Tennessee Valley Authority - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(MARK
ONE)
x ANNUAL REPORT PURSUANT
TO SECTION 13, 15(d), OR 37 OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended September 30, 2009
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _____ to _____
Commission
file number 000-52313
TENNESSEE
VALLEY AUTHORITY
(Exact
name of registrant as specified in its charter)
A
corporate agency of the United States created by an act of
Congress
(State
or other jurisdiction of incorporation or organization)
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62-0474417
(IRS
Employer Identification No.)
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|
400
W. Summit Hill Drive
Knoxville,
Tennessee
(Address
of principal executive offices)
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37902
(Zip
Code)
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(865)
632-2101
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13, Section 15(d), or Section 37 of the Securities Exchange
Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o Accelerated
filer o
Non-accelerated
filer x Smaller
reporting company o
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act). Yes o No x
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3
GLOSSARY
OF COMMON ACRONYMS
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The
following terms or acronyms frequently used in this Annual Report on Form
10-K (the “Annual Report”) are defined below:
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Term or Acronym
|
Definition
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ADEM
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Alabama
Department of Environmental Management
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AFUDC
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Allowance
for funds used during construction
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ART
|
Asset
Retirement Trust
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ARO
|
Asset
retirement obligation
|
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CAA
|
Clean
Air Act
|
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CAIR
|
Clean
Air Interstate Rule
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CCP
|
Coal
combustion products
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CERCLA
|
Comprehensive
Environmental Response, Compensation, and Liability Act
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CERES
|
Combined
Efficiency and Renewable Electricity Standard
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CO2
|
Carbon
dioxide
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COLA
|
Cost
of living adjustment
|
|
CVA
|
Credit
valuation adjustment
|
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CY
|
Calendar
year
|
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DOE
|
Department
of Energy
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EPA
|
Environmental
Protection Agency
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|
EIS
|
Environmental
Impact Statement
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FASB
|
Financial
Accounting Standards Board
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FCA
|
Fuel
cost adjustment
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FERC
|
Federal
Energy Regulatory Commission
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FPA
|
Federal
Power Act
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FTP
|
Financial
Trading Program
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FWS
|
Fish
and Wildlife Service
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GAAP
|
Accounting
principles generally accepted in the United States of
America
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GHG
|
Greenhouse
gas
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GWh
|
Gigawatt
hour(s)
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kWh
|
Kilowatt
hour(s)
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LIBOR
|
London
Interbank Offered Rate
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MACT
|
Maximum
achievable control technology
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MtM
|
Mark-to-market
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MW
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Megawatt
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Moody’s
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Moody’s
Investors Service, Inc.
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mmBtu
|
Million
British thermal unit(s)
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NDT
|
Nuclear
Decommissioning Trust
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NEPA
|
National
Environmental Policy Act
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NOx
|
Nitrogen
oxides
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NRC
|
Nuclear
Regulatory Commission
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NYMEX
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New
York Mercantile Exchange
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PCB
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Polychlorinated
biphenyls
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REIT
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Real
estate investment trust
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RFP
|
Request
for proposal
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SCR
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Selective
catalytic reduction systems
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SERP
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Supplemental
executive retirement plan
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SO2
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Sulfur
dioxide
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S&P
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Standard
& Poor’s Rating Services
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SSPL
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Seven
States Power Corporation
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SSSL
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Seven
States Southaven, LLC
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TDEC
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Tennessee
Department of Environment and Conservation
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TVARS
|
Tennessee
Valley Authority Retirement
System
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This
Annual Report contains forward-looking statements relating to future events and
future performance. All statements other than those that are purely
historical may be forward-looking statements. In certain cases,
forward-looking statements can be identified by the use of words such as “may,”
“will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “project,”
“plan,” “predict,” “assume,” “forecast,” “estimate,” “objective,” “possible,”
“probably,” “likely,” “potential,” or other similar expressions.
Although the Tennessee Valley Authority
(“TVA”) believes that the assumptions underlying the forward-looking statements
are reasonable, TVA does not guarantee the accuracy of these
statements. Numerous factors could cause actual results to differ
materially from those in the forward-looking statements. These
factors include, among other things:
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•
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New
or changed laws, regulations, and administrative orders, including those
related to environmental matters, and the costs of complying with these
new or changed, as well as existing, laws, regulations, and administrative
orders;
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•
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Unplanned
contributions to TVA’s pension or other post-retirement
benefit plans or to TVA’s nuclear decommissioning trust
(“NDT”);
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•
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Significant
delays or cost overruns associated with the cleanup and recovery
activities associated with the ash spill at TVA’s Kingston Fossil Plant
(“Kingston”) or in construction of generation and transmission
assets;
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•
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Fines,
penalties, and settlements associated with the Kingston ash
spill;
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•
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The
outcome of legal and administrative proceedings, including, but not
limited to, proceedings involving the Kingston ash spill and the North
Carolina public nuisance case;
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•
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Significant
changes in demand for electricity;
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•
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Loss
of customers;
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•
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The
performance or failure of TVA’s generation, transmission, and related
assets (including facilities such as coal combustion product
facilities);
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•
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Disruption
of fuel supplies, which may result from, among other things, weather
conditions, production or transportation difficulties, labor challenges,
or environmental regulations affecting TVA’s fuel
suppliers;
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•
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Purchased
power price volatility and disruption of purchased power
supplies;
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•
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Events
at transmission lines and other facilities not operated by TVA, including
those that affect the supply of water to TVA’s generation
facilities;
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•
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Inability
to obtain regulatory approval for the construction of
assets;
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Weather
conditions;
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•
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Events
at a nuclear facility, even one that is not operated by or licensed to
TVA;
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•
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Catastrophic
events such as fires, earthquakes, solar events, floods, tornadoes,
pandemics, wars, terrorist activities, and other similar events,
especially if these events occur in or near TVA’s service
area;
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•
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Reliability
and creditworthiness of
counterparties;
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•
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Changes
in the market price of commodities such as coal, uranium, natural gas,
fuel oil, crude oil, construction materials, electricity, and emission
allowances;
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•
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Changes
in the market price of equity securities, debt securities, and other
investments;
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•
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Changes
in interest rates, currency exchange rates, and inflation
rates;
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Rising pension and health care costs;
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Increases
in TVA’s financial liability for decommissioning its nuclear facilities
and retiring other assets;
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•
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Changes
in the market for TVA’s debt, changes in TVA’s credit rating, or
limitations on TVA’s ability to borrow
money;
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Changes
and volatility in the economy and financial
markets;
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Inability
to eliminate identified deficiencies in TVA’s systems, standards,
controls, and corporate culture;
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Ineffectiveness
of TVA’s disclosure controls and procedures and its internal control over
financial reporting;
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Changes
in accounting standards including any change that would eliminate TVA’s
ability to use regulatory
accounting;
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Problems
attracting and retaining a qualified
workforce;
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Changes
in technology;
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Differences
between estimates of revenues and expenses and actual revenues and
expenses incurred; and
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•
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Unforeseeable
events.
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See also Item 1A, Risk Factors, and
Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations. New factors emerge from time to time, and it is
not possible for management to predict all such factors or to assess the extent
to which any factor or combination of factors may impact TVA’s business or cause
results to differ materially from those contained in any forward-looking
statement.
TVA undertakes no obligation to update
any forward-looking statement to reflect developments that occur after the
statement is made.
Fiscal Year
Unless otherwise indicated, years
(2009, 2008, etc.) in this Annual Report refer to TVA’s fiscal years ended
September 30. References to years in the biographical information
about directors and executive officers in Item 10, Directors, Executive Officers
and Corporate Governance, as well as to years that are preceded by “CY”, are to
calendar years.
Notes
References to “Notes” are to the Notes
to Financial Statements contained in Item 8, Financial Statements and
Supplementary Data in this Annual Report.
Available Information
TVA's Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments
to those reports are available on TVA's web site, free of charge, as soon as
reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (“SEC”). TVA's
web site is www.tva.gov. Information contained on TVA’s web site
shall not be deemed to be incorporated into, or to be a part of, this Annual
Report. TVA's SEC reports are also available to the public without
charge from the web site maintained by the SEC at www.sec.gov. In
addition, the public may read and copy any reports or other information that TVA
files with or furnishes to the SEC at the SEC’s Public Reference Room at 100 F
Street N.E., Washington, D.C. 20549. The public may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330.
In response to a proposal by President
Franklin D. Roosevelt, in 1933, the U.S. Congress created TVA, a government
corporation. TVA was created, among other things, to improve
navigation on the Tennessee River, reduce the damage from destructive flood
waters within the Tennessee River System and downstream on the lower Ohio and
Mississippi Rivers, further the economic development of TVA’s service area in
the southeastern United States, and sell the electricity generated at the
facilities TVA operates.
Today, TVA operates the nation’s
largest public power system and supplies power in most of Tennessee, northern
Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of
northern Georgia, western North Carolina, and southwestern Virginia to a
population of nearly nine million people. In 2009, the revenues
generated from TVA’s electricity sales were $11.1 billion and accounted for
virtually all of TVA’s revenues.
TVA also manages the Tennessee River
and its tributaries — the fifth largest river system in the United States — to
provide, among other things, year-round navigation, flood damage reduction, and
affordable and reliable electricity. Consistent with these primary
purposes, TVA also manages the river system to provide recreational
opportunities, adequate water supply, improved water quality, and economic
development. TVA’s management of the Tennessee River and its
tributaries will sometimes be referred to as TVA’s “stewardship” program in this
Annual Report.
Initially, all TVA operations were
funded by federal appropriations. Direct appropriations for the TVA
power program ended in 1959, and appropriations for TVA’s stewardship, economic
development, and multipurpose activities ended in 1999. Since 1999,
TVA has funded all of its operations almost entirely from the sale of
electricity and power system financings. TVA’s power system
financings consist primarily of the sale of debt securities. TVA is
owned by the United States and is not authorized to issue equity
securities.
The area in which TVA sells power, its
service area, is defined by two federal statutes: the Tennessee Valley Authority
Act of 1933, as
amended, 16 U.S.C. §§ 831-831ee (as amended, the “TVA Act”) and an
amendment to the Federal Power Act (“FPA”) known as the “anti-cherrypicking”
provision.
Under the TVA Act, subject to certain
minor exceptions, TVA may not, without specific authorization from the U.S.
Congress, enter into contracts which would have the effect of making it, or the
distributor customers of its power, a source of power supply outside the area
for which TVA or its distributor customers were the primary source of power
supply on July 1, 1957. This provision is referred to as the “fence”
because it bounds TVA’s sales activities, essentially limiting TVA to power
sales within a defined service area.
Correspondingly, the FPA, primarily
through the anti-cherrypicking provision, prevents the Federal Energy Regulatory
Commission (“FERC”) from ordering TVA to provide access to its transmission
lines to others for the purpose of using TVA’s transmission lines to deliver
power to customers within substantially all of TVA’s defined service
area. As a result, the anti-cherrypicking provision reduces TVA’s
exposure to loss of customers.
Sales of electricity account for
substantially all of TVA’s operating revenues. TVA’s revenues by
state are detailed in the table below.
Operating
Revenues
For
the years ended September 30
(in
millions)
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2009
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2008
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2007
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Electricity
sales by state
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Alabama
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$ | 1,526 | $ | 1,410 | $ | 1,264 | ||||||
Georgia
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264 | 238 | 206 | |||||||||
Kentucky
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1,252 | 1,192 | 1,084 | |||||||||
Mississippi
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1,017 | 923 | 804 | |||||||||
North
Carolina
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58 | 50 | 58 | |||||||||
Tennessee
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6,970 | 6,389 | 5,740 | |||||||||
Virginia
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51 | 37 | 7 | |||||||||
Subtotal
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11,138 | 10,239 | 9,163 | |||||||||
Sale
for resale
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4 | 13 | 17 | |||||||||
Subtotal
|
11,142 | 10,252 | 9,180 | |||||||||
Other
revenues
|
113 | 130 | 146 | |||||||||
Operating
revenues
|
$ | 11,255 | $ | 10,382 | $ | 9,326 |
TVA
SERVICE AREA
TVA is primarily a wholesaler of
power. It sells power to distributor customers, consisting of
municipalities and cooperatives that then resell the power to their customers at
a retail rate. TVA also sells power to directly served customers,
consisting primarily of federal agencies and customers with large or unusual
loads. In addition, power that is excess to the needs of the TVA
system may, where consistent with the provisions of the TVA Act, be sold under
exchange power arrangements with other electric systems.
Operating revenues by customer type for
each of the last three years are set forth in the table below. In
this table, sales to industries directly served are included in Industries directly
served, and sales to federal agencies directly served and to exchange
power customers are included in Federal agencies and
other.
Operating
Revenues by Customer Type
For
the years ended September 30
(in
millions)
|
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2009
|
2008
|
2007
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Municipalities
and cooperatives
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$ | 9,644 | $ | 8,659 | $ | 7,847 | ||||||
Industries
directly served
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1,367 | 1,472 | 1,221 | |||||||||
Federal
agencies and other
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||||||||||||
Federal
agencies directly served
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127 | 108 | 95 | |||||||||
Off-system
sales
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4 | 13 | 17 | |||||||||
Subtotal
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11,142 | 10,252 | 9,180 | |||||||||
Other
revenues
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113 | 130 | 146 | |||||||||
Operating
revenues
|
$ | 11,255 | $ | 10,382 | $ | 9,326 |
Municipalities
and Cooperatives
Revenues from distributor customers
accounted for 86 percent of TVA’s total operating revenues in
2009. At September 30, 2009, TVA had wholesale power contracts with
158 municipalities and cooperatives. Each of these contracts requires
distributor customers to purchase all of their electric power and energy
requirements from TVA.
All distributor customers purchase
power under one of three basic termination notice arrangements:
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•
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Contracts
that require five years’ notice to
terminate;
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•
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Contracts
that require 10 years’ notice to terminate;
and
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•
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Contracts
that require 15 years’ notice to
terminate.
|
The number of distributor customers
with the contract arrangements described above, the revenues derived from such
arrangements in 2009, and the percentage of TVA’s 2009 total operating revenues
represented by these revenues are summarized in the table below.
TVA
Distributor Customer Contracts
As
of September 30, 2009
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Contract
Arrangements*
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Number
of Distributor Customers
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Sales
to Distributor
Customers
in 2009
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Percentage
of Total Operating Revenues in 2009
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(in
millions)
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15-year
termination notice
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5 | $ | 105 | 0.9 | % | |||||||
10-year
termination notice
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48 | 3,174 | 28.2 | % | ||||||||
5-year
termination notice
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103 | 6,310 | 56.1 | % | ||||||||
Termination
notice given**
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2 | 55 | 0.5 | % | ||||||||
Total
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158 | $ | 9,644 | 85.7 | % | |||||||
Notes
*Ordinarily
the distributor customer and TVA have the same termination notice period;
however, in contracts with six of the distributor customers with five-year
termination notices, TVA has a 10-year termination notice (which
becomes a five-year termination notice if TVA loses its discretionary
wholesale rate-setting authority). Also, under TVA’s contract with
Bristol Virginia Utilities, a five-year termination notice may not be
given until January 2018.
**One
contract is due to terminate in December 2009, and the second is due to
terminate in January 2010.
|
TVA’s two largest distributor customers
— Memphis Light, Gas and Water Division (“MLGW”) and Nashville Electric Service
(“NES”) — have contracts with five-year and 10-year termination notice periods,
respectively. Although no single customer accounted for 10 percent or
more of TVA’s total operating revenues in 2009, sales to MLGW and NES accounted
for 9 percent and 8 percent, respectively.
The power contracts between TVA and the
distributor customers provide for purchase of power by the distributor customers
at the wholesale rates established by the TVA Board. Beginning with
2007, rates were automatically adjusted quarterly pursuant to a formula
reflecting changing costs of fuel, purchased power, and emissions
allowances. Effective October 1, 2009, rates will be so adjusted on a
monthly basis rather than a quarterly basis. The
periodic adjustment to reflect the changing costs of fuel, purchased power, and
emission allowances is called the fuel cost adjustment (“FCA”). TVA
and distributor customers are also discussing a rate change proposal that would
revise the wholesale rate structure to implement wholesale demand and energy
rates in place of the end-use rates currently in effect. See Item 1, Business —
Rate Actions.
