. Reduced hydroelectric generation has driven up
purchased-power costs, which were about $102 million higher than projected for
the first six months of 2008. TVA is scheduling flows through the
system to fill tributary projects while meeting downstream flow requirements,
maintaining water quality, protecting aquatic habitat, and providing for
commercial navigation.
The
TVA service area experienced severe weather on February 5 and 6, 2008, with 70
tornadoes being reported. A total of 39 transmission structures were
destroyed, but TVA restored service to nearly all affected customers in the
first few hours after the storm. The cost to restore TVA's
transmission system in middle and west Tennessee was approximately $3
million.
Market
Conditions
Due to rising commodity prices across
domestic and foreign markets, TVA and other major utilities have experienced
increased costs for fuel and electricity purchased in short term markets. The
following describes current market conditions for natural gas, fuel oil, coal,
and electricity.
Natural Gas. Prices were higher in
the quarter ended March 31, 2008, as compared to the same period in 2007, due to
higher demand from colder temperatures, lower liquefied natural gas imports, and
lower storage levels. These factors, along with a transition to the
hurricane season, are likely to translate into higher prices and price
volatility this summer. This leads TVA to expect that risks are
skewed more towards higher, rather than lower, prices for the balance of the
calendar year.
Fuel Oil. The
recent spikes in fuel prices are due to record-breaking price increases in crude
oil, magnified by the declining U.S. dollar and strong demand resulting in lower
inventories.
Coal. Coal prices increased
during the quarter ended March 31, 2008, as a result of continued tightness in
the balance of supply and demand, driven partly by increased
exports. With some basins struggling to add supply and others
affected by transportation disruptions, the recovery to normal conditions is
expected to be slow and prices will likely remain elevated through the end of
the calendar year.
Electricity. On-peak
power prices, which are increasingly determined by natural gas-fired power
plants, increased during the quarter ended March 31, 2008, as a result of
several factors, including but not limited to higher natural gas prices and
colder temperatures. Electricity prices are expected to continue to
rise for the summer as the demand for electricity for air conditioning purposes
is expected to increase. Electricity prices are likely to follow
natural gas markets for the remainder of the calendar year.
Off-peak power prices increased during
the quarter ended March 31, 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 primarily as a result of these
continuing high coal prices.
Pricing Table. The
following table illustrates approximate changes in commodity pricing for the
most recent quarter and the same quarter in the prior fiscal year.
Commodity
Pricing Table
Commodity
|
Price
Increases: Calendar year
1st
Quarter 2008 vs.
1st
Quarter 2007
|
1st
Quarter 2008
Percent
Change vs.
1st
Quarter 2007
|
||||||
Henry
Hub Natural Gas ($/mmBtu)
|
$ | 1.40 | 20 | % | ||||
Gulf
Coast Fuel Oil ($/mmBtu)
|
7.78 | 67 | % | |||||
Composite
Coal (FOB Mine $/ton)
weighted
average from FY budget plan
|
9.70 | 33 | % | |||||
Into
TVA Electricity ($/MWh)
|
||||||||
On-Peak
(5 days x 16 hours)
|
12.77 | 23 | % | |||||
Off-Peak
(5 days x 8 hours)
|
11.18 | 30 | % |
Performance
of TVA Assets
Nuclear production increased by 26
percent for the six months ended March 31, 2008, as compared to the six months
ended March 31, 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 44 percent during the
same period as a result of the drought conditions discussed in Financial Outlook and Weather
Conditions.
The following table summarizes TVA’s
net generation in millions of kilowatt-hours by generating source and the
percentage of all electric power generated by TVA for the periods
indicated:
Power
Supply from TVA-Owned Generation Facilities
|
||||||||||||||||
For
the six months ended March 31
|
||||||||||||||||
(millions
of kWh)
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
Coal-fired
|
48,688 | 63 | % | 49,385 | 65 | % | ||||||||||
Nuclear
|
25,562 | 33 | % | 20,358 | 27 | % | ||||||||||
Hydroelectric
|
3,394 | 4 | % | 6,055 | 8 | % | ||||||||||
Combustion
turbine and diesel generators
|
249 |
<1
|
% | 156 |
<1
|
% | ||||||||||
Renewable
resources
|
20 |
<1
|
% | 17 |
<1
|
% | ||||||||||
Total
|
77,913 | 100 | % | 75,971 | 100 | % |
Although Browns Ferry Unit 1
experienced five unplanned reactor shutdowns in the first five months after
restart in June 2007, the unit has run continuously since November 14,
2007. Reactor shutdowns are used by the NRC as an indicator of plant
performance, and, as a result of the high number of early shutdowns, NRC
classified Unit 1 in the "yellow" performance band which requires additional
regulatory oversight and inspections. In accordance with NRC
procedures, a Supplemental Inspection will be conducted to determine
effectiveness of TVA's evaluation of the causes of these
shutdowns. Given current improved performance, the NRC has moved Unit
1 performance to the "white" performance classification at March 31, 2008, and
continued good performance should result in this indicator being returned to
normal ("green") along with all other plant performance indicators.
The duration of a planned outage
scheduled from October 3, 2007, to November 2, 2007, at Sequoyah Nuclear Plant
Unit 1 was extended 16 days due to the identification of damage in the main
generator during the outage work. The cost of the extension was $7
million, and the net cost of replacement power during this extended period was
$22 million. The cost of the replacement power will be recovered
through the FCA.
Browns Ferry Nuclear Plant Unit 3
(“Browns Ferry Unit 3”) experienced an unplanned automatic shutdown due to a
main generator trip on December 31, 2007. This trip was due to
opening of one of three main generator output breakers. Corrective
actions have been implemented and the problem appears to have been
resolved. As part of the recovery from this generator trip, a problem
was discovered with the main generator exciter that required
repair. The required repairs extended the duration of this outage to
21 days. The cost of the repairs was $3 million.
The duration of a planned outage
scheduled from February 10, 2008, to March 16, 2008, 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 the extension was $2 million, and the net cost of
replacement power during this extended period was $13 million. The
cost of the replacement power will be recovered through the FCA.
Challenges
Related to Water Supply and Water Temperature
TVA faces challenges related to water
supply and water temperature on the Cumberland River 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. 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 the 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.
The
second impact is an increase in the likelihood that TVA will be forced to reduce
(“derate”) the power output of its Cumberland and Gallatin Fossil Plants at
times during the summer. During the summer of 2007, reduced flow
through the Cumberland River system, combined with higher than normal upstream
river temperatures, forced TVA to derate both these plants to remain in
compliance with discharge temperature limits contained in the plant's discharge
permits. Summer derates in 2008 remain a possibility, especially
until the Wolf Creek and Center Hill Dams are repaired and normal water flow is
restored on the Cumberland River. TVA is installing temporary cooling
towers at its Cumberland Fossil Plant to mitigate summer derates while the Wolf
Creek and Center Hill Dams are being repaired.
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. Additionally, TVA used its cooling towers at Browns
Ferry and Sequoyah Nuclear Plants. Using the cooling towers takes a
substantial amount of power that TVA would have otherwise sold. If
the drought continues, TVA may have to take similar actions in the summer of
2008.
New
Initiatives
The
Department of Energy (“DOE”) and TVA have agreed to a Memorandum of
Understanding (“MOU”) that would allow the two agencies to develop a concept for
an advanced fuel cycle demonstration project that could recycle used nuclear
fuel. The agreement establishes the principles and framework for
exchanging information and conducting activities related to the project. The
purpose of the MOU is to gather information for use by DOE and TVA in further
development of the demonstration concept, but the MOU does not commit DOE or TVA
to construct any facilities at this time. Additionally, there is no
financial commitment for TVA.
Clean
Air Initiatives
In 2007, TVA began operating the High
Energy Reagent Technology (“HERT”) on Unit 1 of its John Sevier Fossil Plant
located near Rogersville, TN. TVA plans to add similar systems to
reduce nitrogen oxide (“NOx”)
emissions on Units 2-4 by 2009. 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. Engineering design will begin in 2008. 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.
TVA also agreed to purchase, as part of
a bankruptcy auction process, 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 currently held by a Southaven affiliate. The
purchase closed May 9, 2008.
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 its fleet by acquiring natural gas plants.
With the acquisition of the Brownsville and Southaven plants, TVA now owns
or leases 87 combustion-turbine peaking units and six combined-cycle
units.