Under
section 10 of the TVA Act, the TVA Board is authorized to regulate the municipal
and cooperative distributors of TVA power to carry out the purposes of the TVA
Act through contract terms and conditions as well as through rules and
regulations. The TVA Board regulates distributor customers primarily
through the provisions of TVA’s wholesale power contracts. All of the
power contracts between TVA and the distributor customers require that power
purchased from TVA be sold and distributed to the ultimate consumer without
discrimination among consumers of the same class, and prohibit direct or
indirect discriminatory rates, rebates, or other special
concessions. In addition, there are a number of wholesale power
contract provisions through which TVA seeks to ensure that the electric system
revenues of the distributor customers are used only for electric system
purposes. Furthermore, almost all of these contracts specify the
specific resale rates and charges at which the distributor customers must resell
TVA power to their customers. These rates are revised from time to
time, subject to TVA approval, to reflect changes in costs, including changes in
the wholesale cost of power. The regulatory provisions in TVA’s
wholesale power contracts help carry out the TVA Act’s objective of providing
for an adequate supply of power at the lowest feasible rates.
Other
Customers
Revenues from industrial customers
directly served accounted for 12 percent of TVA’s total operating revenues in
2009. In 2009, contracts for customers directly served were generally
for terms ranging from five to 10 years. These contracts are subject
to termination by TVA or the customer upon a minimum notice period that varies
according to the customer’s contract demand and the period of time service has
been provided.
The
United States Enrichment Corporation (“USEC”) is TVA’s largest industrial
customer directly served. Sales to USEC for its Paducah, Kentucky
facility represented 5 percent of TVA’s total operating revenues in
2009. TVA’s current contract with USEC expires on May 31,
2012. See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations — Risk Management Activities
— Credit
Risk. In January 2004, USEC announced its decision to
construct a new commercial centrifuge facility in Piketon, Ohio, which is outside
TVA’s service area. TVA believes that if the facility is constructed,
USEC would reduce its electricity purchases at the Paducah, Kentucky facility
from about 2,000 megawatts (“MW”) at its peak to less than 50 MW. On
August 4, 2009, the U.S. Department of Energy (“DOE”) and USEC announced a
decision to delay DOE’s final review of a USEC loan guarantee application for
the Piketon, Ohio facility. In light of this event, it is possible
that the Paducah, Kentucky facility may continue to operate until CY 2017 or CY
2018.
TVA is
self-regulated with respect to rates, and the TVA Act gives the TVA Board sole
responsibility for establishing the rates TVA charges for
power. These rates are not subject to judicial review or to review or
approval by any state or federal regulatory body.
Under the TVA Act, TVA is required to
charge rates for power which will produce gross revenues sufficient to provide
funds for:
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•
|
Operation,
maintenance, and administration of its power
system;
|
|
•
|
Payments
to states and counties in lieu of taxes (“tax
equivalents”);
|
|
•
|
Debt
service on outstanding
indebtedness;
|
|
•
|
Payments
to the U.S. Treasury in repayment of and as a return on the government’s
appropriation investment in TVA’s power facilities (the “Power Facility
Appropriation Investment”); and
|
|
•
|
Such
additional margin as the TVA Board may consider desirable for investment
in power system assets, retirement of outstanding bonds, notes, or other
evidences of indebtedness (“Bonds”) in advance of maturity, additional
reduction of the Power 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.
In setting rates to cover the costs set
out in the TVA Act, TVA uses a debt-service coverage (“DSC”) methodology to
derive annual revenue requirements in a manner similar to that used by other
public power entities that also use the DSC rate methodology. The DSC
method ensures that an organization will be able to cover its operating costs
and to satisfy its obligations to pay principal and interest on
debt. This ratemaking approach is particularly suitable for use by
enterprises financed primarily, if not entirely, by debt capital, such as
TVA.
TVA’s rate requirements (or projected
costs) are calculated under the DSC method as the sum of the following
components:
|
•
|
Fuel
and purchased power costs;
|
|
•
|
Operating
and maintenance costs;
|
|
•
|
Tax
equivalents; and
|
|
•
|
Debt
service coverage.
|
This
methodology reflects the cause-and-effect relationship between a regulated
entity’s costs and the corresponding rates the entity charges for its regulated
products and services. Once the revenue requirements (or projected
costs) are determined, this amount is compared to the projected revenues for the
year in question, at existing rates, to arrive at the shortfall or surplus of
revenues as compared to the projected costs. Subject to TVA Board
approval, power rates would be adjusted to a level sufficient to produce
revenues approximately equal to projected costs. In addition, as
discussed above, the rates established under the DSC method are adjusted by the
FCA.
Under
accounting principles generally accepted in the United States of America
(“GAAP”), TVA is entitled to use regulatory accounting. TVA’s Board
is authorized by the TVA Act to set rates for power sold to its
customers. Additionally, TVA’s regulated rates are designed to
recover its costs of providing electricity. 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. Further, TVA’s Board has the discretion to determine when
costs will be recovered in rates. As a result of these factors, TVA
records certain assets and liabilities that result from the regulated ratemaking
process that would not be recorded under GAAP for non-regulated
entities. Regulatory assets generally represent incurred costs that
have been deferred because such costs are probable of future recovery in
customer rates. Regulatory liabilities generally represent
obligations to make refunds to customers for previous collections for costs that
are not likely to be incurred or deferral of gains that will be credited to
customers in future periods. TVA assesses whether the regulatory
assets are probable of future recovery by considering factors such as applicable
regulatory changes, potential legislation, and changes in
technology. This determination reflects the current regulatory and
political environment and is subject to change in the future. If
future recovery of regulatory assets ceases to be probable or any of the other
factors described above cease to be applicable, TVA would be required to write
off these regulatory assets or liabilities. Most regulatory asset or
liability write-offs would be required to be recognized in earnings in the
period in which future recovery ceases to be probable.
2009 Rate Adjustment
On August
20, 2008, the TVA Board approved a 3 percent increase in the base portion of
TVA’s firm wholesale rates effective October 1, 2008. A quarterly FCA
increase of 17 percent also became effective on October 1, 2008. This
FCA increase was followed by quarterly FCA reductions of 6 percent, 7 percent,
and 4 percent, respectively, on January 1, 2009, April 1, 2009, and July 1,
2009. In addition, pursuant to a revised FCA formula approved by the
TVA Board at its August 20, 2009 meeting to convert the FCA to monthly rather
than quarterly operation, TVA reduced its FCA for the billing month beginning
October 1, 2009, by an average of 11 percent on the average firm wholesale
rate. The combined FCA reductions more than offset the 17 percent FCA
increase on October 1, 2008, and resulted primarily from lower than forecasted
fuel and purchased power costs and lower sales. On August 20,
2009, the TVA
Board also approved a nine percent increase to the base rate portion of TVA’s
firm wholesale electric rates, effective October 1, 2009. The 9
percent increase in base wholesale rates results in an 8 percent increase on the
average firm wholesale rate for end-use customers when the FCA component is
considered in the total rate.
Current Rate Structure
TVA’s existing rate structure with its
distributors is based on end-use customer demand and/or energy
consumption. Under this rate structure, wholesale charges are
specified for each customer classification, and each distributor’s wholesale
bill reflects the application of these charges to its actual end-use consumers’
volumes within each classification. A demand and energy rate
structure applies to TVA’s directly served customers.
Proposed Rate Change
On July
8, 2009, in accordance with the rate change provisions of its wholesale power
contracts, TVA issued a letter to its distributor customers proposing the
implementation of a new rate structure in 2010. This letter initiated
a required negotiation period during which TVA is seeking to reach agreement
with distributors on the proposed changes to wholesale and retail
rates. The proposed changes are not intended to provide additional
revenue for TVA; however, individual distributors and end-use customers may see
some effects on their bills. The proposed rate structures would
provide price signals intended to incentivize distributors and end-use customers
to shift energy usage from high cost periods to less expensive
periods. For distributors, the wholesale rates would initially be a
demand and energy rate with an option for a time-of-use rate. TVA is
proposing to have all distributors on a time-of-use wholesale rate structure by
no later than April 2012. For directly served customers and
distributor-served customers with loads in excess of 5 MW, TVA is proposing a
time-of-use rate structure. Under the power contract rate change
provisions, if agreement is not reached by January 4, 2010, the TVA Board may
thereafter, upon not less than 30 days’ notice, place into effect the changes
that it determines to be appropriate.
General
Power generating facilities operated by
TVA at September 30, 2009, included 29 conventional hydroelectric sites, one
pumped storage hydroelectric site, 11 coal-fired sites, three nuclear sites, 11
combustion turbine sites, two diesel generator sites, one wind energy site, one
digester gas site, one biomass cofiring site, and 15 solar energy sites. In
addition, TVA acquires power under power purchase agreements of varying duration
as well as short-term contracts of less than 24-hours in duration.
On average, TVA’s generation fleet is
among the oldest of any utility in the southeastern United States. As
of September 30, 2009, the weighted average age of TVA’s coal-fired generation
assets was 47 years. During recent years, TVA has invested
substantially less in maintaining its generation assets than surrounding
utilities. Although TVA is planning to increase its maintenance
expenditures on its generating assets in 2010, some assets may not operate as
planned in the future in light of their age.
The
following table summarizes TVA’s net generation in millions of kilowatt-hours
(“kWh”) by generating source and the percentage of all electric power generated
by TVA for the years indicated:
Power
Supply from TVA-Operated Generation Facilities
For
the years ended September 30
(millions
of kWh)
|
||||||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
Coal-fired
|
76,794 | 53 | % | 98,752 | 62 | % | 100,169 | 64 | % | 99,598 | 64 | % | 98,361 | 62 | % | |||||||||||||||||||||||||
Nuclear
|
53,047 | 37 | % | 51,371 | 33 | % | 46,441 | 30 | % | 45,313 | 29 | % | 45,156 | 28 | % | |||||||||||||||||||||||||
Hydroelectric
|
11,421 | 8 | % | 6,685 | 4 | % | 9,047 | 6 | % | 9,961 | 6 | % | 15,723 | 10 | % | |||||||||||||||||||||||||
Combustion
turbine and diesel generators
|
3,481 | 2 | % | 1,386 | 1 | % | 705 | <1 | % | 613 | <1 | % | 595 | <1 | % | |||||||||||||||||||||||||
Renewable
resources (non-hydro)
|
29 | <1 | % | 39 | <1 | % | 27 | <1 | % | 36 | <1 | % | 47 | <1 | % | |||||||||||||||||||||||||
Total
|
144,772 | 100 | % | 158,233 | 100 | % | 156,389 | 100 | % | 155,521 | 100 | % | 159,882 | 100 | % | |||||||||||||||||||||||||
Net
Capability
The following table summarizes the
summer net capability in MW TVA had available as of September 30,
2009:
SUMMER
NET CAPABILITY1
As
of September 30, 2009
|
|||||||||||||||||
Source
of Capability
|
Location
|
Number
of
Units
|
Summer
Net Capability (MW)
|
Date
First Unit Placed in Service
|
Date
Last Unit Placed in Service
|
||||||||||||
TVA-OPERATED GENERATING
FACILITIES
|
|||||||||||||||||
Coal-Fired
|
|||||||||||||||||
Allen
|
Tennessee
|
3 | 741 | 1959 | 1959 | ||||||||||||
Bull
Run
|
Tennessee
|
1 | 870 | 1967 | 1967 | ||||||||||||
Colbert
|
Alabama
|
5 | 1,184 | 1955 | 1965 | ||||||||||||
Cumberland
|
Tennessee
|
2 | 2,470 | 1973 | 1973 | ||||||||||||
Gallatin
|
Tennessee
|
4 | 976 | 1956 | 1959 | ||||||||||||
John
Sevier
|
Tennessee
|
4 | 704 | 1955 | 1957 | ||||||||||||
Johnsonville
|
Tennessee
|
10 | 1,206 | 1951 | 1959 | ||||||||||||
Kingston
|
Tennessee
|
9 | 1,425 | 1954 | 1955 | ||||||||||||
Paradise
|
Kentucky
|
3 | 2,201 | 1963 | 1970 | ||||||||||||
Shawnee
|
Kentucky
|
10 | 1,330 | 1953 | 1956 | ||||||||||||
Widows
Creek
|
Alabama
|
8 | 1,604 | 1952 | 1965 | ||||||||||||
Total
Coal-Fired
|
59 | 14,711 | |||||||||||||||
Nuclear
|
|||||||||||||||||
Browns
Ferry
|
Alabama
|
3 | 3,242 | 1974 | 1977 | ||||||||||||
Sequoyah
|
Tennessee
|
2 | 2,282 | 1981 | 1982 | ||||||||||||
Watts
Bar
|
Tennessee
|
1 | 1,100 | 1996 | 1996 | ||||||||||||
Total
Nuclear
|
6 | 6,624 | |||||||||||||||
Hydroelectric
|
|||||||||||||||||
Conventional
Plants
|
Alabama
|
36 | 1,188 | 1925 | 1962 | ||||||||||||
Georgia
|
2 | 35 | 1931 | 1956 | |||||||||||||
Kentucky
|
5 | 225 | 1944 | 1948 | |||||||||||||
North
Carolina
|
6 | 495 | 1940 | 1956 | |||||||||||||
Tennessee
|
60 | 1,898 | 1912 | 1972 | |||||||||||||
Pumped
Storage
|
Tennessee
|
4 | 1,653 | 1978 | 1979 | ||||||||||||
Total
Hydroelectric
|
113 | 5,494 | |||||||||||||||
Natural Gas & Oil-Fired2
|
|||||||||||||||||
Allen
|
Tennessee
|
20 | 452 | 1971 | 1972 | ||||||||||||
Brownsville
|
Tennessee
|
4 | 460 | 2008 | 2008 | ||||||||||||
Caledonia
|
Mississippi
|
3 | 768 | 2007 | 2007 | ||||||||||||
Colbert
|
Alabama
|
8 | 384 | 1972 | 1972 | ||||||||||||
Gallatin
|
Tennessee
|
8 | 588 | 1975 | 2000 | ||||||||||||
Gleason
|
Tennessee
|
3 | 494 | 2007 | 2007 | ||||||||||||
Johnsonville
|
Tennessee
|
20 | 1,104 | 1975 | 2000 | ||||||||||||
Kemper
|
Mississippi
|
4 | 304 | 2001 | 2001 | ||||||||||||
Lagoon
Creek
|
Tennessee
|
12 | 932 | 2002 | 2002 | ||||||||||||
Marshall
County
|
Kentucky
|
8 | 608 | 2007 | 2007 | ||||||||||||
Southaven
|
Mississippi
|
3 | 777 | 2008 | 2008 | ||||||||||||
Total
Natural Gas & Oil-Fired
|
93 | 6,871 | |||||||||||||||
Diesel Generator
|
|||||||||||||||||
Meridian
|
Mississippi
|
5 | 9 | 1998 | 1998 | ||||||||||||
Albertville
|
Alabama
|
4 | 4 | 2000 | 2000 | ||||||||||||
Total
Diesel Generators
|
9 | 13 | |||||||||||||||
Renewable Resources
(non-hydro)
|
3 | ||||||||||||||||
Total
TVA Generating Facilities
|
33,716 | ||||||||||||||||
POWER PURCHASE AND OTHER
AGREEMENTS
|
2,774 | ||||||||||||||||
Total
Summer Net Capability
|
36,490 | ||||||||||||||||
Notes
(1) Net
capability is defined as the ability of an electric system, generating
unit, or other system component to carry or generate power for a specified
time period.
(2) See
Item 1, Business — Current Power Supply —
Combustion Turbine
Facilities for a discussion of the natural gas and oil-fired
facilities operated by TVA.
|
Coal
TVA has
11 coal-fired power sites consisting of 59 units. At September 30,
2009, these facilities accounted for 14,711 MW of summer net
capability. TVA began its fossil-plant construction program in the
1940s and its coal-fired units were placed in service between 1951 and 1973.
TVA anticipates that clean air
regulations will require that all coal-fired plants eventually have clean air
controls, consisting of scrubbers and selective catalytic reduction systems
(“SCRs”) for sulfur dioxide (“SO2”),
nitrogen oxide (“NOx”), and
mercury control. Also, TVA expects that legislation will eventually
require it to reduce carbon dioxide (“CO2”)
emissions or purchase CO2
allowances. Although TVA uses scrubbers on
its largest generating units and low sulfur coal on other units to remove
SO2,
and SCRs and other controls to reduce NOx emissions,
several of TVA’s older coal-fired plants do not have clean air controls, and
their lower efficiency leads to higher CO2 emission
rates. These less efficient units have been less economical in recent
periods. Due to the age, lower capacity, and lower efficiency of some
plants, it may not be economical to install new clean air controls; accordingly,
TVA may choose to retire some coal-fired units.
See Item
7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Challenges During
2009 for a discussion of the challenges of dealing with coal combustion
byproducts, and Note 7 for a discussion of the Kingston ash spill.
Nuclear
TVA has three nuclear sites
consisting of six units in operation. The units at Browns Ferry
Nuclear Plant are boiling water reactor units and the units at the Sequoyah and
Watts Bar Nuclear Plants are pressurized water reactor units. At
September 30, 2009, these facilities accounted for 6,624 MW of summer net
capability. In addition, construction has resumed on Watts Bar Unit
2, and that unit is scheduled to be placed in service in the fall of CY
2012. Statistics
for each of these units are included in the table below.
TVA
Nuclear Power
As
of September 30, 2009
|
|||||||||||||||||
Nuclear
Unit
|
Status
|
Installed
Capacity (MW)
|
Net
Capacity Factor for 2009
|
Date
of Expiration of Operating License
|
Date
of Expiration of Construction Permit
|
||||||||||||
Sequoyah
Unit 1
|
Operating
|
1,221 | 87.3 | 2020 | — | ||||||||||||
Sequoyah
Unit 2
|
Operating
|
1,221 | 93.6 | 2021 | — | ||||||||||||
Browns
Ferry Unit 1
|
Operating
|
1,150 | 80.6 | 2033 | — | ||||||||||||
Browns
Ferry Unit 2
|
Operating
|
1,190 | 79.2 | 2034 | — | ||||||||||||
Browns
Ferry Unit 3
|
Operating
|
1,190 | 95.1 | 2036 | — | ||||||||||||
Watts
Bar Unit 1
|
Operating
|
1,230 | 96.0 | 2035 | — | ||||||||||||
Watts
Bar Unit 2
|
Construction
resumed in December 2007
|
— | — | — | 2013 |
On August 5, 2009, TVA notified the NRC
of its intent to submit license renewal applications for both Sequoyah Nuclear
Plant units in the third quarter of 2013. If approved, the licenses
for both units would be extended by an additional 20 years. Prior to
the 2013 submittal date, TVA will prepare a detailed application and perform the
necessary environmental reviews. After submittal, the NRC reviews are
expected to take up to three years.
See Item 1, Business — Environmental Matters — Spent
Nuclear Fuel for a discussion of spent nuclear fuel, Item 1, Business
— Environmental Matters
— Low-Level Radioactive Waste
for a discussion of low-level radioactive waste, Note 20 — Contingencies — Decommissioning
Costs for a discussion of TVA’s nuclear decommissioning liabilities and
related trust, and Note 20 —
Contingencies — Nuclear Insurance for a discussion of nuclear insurance,
which discussions are incorporated herein by reference.
Hydroelectric
TVA
maintains 29 conventional hydroelectric dams throughout the Tennessee River
system and one pumped-storage facility for the production of
electricity. At September 30, 2009, these facilities accounted for
5,494 MW of summer net capability. The amount of electricity that TVA
is able to generate from its hydroelectric plants depends on a number of factors
outside TVA’s control, including the amount of precipitation, runoff, initial
water levels, and the need for water for competing water management
objectives. The amount of electricity generation is also dependent
upon the availability of its hydroelectric generation plants, which is in TVA’s
control. When these factors are unfavorable, TVA must increase its
reliance on more expensive generation plants and purchased power. In
addition, four hydroelectric dams owned by Alcoa Power Generating, Inc. on the
Little Tennessee River and eight U.S. Army Corps of Engineers dams on the
Cumberland River contribute to the TVA power system. With drought
conditions easing in TVA’s service area in 2009, TVA realized increased
conventional hydroelectric generation. See Item 1, Business — Weather and Seasonality.
TVA’s
Hydro Modernization Program (“HMOD”) began in 1992 to address reliability issues
on a majority of its conventional hydroelectric units and on its Raccoon
Mountain pumped storage facility. As currently planned, the HMOD
program is scheduled to be completed in 2030. As of September 30,
2009, updates to 57 hydroelectric units had been completed. The
capacity gain has been 564 MW, and the average
efficiency gain has been 5.0 percent. There are 38 units remaining to
be updated for reliability and/or capacity increases.
A
preliminary analysis that was part of TVA’s update to its hydrology model
indicated that dam overtopping would occur at four TVA dams under the model’s
assumptions that define “probable maximum flood” levels. While the
“probable maximum flood” is an extremely unlikely event, TVA is taking actions
with the aim of ensuring that overtopping would not occur even under these
conditions. TVA plans to implement interim dam modifications by
January 1, 2010. Permanent dam modifications are being planned to
prevent the “probable maximum flood” from overtopping these dams, and cost
estimates, which could reach several tens of millions of dollars per dam, are
being prepared.
As a
result of the update, TVA is performing additional hydrologic assessments at
most of its other dams to determine how many of these dams may also be
susceptible to unacceptable overtopping during the “probable maximum
flood.” The total financial impact of permanent modifications to any
additional dams which may be identified as a result of the ongoing assessment
will be determined as these assessments are completed in 2010.
Combustion Turbine
Facilities
As of September 30, 2009, TVA operated
93 combustion turbine units, 87 of which are simple cycle and six of which are
combined cycle. The simple cycle units provide a maximum of 5,326 MW
of summer net capability. The six combined cycle units provide a
maximum of 1,545 MW of summer net capability. Eighty of the simple
cycle units are fueled by either natural gas or diesel fuel. The
remaining seven simple cycle units as well as the six combined cycle units were
fueled by natural gas only. Seventy-six of the simple cycle units are
capable of quick-start response allowing full generation capability in
approximately 10 minutes. TVA uses combustion turbines as peaking or
backup units. Their relatively low capital requirement and quick
start-up capabilities make them favorable for intermittent operation to generate
power at periods of high demand or to provide ancillary
services. Additionally, low natural gas prices during 2009 have made
these units more economical to operate. As of September 30, 2009, 24
of the simple cycle combustion turbine units were leased by private entities and
leased back to TVA under long-term leases, and TVA leases the three Caledonia
combined cycle units under a long term lease. In addition, as of
September 30, 2009, Seven States Southaven, LLC (“SSSL”) owned an undivided 90
percent interest in the three Southaven combined cycle units, and TVA has
entered into an agreement under which TVA leases SSSL’s undivided 90 percent
interest in Southaven and operates the entire facility through April 30,
2010. For additional details, see Note 11.
Diesel Generators
TVA has two diesel generator plants
consisting of nine units. At September 30, 2009, these facilities
provided 13 MW of summer net capability.
Renewable Resources
TVA has one wind energy site with three
wind turbines, one biomass cofiring site, one digester gas cofiring site, and 15
solar energy sites. At September 30, 2009, the digester gas cofiring
site provided TVA with about three MW of renewable summer net
capability. In addition, the wind energy site, the solar energy
sites, and the biomass cofiring site provided additional capability, but because
of the nature of this capability, it is not considered to be summer net
capability.
Purchased Power and Other
Agreements
Prices for purchased power were 36
percent lower in 2009 than in 2008, and at times during 2009 it was cheaper for
TVA to purchase power than to operate some of its less efficient generation
plants. As a result, TVA purchased 5.7 percent more power in 2009
than in 2008.
TVA
acquires power from a variety of power producers through long-term and
short-term power purchase agreements as well as through power spot market
purchases. During 2009, TVA acquired 27 percent of the power that it
purchased on the power spot market, 4 percent through short-term power purchase
agreements, and 69 percent through long-term power purchase agreements that
expire more than one year after September 30, 2009.
A portion of TVA’s capability provided
by power purchase agreements is provided under contracts that expire between
2010 and 2032, and the most significant of these contracts are discussed
below.
|
•
|
Calpine Energy Services,
L.P. TVA has contracted with Calpine Energy Services,
L.P. (“Calpine”) for 720 MW of summer net capability from a natural
gas-fired generating plant located at Decatur, Alabama. This
contract expires on August 31, 2012. In addition, TVA has
contracted with Calpine for 500 MW of summer net capability from a natural
gas-fired generating plant located in Morgan County,
Alabama. This contract expires on December 31,
2011.
|
|
•
|
Suez Energy Marketing NA,
Inc. TVA has contracted with Suez Energy Marketing NA,
Inc. (“Suez”) for 690 MW of summer net capability from a natural gas-fired
generating plant located near Ackerman, Mississippi. TVA’s
contract with Suez expires on December 31,
2012.
|
|
•
|
Choctaw Generation,
L.P. TVA has contracted with Choctaw Generation, L.P.
(“Choctaw”) for 440 MW of summer net capability from a lignite-fired
generating plant in Chester, Mississippi. TVA’s contract with
Choctaw expires on March 31, 2032. See Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
— Risk Management
Activities —
Credit Risk.
|
|
•
|
Alcoa Power Generating,
Inc. Four hydroelectric plants owned by Alcoa Power
Generating, Inc. (“APGI”) are operated in coordination with the TVA
system. Under contractual arrangements with APGI, which
terminate on June 20, 2010, TVA currently purchases and dispatches all
electricity generated at these facilities and uses the power to supply
Alcoa’s energy needs. TVA may be the net purchaser or net
supplier under these arrangements.
|
|
•
|
Invenergy TN
LLC. TVA has contracted with Invenergy TN LLC for 27 MW of wind
energy generation from 15 wind turbine generators located on Buffalo
Mountain near Oak Ridge, Tennessee. Because of the nature of
intermittent wind conditions in the TVA service area, these generators
provide energy benefits but are not included in TVA’s summer net
capability total. TVA's contract with Invenergy TN LLC expires
on December 31, 2024.
|
|
•
|
Southeastern Power
Administration. TVA, along with others, has contracted
with the Southeastern Power Administration (“SEPA”) to obtain power from
eight U.S. Army Corps of Engineers (“USACE”) hydroelectric facilities on
the Cumberland River system. The agreement with SEPA can be
terminated upon three years’ notice, but this notice of termination may
not become effective prior to June 30, 2017. The contract
requires SEPA to provide TVA an annual minimum of 1,500 hours of power for
each megawatt of TVA’s 405 MW allocation, and all surplus power from the
Cumberland River system. Because hydroelectric production has
been reduced at two of the hydroelectric facilities on the Cumberland
River system due to repair work being performed by USACE at those two
facilities and because of reductions in the summer stream flow on the
Cumberland River, SEPA declared “force majeure” on February 25,
2007. SEPA then instituted an emergency operating plan that,
among other things, eliminates SEPA’s obligation to provide TVA and other
affected customers with a minimum amount of power. It is
unclear how long the emergency operating plan will remain in
effect.
|
In addition, under federal law, TVA is
required to purchase energy from qualifying facilities, cogenerators, and small
power producers at TVA's avoided cost of self-generating or purchasing this
energy from another source. At September 30, 2009, there were seven
suppliers, with a combined capacity of 914 MW, whose power is purchased by TVA
under this law.
During the past five years, TVA
supplemented its power generation through power purchases as
follows:
Purchased
Power*
For
the years ended September 30
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Millions
of kWh
|
22,088 | 20,887 | 22,141 | 19,019 | 14,892 | |||||||||||||||
Percent
of TVA’s Total Power Supply
|
13.1 | % | 11.6 | % | 12.4 | % | 10.9 | % | 8.5 | % | ||||||||||
Note
* Purchased
power amounts for years 2005 and 2006 have been adjusted to remove APGI
purchases and include them as a credit to power sales. Purchased
power amounts
include generation from Caledonia, which is currently a leased facility
operated by TVA.
|
For more information regarding TVA’s
power purchase obligations, see Note 20 — Contingencies — Power Purchase
Obligations.
TVA
produces a range of forecasts of future load and energy
requirements. Although numerous factors, such as weather conditions
and the health of the regional economy, could cause actual results to differ
materially from TVA’s forecasts, TVA believes that
new generation sources will be needed to meet load growth under most likely
scenarios. To meet increased future demand, TVA plans to build new
generation facilities and purchase power from other suppliers. See
Forward-Looking Information
and Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Future
Challenges.
On June
15, 2009, TVA began the preparation of a new Integrated Resource Plan (“IRP”)
entitled TVA's Environmental and Energy Future. The purpose of the
IRP is to analyze alternative ways of addressing the Tennessee Valley's
electricity needs for the next 20 years. The IRP builds on the energy
resource portfolio that resulted from TVA’s 1995 IRP. The alternative
portfolios developed for this effort will be evaluated using several criteria
including capital and fuel costs, reliability, possible environmental impacts
including climate change, compliance with existing and anticipated future
regulations, and other factors. TVA expects to issue a final IRP in
early CY 2011.
Combustion Turbines
Lagoon Creek Combined
Cycle. TVA is constructing a gas-fired combined cycle
facility, the Lagoon Creek Combined Cycle Facility, which is currently scheduled
to be in service in July 2010 and have a summer net capability of 540
MW. The gas-fired combined cycle plant will consist of two combustion
turbines that supply steam to a single steam turbine.
John
Sevier Combined Cycle. On
June 4, 2009, the TVA Board approved deferring certain upgrades planned for
TVA’s Gleason combustion turbine plant and the newly planned New Caledonia
combustion turbine plant in order to construct John Sevier Combined Cycle
Facility, in northeast Tennessee, using, in part, funds and certain equipment
originally allocated for the deferred projects. By the end of
December 2011, TVA plans to have operational the three combustion turbines of
the John Sevier Combined Cycle Facility, which are expected to supply over 500
MW of power. TVA expects to complete the combined cycle portion of
the facility by mid-CY 2012. The completed facility is expected to
add approximately 880 MW of summer capability to the TVA system at a cost of
approximately $820 million. Also, the new combined cycle facility is
expected to provide TVA the flexibility to build the scrubbers and SCRs for the
John Sevier Fossil Plant on a more reasonable schedule than required by the
court in the North Carolina public nuisance litigation. See Note 20 —
Legal Proceedings — Case
Brought by North Carolina Alleging Public Nuisance.
Nuclear
Watts Bar Unit
2. On August 1, 2007, the TVA Board approved the completion of
Watts Bar Nuclear Plant Unit 2 (“Watts Bar Unit 2”), construction of which was
halted in 1985. The project is scheduled to be completed in the fall
of CY 2012. TVA has applied for an NRC operating license, and this
process includes opportunity for a public hearing. Contentions
against the licensing request have been filed. See Note 20 — Legal Proceedings — Administrative Proceeding Regarding
Watts Bar Nuclear Plant Unit 2. Completing
Watts Bar Unit 2 is expected to cost approximately $2.5 billion, excluding an
allowance for funds used during construction (“AFUDC”) and the cost of the
initial fuel load. Watts Bar Unit 2 is expected to provide 1,150 MW
of summer net capability.
Extended Power
Uprate. TVA is undertaking an Extended Power Uprate (“EPU”)
project at Browns Ferry Nuclear Plant which is expected to increase the amount
of electrical generation by increasing the amount of steam produced by the
reactors. Additional fuel would be added to the reactor during each
refueling outage to support the increased steam production. The NRC
license for operating the reactor must be modified to allow reactor operation at
the higher power level. TVA has submitted a license amendment request
and is currently in discussions with the NRC on selected technical issues
affecting EPU licensing. The result of these discussions may impact
the amount of power level increase realized by the EPU. Completion of
the licensing process will determine the final implementation
schedule.
Bellefonte
Units 1 and 2. TVA’s
construction of Units 1 and 2 at Bellefonte Nuclear Plant had been undertaken
pursuant to construction permits issued by the NRC, but in November 2005 TVA
cancelled the construction of these units and asked the NRC to withdraw the
permits. Subsequently, TVA began to consider the feasibility of
completing these units, and in August 2008, TVA asked the NRC to reinstate the
construction permits for both units. On March 9, 2009, the NRC issued
an order reinstating the construction permits for Bellefonte Units 1 and
2. Reinstatement of the construction permits, however, does not mean
TVA can re-commence construction of these units. Further action by
the NRC, the resolution of the contentions that have been filed, reviews by TVA,
and approval by the TVA Board are required before construction activities can
resume. See Note 20 — Legal Proceedings — Proceedings Regarding Bellefonte
Nuclear Plant Units 1 and 2.