New Nuclear Generation. TVA submitted its
combined license application 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 combined license application for two
AP1000 reactors at Bellefonte was officially docketed by NRC on January 18,
2008, indicating NRC found it complete and technically sufficient to support its
more detailed reviews. NRC partially accepted a motion by the Bellefonte
Environmental Sustainability Team ("BEST"), a Chapter of the Blue Ridge
Environmental Defense League, to extend the period of time allowed to file an
intervention for the Bellefonte hearing process by sixty days. The
date of NRC order was April 7, 2008. The TVA Board has not made a
decision to construct a new plant at the Bellefonte site, and TVA continues to
evaluate all nuclear generation options at the site.
Preliminary project activities began at
Watts Bar Nuclear Plant Unit 2 (“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 by
October 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, which constituted 14 percent of the power that TVA sold to
its customers in the first six months of 2008. The purchases during
the first six months of 2008 represent a 24 percent increase over the amount of
power purchased during the same period of 2007 due to lower hydro
generation. A return to normal weather patterns will likely increase
hydro 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, when approved by the TVA Board, 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. TVA is conducting a series of stakeholder briefings
throughout the region in April and May 2008 to receive 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 0.7 percent of TVA’s total sales for the three months ended March
31, 2008.
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.
Automated
Controls
Reviews
of TVA's security practices in connection with the automated systems it uses to
control facilities and infrastructures have identified
weaknesses. TVA is reviewing the nature and extent of the weaknesses
and is addressing them.
Sources
of Liquidity
TVA’s current liabilities exceed
current assets because of the continued use of short-term debt to fund cash
needs as well as scheduled maturities of long-term debt. To meet short-term cash
needs and contingencies, TVA depends on various sources of liquidity. TVA’s
primary sources of liquidity are cash on hand and cash from operations, proceeds
from the issuance of short-term and long-term debt, and proceeds from borrowings
under TVA’s $150 million note with the U.S. Treasury. Other
sources of liquidity include two $1.25 billion credit facilities with a
national bank and occasional proceeds from other financing arrangements
including call monetization transactions and sales of receivables and
loans.
The majority of TVA’s balance of cash
on hand is typically invested in short-term investments. During 2007,
TVA’s average daily balance of cash and cash equivalents on hand was $389
million. The daily balance of cash and cash equivalents maintained is
based on near-term expectations for cash expenditures and funding
needs. TVA’s cash and cash equivalents at March 31, 2008, was $760
million, an increase of $595 million from the cash balance at September 30,
2007. The increase in cash was primarily due to proceeds from a
mid-month power bond issue still on hand at month end. The cash was
subsequently used to pay down discount notes.
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 six months
ended March 31, 2008, and 2007, follows:
Summary
Cash Flows
For
the Six Months Ended March 31
|
||||||||
2008
|
2007
|
|||||||
Cash
provided by (used in)
|
||||||||
Operating
activities
|
$ | 881 | $ | 945 | ||||
Investing
activities
|
(756 | ) | (880 | ) | ||||
Financing
activities
|
470 | (219 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
$ | 595 | $ | (154 | ) |
Issuance of Debt. TVA issued $41 million
of electronotes® during
first quarter of 2008 and $61 million during the second quarter of
2008. TVA issued $1.0 billion of power bonds with an interest rate of
4.50 percent and $500 million of power bonds with an interest rate of 4.88
percent. Electronotes® of $197
million were retired or redeemed during the first two quarters of
2008. For more information about TVA's debt activities, see Notes 3
and 9.
Credit Facilities. In the event of
shortfalls in cash resources, TVA has short-term funding available in the form
of two $1.25 billion short-term revolving credit facilities, one of which
matures on May 13, 2009, and the other of which matures on November 10, 2008.
The interest rate on any borrowing under either of these facilities is variable
and based on market factors and the rating of TVA’s senior unsecured long-term
non-credit enhanced debt. TVA is required to pay an unused facility fee on the
portion of the total $2.5 billion against which TVA has not borrowed. The fee
may fluctuate depending on the non-enhanced credit ratings on TVA’s senior
unsecured long-term debt. There were no outstanding borrowings under the
facilities at March 31, 2008. TVA anticipates renewing each credit facility from
time to time.
Call Option
Monetization. In May 2005, TVA entered into certain call
monetization transactions to hedge the value of call options contained in two of
its bond issues (see Note 9, 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 will
be required to make fixed rate payments to the counterparty at 6.125 percent and
the counterparty will be required to make floating payments to TVA based on
London Interbank Offered Rate (“LIBOR”). These payments were based on
a combined notional amount of $41.7 million and began on April 15,
2008.
Comparative
Cash Flow Analysis
2008 Compared to 2007
Net cash provided by operating
activities decreased $64 million from $945 million to $881 million for the six
months ended March 31, 2007, and 2008, respectively. This decrease was primarily
due to:
|
•
|
An
increase in cash paid for fuel and purchased power of $279 million due to
higher volume and increased market prices for purchased
power;
|
|
•
|
An
increase in cash paid for interest of $77
million;
|
|
•
|
An
increase in cash outlays for routine and recurring operating costs of $28
million;
|
|
•
|
An
increase in tax equivalent payments of $21
million;
|
|
•
|
A
use of cash by changes in working capital of $16 million during the six
months ended March 31, 2008, as compared to a source of cash of $12
million during the same period of the prior year resulting primarily from
a $232 million greater reduction in accounts payable and accrued
liabilities, partially offset by a $137 million greater decrease in
accounts receivable, a $55 million smaller increase in inventories and
other, and a $12 million larger increase in interest
payable;
|
|
•
|
Cash
used by deferred items of $6 million in the first six months of 2008
compared to $26 million cash provided by deferred items in the same period
of 2007. This change is primarily due to funds collected in
rates during first six months of 2007 that were used to fund future
generation. See Note 1 — Reserve for Future
Generation; and
|
|
•
|
An
increase in cash paid for refueling outage costs of $8
million.
|
These items were partially offset by an
increase in operating revenues of $418 million resulting primarily from
increases in revenue from municipalities and cooperatives and industries
directly served, in both cases, from higher average rates and the FCA and, in
the case of industries directly served, higher volume.
Cash used in investing activities
decreased $124 million from the first six months of 2007 to the first six months
of 2008. The decrease is primarily due to:
|
•
|
The
inclusion in the first six months of 2007 of a $98 million use of funds to
acquire two combustion turbine
facilities;
|
|
•
|
A
$39 million larger reduction in the amount of restricted cash and
investments held by TVA during the first six months of 2008 as compared to
the same period of 2007; and
|
|
•
|
A
decrease in expenditures for capital projects of $56
million.
|
These items were partially offset by a
$64 million increase in expenditures for the enrichment and fabrication of
nuclear fuel related to a buildup of fuel for strategic inventory, a buildup of
fuel for identified upcoming Browns Ferry Unit 3 and Watts Bar Unit 1 outages,
and blended low enriched uranium fuel and uranium purchases that are not related
to a specific outage.
Net cash provided by financing
activities was $470 million during the first six months of 2008 as compared to
net cash used by financing activities of $219 million during the same period of
2007. The change was primarily the result of:
|
•
|
A
decrease in redemptions and repurchases of long-term debt of $250 million,
with long-term debt of $214 million retired in the first six months of
2008; and
|
|
•
|
An
increase in long-term debt issues of $1,574 million as a result of the
issuance of $1,602 million of long-term
debt.
|
These items were partially offset by
the net redemption of $854 million of short-term debt issues during the first
six months of 2008 as compared to the net issuance of $262 million of short-term
debt issues during the same period of the prior year.
Cash
Requirements and Contractual Obligations
The estimated cash requirements and
contractual obligations for TVA as of March 31, 2008, are detailed in the
following table.
Commitments
and Contingencies
|
Total
|
2008
(1)
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||||||||
Debt
|
$ | 23,035 | (2) | $ | 1,502 | $ | 2,030 | $ | 42 | $ | 1,000 | $ | 1,525 | $ | 16,936 | |||||||||||||
Interest
payments relating to debt
|
21,878 | 639 | 1,288 | 1,180 | 1,152 | 1,124 | 16,495 | |||||||||||||||||||||
Lease
obligations
|
||||||||||||||||||||||||||||
Capital
|
173 | 28 | 56 | 56 | 29 | 2 | 2 | |||||||||||||||||||||
Non-cancelable
operating
|
396 | 32 | 51 | 39 | 28 | 27 | 219 | |||||||||||||||||||||
Purchase
obligations
|
||||||||||||||||||||||||||||
Power
|
5,615 | 116 | 202 | 215 | 223 | 229 | 4,630 | |||||||||||||||||||||
Fuel
|
3,629 | 932 | 655 | 652 | 292 | 399 | 699 | |||||||||||||||||||||
Other
|
618 | 182 | 211 | 31 | 49 | 26 | 119 | |||||||||||||||||||||
Payments
on other financings
|
1,417 | 33 | 85 | 89 | 95 | 97 | 1,018 | |||||||||||||||||||||
Payment
to U.S. Treasury (3)
|
||||||||||||||||||||||||||||
Return
of Power Facilities
Appropriation
Investment
|
130 | 20 | 20 | 20 | 20 | 20 | 30 | |||||||||||||||||||||
Return
on Power Facilities
Appropriation
Investment
|
258 | 19 | 22 | 21 | 20 | 18 | 158 | |||||||||||||||||||||
Retirement
plans (4)
|
44 | 44 | – | – | – | – | – | |||||||||||||||||||||
Total
|
$ | 57,193 | $ | 3,547 | $ | 4,620 | $ | 2,345 | $ | 2,908 | $ | 3,467 | $ | 40,306 |
Notes
|
(1)
|
Period
April 1 - September 30, 2008.
|
|
(2)
|
Does
not include noncash items of foreign currency valuation loss of $262
million and net discount on sale of Bonds of $202
million.
|
|
(3)
|
TVA
has access to financing arrangements with the U.S. Treasury whereby the
U.S. Treasury is authorized to accept from TVA a short-term note with a
maturity of one year or less in an amount not to exceed $150
million. TVA may draw any portion of the authorized $150
million during the year. TVA’s practice is to repay on a
quarterly basis the outstanding balance of the note and related
interest. Because of this practice, there was no outstanding
balance on the note as of March 31, 2008. Accordingly, the
Commitments and Contingencies table does not include any outstanding
payment obligations to the U.S. Treasury for this note at March 31,
2008.
|
|
(4)
|
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
|
$ | 1,086 | $ | 53 | $ | 105 | $ | 105 | $ | 105 | $ | 105 | $ | 613 |
Note
|
(1)
|
Period
April 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 March 31, 2008, expenditures against these
contracts are forecasted to be approximately $1.4 billion.
Financial
Results
The following table compares operating
results and selected statistics for the three and six months ended March 31,
2008, and 2007:
Summary
Statements of Income
Three
Months Ended
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Operating
revenues
|
$ | 2,454 | $ | 2,280 | $ | 4,804 | $ | 4,384 | ||||||||
Operating
expenses
|
(2,050 | ) | (1,891 | ) | (4,088 | ) | (3,679 | ) | ||||||||
Operating
income
|
404 | 389 | 716 | 705 | ||||||||||||
Other
(expense) income, net
|
(3 | ) | 15 | (1 | ) | 27 | ||||||||||
Unrealized
gain on derivative contracts, net
|
– | 16 | – | 31 | ||||||||||||
Interest
expense, net
|
(328 | ) | (294 | ) | (659 | ) | (586 | ) | ||||||||
Net
income
|
$ | 73 | $ | 126 | $ | 56 | $ | 177 | ||||||||
Sales
(millions of kWh)
|
45,365 | 43,760 | 85,806 | 83,275 | ||||||||||||
Heating
degree days (normal 1,858 and 3,169, respectively)
|
1,828 | 1,632 | 2,886 | 2,859 | ||||||||||||
Cooling
degree days (normal 10 and 74, respectively)
|
11 | 63 | 161 | 126 | ||||||||||||
Combined
degree days (normal 1,868 and 3,243, respectively)
|
1,839 | 1,695 | 3,047 | 2,985 | ||||||||||||
Net income for the second quarter of
2008 was $73 million compared to net income of $126 million for the same period
in 2007. The $53 million decrease in net income was primarily
attributable to:
•
|
A
$159 million increase in operating
expenses;
|
•
|
A
$34 million increase in net interest expense resulting mainly from the
change in ratemaking methodology relating to allowance for funds used
during construction (“AFUDC”);
|
•
|
An
$18 million change in net other (expense) income;
and
|
•
|
A
$16 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.
|
These items were partially offset by a
$174 million increase in operating revenues.
Net income through the first two
quarters of 2008 was $56 million compared to net income of $177 million for the
same period in 2007. The $121 million decrease in net income was
primarily attributable to:
•
|
A
$409 million increase in operating
expenses;
|
•
|
A
$73 million increase in net interest expense resulting mainly from the
change in ratemaking methodology relating to
AFUDC;
|
•
|
A
$31 million decrease in net unrealized gain on derivative contracts
resulting largely from the change in ratemaking methodology for gains and
losses on swaps and swaptions used in call monetization transactions;
and
|
•
|
A
$28 million change in net other (expense)
income.
|
These items were
partially offset by a $420 million increase in operating revenues.
Operating
Revenues. Below is a detailed table of operating revenues for
the three and six months ended March 31, 2008, and 2007.
Operating
Revenues
Three
Months Ended
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||||||||||
2008
|
2007
|
Percent
Change
|
2008
|
2007
|
Percent
Change
|
|||||||||||||||||||
Sales
of Electricity
|
||||||||||||||||||||||||
Municipalities
and cooperatives
|
$ | 2,011 | $ | 1,922 | 4.6 | % | $ | 3,916 | $ | 3,664 | 6.9 | % | ||||||||||||
Industries
directly served
|
382 | 301 | 26.9 | % | 774 | 603 | 28.4 | % | ||||||||||||||||
Federal
agencies and other
|
33 | 26 | 26.9 | % | 58 | 51 | 13.7 | % | ||||||||||||||||
Other
revenue
|
28 | 31 | (9.7 | %) | 56 | 66 | (15.2 | %) | ||||||||||||||||
Total
operating revenues
|
$ | 2,454 | $ | 2,280 | 7.6 | % | $ | 4,804 | $ | 4,384 | 9.6 | % |
Significant items contributing to the
$174 million increase in operating revenues for the second quarter of 2008 as
compared to the same period in 2007 included:
•
|
An
$89 million increase in revenue from Municipalities and cooperatives
primarily due to the FCA, which provided $85 million in additional
revenue. Increased sales and increased distribution loss
charges yielded $12 million and $9 million, respectively, in additional
revenue. These increases were partially offset by fluctuations
in rates related to certain types of energy programs, which reduced
revenue by $17 million;
|
•
|
An
$81 million increase in revenue from Industries directly served mainly
attributable to increased sales of 18.2 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 $54
million, $19 million, and $8 million, respectively, in additional revenue;
and
|
•
|
A
$7 million increase in revenue from Federal agencies and
other.
|
|
º
|
This
increase reflected a $4 million increase in revenue from off-system sales
and a $3 million increase in revenue from federal agencies directly
served.
|
|
–
|
The
increase in revenue from off-system sales resulted largely from increased
sales of 102.3 percent and an increase in average rates of 26.8
percent. Increased sales and an increase in average rates
yielded $3 million and $1 million, respectively, in additional
revenue.
|
|
–
|
The
increase in revenue from federal agencies directly served was primarily
due to increased sales of 9.4 percent and the FCA. Increased
sales and the FCA provided $2 million and $1 million, respectively, in
additional revenue.
|
These items were partially offset by a
$3 million decrease in Other revenue mainly attributable to decreased
transmission revenues from wheeling activity.
Significant items contributing to the
$420 million increase in operating revenues for the first two quarters of 2008
as compared to the same period in 2007 included:
•
|
A
$252 million increase in revenue from Municipalities and cooperatives
largely reflecting the FCA, which yielded $225 million in additional
revenue. Increased distribution loss charges and fluctuations
in rates related to certain types of energy programs and credits provided
$23 million and $12 million, respectively, in additional
revenue. This increase was partially offset by decreased sales,
which reduced revenue by $8
million;
|
•
|
A
$171 million increase in revenue from Industries directly served primarily
as a result of increased sales of 19.6 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 $115
million, $37 million, and $19 million, respectively, in additional
revenue; and
|
•
|
A
$7 million increase in revenue from Federal agencies and other due to a $7
million increase in revenue from federal agencies directly served mainly
attributable to increased sales of 8.3 percent and the
FCA. Increased sales and the FCA provided $4 million and $3
million, respectively, in additional
revenue.
|
These items were partially offset by a
$10 million decrease in Other revenue largely reflecting a $6 million decrease
in revenue from salvage sales, a $3 million decrease in transmission revenues
from wheeling activity, and a $1 million gain on the sale of SO2 emission
allowances during the first two quarters of 2007 not present in the first two
quarters of 2008.