Bellefonte
Units 3 and 4. TVA is
developing other options for future nuclear generation at its Bellefonte
site. In October 2007, TVA submitted a Combined Construction and
Operating License Application to the NRC for two new Westinghouse Electric Co.
designed Advanced Passive 1000 reactors to be located at the Bellefonte site and
designated as Bellefonte Units 3 and 4. TVA’s application was being
supported, in part, by NuStart, an industry consortium comprised of 10 utilities
and two reactor vendors whose purpose is to satisfactorily demonstrate the new
NRC licensing process for new nuclear plants. The Bellefonte Combined
Construction and Operating License Application is one of several Advanced
Passive 1000 Westinghouse standardized plant applications, and other applicants
have announced construction schedules that call for their license reviews to be
completed prior to Bellefonte’s. As a result, NuStart, with TVA’s
agreement, is transitioning its reference plant to the Combined Construction and
Operating License Application of another utility. TVA intends to
continue to support the review of the Bellefonte application and does not expect
this transition, by itself, to impact the issuance of a license for Bellefonte
Units 3 and 4. Contentions have been filed with respect to the
Bellefonte Combined Construction and Operating License
Application. See Note 20 — Legal Proceedings — Administrative Proceeding Regarding
Bellefonte Nuclear Plant Units 3 and 4.
Hydroelectric
TVA plans
to update 38 of its conventional hydroelectric units for reliability and/or
capacity increases by 2030.
Renewable and Clean
Energy
On May 19, 2008, the TVA Board approved
guiding principles for a Renewable and Clean Energy Assessment, to review TVA’s
generation mix and identify a road map for pursuing additional renewable and
clean energy supply in the region, including consideration of different sources
of renewable energy and a reduction in carbon intensity in TVA’s generation mix,
along with additional energy conservation by everyone who uses electricity.
In accordance with TVA’s 2008
Environmental Policy (“Environmental Policy”), TVA is working towards obtaining
50 percent of its power supply from clean (low or zero carbon-emitting) or
renewable sources by 2020. TVA defines its clean energy portfolio as
energy that has a zero or near-zero CO2 emission
rate, such as nuclear and renewables (energy production that is sustainable and
often naturally replenished), or energy efficiency improvements including demand
reduction, or waste heat recovery. In 2009, about 45 percent of TVA’s
total generation came from non-CO2-emitting
sources (nuclear, hydroelectric, and renewable energy) as defined by
TVA. TVA’s plans to add clean and renewable power are consistent with
increasing expectations that Congress will pass legislation in the near-term
that requires utilities to supply a certain percentage of energy from renewable
sources and, possibly, to participate in an economy-wide program to cap and
reduce emissions of greenhouse gases (“GHGs”), including CO2. To
comply, TVA may be required to reduce or offset emissions, or to purchase
emission allowances under a cap-and-trade program, and may be required to
contract for or generate an increasing percentage of energy from renewable
sources. Since the final outcome of any such legislation is not now
known, TVA presently is unable to accurately estimate the cost of future
renewable and GHG requirements. The current process for the
development of TVA’s IRP will help to inform future decisions on investment in
new renewable and clean generation.
In December 2008, TVA issued requests
for proposals (“RFPs”) for both dispatchable capacity and as-available energy
from renewable energy sources of up to a total of 2,000 MW of
generation. TVA received over 60 responses to the RFPs which included
wind (most coming from the Midwest and Great Plains states), biomass, and solar
to be delivered by 2011. Bringing power from distant locations raises
transmission issues and costs, and the intermittent nature of wind, solar, and
other renewable sources can result in TVA needing backups for those sources or
mechanisms. In October 2009, TVA entered into two 20-year contracts
for the purchase of up to 450 MW of renewable wind energy from wind farms
located in North Dakota and South Dakota. Power
under these contracts is scheduled to be delivered beginning in CY
2012.
In June 2009, the U.S. Senate Committee
on Energy and Natural Resources reported S. 1462, the American Clean Energy
Leadership Act of 2009, which would require electric suppliers to meet 15
percent of their electricity sales through renewable sources of energy or energy
efficiency by CY 2021. The legislation, which is yet to be considered
by the full Senate, would also set interim minimum annual percentage
requirements for renewable generation of 3 percent by CY 2011, 6 percent by CY
2014, 9 percent by CY 2016, and 12 percent by CY 2019. The
legislation would allow demonstrated electricity savings from energy efficiency
measures to meet up to 26.67 percent of the annual renewable generation
requirements.
Also, in June 2009, the U.S. House of
Representatives passed H.R. 2454, the American Clean Energy and Security Act of
2009, which,
in addition to mandated GHG reductions, would require
electric suppliers to meet 20 percent of their electricity sales through
renewable sources of energy or energy efficiency by CY 2020. This
bill defines eligible renewable energy resources as wind, solar, geothermal,
renewable biomass, biogas and biofuels derived exclusively from renewable
biomass, marine and hydrokinetic and qualified hydropower, and other
qualifying energy resources, including landfill and wastewater treatment gas,
coal mine methane, and qualified
waste-to-energy. The bill would also set interim minimum annual
percentage requirements for renewable generation of 6 percent by CY 2012, 9.5
percent by CY 2014, 13 percent by CY 2016, and 16.5 percent by CY
2018. The bill would allow demonstrated electricity savings from
energy efficiency measures to meet up to 25 percent of the annual renewable
generation requirements, or up to 40 percent upon FERC’s approval of a
governor’s petition to allow a higher percentage through energy
efficiency.
In May 2009, TVA began offering new
incentives for homes and businesses to encourage the installation of renewable,
distributed generation sources below 1 MW of capacity. Under this
program, TVA purchases all of the energy output at a premium price, and the
distributor credits the customers for the generation received through a credit
on their monthly electric bills. All new participants receive a
one-time incentive of $1,000 to help offset the startup costs for installing
qualifying renewable resources, such as wind, solar, biomass, and low-impact
hydropower. The price that TVA pays for solar generation is now 12
cents per kWh above the rates charged by TVA’s distributor customers, and the
price that TVA pays for wind, low impact hydro, and biomass generation is
currently 3 cents per kWh above the rates charged by TVA’s distributor
customers. TVA anticipates that these projects will qualify for
renewable energy credits under any future legislation establishing requirements
for renewable electricity.
On September 16, 2009, the U.S.
Department of Energy confirmed funding to support the State of Tennessee’s
Volunteer State Solar Initiative. Upon completion of applicable
environmental reviews, the proposed initiative will include a five MW solar
power generation facility to be located in west Tennessee. As
proposed, TVA would purchase the power generated from the facility.
Energy Efficiency and Demand Response
Initiatives
On May
27, 2009, TVA announced additional energy efficiency programs designed to
promote energy efficiency to residential and commercial
customers. This initiative supports the TVA Board directive to reduce
energy use during times when demand and cost for power is highest.
Tests for the new residential program,
called the In-Home Energy Evaluation Program, have begun in 22 markets including
Nashville, Chattanooga, and the Tri-Cities area (Bristol, Johnson City, and
Kingsport) in Tennessee as well as Hopkinsville, Kentucky, and Huntsville,
Alabama. The program will offer comprehensive in-home energy audits
as well as financing options and incentives to help homeowners who choose to
make investments in significant energy efficiency improvements.
The Commercial Efficiency Advice and
Incentives Program, a new initiative targeting businesses and institutions,
began testing in Mississippi and Nashville. This program will offer
businesses in these areas an opportunity to receive an energy assessment of
their facilities to help them identify energy-saving
opportunities. Financial incentives are also available for projects
that help reduce power consumption during TVA’s peak period.
The Major Industrial Program targets
very large industrial customers with contract demand greater than 5 MW and
offers technical assistance and incentives for energy efficiency projects that
lower the customer’s demand for power during peak usage periods on the TVA
system.
These three programs are part of an
effort which involved input from TVA power distributors and the public regarding
the best options for encouraging electricity users in the Tennessee Valley to
save energy. System-wide expansion of these programs is expected to
take place in 2010.
In August 2009, TVA announced it will
test building techniques, technologies, and household appliances at three
experimental houses in Knoxville over a three-year period to learn more about
how cutting-edge residential construction affects energy efficiency in homes in
the Tennessee Valley region. The three houses include a newly built
home that meets ENERGY STAR performance standards, a second home modified with
improvements that could easily be made to existing homes for increased
efficiency, and a third home built from the ground up to be a “near-Zero Energy
Home.” TVA will use data collected from the houses to develop
information and programs to help the public choose energy efficiency packages
for their homes and to help builders provide affordable, near-Zero Energy Homes
in the future. TVA also intends to test technologies that enable
consumers to better manage the energy they use and save money on their electric
bills.
Purchased Power and Other
Agreements
Purchasing power from others will
likely remain a component of how TVA addresses the power needs of its service
area. TVA has established a goal of balancing production capabilities
with power supply requirements by promoting the conservation and efficient use
of electricity and, when necessary, buying, building, and/or leasing assets or
entering into purchased power agreements. Achieving this goal will
allow TVA to reduce its reliance on purchased power.
General
TVA’s consumption of various types of
fuel depends largely on the demand for electricity by TVA’s customers, the
availability of various generating units, and the availability and cost of
fuel. The following table indicates TVA’s costs for various fuels for
the years indicated:
Fuel
Purchases for TVA-Operated Facilities
For
the years ended September 30
(in
millions)
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Coal
|
$ | 2,019 | $ | 2,110 | $ | 1,922 | $ | 1,835 | $ | 1,495 | ||||||||||
Natural
gas
|
133 | 131 | 62 | 60 | 63 | |||||||||||||||
Fuel
oil
|
38 | 61 | 22 | 46 | 28 | |||||||||||||||
Uranium
|
162 | 71 | 121 | 71 | 44 | |||||||||||||||
Total
|
$ | 2,352 | $ | 2,373 | $ | 2,127 | $ | 2,012 | $ | 1,630 |
The following table indicates TVA’s
average fuel expense by generation-type for the years indicated:
Fuel
Expense Per kWh*
For
the years ended September 30
(cents/kWh)
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Coal
|
2.75 | 2.31 | 2.09 | 2.02 | 1.65 | |||||||||||||||
Natural
gas and fuel oil
|
3.91 | 9.73 | 9.62 | 10.65 | 11.44 | |||||||||||||||
Nuclear
|
0.50 | 0.50 | 0.39 | 0.38 | 0.39 | |||||||||||||||
Average
fuel cost per kWh net thermal generation from all
sources
|
1.92 | 1.76 | 1.59 | 1.54 | 1.30 | |||||||||||||||
Note
* Excludes
amounts related to the fuel cost adjustment deferrals.
|
TVA also has tolling agreements under
which it buys power production from outside suppliers. Under these
tolling agreements, TVA supplies the fuel to the outside supplier, and the
outsider supplier converts the fuel into electricity. The following
table indicates the cost of fuel supplied by TVA under these agreements and also
the average fuel expense per kilowatt-hour for the years indicated:
Natural
Gas Purchases for Tolling Plants
For
the years ended September 30
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Cost
of Fuel (in millions)
|
$ | 255 | $ | 457 | $ | 430 | $ | 288 | $ | 159 | ||||||||||
Average
Fuel Expense (cents/kWh)
|
6.54 | 12.26 | 5.51 | 6.07 | 6.21 |
Coal
Coal consumption at TVA’s coal-fired
generating facilities during 2009 was approximately 37 million
tons. As of September 30, 2009, and 2008, TVA had 36 days and 26 days
of system-wide coal supply at full burn, respectively, with a net book value of
$460 million and $303 million, respectively.
TVA utilizes both short-term and
long-term coal contracts. Long-term coal contracts generally last
longer than one year, while short-term contracts are usually for one year or
less. During 2009, long-term contracts made up 92 percent of coal
purchases and short-term contracts accounted for the remaining 8
percent. TVA plans to continue using contracts of various lengths,
terms, and coal quality to meet its expected consumption and inventory
requirements. During 2009, TVA purchased coal by basin as
follows:
|
•
|
40
percent from the Illinois Basin;
|
|
•
|
28
percent from the Powder River Basin in
Wyoming;
|
|
•
|
18
percent from the Uinta Basin of Utah and Colorado;
and
|
|
•
|
14
percent from the Appalachian Basin of Kentucky, Pennsylvania, Tennessee,
Virginia, and West Virginia.
|
Total system coal inventories were at
or above target levels for most of 2009. During 2009, 41 percent of
TVA’s coal supply was delivered by rail, 23 percent was delivered by barge, and
35 percent was delivered by a combination of barge and rail. The
remainder was delivered by truck.
Natural
Gas and Fuel Oil
During
2009, TVA purchased substantially all of its natural gas requirements from a
variety of suppliers under contracts with terms of one year or
less. TVA purchases substantially all of its natural gas to operate
combustion turbine peaking units and to supply fuel under tolling agreements in
which TVA is the fuel supplier. At September 30, 2009, all but two of
TVA’s combustion turbine plants were dual fuel capable, and TVA has fuel oil
stored on each site for its dual fuel combustion turbines as a backup to natural
gas.
During
2009, TVA purchased substantially all of its fuel oil on the spot
market. At September 30, 2009, and 2008, the net book value of TVA’s
natural gas in inventory was $3 million and $12 million, respectively, and the
net book value of TVA’s fuel oil in inventory was $71 million and $66 million,
respectively.
Nuclear
Fuel
Converting uranium to nuclear fuel
generally involves four stages: the mining and milling of uranium ore to produce
uranium concentrates; the conversion of uranium concentrates to uranium
hexafluoride gas; enrichment of uranium hexafluoride; and the fabrication of the
enriched uranium hexafluoride into usable fuel assemblies. TVA
currently has 100 percent of its forward five-year (2010 through 2014) uranium
mining and milling requirements either in inventory or under
contract. In addition, TVA has 100 percent of its conversion,
enrichment, and fabrication needs under contract through 2014. Beyond
2014, TVA anticipates being able to fill its needs by normal contracting
processes for fuel cycle components as market forecasts indicate that the fuel
cycle components will be readily available.
TVA, DOE, and certain nuclear fuel
contractors have entered into agreements that provide for the blending down of
surplus DOE highly enriched uranium (uranium that is too highly enriched for use
in a nuclear power plant) with other uranium. Under these agreements,
the enriched uranium that results from this blending process, which is called
blended low enriched uranium (“BLEU”), is fabricated into fuel that can be used
in a nuclear power plant. This blended nuclear fuel was first loaded
in a Browns Ferry reactor in 2005 and is expected to continue to be used to
reload the Browns Ferry reactors through 2016. BLEU fuel was first
loaded into Sequoyah Unit 2 in May 2008 and is expected
to be loaded again in CY 2010 and CY 2011.
Under the terms of an interagency
agreement between DOE and TVA, in exchange for supplying highly enriched uranium
materials for processing into usable BLEU fuel for TVA, DOE participates to a
degree in the savings generated by TVA’s use of this blended nuclear
fuel. TVA anticipates these future payments could begin in 2010 and
last until 2016. See Note 1 — Blended Low Enriched Uranium Program
for a more detailed discussion of the BLEU project.
TVA owns
all nuclear fuel held for its nuclear plants. As of September 30,
2009, and 2008, the net book value of this nuclear fuel was $898 million and
$722 million, respectively.
The TVA
transmission system is one of the largest in North America. TVA’s
transmission system has 66 interconnections with 14 neighboring electric
systems, and delivered more than 164 billion kilowatt-hours of electricity to
Tennessee Valley customers in 2009. In carrying out its
responsibility for grid reliability in the TVA service area, TVA has operated
with 99.999 percent reliability over the last ten years in delivering
electricity to customers. Any changes to federal law altering TVA’s
authority to operate and control the transmission system could negatively impact
reliability in the region. See Item 1A, Risk Factors.
TVA’s
transmission system interconnects with systems of surrounding utilities and
consists primarily of the following assets:
|
•
|
Approximately
15,954 circuit miles of transmission lines (primarily 500 kilovolt and 161
kilovolt lines);
|
|
•
|
487
transmission substations, power switchyards, and switching stations;
and
|
|
•
|
66
individual interconnection points and 1,020 customer connection
points.
|
To the extent that federal law requires
access to the TVA transmission system, the TVA transmission organization offers
transmission services to others to transmit power at wholesale in a manner that
is comparable to TVA's own use of the transmission system. TVA has
also adopted and operates in accordance with a published Standards of Conduct
for Transmission Providers and appropriately separates its transmission
functions from its marketing functions.
Weather affects both the demand for and
the market prices of electricity. TVA uses weather degree days to
measure the impact of weather on TVA’s power operations. Weather
degree days measure the extent to which average temperatures in the five largest
cities in TVA's service area vary from 65 degrees Fahrenheit. During
2009, TVA had 294, or 9.5 percent, more heating degree days and 161, or 8.1
percent, less cooling degree days than in 2008. An increase in
heating degree days does not produce the same increase in revenues as an
increase in cooling degree days because alternative heating sources are
typically available.
TVA’s
power system is generally a dual-peaking system where the demand for electricity
peaks during the summer and winter months to meet cooling and heating
needs. TVA met a new all time winter peak demand of 32,572 MW on
January 16, 2009 at 9 degrees Fahrenheit.