A detailed table of sales of
electricity for the three and six months ended March 31, 2008, and 2007, is
below.
Sales
of Electricity
(Millions
of kWh)
Three
Months Ended
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||||||||||
2008
|
2007
|
Percent
Change
|
2008
|
2007
|
Percent
Change
|
|||||||||||||||||||
Sales
of electricity
|
||||||||||||||||||||||||
Municipalities
and cooperatives
|
35,124 | 35,102 | 0.1 | % | 65,306 | 66,009 | (1.1 | %) | ||||||||||||||||
Industries
directly served
|
9,660 | 8,175 | 18.2 | % | 19,478 | 16,283 | 19.6 | % | ||||||||||||||||
Federal
agencies and other
|
581 | 483 | 20.3 | % | 1,022 | 983 | 4.0 | % | ||||||||||||||||
Total
sales of electricity
|
45,365 | 43,760 | 3.7 | % | 85,806 | 83,275 | 3.0 | % |
Significant items contributing to the
1,605 million kilowatt-hour increase in sales of electricity for the second
quarter of 2008 as compared to the same period in 2007 included:
|
•
|
A
1,485 million kilowatt-hour increase in sales to Industries directly
served. Eighty-four percent of the increase was attributable to
increased demand from two 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
98 million kilowatt-hour increase in sales to Federal agencies and
other.
|
|
º
|
This
increase was due to a 58 million kilowatt-hour increase in off-system
sales and a 40 million kilowatt-hour increase in sales to federal agencies
directly served.
|
|
–
|
The
increase in sales to off-system sales was due mainly to an increase in
surplus generation available for sale on the
market.
|
|
–
|
The
increase in sales to federal agencies directly served was 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.
|
|
•
|
A
22 million kilowatt-hour increase 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 second quarter of 2008,
there was an increase in combined degree days of 144 days, or 8.5
percent.
|
Significant items contributing to the
2,531 million kilowatt-hour increase in sales of electricity for the first two
quarters of 2008 as compared to the same period in 2007 included:
•
|
A
3,195 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
39 million kilowatt-hour increase in sales to Federal agencies and
other.
|
|
º
|
This
increase was due to a 67 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 28 million kilowatt-hour decrease in
off-system sales primarily reflecting decreased generation available for
sale.
|
These items were partially offset by a
703 million kilowatt-hour decrease in sales to municipalities and cooperatives
mainly as a result of a significant decrease in unbilled distribution
losses. This decrease was partially offset by an increase in
residential sales reflecting an increase in combined degree days of 62 days, or
2.1 percent.
Operating Expenses. Operating
expenses for the three and six months ended March 31, 2008, and 2007, consisted
of the following:
Operating
Expenses
Three
Months Ended
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||||||||||
2008
|
2007
|
Percent
Change
|
2008
|
2007
|
Percent
Change
|
|||||||||||||||||||
Fuel
and purchased power
|
$ | 971 | $ | 824 | 17.8 |
%
|
$ | 1,906 | $ | 1,563 | 21.9 | % | ||||||||||||
Operating
and maintenance
|
570 | 576 | (1.0 |
%)
|
1,162 | 1,139 | 2.0 | % | ||||||||||||||||
Depreciation,
amortization, and accretion
|
392 | 382 | 2.6 | % | 782 | 738 | 6.0 | % | ||||||||||||||||
Tax
equivalents
|
117 | 109 | 7.3 | % | 238 | 217 | 9.7 | % | ||||||||||||||||
Loss
on asset impairment
|
– | – | 0.0 | % | – | 22 | (100.0 | %) | ||||||||||||||||
Total
operating expenses
|
$ | 2,050 | $ | 1,891 | 8.4 | % | $ | 4,088 | $ | 3,679 | 11.1 | % |
Significant drivers contributing to the
$159 million increase in total operating expenses for the second quarter of 2008
as compared to the same period in 2007 included:
|
•
|
A
$147 million increase in Fuel and purchased power
expense.
|
|
º
|
This
increase was due to an $88 million increase in purchased power expense and
a $59 million increase in fuel
expense.
|
|
–
|
The
increase in purchased power expense was due
to:
|
•
|
An
increase in the average purchase price of 13.9 percent, which resulted in
$47 million in additional expense;
|
•
|
An
increase in the volume of purchased power of 13.0 percent, which resulted
in $39 million in additional expense;
and
|
•
|
An
increase in the FCA net deferral and amortization for purchased power
expense of $2 million.
|
–
|
The
increase in fuel expense was attributable
to:
|
•
|
An
increase in the aggregate fuel cost per kilowatt-hour net thermal
generation of 9.9 percent, which resulted in $57 million in additional
expense; and
|
•
|
An
increase in the net commercial generation of 5.6 percent, which resulted
in $31 million in additional
expense.
|
–
|
The
increase in fuel expense was partially offset by a decrease in the FCA net
deferral and amortization for fuel expense of $29
million.
|
•
|
A
$10 million increase in Depreciation, amortization, and accretion
expense.
|
|
º
|
This
increase was a result of a $10 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.
|
|
•
|
An
$8 million increase in Tax equivalent payments reflecting increased gross
revenues from the sale of power (excluding sales or deliveries to other
federal agencies and off-system sales with other utilities) during 2007
compared to 2006.
|
The increases in Fuel and purchased
power expense, Depreciation, amortization, and accretion expense, and Tax
equivalent payments in the second quarter of 2008 were partially offset
by:
|
•
|
A
$6 million decrease in Operating and maintenance
expense.
|
|
º
|
This
decrease was largely a result of:
|
–
|
Decreased
outage and routine operating and maintenance costs at coal-fired plants of
$17 million largely due to a decrease in outage days of 125 days as a
result of six less planned outages and a change in the nature and scope of
the outages during the second quarter of 2008, and significant repair work
on Unit 3 at Paradise Fossil Plant during the second quarter of 2007 not
present in the second quarter of 2008, partially offset by an increase due
to the expense of operating one additional combustion turbine unit not
operated during the second quarter of
2007;
|
–
|
Decreased
pension costs of $15 million mainly as a result of a 0.35 percent higher
discount rate used during the second quarter of 2008;
and
|
–
|
Decreased
benefit expense of $5 million largely reflecting decreased pension-related
retirement costs of $3 million and decreased costs of $3 million related
to Federal Insurance Contributions Act (“FICA”). These
decreases were partially offset by increased health care and dental costs
of $1 million during the second quarter of
2008.
|
|
º
|
These
items were partially offset by:
|
–
|
Increased
workers’ compensation expense of $23 million mainly as a result of a lower
discount rate used during the second quarter of 2008 (see Note 6);
and
|
–
|
Increased
outage and routine operating and maintenance costs at nuclear plants of $8
million primarily attributable to:
|
•
|
The
operation of an additional nuclear unit not operated in the second quarter
of 2007,
|
•
|
Timing
of contractor work and materials purchased,
and
|
•
|
Timing
of mid-cycle and forced outages.
|
Significant drivers contributing to the
$409 million increase in total operating expenses for the first two quarters of
2008 as compared to the same period in 2007 included:
|
•
|
A
$343 million increase in Fuel and purchased power
expense.
|
|
º
|
This
increase was due to a $241 million increase in purchased power expense and
a $102 million increase in fuel
expense.
|
|
–
|
The
increase in purchased power expense was due
to:
|
•
|
An
increase in the volume of purchased power of 24.7 percent, which resulted
in $121 million in additional
expense;
|
•
|
An
increase in the average purchase price of 15.9 percent, which resulted in
$97 million in additional expense;
and
|
•
|
An
increase in the FCA net deferral and amortization for purchased power
expense of $23 million.