The drought conditions in TVA’s service
area began to ease in 2009, and rainfall in the eastern Tennessee Valley was 103
percent of normal. Runoff has not yet reached normal conditions and
was at 85 percent of normal for 2009; accordingly, a period of above average
rain will be necessary to offset the dry ground conditions and improve the total
runoff amount. Runoff is the amount of rainfall that is not absorbed
by vegetation or the ground which actually reaches the rivers and reservoirs
that TVA manages. As a result, TVA’s conventional hydroelectric
generation increased 64 percent in 2009 over 2008, although it was still only 85
percent of normal. See Item 1A, Risk Factors, for a discussion of the
potential impact of weather on TVA.
TVA sells
electricity in a service area that is largely free of competition from other
electric power providers. This service area is defined primarily by
two provisions of law: one called the “fence” and one called the
“anti-cherrypicking” provision. The fence limits the region in which
TVA or distributors of TVA power may provide power. The
anti-cherrypicking provision limits the ability of others to use the TVA
transmission system for the purpose of serving customers within TVA’s service
area. Bristol, Virginia, was exempted from the anti-cherrypicking
provision.
There have been efforts to erode the
protection of the anti-cherrypicking provision. FERC issued an order
that would have required TVA to interconnect its transmission system with the
transmission system of East Kentucky Power Cooperative, Inc. (“East Kentucky”)
in what TVA believed was a violation of the anti-cherrypicking
provision. While the FERC action involving East Kentucky is moot, the
event illustrates how the protection to TVA’s service area provided by the
anti-cherrypicking provision could be called into question and perhaps
eliminated at some time in the future.
TVA makes
investments in science and technological innovation to help enable TVA to meet
future challenges in the development and testing of infrastructure and
technologies to enable consumer awareness and access to demand response and
energy efficiency tools; evaluation of technologies and development of a utility
plan for the integration of electric vehicles onto the distribution and
transmission system; and evaluation, demonstration, and implementation of clean
energy technologies that reduce TVA’s environmental footprint including its
CO2
emissions. TVA seeks to leverage research and development activities
through partnerships with distributors of TVA power, the Electric Power Research
Institute, DOE, Oak Ridge National Laboratory, other utilities, and
universities. Examples of ongoing work include TVA’s energy
efficiency demonstration and testing center for the evaluation of energy
efficiency technologies, building techniques, and demand response programs;
demonstration of solar charging stations for electric vehicles; participation in
several technology evaluations for carbon capture and sequestration; development
and demonstration of coal ash utilization technologies; and development of smart
grid infrastructure for both transmission and distribution
systems. See Note 1 — Research and Development
Costs.
TVA is governed by the TVA
Board. The Consolidated Appropriations Act, 2005, amended the TVA Act
by restructuring the TVA Board from three full-time members to nine part-time
members, no more than two of whom may be legal residents outside of TVA’s
service area. TVA Board members are appointed by the President of the
United States with the advice and consent of the U.S. Senate. After
an initial phase-in period, TVA Board members serve five-year terms, and at
least one member’s term ends each year. The TVA Board, among other
things, establishes broad goals, objectives, and policies for TVA; establishes
long-range plans to carry out these goals, objectives, and policies; approves
annual budgets; and establishes a compensation plan for
employees. Information about members of the TVA Board and TVA’s
executive officers is discussed in Item 10, Directors, Executive Officers and
Corporate Governance.
On May
31, 2007, the TVA Board approved a high-level plan that identifies critical
aspects of TVA’s business that need to be addressed to strengthen the ability of
TVA to carry out its mission (the “Strategic Plan”). The Strategic
Plan emphasizes TVA’s obligation to provide reliable, competitively priced
power, establishes sound financial principles for TVA to follow, and directs TVA
to improve its relationships with customers and develop partnerships with them
in energy efficiency, power supply, and economic development. A
significant priority of the plan is for the TVA power system to have the right
balance of generating capacity and energy supply to meet the growth in customer
demand and reduce TVA’s exposure to the price volatility of the energy
markets. Specific actions to carry out the provisions of the
Strategic Plan are reflected in TVA’s annual business and performance plans and
budgets.
Congress
TVA exists pursuant to legislation
enacted by Congress and carries on its operations in accordance with this
legislation. Congress can enact legislation expanding or reducing
TVA’s activities, change TVA’s structure, and even eliminate
TVA. Congress can also enact legislation requiring the sale of some
or all of the assets TVA operates or reduce the United States’ ownership in
TVA. To allow TVA to operate more flexibly than a traditional
government agency, Congress exempted TVA from certain general federal laws that
govern other agencies, such as federal labor relations laws and the civil
service laws related to the hiring of federal employees, the procurement of
supplies and services, and the acquisition of land. Other federal
laws enacted since the creation of TVA have been made applicable to TVA,
including those related to paying employees overtime and the protection of the
environment, cultural resources, and civil rights.
Securities
and Exchange Commission
Section 37 of the Securities Exchange
Act of 1934 requires TVA to file with the SEC such periodic, current, and
supplementary information, documents, and reports as would be required pursuant
to section 13 of the Exchange Act if TVA were an issuer of a security registered
pursuant to section 12 of the Exchange Act. Section 37 of the
Exchange Act exempts TVA from complying with section 10A(m)(3) of the Exchange
Act, which requires each member of a listed issuer’s audit committee to be an
independent member of the board of directors of the issuer. Since TVA
is an agency and instrumentality of the United States, securities issued or
guaranteed by TVA are "exempted securities" under the Securities
Act of 1933, as amended (the “Securities Act”), and may be offered and sold
without registration under the Securities Act. In addition,
securities issued or guaranteed by TVA are "exempted securities"
and “government securities” under the Exchange Act. TVA is also
exempt from sections 14(a)-(d) and 14(f)-(h) of the Exchange Act (which address
proxy solicitations) insofar as those sections relate to securities issued by
TVA, and transactions in TVA securities are exempt from rules governing tender
offers under Regulation 14E of the Exchange Act. Also, since TVA
securities are exempted securities under the Securities Act, TVA is exempt from
the Trust Indenture Act of 1939 insofar as it relates to securities issued by
TVA, and no independent trustee is required for these
securities.
Federal
Energy Regulatory Commission
Under the FPA, TVA is not a “public
utility,” a term which generally includes investor-owned
utilities. Therefore, TVA is not subject to the full jurisdiction
that FERC exercises over public utilities under the FPA. TVA is,
however, an “electric utility” and a “transmitting utility” as defined in
the FPA and thus, is directly subject to certain aspects of FERC's
jurisdiction.
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Under
section 210 of the FPA, TVA can be ordered to interconnect its
transmission facilities with the electrical facilities of qualified
generators and other electric utilities that meet certain
requirements. It must be found that the requested
interconnection is in the public interest and would encourage conservation
of energy or capital, optimize efficiency of facilities or resources, or
improve reliability. The requirements of section 212 concerning
the terms and conditions of interconnection, including reimbursement of
costs, must also be met.
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Under
section 211 of the FPA, TVA can be ordered to transmit power at wholesale
provided that the order does not impair the reliability of the TVA or
surrounding systems and likewise meets the applicable requirements of
section 212 concerning terms, conditions, and rates for
service. Under section 211A of the FPA, TVA is subject to FERC
review of the transmission rates and the terms and conditions of service
that TVA provides others to ensure comparability of treatment of such
service with TVA’s own use of its transmission system and that the terms
and conditions of service are not unduly discriminatory or
preferential. The anti-cherrypicking provision of the FPA
precludes TVA from being ordered to wheel another supplier’s power to a
customer if the power would be consumed within TVA’s defined service
territory.
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Sections
221 and 222 of the FPA, applicable to all market participants, including
TVA, prohibit (i) using manipulative or deceptive devices or contrivances
in connection with the purchase or sale of power or transmission services
subject to FERC’s jurisdiction and (ii) reporting false information on the
price of electricity sold at wholesale or the availability of transmission
capacity to a federal agency with intent to fraudulently affect the data
being compiled by the agency.
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Under
Section 215 of the FPA, TVA must comply with certain standards designed to
maintain transmission system reliability. These standards are
approved by FERC and enforced by the Electric Reliability
Organization.
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Section
206(e) of the FPA provides FERC with authority to order refunds of
excessive prices on short-term sales (transactions lasting 31 days or
less) by all market participants, including TVA, in market manipulation
and price gouging situations if such sales are under a FERC-approved
tariff.
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Section
220 of the FPA provides FERC with authority to issue regulations requiring
the reporting, on a timely basis, of information about the availability
and prices of wholesale power and transmission service by all market
participants, including TVA.
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Under
sections 306 and 307 of the FPA, FERC may investigate electric industry
practices, including TVA’s operations previously mentioned that are
subject to FERC’s jurisdiction.
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Under
sections 316 and 316A of the FPA, FERC has authority to impose criminal
penalties and civil penalties of up to $1 million a day for each violation
on entities subject to the provisions of Part II of the FPA, which
includes the above provisions applicable to TVA.
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Finally, while not required to do so,
TVA has elected to implement various FERC orders and regulations pertaining to
public utilities on a voluntary basis to the extent that these are consistent
with TVA’s obligations under the TVA Act.
Nuclear
Regulatory Commission
TVA operates its nuclear facilities in
a highly regulated environment and is subject to the oversight of the NRC, an
independent agency which sets the rules that users of radioactive materials must
follow. The NRC has broad authority to impose requirements relating
to the licensing, operation, and decommissioning of nuclear generating
facilities. In addition, if TVA fails to comply with requirements
promulgated by the NRC, the NRC has the authority to impose fines, shut down
units, or modify, suspend, or revoke TVA’s operating licenses.
Environmental
Protection Agency
TVA is subject to regulation by the
Environmental Protection Agency (“EPA”) in a variety of areas, including air
quality control, water quality control, and management and disposal of hazardous
wastes. See Item 1, Business — Environmental
Matters.
States
The Supremacy Clause of the U.S.
Constitution prohibits states, without congressional consent, from regulating
the manner in which the federal government conducts its
activities. As a federal agency, TVA is exempt from regulation,
control, and taxation by states except in certain areas such as air and water
quality where Congress has given the states limited powers to regulate federal
activities.
Other
Federal Entities
TVA’s activities and records are also
subject to review to varying degrees by other federal entities, including the
Government Accountability Office and the Office of Management and
Budget. There is also an Office of Inspector General which reviews
TVA’s activities and records.
TVA is not subject to federal income
taxes. In addition, neither TVA nor its property, franchises, or
income is subject to taxation by states or their
subdivisions. Section 13 of the TVA Act does, however, require TVA to
make tax equivalent payments to states and counties in which TVA conducts power
operations or in which TVA has acquired power-producing properties previously
subject to state and local taxation. The total amount of these
payments is 5 percent of gross revenues from the sale of power during the
preceding year excluding sales or deliveries to other federal agencies and
off-system sales with other utilities, with a provision for minimum payments
under certain circumstances. Except for certain direct payments TVA
is required to make to counties, distribution of tax equivalent payments within
a state is determined by individual state legislation.
TVA’s
power generation activities, like those across the utility industry and in other
industrial sectors, are subject to most federal, state, and local environmental
laws and regulations. Major areas of regulation affecting TVA’s
activities include air quality control, water quality control, and management
and disposal of solid and hazardous wastes. In the future,
regulations in all of these areas are expected to become more stringent and
apply to new emissions and sources with the increased emphasis on dealing with
climate change, expanding renewable generation alternatives, and encouraging
efficient use of electricity.
Due to
the increasing level and complexity of environmental requirements and
expectations, TVA completed a new high-level environmental policy to align with
and execute the direction in the Strategic Plan. The Environmental
Policy was approved by the TVA Board on May 19, 2008, and is intended to be an
integrated framework which provides policy-level guidance to carry out TVA's
objectives of providing cleaner, affordable energy, sustainable economic
development, and environmental stewardship. The Environmental Policy
sets out environmental objectives and critical success factors in six
environmental dimensions: climate change mitigation, air quality improvement,
water resource protection and improvement, waste minimization, sustainable land
use, and natural resource management.
TVA has
incurred, and expects to continue to incur, substantial capital and operating
and maintenance costs to comply with evolving environmental requirements
primarily associated with, but not limited to, the operation of TVA’s 59
coal-fired generating units. It is virtually certain that
environmental requirements placed on the operation of coal-fired and other
generating units will continue to become more restrictive and will affect new
emissions and sources. Litigation
over emissions from coal-fired generating units is also occurring, including
litigation against TVA. Failure to comply with environmental and
safety laws can result in being subject to enforcement actions which can lead to
the imposition of significant civil liability, including fines and penalties,
criminal sanctions, and/or the shutting down of non-compliant
facilities. See Note 20 — Legal Proceedings.
Air
Quality Control Developments
Air
quality in the United States and in the Tennessee Valley has significantly
improved since the enactment of the Clean Air Act (“CAA”) in
1970. These air quality improvements are expected to continue as the
CAA continues to be implemented and evolve as a result of legislative and
regulatory changes. Three substances emitted from coal-fired units —
SO2,
NOx,
and particulates — have historically been the focus of CAA emission reduction
regulatory programs, and these are discussed in more detail below.
Expenditures
related to clean air projects aimed at controlling emissions of these substances
during 2009 and 2008 were approximately $172 million and $274 million,
respectively. These figures include expenditures in 2009 of $12
million to continue to reduce NOx emissions
through the installation of selective non-catalytic reduction (“SNCR”) systems,
and $131 million for the installation of flue gas desulfurization systems
(“scrubbers”) to continue to reduce SO2
emissions. TVA had previously estimated its total capital cost for
reducing emissions from its power plants from 1977 through CY 2010 would reach
$5.5 billion, $5.3 billion of which had already been spent as of September 30,
2009. TVA estimates that compliance with future CAA requirements and
potential mercury regulations, but not including CO2, as
discussed below could lead to additional costs of $4.2 billion in the decade
beginning in CY 2011. There could be additional costs for complying
with particulate collection requirements associated with a utility maximum
achievable control technology (“MACT”) rule. There could be
additional material costs if reductions of GHGs, including CO2, are
mandated under the CAA or by legislation, or if future legislative, regulatory,
or judicial actions lead to more stringent emission reduction requirements for
conventional pollutants. These costs cannot reasonably be predicted
at this time because of the uncertainty of such potential actions.
On July
11, 2008, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) issued
a decision in State of North
Carolina vs. EPA
that remanded the Clean Air Interstate Rule (“CAIR”) and directed the EPA to
promulgate a new rule that is consistent with the D.C. Circuit
opinion. The EPA promulgated CAIR in 2005, and the rule required
significant additional utility SO2 and NOx emission reductions
to address ozone and fine particulate matter attainment issues in 28 eastern
states, including all of TVA’s service area, and the District of
Columbia. Based on the court’s decision, the EPA may not be able to
use emissions trading or the surrender of Title IV SO2 allowances
to achieve compliance, and may require sources to install new pollution control
systems. The court did not set a deadline for EPA to issue the
revised regulations, but the EPA has announced that it plans to publish a
proposed replacement rule in early CY 2010 and publish a final rule in early CY
2011. The requirements of CAIR formed the primary basis for TVA’s
(and much of the utility industry’s) planning with regard to air emission
controls beginning in 2009 and continuing well into the next
decade. With the potential redirection of CAIR, the uncertainty
regarding compliance requirements, methods, and timelines may result in
increased capital expenditures and operating expenses. Although
remanded, CAIR currently remains in effect and TVA plans to continue its
previously announced emissions reduction program.
Other
requirements of the CAA, such as achievement of ozone and fine particulate
ambient air quality standards, requirements relating to regional haze, and
control of interstate transport of air pollution (Section 126 petitions), will
continue to drive installation of additional controls on electric generating
units across the industry, including at TVA. As discussed in more
detail below, TVA expects to continue its previously announced emissions
reduction program, including completion of scrubber installations for SO2 control at
Kingston and evaluation of John Sevier Fossil Plants, and annual operation of
the 21 SCR and other NOx controls
that began in October 2008.
On
February 8, 2008, the D.C. Circuit vacated the EPA’s decision to remove coal and
oil-fired electric generating units from the list of stationary sources whose
hazardous air pollutant (“HAP”) emissions are subject to MACT standards under
section 112 of the CAA. The D.C. Circuit also vacated and remanded
the Clean Air Mercury Rule (“CAMR”), which set mercury
limits via a cap-and-trade program. The EPA now plans to regulate
mercury emissions from utilities under section 112(d) of the CAA, setting MACT
standards for emissions based on command and control type
requirements. The cost to comply with the MACT standards is not
known, but is expected to be higher than the cost would have been to comply with
CAMR. Regardless of the status of the EPA’s regulatory program for
mercury, TVA intends to continue to reduce mercury emissions from its coal-fired
power plants. Over the next five years, mercury emissions from its
coal-fired plants are expected to continue to decline, primarily as a result of
the co-benefits received from the controls TVA is installing to reduce SO2 and
NOx
emissions.
The D.C.
Circuit’s recent decisions with regard to CAIR and CAMR may also have the effect
of reviving interest in Congress in adopting multi-pollutant control legislation
focused on the electric power sector. Among other things, such an
approach could seek to establish coordinated caps for power plant emissions of
mercury, SO2, NOx, and
CO2. The
legislative and regulatory landscape is continuing to change for these and other
issues and the outcome cannot be predicted accurately at this time.
Sulfur
Dioxide. Utility SO2 emissions are
currently regulated under the Federal Acid Rain Program and state programs
designed to meet the National Ambient Air Quality Standards (“NAAQS”) for
SO2 and PM2.5. Looking
forward, these programs, as well as implementation of the regional haze program,
will result in additional regulation of SO2
emissions. The regional haze program establishes timelines for states
to improve visibility in national parks and wilderness areas throughout the
United States. The regional haze program will require certain types
of older sources to install best available retrofit technology to control
NOx,
SO2,
and particulate matter emissions.
Through
CY 2008, TVA had reduced its SO2 emissions
by 84 percent from the peak 1977 level by switching to lower-sulfur coals,
continuing to operate an Atmospheric Fluidized Bed Combustion (“AFBC”) unit at
its Shawnee Fossil Plant, and operating scrubbers on seven larger
units. TVA constructed a scrubber at Bull Run Fossil Plant (“Bull
Run”), which began operation in December 2008, and is constructing two scrubbers
at its Kingston Fossil Plant (“Kingston”), which are scheduled to begin
operation in 2010. In April 2008, the TVA Board approved construction
of additional scrubber equipment at the four-unit John Sevier Fossil Plant in
east Tennessee (“John Sevier”). Additionally, TVA has switched, or
plans to switch, to lower-sulfur coal at several additional units in the next
few years. It is likely that additional emission reduction measures
will have to be undertaken in addition to these announced actions to achieve
compliance with requirements yet to be adopted. Such measures will
also help to meet the goal identified in TVA’s Environmental Policy to reduce
emissions by continuing to install emission reduction equipment and new
technology with the aim of controlling over 80 percent of fossil generation in
the next 10 years.
Nitrogen
Oxides. Utility NOx emissions
continue to be regulated under state programs to achieve and maintain the EPA’s
NAAQS for ozone and fine particles, the Federal Acid Rain Program, and the
regional haze program. On March 12, 2008, the EPA issued final rules
adopting new, more stringent NAAQS for ozone. The 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. The 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. The EPA is now reconsidering its March 2008
decision respecting the level of this standard.
In CY
2009, states will have to recommend to the EPA those counties proposed to be
designated as “non-attainment” counties under the new standards, and in CY 2010,
the EPA is expected to finalize attainment designations using CY 2006 to CY 2008
monitoring data. States must submit plans to the EPA no later than CY
2013 that demonstrate attainment with the standard. Areas must reach
attainment by deadlines that vary (CY 2013 to CY 2030) depending on the severity
of the ozone problem.
Based on
CY 2005 to CY 2007 monitoring data, virtually all of the larger cities in the
Tennessee Valley area and their associated Metropolitan Statistical Areas, as
well as those rural counties where ozone monitors are present, will likely be
designated as non-attainment areas under the new standard.
Non-attainment
designation can impact industrial development and expansion since new businesses
tend to avoid non-attainment areas, and expansion of existing businesses becomes
more difficult. Non-attainment can have serious repercussions for
counties by increasing costs to industry, delaying the air permitting process,
and restricting expansion of existing sources. Consumers are also
likely to be affected as a result of the institution of vehicle inspection and
fuel restriction programs. Non-attainment can also impact
transportation planning since loss of federal highway funds can occur unless
projects demonstrate “conformity” with the new standards.
TVA
contributes to ambient ozone levels primarily as a result of NOx emissions
from fossil-fired power plants. As a result of its emission reduction
program, TVA’s summertime NOx emissions
have declined substantially. Since 1995, TVA has reduced its NOx emissions
during the summer (when ozone levels increase) by 82 percent by installing
various controls, including low-NOx burners
and/or combustion controls on 58 of its 59 coal-fired units and installing SCRs
on 21 of the largest units.
In 2005,
TVA installed SNCR systems, which generally have lower NOx removal
capabilities than SCRs, on two units, Johnsonville Unit 1 and Shawnee Unit 1, to
demonstrate long-term technology capability, and continues to operate the SNCR
at Johnsonville Unit 1 in west Tennessee. TVA also is operating High
Energy Reagent Technology (“HERT”) systems on the four units at John Sevier, and
on Units 2 and 4 at Johnsonville Fossil Plant (“Johnsonville”). HERT
is similar to SNCR technology but has higher removal
capabilities. Similar HERT equipment is planned for installation on
Johnsonville Unit 3 by the fall of 2009, and TVA is evaluating plans to
install SCRs at John Sevier by 2015.
TVA’s
NOx
emission reduction program is expected to continue to depend primarily on SCRs,
but these plans may change depending on the timing and severity of future
regulatory developments affecting power plant emissions. In October
2008, TVA began operating this NOx control
equipment year round (except for maintenance outages).
An
increase in the number of counties in the Tennessee Valley designated as
non-attainment areas is likely to focus additional regulatory attention on all
NOx
emission sources, including TVA sources.
Particulates/Opacity. Coarse
particulates (defined as particles of 10 micrometers or larger), which include
fly ash, have long been regulated by states to meet the EPA’s NAAQS for
particulate matter. All of TVA’s coal-fired units have been equipped
with mechanical collectors, electrostatic precipitators, scrubbers, or
baghouses, which have reduced particulate emissions from the TVA system by more
than 99 percent compared to uncontrolled units. In 1997, the EPA
issued separate NAAQS for even smaller particles with a size of up to 2.5
micrometers (“fine particles” or “PM2.5”). Counties
and parts of counties in the Knoxville and Chattanooga, Tennessee, metropolitan
areas have been designated as non-attainment areas under the 1997
standard.
In
September 2006, the EPA revised the 1997 standards. The 2006
revisions tighten the 24-hour fine particle standard and retain the 1997 annual
fine particle standard. The EPA also decided to retain the existing
24-hour standard for coarse particles, but revoked the related annual
standard. On October 8, 2009, the EPA issued non-attainment
designations for areas not meeting the 24-hour national ambient air quality
standards for PM2.5. Several
counties in the Knoxville, Tennessee area that include the Bull Run and Kingston
Fossil Plants are included in this designation. Flue gas
desulfurization has been installed on Bull Run, and is expected to be installed
on Kingston in 2010. TVA will continue efforts to reduce emissions
and engage regional and national stakeholders to further understand and improve
regional air quality. TVA’s continued installations of scrubbers for
SO2
control and SCRs and other technologies for NOx control as
described above are expected to continue to reduce fine particle
levels.
Issues
regarding utility compliance with state opacity requirements are also
increasing. Opacity measures the denseness (or color) of power plant
plumes and has traditionally been used by states as a means of monitoring good
maintenance and operation of particulate control equipment. Under
some conditions, retrofitting a unit with additional equipment to better control
SO2
and NOx emissions
can adversely affect opacity performance, and TVA and other utilities are
addressing this issue. There are also disputes and lawsuits over the
role of continuous opacity monitors in determining compliance with opacity
limitations.
Climate
Change. TVA produces about 100 million tons of CO2 per
year. In 1995, TVA
was the first utility in the nation to participate in “Climate Challenge,” a
DOE-sponsored voluntary GHG reduction program. Over the past decade,
TVA has reduced, avoided, or sequestered over 305 million tons of CO2 under this
program. TVA also participates in DOE’s Climate VISION program, a
public-private partnership, which calls on the electric utility sector, along
with other industry sectors, to help meet a national goal of reducing the GHG
intensity of the U.S. economy by 18 percent from CY 2002 to CY
2012.
TVA has
taken and is continuing to take significant voluntary steps that will reduce the
CO2
emissions intensity of its electric generation, including the recovery of Browns
Ferry Unit 1, planned power up-rates of certain nuclear units (which are
expected to increase the generating capability of the units and thereby result
in additional avoided emissions of CO2), the
completion of Watts Bar Unit 2, and the completion of the hydroelectric
modernization program. TVA has also filed with the NRC a combined
operating license application for two advanced nuclear reactors at the
Bellefonte Nuclear Plant near Hollywood, Alabama, and the reactivation of the
construction permits for the existing Bellefonte Nuclear Units 1 and 2, although
no decision has been made to complete those units or to build the new
reactors.
In addition, TVA is a member of the
Southeast Regional Carbon Sequestration Partnership and is working with the
Electric Power Research Institute and other electric utilities on projects
investigating technologies for CO2 capture and geologic
storage, as well as carbon sequestration via
reforestation. Legislation currently under consideration by the U.S.
Congress would require reductions of GHG emissions, including CO2, and, if enacted
into law, could result in significant additional costs for TVA and other
utilities with fossil fuel-based power generation. On June 26, 2009,
the House of Representatives passed H.R. 2454, the “American Clean Energy and
Security Act of 2009,” also referred to as the Waxman-Markey
bill. This bill is a comprehensive energy and climate change bill
that, if enacted, would impose a cap on emissions of GHGs from covered sources,
including electric utilities, to 3 percent below CY 2005 emission levels in CY
2012, 17 percent below CY 2005 levels in CY 2020, 40 percent below CY 2005
levels by CY 2030, and 83 percent below CY 2005 levels in CY 2050. On
September 30, 2009, U.S. Senators Kerry and Boxer introduced S.1733, “The Clean
Energy Jobs & American Power Act.” On October 23, 2009, the
Senate Environment and Public Works Committee released a Chairman’s Mark of
S.1733, and on November 5, 2009, the Committee ordered
the bill
to be reported
to the Senate. The bill, which is expected to be further revised
before being considered by the Senate as a whole, includes provisions to reduce
U.S. GHG emissions, fund research, expand “green” jobs, promote both domestic
and international deployment of clean energy technology, establish GHG emission
performance standards for mobile and stationary sources, and invest in numerous
programs to transition to a low-carbon and energy efficient economy and fund
programs for adaptation to climate change. The
GHG cap-and-trade provisions in the bill are slightly more stringent than those
in H.R. 2454, requiring reductions in emissions of GHGs from covered sources,
including electric utilities, to 3 percent below CY 2005 emission levels in CY
2012, 20 percent below CY 2005 levels in CY 2020, 40 percent below CY 2005
levels by CY 2030, and 83 percent below CY 2005 levels in CY 2050. If
H.R. 2454, S.1733, or a similar law is enacted, it would result in significant
additional costs for TVA and other utilities with fossil fuel-fired
generation. In general, any legislation requiring reductions in
emissions of GHGs, is expected to result in some level of increase in the price
of electricity to consumers, regardless of form, severity, and timing of the
legislation, and TVA's analyses of several proposed climate bills indicate that
the price increases could be substantial. These analyses also show
that most of TVA's existing coal-fired generating assets will continue to play
an important role in meeting the energy needs of the Tennessee
Valley. TVA anticipates future legislation and regulations requiring
reductions in emissions of GHGs and TVA is incorporating the possibility of
mandatory carbon reductions and a renewable portfolio standard into its
long-range planning. TVA will continue to monitor legislative and
regulatory developments related to CO2 and a renewable portfolio
standard to assess any potential financial and operational impacts as
information becomes available. Looking ahead, TVA’s Environmental
Policy contains a Climate Change Mitigation objective to stop the growth in
volume of emissions and reduce the rate of carbon emissions by CY
2020.
In
addition to legislative activity, climate change issues are the subject of a
number of lawsuits, including lawsuits against TVA. See Note 20 —
Legal
Proceedings. On April 2, 2007, in Massachusetts v. EPA, the
U.S. Supreme Court found that the EPA has authority to regulate GHGs under the
CAA. The
Court held that the statutory definition of "air pollutant" unambiguously
includes GHGs, and disagreed with the EPA that there is evidence that Congress
intended to curtail the EPA’s power to treat GHGs as air
pollutants. The Court also concluded that the EPA's refusal to
regulate these pollutants was based on impermissible reasons, and concluded that
the EPA can avoid taking further action under the CAA only if it determines that
GHGs do not contribute to climate change or if it provides some reasonable
explanation as to why it cannot or will not exercise its discretion to determine
whether they do. The Court remanded the case to the EPA to make a
judgment regarding endangerment (either that GHGs do, or do not, pose a threat
to health and welfare) with respect to certain mobile sources. While
this case focused on CO2 emissions
from motor vehicles, it sets a precedent for regulation in other industrial
sectors, such as the electric utility industry.
On April
24, 2009, the EPA published a proposal to make a determination under section 202
of the CAA that GHG emissions may endanger public health or
welfare. The EPA proposed that concentrations of six gases – CO2, methane,
NOx,
hydrofluorocarbons, perfluorocarbons, and sulfur
hexafluoride – increase average temperatures and impact human health by
contributing to increased likelihood of higher concentrations of ground-level
ozone; increased drought; more heavy downpours and flooding; more frequent and
intense heat waves and wildfires; greater sea level rise; more intense storms;
and harm to water resources, agriculture, wildlife, and
ecosystems. The EPA is also proposing to find that the combined
emissions of carbon dioxide, methane, nitrous oxide, and hydrofluorocarbons from
new motor vehicles and new motor vehicle engines are contributing to air
pollution that is endangering public health and welfare. The EPA’s
proposal responds to the remand from the Supreme Court, based on its April 2007
ruling in Massachusetts v.
EPA, directing the EPA to determine whether GHGs “may reasonably be
anticipated to endanger public health or welfare” and to clarify a prior
decision by the EPA to deny a petition from states to regulate GHGs from new
motor vehicles or engines under section 202(a)(1) of the CAA.
TVA
anticipates that the EPA will finalize its proposed endangerment finding in CY
2010. Such a ruling has broad implications for future potential
regulation of GHGs under the CAA. The EPA’s proposed treatment of
GHGs as “air pollutants” and the establishment of emission standards for
vehicles means that the EPA could regulate GHGs under many CAA programs,
including the NAAQS, the new source performance standards, New Source Review
(“NSR”), Prevention of Significant Deterioration (“PSD”), and stratospheric
ozone (CAA Title VI), in addition to mobile sources and fuels
programs. On September 30, 2009, the EPA issued a proposed regulation
that would establish GHG emission thresholds for stationary sources under the
PSD and Title V programs.
On
September 22, 2009, the EPA released for publication a final rule that requires
monitoring and annual reporting of GHG emissions in the United States by dozens
of industries, including the electricity generating industry. The
rule targets fossil fuel combustion sources emitting more than the equivalent of
25,000 metric tons of GHGs per year, which includes virtually all fossil
fuel-fired electric generating units. Reporting will be required for
individual facilities (and, if applicable, equipment or units falling into
different source categories at a larger facility). The EPA does not
state that it intends to regulate GHG emissions, but instead explains that the
purpose of the monitoring system would be to support the discussion of options
for such regulation. However, reporting and recordkeeping are the
foundation for many potential new programs, including cap-and-trade systems,
permitting requirements, or GHG capture technologies.
States are also becoming more active in
the regulation of GHG emissions that are believed to be contributing to global
climate change. Ten states in the Northeast and Mid-Atlantic
participate in the Regional Greenhouse Gas Initiative, a mandatory cap-and-trade
program designed to reduce CO2 emissions
from electric power generation by 10 percent below CY 2009 levels by CY
2018. Seven states (and four Canadian provinces) participate in the
Western Climate Initiative (“WCI”), a mandatory cap-and-trade program (beginning
in CY 2012) for the electric utility and industrial sectors. The
state of California, a participant in the WCI, passed a law that requires the
state to reduce GHG emissions to 1990 levels by CY 2020. Six states
(and one Canadian province) are participating in the Midwestern Greenhouse Gas
Reduction Accord, which designed a regional cap-and-trade program to reduce
emissions 18-20 percent below CY 2005 levels by CY 2020, and 80 percent below CY
2005 levels by CY 2050. In May 2009, the Governors’ Energy and
Climate Coalition, representing 30 states and territories, including three
states in TVA’s service territory - Tennessee, North Carolina, and Virginia -
pledged to work with Congress to pass legislation that will address climate
change and provide the nation with a comprehensive energy strategy. North
Carolina is studying initiatives aimed at climate change. Under the
provisions of the state’s Clean Smokestacks Act of 2002, the North Carolina
Department of Environment and Natural Resources’ Division of Air Quality studied
options for reducing CO2 emissions
from coal-burning power plants and other sources. The final Clean
Smokestacks Act report, submitted to the North Carolina General Assembly in
September of 2005, contained a recommendation that the state continue GHG
mitigation planning and consider a public stakeholder process. Thus,
the North Carolina Climate Action Plan Advisory Group issued recommendations in
an October 2008 report to further identify and assess mitigation options that
state policy makers should consider for a state climate action
plan.