|
–
|
The
increase in fuel expense was attributable
to:
|
•
|
An
increase in the net commercial generation of 6.6 percent, which resulted
in $73 million in additional
expense;
|
•
|
An
increase in the aggregate fuel cost per kilowatt-hour net thermal
generation of 1.3 percent, which resulted in $15 million in additional
expense; and
|
•
|
An
increase in the FCA net deferral and amortization for fuel expense of $14
million.
|
•
|
A
$44 million increase in Depreciation, amortization, and accretion
expense.
|
|
º
|
This
increase was a result of a $44 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.
|
|
•
|
A
$23 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 $27 million
primarily attributable to:
|
•
|
The
operation of an additional nuclear unit not operated in the first two
quarters of 2007,
|
•
|
Timing
of contractor work and materials purchased,
and
|
•
|
Timing
of mid-cycle and forced outages;
|
–
|
Increased
outage and routine operating and maintenance costs at coal-fired plants of
$24 million largely due to:
|
•
|
An
increase in outage days of 48 days as a result of a change in the nature
and scope of the outages during the first two quarters of
2008,
|
•
|
Significant
repair work on Unit 3 at Paradise Fossil Plant not present in the first
quarter of 2007, and
|
•
|
The
operation of two additional combustion turbine units not operated during
the first quarter of 2007 and the operation of one additional combustion
turbine unit not operated during the second quarter of 2007;
and
|
–
|
Increased
workers’ compensation expense of $23 million mainly as a result of a lower
discount rate used during the second quarter of
2008.
|
|
º
|
These
items were partially offset by:
|
–
|
Decreased
pension costs of $30 million mainly as a result of a 0.35 percent higher
discount rate used during the first two quarters of
2008;
|
–
|
Decreased
project costs of $10 million related to power systems operations and
nuclear generation development and construction projects due to timing and
a change in the nature and scope of the projects during the first two
quarters of 2008;
|
–
|
Decreased
benefit expense of $8 million largely reflecting decreased pension related
retirement costs of $5 million and decreased costs of $3 million related
to FICA during the first two quarters of 2008;
and
|
–
|
A
decrease in the FCA net deferral and amortization for operating and
maintenance expense of $3 million during the first two quarters of
2008.
|
|
•
|
A
$21 million increase in Tax equivalent payments reflecting increased gross
revenues from the sale of power (excluding sales or deliveries to other
federal agencies and off-system sales with other utilities) during 2007
compared to 2006.
|
The increases in Fuel and purchased
power expense, Depreciation, amortization, and accretion expense, Operating and
maintenance expense, and Tax equivalent payments in the first two quarters of
2008 were partially offset by a $22 million decrease in Loss on asset
impairment. During the first two quarters of 2007, a $22 million Loss
on asset impairment was recorded as a result of a $17 million write-down of a
scrubber project at TVA’s Colbert Fossil Plant (“Colbert”) and write-downs of $5
million related to other Construction in progress assets. There was
no Loss on asset impairment during the first two quarters of
2008. See Note 7.
Other (Expense) Income,
Net. The $18 million change in Other (expense) income, net for
the second quarter of 2008 as compared to the same period in 2007 was largely
due to unrealized losses on TVA’s supplemental executive retirement plan funds
and restricted investments related to the collateral held by TVA and decreased
interest income from short-term investments.
The $28 million change in Other
(expense) income, net for the first two quarters of 2008 as compared to the same
period in 2007 was primarily attributable to unrealized losses on TVA’s
supplemental executive retirement plan funds and restricted investments related
to the collateral held by TVA and decreased interest income from short-term
investments. These items were partially offset by a payment received
by TVA in connection with a False Claims Act suit during the first quarter of
2008.
Unrealized Gain on Derivative
Contracts, Net. The decreases in Unrealized gain on derivative
contracts, net were attributable to the change in ratemaking
methodology. Beginning in 2008, TVA began using regulatory accounting
treatment for swaps and swaptions related to call monetization transactions to
reflect that the gain or loss is included in the ratemaking formula when these
transactions actually settle. This treatment removes the non-cash
impacts to TVA’s earnings that result from marking the value of these
instruments to market each quarter. The values of the swaps and
swaptions for 2008 were recorded on TVA’s balance sheet and no income was
recognized. However, TVA recognized $16 million and $31 million as
Unrealized gain on derivative contracts, net for the second quarter of 2007 and
the first two quarters of 2007, respectively. See Changes in
Ratemaking.
Interest
Expense. Interest expense, outstanding debt, and interest
rates for the three and six months ended March 31, 2008, and 2007, consisted of
the following:
Interest
Expense
Three
Months Ended
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||||||||||
2008
|
2007
|
Percent
Change
|
2008
|
2007
|
Percent
Change
|
|||||||||||||||||||
Interest
on debt
|
$ | 328 | $ | 339 | (3.2 | %) | $ | 657 | $ | 675 | (2.7 | %) | ||||||||||||
Amortization
of debt discount, issue, and reacquisition
costs,
net
|
5 | 5 | 0.0 | % | 10 | 10 | 0.0 | % | ||||||||||||||||
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(5 | ) | (50 | ) | (90.0 | %) | (8 | ) | (99 | ) | (91.9 | %) | ||||||||||||
Net
interest expense
|
$ | 328 | $ | 294 | 11.6 | % | $ | 659 | $ | 586 | 12.5 | % | ||||||||||||
(percent)
|
(percent)
|
|||||||||||||||||||||||
2008
|
2007
|
Percent
Change
|
2008
|
2007
|
Percent
Change
|
|||||||||||||||||||
Interest
rates (average)
|
||||||||||||||||||||||||
Long-term
|
5.87 | 5.98 | (1.8 | %) | 5.82 | 6.02 | (3.3 | %) | ||||||||||||||||
Discount
notes
|
3.64 | 5.16 | (29.5 | %) | 4.19 | 5.20 | (19.4 | %) | ||||||||||||||||
Blended
|
5.77 | 5.89 | (2.0 | %) | 5.74 | 5.93 | (3.2 | %) |
Significant items contributing to the
$34 million increase in net interest expense for the second quarter of 2008 as
compared to the same period in 2007 included:
•
|
A
$45 million decrease in AFUDC and nuclear fuel expenditures primarily due
to the change in ratemaking methodology. TVA continues to
capitalize a portion of current interest costs associated with funds
invested in most nuclear fuel inventories, but beginning in 2008, interest
on funds invested in construction projects will be capitalized only if
(1) the expected total cost of a project is $1 billion or more
and (2) the estimated construction period is at least three
years. Capitalized interest continues to be a component of the
asset cost and will be recovered in future periods through depreciation
expense. In addition, AFUDC continues to be a reduction to
interest expense as costs are incurred. The interest costs
associated with funds invested in construction projects that do not
satisfy the $1 billion and three-year criteria are no longer capitalized
as AFUDC, remain in the Statement of Income, and will be recovered in
current year rates as a component of interest expense;
and
|
•
|
An
increase of $1.4 billion in the average balance of long-term debt
outstanding in the second quarter of 2008 as compared to the same period
of 2007.
|
These items were partially offset
by:
•
|
A
decrease in the average long-term interest rate from 5.98 percent during
the second quarter of 2007 to 5.87 percent during the same period in
2008;
|
•
|
A
decrease in the average discount notes interest rate from 5.16 percent
during the second quarter of 2007 to 3.64 percent during the same period
in 2008; and
|
•
|
A
decrease of $1.6 billion in the average balance of discount notes
outstanding in the second quarter of 2008 as compared to the same period
of 2007.
|
Significant items contributing to the
$73 million increase in net interest expense for the first two quarters of 2008
as compared to the same period in 2007 included:
•
|
A
$91 million decrease in AFUDC and nuclear fuel expenditures primarily due
to the previously described change in ratemaking methodology;
and
|
•
|
An
increase of $1.5 billion in the average balance of long-term outstanding
debt in the first two quarters of 2008 as compared to the same period of
2007.
|
These items were partially offset
by:
•
|
A
decrease in the average long-term interest rate from 6.02 percent during
the first two quarters of 2007 to 5.82 percent during the same period in
2008;
|
•
|
A
decrease in the average discount notes interest rate from 5.20 percent
during the first two quarters of 2007 to 4.19 percent during the same
period in 2008; and
|
•
|
A
decrease of $1.2 billion in the average balance of discount notes
outstanding in the first two 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 six
months ended March 31, 2008. Power purchases for the first six months
of 2008 under the agreement amounted to $52 million, and the remaining financial
commitment under this agreement is $5.2 billion. TVA has no
additional financial commitments beyond the purchase power agreement with
respect to the facility.