Water
Quality Control Developments
In
the second phase of a three-part rulemaking to minimize the adverse impacts from
cooling water intake structures on fish and shellfish, as
required under Section 316(b) of the Clean Water Act (“CWA”), the EPA
promulgated a final
rule for existing power producing facilities (“Phase II Rule”) that became
effective on September 7, 2004. On January 25, 2007, the U.S. Court
of Appeals for the Second Circuit (the “Second Circuit”) remanded the Phase II
Rule, holding, among
other things, that costs cannot be compared to benefits in picking the best
technology available (“BTA”) to minimize the adverse environmental impacts of
intake structures. The Utility Water Act Group, Entergy Corporation,
and PSEG Fossil LLC
filed a petition seeking review of the decision by the U.S. Supreme
Court. On
April 1, 2009, the Supreme Court in Entergy Corp. v. Riverkeeper, Inc., agreed with the industry petitioners and
ruled that the EPA can compare costs with benefits to determine the technology
that must be used at cooling water intake structures. This decision
overturns the Second Circuit ruling that federal clean water law does not permit the EPA to consider
the cost-benefit relationship in deciding the best technology available to
minimize adverse
environmental impact. On July 9, 2007, the EPA suspended
all but one provision of the Phase II Rule until the agency resolves the issues
raised by the Second
Circuit's remand. The provision that was retained requires permitting
authorities to apply, in the interim, Best Professional Judgment
(“BPJ”) controls for existing facilities. BPJ controls are those that reflect
the best technology
available for minimizing the adverse environmental impacts of intake
structures. The use of BPJ controls reflects a return to the regulatory
process that was used by permitting authorities to regulate the impact of intake
structures prior to the
promulgation of the Phase II Rule.
All of
the intakes at TVA's existing coal and nuclear generating facilities were
subject to the Phase II Rule. Given the uncertainty over the changes
the EPA will make to the rule, the impacts of the eventual rulemaking are
uncertain at this time.
Section
303d of the CWA requires states to develop and report to the EPA on a two-year
cycle a list of waters that are “impaired” or are expected to not meet water
quality standards in the next two years and need additional pollution
controls. The Tennessee Department of Environment and Conservation
(“TDEC”) placed a portion of Barkley Reservoir downstream of TVA's Cumberland
Fossil Plant (“Cumberland”) on its 2008 list of impaired streams (the “303d
List”). This section of Barkley Reservoir had not been listed
previously. The reservoir conditions in 2007, especially for
temperature and dissolved oxygen, changed significantly due primarily to reduced
flows in the Cumberland River resulting from emergency dam repairs performed by
the U.S. Army Corps of Engineers on the Wolf Creek and Center Hill Dams coupled
with the most severe drought on record in the region. The lower flows
made less water available to dissipate the heated discharge from Cumberland and
resulted in increased river temperatures. The prospect of continued
reduced flows through the Cumberland River system during the period required to
complete the necessary repairs to Wolf Creek and Center Hill Dams may impact the
generation of electricity from TVA's Cumberland and Gallatin Fossil
Plants. Placing this section of Barkley Reservoir on the 303d List
could also impact the thermal limits imposed by the State of Tennessee when the
discharge permit for Cumberland is renewed in 2010, or earlier if the state or
the EPA determines that additional actions are required to protect the aquatic
environment
downstream from the plant. TVA is working with the U.S. Army Corps of
Engineers and TDEC to minimize the impacts to TVA's generating plants and
improve the conditions observed in the river in 2007. TVA began
operating temporary cooling towers at Cumberland to reduce the temperature of
the water discharged to the river. On May 28, 2009, TVA met with TDEC
to discuss TVA’s planned actions in 2009 to mitigate the impacts of the low
river flow conditions. While the official state-issued permit limit
for Cumberland remains unchanged, TVA agreed at the TDEC meeting to take some
additional mitigating steps with regard to plant operations, and perform
additional monitoring to assess the impacts to fish and wildlife during the
summer months. TDEC was also informed that de-rating the plant was
the best option for limiting the heat discharged to the river, that the
temporary cooling towers installed in 2008 would not be restarted, and that TVA
was initiating an engineering study for permanent cooling towers.
The EPA
and many states are taking increased interest in evaluating the potential
effects of thermal discharges from steam-electric generating
facilities. TVA is working with states and the EPA Region IV to
demonstrate that the data collected by TVA in the vicinity of its facilities is
sufficient to meet the requirements for assessing the impacts of thermal
discharges on the aquatic environment.
In March
2007, TDEC adopted a lower, more conservative threshold (0.3 ppm) for issuing
precautionary advisories for fish consumption due to
mercury. Adoption of the lower threshold resulted in the issuance of
several new precautionary fish consumption advisories in April 2007 for all or
parts of five TVA reservoirs (Norris, Cherokee, South Holston, Watauga, and
Tellico) and parts of four rivers in the Tennessee Valley (Buffalo, Emory,
Hiwassee, and Holston) as well as the Loosahatchie, Wolf, and Mississippi Rivers
in Tennessee that are not in the Tennessee River watershed.
As part
of the 2007 advisory determinations, TDEC also identified several water bodies
where more data were needed to determine if advisories were
necessary. State agencies have since collected fish from those water
bodies and decided several of them needed advisories to protect public
health. The new Precautionary Advisory list for 2008 includes one
additional TVA reservoir (Beech) and three additional river segments in the
Tennessee River watershed (French Broad, Sequatchie, and Duck). Also,
existing advisories for several reservoirs and rivers were expanded to include
mercury as a chemical of concern and/or to include more kinds of
fish.
TDEC’s
announcement of additional precautionary advisories for several Tennessee water
bodies does not mean that mercury levels in fish are increasing, but is more
reflective of the effect of the lowered threshold values for issuing a
precautionary consumption advisory. TVA has been monitoring mercury
levels in fish and sediments in TVA reservoirs for the last 35 years, and TVA’s
data were provided to TDEC as a part of its review process. TVA’s
data show significant reductions in mercury concentrations in fish from the
reservoirs with known industrial discharges that have now
ceased. Other than those areas historically impacted by industrial
discharges, mercury concentrations in fish have tended to fluctuate through time
with no discernible trend in fish from most reservoirs. Despite
increased burning of coal for electricity generation, current and historic
records indicate that mercury concentrations in reservoir sediments have
remained stable or declined.
One of
the results of the major reductions in atmospheric emissions resulting from the
clean air expenditures discussed above is that wastewaters at TVA coal-fired
facilities and across the utility industry may be changing because of waste
streams from air quality control technologies. Varying amounts of
ammonia or similar compounds used as a necessary component of SCR and SNCR
operations may end up in facility wastewater ponds that may discharge through
outfalls regulated under the CWA. Operation of scrubbers for SO2 control
also results in additional amounts of pollutants being introduced into facility
wastewater treatment ponds. The EPA is currently collecting
information to determine if the national Steam Electric Point Source Effluent
Guidelines (“Effluent Guidelines”) under the CWA need to be
revised. If the Effluent Guidelines are revised, potentially more
restrictive discharge limitations for existing parameters or the addition of new
parameters could result in additional wastewater treatment expenses to meet
requirements of the CWA. These costs cannot be accurately predicted
at this time, but TVA is involved in and monitoring the EPA’s data collection
activities and the progress of the Effluent Guidelines review
process. On the state level, new numeric nutrient criteria
development and implementation (an EPA requirement) may require additional
treatment costs to reduce nitrogen concentrations being added to the waste
treatment ponds as a result of the operation of air pollution control
equipment. TVA is monitoring the development and implementation of
numeric nutrient criteria, particularly by the states in TVA’s service area, and is
encouraging regulatory agencies in the Tennessee Valley states to incorporate
water quality trading regulations into their water quality
standards.
As is the
case across the utility industry and in other industrial sectors, TVA is also
facing more stringent requirements related to protection of wetlands, reductions
in storm water impacts from construction activities, water quality degradation,
new water quality criteria, and laboratory analytical methods. TVA is
also following litigation related to the use of herbicides, water transfers, and
releases from dams. TVA is not facing any substantive requirements
related to non-compliance with existing CWA regulations.
Hazardous
Substance Response and Oil Cleanup
Liability
for releases and cleanup of hazardous substances is primarily regulated under
the federal Comprehensive Environmental Response, Compensation, and Liability
Act (“CERCLA”), and other federal and parallel state statutes. In a
manner similar to many other industries and power systems, TVA has generated or
used hazardous substances over the years. TVA is aware of alleged
hazardous-substance releases at 11 non-TVA areas for which it may have some
liability. TVA has reached agreements with the EPA to settle its
liability at two of these non-TVA areas for a total of less than
$23,000. There is little or no known evidence that TVA contributed
any significant quantity of hazardous substances to six of the non-TVA areas,
and there has been no recent assertion of potential TVA liability for five of
these six areas. There
is evidence that TVA sent some materials to the remaining three non-TVA sites:
the David Witherspoon site in Knoxville, Tennessee, the Ward Transformer site in
Raleigh, North Carolina, and the General Waste Products site in Evansville,
Indiana.
The David
Witherspoon site was contaminated with radionuclides, polychlorinated biphenyls
(“PCBs”), and metals.
DOE admitted to being the main contributor of materials to the site and cleaned
the site up at a reported cost of about $35 million. While DOE asked
TVA to “cooperate” in completing the cleanup; TVA believes it sent only a
relatively small amount of equipment and that none of it was
radioactive.
The Ward
Transformer site in Raleigh, North Carolina, is contaminated by PCBs from
electrical equipment. There is documentation showing that TVA sent a
limited amount of electrical equipment containing PCBs to the site in
1974. A working group of potentially responsible parties (the “PRP
Work Group”) is cleaning up on-site contamination in accordance with an
agreement with the EPA. The cleanup effort has been divided into four
areas: two phases of soil cleanup; cleanup of off-site contamination in the
downstream drainage basin; and supplemental groundwater
remediation. The cost estimate for the first phase of soil cleanup is
approximately $55 million. The cost estimate for the second phase of
soil cleanup is $10 million. Estimates for cleanup of off-site
contamination in the downstream drainage basin range from $6 million to $25
million. There are no reliable estimates for the supplemental
groundwater remediation phase. On April 30, 2009, the PRP Work Group
filed an amended complaint in federal court against potentially responsible
parties who had not yet settled, including TVA, regarding the two phases of soil
cleanup. TVA settled this lawsuit and its potential liability for the
two phases of soil cleanup for $300,000 and has been dismissed as a
party. Although the settlement with respect to the first two phases
does not prohibit TVA from having liability in connection with the other two
phases or any natural resource damages, the U.S. Department of Justice is
attempting to negotiate a government-wide settlement of all federal agencies’
liability for cleanup of offsite contamination in the downstream drainage basin
and the investigative portion of the supplemental groundwater
remediation.
General
Waste Products, located in Evansville, Indiana, operated scrap metal salvage
yards from the 1930s until 1998 that contain contamination from lead batteries
and PCB transformers. The original defendants in a CERCLA action for
the sites have filed a third-party complaint in the U.S. District Court for the
Southern District of Indiana against TVA and others seeking cost contribution
for cleanup of the yards. There is evidence that TVA sent scrap metal
to General Waste Products, but TVA has not found any records indicating that it
sent batteries or PCB equipment. Counsel for the original plaintiffs
has informed TVA that the first yard has been cleaned up at a cost of $3.2
million, and cleanup estimates for the second yard range from $2 million to $7
million. TVA’s allocated share of the cleanup costs, if any, is
expected to be relatively small.
TVA
operations at some TVA facilities have resulted in oil spills and other
contamination that TVA is addressing, and TVA expects to incur costs of about
$17 million for environmental work related to decommissioning of the Watts Bar
Fossil Plant.
As of
September 30, 2009, TVA’s estimated liability for cleanup and similar
environmental work for those sites for which sufficient information is available
to develop a cost estimate (primarily the TVA sites) is approximately $20
million on a non-discounted basis, including the Watts Bar Fossil Plant work,
and is included in Other
liabilities on the Balance Sheet.
Coal-Combustion
Wastes
In
accordance with a regulatory determination by the EPA in May 2000,
coal-combustion and certain related wastes disposed of in landfills and surface
impoundments are not regulated as hazardous waste. In conjunction
with this determination, the EPA committed to developing non-hazardous
management standards for these wastes. These existing
waste-management facilities not meeting minimum standards. On August
29, 2007, the EPA issued a Notice of Data
Availability (“NODA”) in which it requested public comment on whether the
additional information mentioned in the notice should affect the EPA’s decisions
as it continues to follow up on its commitment to develop management standards
for coal-combustion wastes. After the Kingston coal ash release, both
Congress and the EPA are considering taking action to increase the regulation of
coal combustion waste surface impoundments, including regulation of coal ash as
a hazardous waste under the Resource Conservation and Recovery Act and surface
impoundment integrity requirements modeled after coal slurry management under
the Surface Mining Control and Reclamation Act of 1977. The EPA has
announced that it plans to issue new regulations for the management of coal
combustion wastes by December 31, 2009. Tennessee enacted a law
providing that any new coal ash disposal facility or any expansion of existing
facilities used for coal ash disposal have a liner and a final
cap. Additional proposals to regulate coal ash and related
impoundments are currently being developed by the EPA. In August 2009
TVA announced plans to convert remaining wet ash and gypsum facilities to dry
storage and disposal. These projects are expected to be completed
over an eight to 10 year period with a projected cost of $1.5 billion to $2.0
billion.
Low-Level Radioactive
Waste
Low-level radioactive waste
(“radwaste”) results from the normal operation of nuclear units and includes
such materials as disposable protective clothing, mops, and
filters. TVA contracted to dispose of such waste at a Barnwell, South
Carolina disposal facility through June 2008. That facility closed to
TVA and radwaste generators located in states that are not members of the
Atlantic Interstate Low-Level Radioactive Waste Management
Compact. Since June 2008, TVA has continued its practice of having
certain types of radwaste processed and shipped to a disposal facility in Clive,
Utah, and TVA is also storing some radwaste at its own
facilities. TVA is capable of storing radwaste at its facilities for
an extended period of time.
Spent Nuclear Fuel
Under the Nuclear Waste Policy Act of
1982, TVA (and other domestic nuclear utility licensees) entered into a contract
with DOE for the disposal of spent nuclear fuel. Payments to DOE are
based upon TVA’s nuclear generation and charged to nuclear fuel
expense. Although the contracts called for DOE to begin accepting
spent nuclear fuel from the utilities by January 31, 1998, DOE announced that it
would not begin receiving spent nuclear fuel from any domestic nuclear
utility. TVA, like other nuclear utilities, stores spent nuclear fuel
in pools of borated water at its nuclear sites. TVA would have had
sufficient space to continue to store spent nuclear fuel in those storage pools
at its Sequoyah and Browns Ferry Nuclear Plants indefinitely had DOE begun
accepting spent nuclear fuel. DOE’s failure to do so in a timely
manner required TVA to construct dry cask storage facilities at its Sequoyah and
Browns Ferry Nuclear Plants and to purchase special storage containers for the
spent nuclear fuel. The Sequoyah and Browns Ferry dry cask storage
facilities have been constructed and approved by the NRC and have been in use
since 2004 and 2005, respectively, providing storage capacity through 2030 at
Sequoyah and 2019 at Browns Ferry. Watts Bar has sufficient storage
capacity in its spent fuel pool to last until approximately 2015.
To recover the cost of providing
long-term, on-site storage for spent nuclear fuel, TVA filed a breach of
contract suit against the United States in the Court of Federal Claims in
2001. In August 2006, the United States paid TVA almost $35 million
in damages awarded by the Court of Federal Claims, which partially offset the
construction costs of the dry cask storage facilities that TVA incurred through
2004. In September 2008, the United States paid TVA about $10 million
for on-site spent nuclear fuel storage costs incurred during
2005. TVA and DOE are considering entering into an agreement to
facilitate the resolution of additional claims on a timely basis. TVA
anticipates submitting additional claims to DOE periodically.