The
preparation of financial statements requires TVA to estimate the effects of
various matters that are inherently uncertain as of the date of the financial
statements. Although the financial statements are prepared in
conformity with generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
amounts of revenues and expenses reported during the reporting
period. Each of these estimates varies in regard to the level of
judgment involved and its potential impact on TVA’s financial
results. Estimates are deemed critical either when a different
estimate could have reasonably been used, or where changes in the estimate are
reasonably likely to occur from period to period, and such use or change would
materially impact TVA’s financial condition, changes in financial position, or
results of operations. See Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and
Estimates in the Annual Report for a discussion of TVA’s critical
accounting policies. TVA’s critical accounting policies are also
discussed in Note 1 of the Notes to the Annual Report and in Note 1 of the Notes
to this Quarterly Report.
TVA’s power rates are not subject to
regulation through a public service commission or other similar
entity. 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 beginning on October 1, 2007, interest on funds invested in
construction projects will be capitalized only if (1) the expected total
cost of a project is $1 billion or more and (2) the estimated construction
period is at least three years. Capitalized interest continues to be
a component of the asset cost and will be recovered in future periods through
depreciation expense. In addition, AFUDC continues to be a reduction
to interest expense as costs are incurred. The interest cost
associated with funds invested in construction projects that do not satisfy the
$1 billion and three-year criteria is no longer capitalized as AFUDC, remains in
the Statement of Income, and will be recovered in current year rates as a
component of interest expense. As a result of the new policy, TVA
recorded a total of $8 million in AFUDC during the first six months of 2008
compared to $99 million for the first six months of 2007.
The TVA Board approved, beginning in
2008, using regulatory accounting treatment for swaps and swaptions related to
call monetization transactions to better match the income statement recognition
of gain and loss with the economic reality of when these transactions actually
settle. This treatment removes the non-cash impacts to TVA’s earnings
that result from marking the value of these instruments to market each quarter.
The value of the swaps and swaptions will still be recorded on TVA’s balance
sheet, and any interest expense impacts will continue to be reflected in TVA’s
income statement. Had TVA not adopted this new accounting treatment,
its net income for the first six months of 2008 would have increased by $199
million.
Accounting for Defined
Benefit Pension and Other Postretirement Plans. On September
30, 2007, TVA adopted the provisions contained within SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158
requires employers to fully recognize within their financial statements the
obligations associated with single-employer defined benefit pension, retiree
healthcare, and other postretirement plans. Specifically, SFAS No.
158 requires an employer to recognize in its statement of financial position an
asset for a plan’s overfunded status or a liability for a plan’s underfunded
status; measure a plan’s assets and its obligations that determine its funded
status as of the end of the employer’s fiscal year (with limited exceptions);
and recognize changes in the funded status of a defined benefit postretirement
plan in the year in which the changes occur. Such changes are to be
reported within comprehensive income of a business entity (except that regulated
entities may report such changes as regulatory assets and/or liabilities in
accordance with the provisions of SFAS No. 71), and within changes in net assets
of a not-for-profit organization.
TVA’s 2007 adoption of SFAS No. 158
resulted in the recognition of the following amounts on its Balance Sheet at
September 30, 2007: additional regulatory assets of $475 million (including the
reclassification of $246 million in unamortized prior service cost previously
classified as intangible assets) resulting in post-SFAS No. 158 benefit
regulatory assets of $973 million; and additional pension and postretirement
obligations of $330 million and $143 million, and $2 million classified as
accumulated other comprehensive gain, resulting in post-SFAS No. 158 benefit
obligations of $1,128 million. The recognition of such amounts
increased total assets and liabilities by $475 million at September 30,
2007.
Fair Value
Measurements. In September 2006, the 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. The standard also responds to investors’ requests for
expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. SFAS No. 157 applies
whenever other standards require (or permit) assets or liabilities to be
measured at fair value but does not expand the use of fair value in any new
circumstances. SFAS No. 157 establishes a fair value hierarchy that
prioritizes the information used to develop measurement
assumptions. The provisions of SFAS No. 157 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, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, "Effective Date of FASB Statement
No. 157” 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 defers 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 is currently
evaluating the requirements of SFAS No. 157 and has not yet determined the
impact of its implementation, which may or may not be material to TVA’s results
of operations or financial position.
Fair Value
Option. In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement No.
115” (“SFAS No. 159”). SFAS No. 159 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 elects to apply the provisions of SFAS No. 157. At this time, TVA is
evaluating the requirements of SFAS No. 159 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” (“FIN No. 39-1”), which addresses certain
modifications to FASB Interpretation No. 39, “Offsetting of Amounts Related to
Certain Contracts.” FIN No. 39-1 replaces the terms “conditional
contracts” and “exchange contracts” with the term “derivative instruments” as
defined in SFAS No. 133. FIN No. 39-1 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 FIN No. 39-1 is effective for fiscal years beginning after November 15, 2007,
with early application permitted. At this time, TVA is evaluating the
requirements of FIN No. 39-1 and has not yet determined the potential impact of
its implementation, which may or may not be material to TVA’s financial
position.
Derivative Instruments and
Hedging Activities. In March 2008, FASB issued SFAS 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. TVA currently
includes many of the disclosures now required by SFAS No. 161 but does not plan
to early adopt the requirements of the new standard. The effective
date of adoption for TVA is the second quarter of 2009.
TVA
Board
On March 28, 2008, Thomas C. Gilliland
of Blairsville, Georgia was sworn in as the seventh TVA Board
member. Mr. Gilliland’s term will expire on May 18,
2011. Two vacancies on the TVA Board remain
unfilled. Bishop William Graves and Ms. Susan Richardson Williams
have been re-nominated for new terms and are awaiting confirmation by the
Senate.
Anticipated
Departure of Director
On April 16, 2008, Director Skila S.
Harris informed the President of the United States that she intends to leave her
position as a Director of the TVA Board effective May 19, 2008, after the
expiration of her term of office. Director Harris plans to
participate in the TVA Board’s public meeting on that date and will leave office
at midnight that night.
Bylaw
Changes
On April
3, 2008, the TVA Board approved the following changes to TVA’s
Bylaws:
Section
1.6 was added to provide that when Board vacancies result in there being less
than a quorum (less than five members), the Board may continue to exercise such
powers as are necessary to assure continuity of operations along the lines
established by the 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 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 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 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 Board to (i) define Board and 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 Board has
already approved and provided to Congress (as information) a
conflict-of-interest policy applicable to Board members, the CEO, and all TVA
employees and (ii) any subsequent changes to that policy adopted by the 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.
Proposed
Legislation
On March
13, 2007, Senators Jim Bunning and Mitch McConnell of Kentucky introduced the
Access to Competitive Power Act of 2007 in the Senate. Under this bill, TVA and
federal power marketing agencies would be subject to greater FERC jurisdiction
with respect to transmission, including rates, terms, and conditions of service.
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 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. Further
congressional committee hearings and proposed amendments to the bill are
expected during 2008.
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 Water Act, 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 (“BTA”) to minimize the adverse
environmental impacts of intake structures. The Utility Water Act
Group, Entergy Corporation, and PSEG Fossil, LLC filed a petition seeking review
of the decision by the U.S. Supreme Court. TVA and the Attorneys
General of several states, including Alabama, Kentucky, and Tennessee, supported
this petition. On April 14, 2008, the U.S. Supreme Court granted the
petition, limiting its review to one issue: "Whether Section 316(b) of the 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.”
In May 2007, the TVA Board approved a
Strategic Plan. Due to the increasing environmental requirements and
expectations, TVA is re-evaluating its high-level environmental policy to align
with and execute the direction in the 2007 TVA Strategic Plan. The
proposed environmental policy 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. TVA contracted the services of a consulting firm to
assist in updating its environmental policy. A draft plan was
developed with input from multiple stakeholders, including customers,
environmental organizations, congressional staffs, and others. TVA's
environmental responsibilities were reviewed within six environmental
dimensions: climate change, clean air, water resources, waste management,
sustainable land use, and natural resources. The draft plan was
presented to the TVA Board at the April 3, 2008, TVA Board meeting and was
subsequently posted for a 30-day public comment period.
In light
of increasing national focus on renewable and clean energy and TVA's desire to
reduce its environmental footprint, the TVA Board initiated a Renewable and
Clean Energy Assessment. On March 4, 2008, members of the TVA Board
held a public listening session to receive input from a panel of national
experts and attending members of the public. Additionally, nine
regional meetings were held throughout the Tennessee Valley to provide further
opportunity for public input. This assessment strives to add more
renewable and clean energy resources to help reduce carbon emissions in the
Tennessee Valley environment 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 located in the region. The draft Renewable and Clean Energy
Assessment was posted for a 30-day public comment period.
The
Tennessee Department of Environment and Conservation (“TDEC”) has placed a
portion of Barkley Reservoir downstream of TVA's Cumberland Fossil Plant on its
draft 2008 list of impaired streams. This list is known as the 303d List after
the section in the Clean Water Act that established these
requirements. Section 303d 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. 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 prospect of continued reduced flows through the Cumberland River system
during the period required to complete the necessary repairs to Wolf Creek and
Center Hill Dams may impact the generation of electricity from TVA's Cumberland
and Gallatin Fossil Plants. TVA is working with the Corps and TDEC to minimize
the impacts to TVA's generating plants and improve the conditions observed in
the river in 2007. TVA is also installing temporary cooling towers at
its 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 decision to remove coal- and oil-fired
Electric Generating Units (“EGU”) from the list of stationary sources whose
hazardous air pollutant (“HAP”) emissions are subject to the Maximum Achievable
Control Technology (“MACT”) standards under section 112 of the Clean Air
Act. Vacating the EPA’s delisting decision, the D.C. Circuit
concluded, also required vacation and remand of 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 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.
The D.C.
Circuit’s decision may also have the effect of reviving interest in Congress in
adopting multi-pollutant control legislation focused only on the electric power
sector. Among other things, such an approach could seek to establish coordinated
caps for power plant emissions of mercury, sulfur dioxide (“SO2”),
nitrogen oxides (“NOx”), and
carbon dioxide (”CO2”).
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
decline by more than 35 percent, primarily as a result of the controls TVA is
installing to reduce SO2 and
NOx
emissions.
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
(2013-2030) depending on the severity of the ozone problem.
TVA contributes to ambient ozone levels
primarily as a result of NOx emissions
from fossil-fired power plants. As a result of its aggressive emission reduction
program, TVA’s summertime NOx emissions
have declined substantially as reported in the 2007 Annual Report.
Based on 2005-2007 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.
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.
TVA is subject to various legal
proceedings and claims that have arisen in the ordinary course of business.
These proceedings and claims include the matters discussed below. In accordance
with SFAS No. 5, “Accounting
for Contingencies,” TVA had accrued approximately $27 million with
respect to the proceedings described below as of March 31, 2008, as well as
approximately $4 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.
Case Involving Alleged
Violations of the New Source Review and New Source Performance Standard
Regulations at Colbert Fossil Plant. The National Parks
Conservation Association, Inc. (“NPCA”), and Sierra Club, Inc. (“Sierra Club”),
filed suit on February 13, 2001, in the United States District Court for the
Northern District of Alabama, alleging that TVA violated the Clean Air Act
(“CAA”) and various Nonattainment New Source Review (“NNSR”) implementing
regulations at Colbert, a coal-fired electric generating facility located in
Tuscumbia, Alabama. The plaintiffs allege that TVA made major
modifications to Colbert Unit 5 without obtaining a preconstruction permit and
without complying with NNSR and New Source Performance Standard (“NSPS”)
emission limits. The plaintiffs seek injunctive relief and civil
penalties. The district court held that sovereign immunity precluded
the plaintiffs from recovering civil penalties against TVA and also dismissed
the lawsuit on statute of limitations grounds, and the United States Court of
Appeals for the Eleventh Circuit (“Eleventh Circuit”) affirmed. In
January 2008, the plaintiffs filed a petition, asking the Supreme Court to
review the Eleventh Circuit’s dismissal of the case.
Case Involving Alleged
Violations of the New Source Review Regulations at Bull Run Fossil
Plant. The NPCA and the Sierra Club filed suit 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. The district court dismissed the lawsuit on statute of
limitations grounds. The plaintiffs appealed to the United States
Court of Appeals for the Sixth Circuit (“Sixth Circuit”), and the Sixth Circuit
reversed the lower court. The district court has set the case for
trial on September 2, 2008. TVA is already installing or has
installed the control equipment that the plaintiffs seek to require TVA to
install in this case, and it is unlikely that an adverse decision will result in
substantial additional costs to TVA at Bull Run. An adverse decision,
however, might influence similar litigation, if filed, in the future, and it is
uncertain whether TVA would bear significant increased costs.
Case Involving Opacity at
Colbert. On September 16, 2002, the Sierra Club and the
Alabama Environmental Council filed suit in the United States District Court for
the Northern District of Alabama alleging that TVA violated CAA opacity limits
applicable to Colbert between July 1, 1997, and June 30, 2002. The
plaintiffs seek a court order that could require TVA to incur substantial
additional costs for environmental controls and pay civil penalties of up to
approximately $250 million. After the district court dismissed the
complaint (finding that the challenged emissions were within Alabama’s two
percent de minimis rule, which provided a safe harbor if nonexempt opacity
monitor readings over 20 percent did not occur more than two percent of the time
each quarter), the plaintiffs appealed the district court’s decision to the
Eleventh Circuit. On November 22, 2005, the Eleventh Circuit affirmed
the district court’s dismissal of the civil penalty demands, held that the
Alabama de minimis rule was not applicable because Alabama had not yet obtained
EPA approval of that rule, and remanded the case to the district
court. On August 27, 2007, 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,
and the district court has decided to conduct a hearing on the
matter. EPA is considering Alabama’s de minimis rule, and, if it
approves the rule, the lawsuit will become moot.
In
addition to Colbert, TVA has another coal-fired power plant in Alabama, Widows
Creek Fossil Plant (“Widows Creek”), which has a winter net dependable
generating capacity of 1,628 megawatts. Since the operation of Widows
Creek must meet the same opacity requirements as Colbert, this plant will likely
be affected by the decision in this case. The proposed Alabama de
minimis rule would help reduce or eliminate the chances of an adverse effect on
Widows Creek from the district court decision.
Global Warming Cases,
Southern District of New York. On July 21, 2004, two lawsuits
were filed against TVA and certain other utilities 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 rather
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. Both lawsuits were dismissed and are currently on
appeal to the United States Court of Appeals for the Second
Circuit.
Global Warming 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. The district court
dismissed the case, and the plaintiffs have appealed to the United States Court
of Appeals for the Fifth Circuit.
Case Brought by North
Carolina Alleging Public Nuisance. On January 30, 2006, North
Carolina filed suit against TVA in the United States District Court for the
Western District of North Carolina alleging that TVA’s operation of its
coal-fired power plants in Tennessee, Alabama, and Kentucky constitute public
nuisances. North Carolina is asking the district court to impose caps
on emissions 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 district court has set a trial date
of July 14, 2008. TVA appealed the district court’s failure to
dismiss this case to the full United States Court of Appeals for the Fourth
Circuit (“Fourth Circuit”). The full Fourth Circuit denied TVA’s
appeal, and TVA is considering whether to request that the Supreme Court hear
the appeal.
East Kentucky Power
Cooperative Transmission Case. In April 2003, Warren Rural
Electric Cooperative Corporation (“Warren”) notified TVA that it was terminating
its TVA power contract. Warren then entered into an arrangement with
East Kentucky Power Cooperative, Inc. (“East Kentucky”) under which Warren would
become a member of East Kentucky, and East Kentucky would supply power to Warren
after its power contract with TVA expires in 2009. East Kentucky
asked TVA to provide transmission service to East Kentucky for its service to
Warren. TVA denied the request on the basis that, under the
anti-cherrypicking provision, it was not required to provide the requested
transmission service. East Kentucky then asked to interconnect its
transmission system with the TVA transmission system in three places that are
currently delivery points through which TVA supplies power to
Warren. TVA did not agree, and East Kentucky asked FERC to order TVA
to provide the interconnections. In January 2006, FERC issued a final
order directing TVA to interconnect its transmission facilities with East
Kentucky’s system at three locations on the TVA transmission
system. On August 11, 2006, TVA filed an appeal in the United States
Court of Appeals for the District of Columbia Circuit (the “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. On December 12, 2007, FERC terminated the proceeding but
did not vacate its previous orders. 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. On April 19, 2007, AREVA filed suit in the
United States District Court for the Eastern District of Tennessee seeking $25.8
million and alleging that the contract required TVA to purchase certain amounts
of fuel and/or to pay a cancellation fee. On June 15, 2007, AREVA
raised its claim for damages to $47.9 million. Trial on the question
of liability is scheduled to begin on September 29, 2008. A second
trial on the question of damages will be held later, if necessary.
Notification of Potential
Liability for Ward Transformer Site. EPA and a working group
of potentially responsible parties (“PRPs”) have provided documentation showing
that TVA sent electrical equipment containing PCBs to the Ward Transformer site
in Raleigh, North Carolina. Under the Comprehensive Environmental
Response, Compensation, and Liability Act (“CERCLA”), any entity which arranges
for disposal of a CERCLA hazardous substance at a site may bear liability for
the cost of cleaning up the site. The working group is cleaning up
on-site contamination in accordance with an agreement with EPA and plans to sue
non-participating PRPs for contribution. The estimated cost of the
cleanup is $20 million. In addition, EPA likely has incurred several
million dollars in response costs, and the working group has reimbursed EPA
approximately $725,000 of those costs. EPA has also proposed a
cleanup plan for off-site contamination. The present worth cost
estimate for performing the proposed plan is about $5 million, which would be
shared by the participants. In addition, there may be natural
resource damages liability related to this site, but TVA is not aware of any
estimated amount for any such damages.
Completion of Browns Ferry
Unit 1, Team Incentive Fee Pool Claims. Under the
contracts for the restart of TVA’s Browns Ferry Unit 1, TVA and the engineering
and construction contractors, Bechtel Power Corporation and Stone & Webster
Construction, Inc., respectively, are to share in a team incentive fee pool
funded from cost savings 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.
Currently, TVA has calculated each contractor’s share at $12,371,405, for
a total payout under both contracts of $24,742,810. The parties have
submitted this matter to nonbinding mediation which is scheduled for May
2008. It is reasonably possible that TVA could incur some potential
liability in excess of the amount previously calculated by TVA, but TVA is
unable to estimate any such amount at this time.
Notice of Violation at
Widows Creek Unit 7. On July 16, 2007, TVA received a Notice
of Violation (“NOV”) from EPA as a result of TVA’s failure to properly maintain
ductwork at Widows Creek Unit 7. From 2002 to 2005, the unit’s ducts
allowed SO2 and
nitrogen oxides NOx to escape
into the air. TVA repaired the ductwork in 2005, and the problem has
been resolved. TVA is reviewing the NOV. While the NOV
does not set out an administrative penalty, it is likely that TVA will face a
monetary sanction through giving up emission allowances, paying an
administrative penalty, or both. TVA 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 for which it may be liable in connection with the NOV from
EPA.
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 Clean Air Act 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 New Source Review enforcement
initiative. TVA plans to respond to this request.
Significant Litigation to
Which TVA Is Not a Party, United
States v. Duke Energy. On April 2, 2007, the Supreme Court
issued an opinion in the case of United States v. Duke Energy,
vacating the ruling of the Fourth Circuit in favor of Duke Energy and
against EPA in EPA’s NSR enforcement case against Duke Energy. The
NSR regulations apply primarily to the construction of new plants but can apply
to existing plants if a maintenance project (1) is “non-routine” and (2)
increases emissions. The Supreme Court held that the test for
emission increases under the NSR program does not have to be the same as the
test under the NSPS program. In light of the decision, it appears
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 on this issue, holding that “routine” must take into account what is
routine in the industry and not just what is routine at a particular plant or
unit as EPA has argued. EPA did not appeal this ruling. On October 5,
2007, EPA filed a motion with the United States District Court for the Middle
District of North Carolina asking that court to vacate its entire prior ruling,
including the portion relating to the test for “routine” projects.
TVA is currently involved in two NSR
cases (one involving Bull Run, the dismissal of which was recently reversed on
appeal) and another at Colbert (the dismissal of which was recently affirmed on
appeal but may be reviewed by the Supreme Court). These cases are
discussed in more detail above. The Supreme Court’s holding could
undermine one of TVA’s defenses in these cases, although TVA has other available
defenses. Environmental groups and North Carolina have given TVA
notice in the past that they may sue TVA for alleged NSR violations at a number
of TVA units. The Supreme Court’s decision in Duke Energy 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 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
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.
There are no material changes related
to market risk from the market risks disclosed under Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Activities in
the Annual Report.
Disclosure
Controls and Procedures
An evaluation has been performed under
the supervision of TVA management (including the president and chief executive
officer) and members of the disclosure control committee (including the chief
financial officer and the vice president and controller) of the effectiveness
and the design of TVA’s disclosure controls and procedures as of March 31,
2008. Based on that evaluation, the president and chief executive
officer and members of the disclosure control committee (including the chief
financial officer and the vice president and controller) concluded that TVA’s
disclosure controls and procedures were effective as of March 31, 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. This includes controls and
procedures designed to ensure that such information is accumulated and
communicated to TVA management, including the president and chief executive
officer, the disclosure control committee, and the chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure.
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.
Changes
in Internal Control over Financial Reporting
During the most recent fiscal quarter,
there were no changes in TVA’s internal control over financial reporting that
materially affected, or are reasonably likely to materially affect, TVA’s
internal control over financial reporting.
ITEM
1. LEGAL PROCEEDINGS
See Note 8 in this Quarterly Report for
a discussion of legal proceedings affecting TVA.
ITEM
1A. RISK FACTORS
There are no material changes related
to risk factors from the risk factors disclosed under Item 1A in the Annual
Report.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
On May 9, 2008, TVA renewed the
$1,250,000,000 credit facility with Bank of America, N.A.
that expires on May 14, 2008. The new maturity date for this credit
facility is May 13, 2009.
Exhibit
No.
|
Description
|
|
3.1
|
TVA’s
Bylaws adopted by the Board on May 18, 2006, as amended on April 3, 2008
(marked to reflect the April 3, 2008 amendments)
|
|
10.1
|
Assumption
Agreement between TVA and Incapital LLC dated as of February 29, 2008,
relating to the electronotes®
Selling Agent Agreement dated as of June 1, 2006, among TVA, LaSalle
Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global
Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank
National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, and Wachovia Securities, LLC, a copy of which was filed as
Exhibit 10.4 to TVA's Annual Report on Form 10-K filed on December 15,
2006
|
|
31.1
|
Rule 13a-14(a)/15d-14(a)
Certification Executed by the Chief Executive Officer
|
|
31.2
|
Rule 13a-14(a)/15d-14(a)
Certification Executed by the Chief Financial Officer
|
|
32.1
|
Section 1350
Certification Executed by the Chief Executive Officer
|
|
32.2
|
Section 1350
Certification Executed by the Chief Financial Officer
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
Date: May
12, 2008
TENNESSEE VALLEY
AUTHORITY
(Registrant)
By: /s/ Tom D.
Kilgore
Tom D. Kilgore
President and Chief Executive
Officer
(Principal Executive
Officer)
By: /s/ Kimberly S.
Greene
Kimberly S. Greene
Chief Financial Officer and
Executive
Vice President,
Financial Services
(Principal Financial
Officer)
Exhibit
No.
|
Description
|
|
3.1
|
TVA’s
Bylaws adopted by the Board on May 18, 2006, as amended on April 3, 2008
(marked to reflect the April 3, 2008 amendments)
|
|
10.1
|
Assumption
Agreement between TVA and Incapital LLC dated as of February 29, 2008,
relating to the electronotes®
Selling Agent Agreement dated as of June 1, 2006, among TVA, LaSalle
Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global
Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank
National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, and Wachovia Securities, LLC, a copy of which was filed as
Exhibit 10.4 to TVA's Annual Report on Form 10-K filed on December 15,
2006
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31.1
|
Rule 13a-14(a)/15d-14(a)
Certification Executed by the Chief Executive Officer
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31.2
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Rule 13a-14(a)/15d-14(a)
Certification Executed by the Chief Financial Officer
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32.1
|
Section 1350
Certification Executed by the Chief Executive Officer
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32.2
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Section 1350
Certification Executed by the Chief Financial Officer
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54