Reportable
Events
Kingston Ash
Spill. See Note 7 for a discussion of the Kingston ash spill,
which discussion is incorporated herein by reference.
Widows Creek Gypsum
Pond. On
January 9, 2009, a discharge from a gypsum containment pond at Widows Creek
Fossil Plant was discovered. The released material contained water
and a mixture of predominantly gypsum and some fly ash. Testing of
water samples from the Tennessee River and Widows Creek reflected levels of
metals, solids, and nutrients below the national primary drinking water
standards that apply to public water systems for treated
water. Dredging of Widows Creek began on April 18, 2009, as part of
the response to the release. Current estimates of the costs of
remediating the Widows Creek spill are approximately $9 million. The
Alabama Department of Environmental Management (“ADEM”) issued a Notice of
Violation and a Consent Order for several alleged violations of the Alabama
Water Pollution Control Act at Widows Creek, including the January 9, 2009
gypsum pond discharge. The Consent Order requires payment of a
$25,000 civil penalty and submission of engineering reports related to storage
impoundments at both Widows Creek Fossil Plant and Colbert Fossil Plant in
Alabama on a schedule defined in the Consent Order.
Ocoee Hydro
Plant. On January 3, 2009, TVA opened the Ocoee No. 3 sluice
gates to lower the reservoir elevation to prepare for work on the Ocoee No. 2
Dam. On January 4, 2009, large amounts of sediment were released
downstream, and a number of fish were killed. TDEC issued a Notice of
Violation and a Director’s Order for the release of sediments, instructing TVA
to cease sluicing operations from the Ocoee No. 3 Dam and to restore the
affected area of the Ocoee River to pre-event status. On April 3,
2009, TDEC approved the operation of the sluice gates at the Ocoee No. 3 Dam for
flood risk management and recreational releases for the 2009 recreational season
provided certain conditions are met regarding minimum pool elevation during
sluicing, upstream operations, duration of releases, and onsite observation of
the first two releases. After
the recreation season ended, TVA obtained TDEC approval for use of the Ocoee 3
sluice gates.
On September 30, 2009, TVA had 12,219
employees, of whom 4,912 were trades and labor employees. Under the
TVA Act, TVA is required to pay trades and labor workers hired by TVA or certain
of its contractors the rate of wages for work of a similar nature prevailing in
the vicinity where the work is being performed. Neither the federal
labor relations laws covering most private sector employers nor those covering
most federal agencies apply to TVA. However, the TVA Board has a
long-standing policy of acknowledging and dealing with recognized
representatives of its employees, and that policy is reflected in long-term
agreements to recognize the unions (or their successors) that represent TVA
employees. Federal law prohibits TVA employees from engaging in
strikes against TVA.
The risk factors described below, as
well as the other information included in this Annual Report, should be
carefully considered. Risks and uncertainties described in these risk
factors could cause future results to differ materially from historical results
as well as from the results predicted in forward-looking
statements. Although the risk factors described below are the ones
that TVA management considers significant, additional risk factors that are not
presently known to TVA management or that TVA management presently considers
insignificant may also impact TVA’s business operations. Although TVA
has the authority to set its own rates and thus mitigate some risks by
increasing rates, it is possible that partially or completely eliminating one or
more of these risks through rate increases might adversely affect TVA
commercially or politically. Accordingly, the occurrence of any of
the following could have a material adverse effect on TVA’s cash flows, results
of operations, and financial condition.
New
laws, regulations, and administrative orders may negatively affect TVA’s cash
flows, results of operations, and financial condition, as well as the way TVA
conducts its business.
Because
TVA is a corporate agency and instrumentality established by an act of Congress,
TVA may be affected by a variety of laws, regulations, and administrative orders
that do not affect other electric utilities. In fact, the very nature
of TVA may be changed by legislation. Although it is difficult to
predict exactly how new laws, regulations, and administrative orders would
impact TVA, some of the possible effects are described below.
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TVA could
lose its protected service territory.
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TVA’s
service area is primarily defined by the fence and the anti-cherrypicking
provision. If Congress were to eliminate or reduce the coverage of
the anti-cherrypicking provision but retain the fence, TVA could more easily
lose customers that it could not replace within its specified service
area. The loss of these customers could adversely affect TVA’s cash
flows, results of operations, and financial condition.
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The
TVA Board could lose its sole authority to set rates for
electricity.
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Under the
TVA Act, the TVA Board has the sole authority to set the rates that TVA charges
for electricity, and these rates are not subject to further
review. If TVA loses this authority or if the rates become subject to
outside review, there could be material adverse effects on TVA including, but
not limited to, the following:
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TVA
might be unable to set rates at a level sufficient to generate adequate
revenues to service its financial obligations, properly operate and
maintain its power assets, and provide for reinvestment in its power
program; and
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TVA
might become subject to additional regulatory oversight that could impede
TVA’s ability to manage its
business.
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TVA
could lose responsibility for managing the Tennessee Valley River
System.
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TVA’s
management of the Tennessee River system is important to effective operation of
the power system. TVA’s ability to integrate management of the
Tennessee River system with power system operations increases power system
reliability and reduces costs. Restrictions on how TVA manages the
Tennessee River system could negatively affect TVA’s operations.
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Congress
could take actions that lead to a downgrade of TVA’s credit
rating.
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TVA’s
rated securities are currently rated “Aaa” by Moody’s Investors Service and
“AAA” by Standard and Poor’s and Fitch Ratings, which are the highest ratings
assigned by these rating agencies. TVA’s credit ratings are not based
solely on its underlying business or financial condition, which by themselves
may not be commensurate with a triple-A rating. TVA’s current ratings
are based to a large extent on the legislation that defines TVA’s business
structure. Key characteristics of TVA’s business defined by
legislation include (1) the TVA Board’s ratemaking authority, (2) the current
competitive environment, which is defined by the fence and the
anti-cherrypicking provision, and (3) TVA’s status as a corporate agency and
instrumentality of the United States. Accordingly, if Congress takes
any action that effectively alters any of these characteristics, TVA’s credit
ratings could be downgraded.
Existing
and future environmental laws, regulations, and orders may negatively affect
TVA’s cash flows, results of operations, and financial condition, as well as the
way TVA conducts its business.
Existing
environmental laws, regulations, and orders could affect TVA in several
ways.
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Compliance
costs. The cost of compliance with existing
environmental laws, regulations, and orders is expected to be substantial,
and costs could be significantly more than TVA anticipates. In
connection with the remediation of the Kingston ash spill, for example,
actual costs could substantially exceed estimated costs if, among other
things, TVA has to remove more ash than it anticipates, additional
environmentally sensitive material is uncovered in the river sediment,
delays of the ash removal process occur, or the methods of final
remediation change.
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Closure of
facilities. At some of TVA’s older facilities, it may be
uneconomical for TVA to install the necessary equipment to comply with
existing environmental laws, regulations, and orders, which may cause TVA
to shut down those facilities.
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On-site
liabilities. TVA may be responsible for on-site
liabilities associated with the environmental condition of facilities or
property that it has acquired or developed or operates regardless of when
the liabilities arose, whether they are known or unknown, and whether they
were caused by TVA or a third party.
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Failure to obtain regulatory
approvals. TVA may be unable to obtain or maintain all
required environmental regulatory approvals. If there is a
delay in obtaining required environmental regulatory approvals or if TVA
fails to obtain, maintain, or comply with any such approval, TVA may be
unable to operate its facilities or may have to pay fines or
penalties.
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In
addition, new environmental laws, regulations, and orders could become
applicable to TVA or the facilities it operates, and existing
environmental regulations could be revised or reinterpreted in a way that
adversely affects TVA. Possible areas of future regulation include,
but are not limited to, the following:
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Greenhouse
gases. Costs to comply with future regulation of CO2 and
other GHGs may reduce TVA’s cash flows and negatively impact its financial
position and results of operations. The cost impact of
legislation or regulation cannot be determined at this
time.
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Coal combustion
by-products. Federal and state governments may regulate
coal combustion by-products. The EPA plans to issue new federal
regulations governing the management of coal combustion by-products,
including fly ash, by December 31, 2009. These regulations may
require TVA to make additional capital expenditures, increase TVA’s
operating and maintenance costs, or lead to TVA shutting down certain
facilities.
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Renewable energy portfolio
standards. TVA is not currently obligated to provide a
percentage of the power it sells from renewable sources but may be
required to do so in the future. In such a case, TVA would
either have to build additional facilities that use renewable resources to
produce the power itself, purchase renewable power from other companies,
or offset some of its renewable requirements through energy
efficiency. Such developments could require
TVA to make significant capital expenditures, increase its purchased power
costs, or make changes in how it operates its
facilities.
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Demand
for electricity could be significantly reduced, negatively affecting TVA’s cash
flows, results of operations, and financial condition.
Some of the
factors that could reduce the demand for electricity include the
following:
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Economic
downturns. Sustained economic downturns in TVA’s service
area or other parts of the United States could reduce overall demand for
power and thus reduce TVA’s power sales and cash flows, especially as
TVA’s industrial customers reduce their operations and thus their
consumption of power.
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Loss of
customers. As of September 30, 2009, two distributor
customers had notices in effect terminating their power contracts with
TVA. The loss of additional customers could have a material
adverse effect on TVA’s cash flows, results of operations, and financial
condition.
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Change in
technology. Research and development activities are
ongoing to improve existing and alternative technologies to produce
electricity, including gas turbines, wind turbines, fuel cells,
microturbines, solar cells, and distributed generation
devices. It is possible that advances in these or other
alternative technologies could reduce the costs of electricity production
from alternative technologies to a level that will enable these
technologies to compete effectively with traditional power plants like
TVA’s. To the extent these technologies become a more
cost-effective option for certain customers, TVA’s sales to these
customers could be reduced, thereby negatively affecting TVA’s cash flows,
results of operations, and financial condition.
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Catastrophic
events could affect TVA’s ability to supply electricity or reduce demand for
electricity.
TVA could
be adversely affected by catastrophic events such as fires, earthquakes, solar
events, floods, tornados, wars, terrorist activities, pandemics, and other
similar events. These events, the frequency and severity of which are
unpredictable, could negatively affect TVA’s cash flows, results of operations,
and financial condition by, among other things, limiting TVA’s ability to
generate and transmit power, reducing the demand for power, disrupting fuel or
other supplies, leading to an economic downturn, or creating instability in the
financial markets.
Weather
conditions could influence TVA’s ability to supply power and its customers’
demands for power.
Extreme
temperatures may increase the demand for power and require TVA to purchase power
at high prices to meet the demand from customers, while unusually mild weather
may result in decreased demand for power and lead to reduced electricity
sales. In addition, in periods of low rainfall or drought, TVA’s
low-cost hydroelectric generation may be reduced, requiring TVA to purchase
power or use more costly means of producing power. Furthermore, high
river water temperatures in the summer may limit TVA’s ability to use water from
the Tennessee or Cumberland River systems for cooling at its generating
facilities, thereby limiting TVA’s ability to operate its generating
facilities.
TVA
is the sole power provider for customers within its service area, and if demand
for power in TVA’s service area increases, TVA is contractually obligated to
take steps to meet this increased demand.
If demand
for power in TVA’s service area increases, TVA may need to meet this increased
demand by purchasing additional power from other sources, building new
generation and transmission facilities, or purchasing existing generation and
transmission facilities. Purchasing power from external sources, as
well as acquiring or building new generation and transmission facilities, could
negatively affect TVA’s cash flows, results of operations, and financial
condition.
Owning
and operating nuclear units may subject TVA to nuclear incidents and significant
costs that adversely affect its cash flows, results of operations, and financial
conditions.
TVA has
six operating nuclear units and has resumed construction of one nuclear unit
that is scheduled to be placed in service in the fall of CY
2012. Risks associated with these units include the
following:
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Nuclear
incidents. A nuclear incident at a TVA facility could
have significant consequences including loss of life, damage to the
environment, damage to or loss of the facility, and damage to non-TVA
property. Although TVA carries certain types of nuclear
insurance, the amount that TVA is required to pay in connection with a
nuclear incident could significantly exceed the amount of coverage
provided by insurance. Any nuclear incident, even at a facility
that is not operated by or licensed to TVA, has the potential to impact
TVA adversely by obligating TVA to pay up to $105 million per year and a
total of $671 million per nuclear incident under the Price-Anderson
Act. In
addition, a nuclear incident could negatively affect TVA by, among other
things, obligating TVA to pay retrospective insurance premiums, reducing
the availability and affordability of insurance, increasing the costs of
operating nuclear units, or leading to increased regulation or restriction
on the construction, operation, and decommissioning of nuclear
facilities. Moreover, Congress could impose revenue-raising
measures on the nuclear industry to pay claims exceeding the limit for a
single incident under the Price-Anderson
Act.
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•
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Decommissioning
costs. TVA maintains a nuclear decommissioning trust for
the purpose of providing funds to decommission its nuclear
facilities. The decommissioning trust is invested in securities
generally designed to achieve a return in line with overall equity market
performance. TVA might have to make unplanned contributions to
the trust if, among other things;
|
•
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The
value of the investments in the trust declines
significantly;
|
•
|
The
decommissioning funding requirements are changed by law or
regulation;
|
•
|
The
assumed real rate of return on plan assets, which is currently 5 percent,
is lowered by the TVA Board;
|
•
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The
actual costs of decommissioning are more than
planned;
|
•
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Changes
in technology and experience related to decommissioning cause
decommissioning cost estimates to increase significantly;
or
|
•
|
TVA
is required to decommission a nuclear plant sooner than it
anticipates.
|
If TVA
makes unplanned contributions to the trust, the contributions would negatively
affect TVA’s cash flows, results of operations, and financial
condition.
•
|
Increased
regulation. The NRC has broad authority to adopt
requirements related to the licensing, operation, and decommissioning of
nuclear generation facilities that can result in significant restrictions
or requirements on TVA. If the NRC modifies existing
requirements or adopts new requirements, TVA could be required to make
substantial capital expenditures at its nuclear plants or make substantial
contributions to its nuclear decommissioning trust. In
addition, if TVA fails to comply with requirements promulgated by the NRC,
the NRC has the authority to impose fines, shut down units, or modify,
suspend, or revoke TVA’s operating
licenses.
|
TVA’s
assets may not operate as planned.
Many of
TVA’s assets, including generation and transmissions assets and supporting
infrastructure, have been operating since the 1950s or earlier and have been in
nearly constant service since they were completed. If these assets
fail to operate as planned, TVA, among other things:
•
|
Might
have to invest a significant amount of resources to repair or replace the
assets;
|
•
|
Might
be unable to operate the assets for a significant period of
time;
|
•
|
Might
have to purchase replacement power on the open
market;
|
•
|
Might
not be able to meet its contractual obligations to deliver power;
and
|
•
|
Might
have to remediate collateral damage caused by a failure of the
assets.
|
In
addition, the failure of TVA’s assets to perform as planned could cause health,
safety, and environmental problems and even result
in such events as the failure of a dam, the failure of a containment pond, or a
nuclear incident. Any of these potential outcomes could negatively
affect TVA’s cash flows, results of operations, and financial condition.
TVA’s
organizational transformation efforts could fail.
Two
recent reports have concluded that deficiencies in TVA’s systems, standards,
controls, and corporate culture found at TVA’s coal-fired plants may have
contributed to the Kingston ash spill. The TVA Board in a July 21,
2009 resolution directed TVA to develop a remediation plan to eliminate the
identified deficiencies in these areas. The failure to eliminate the
deficiencies could contribute to other incidents that could adversely affect
TVA’s reputation, cash flow, results of operations, and financial condition.
TVA’s
transmission reliability could be affected by problems at other utilities or at
TVA facilities.
TVA’s
transmission facilities are directly interconnected with the transmission
facilities of neighboring utilities and are thus part of an interstate power
transmission grid. Accordingly, problems at other utilities, or at
TVA’s own facilities, may cause interruptions in TVA’s transmission
service. If TVA were to suffer a transmission service interruption,
TVA’s cash flows, results of operations, and financial condition could be
negatively affected.
Events
which affect the supply of water in the Tennessee River system may interfere
with TVA’s ability to generate power.
An
inadequate supply of water in the Tennessee River system could negatively impact
TVA’s cash flows, results of operations, and financial condition by reducing
generation not only at TVA’s hydroelectric plants but also at its coal-fired and
nuclear plants, which depend on water from the river systems near which they are
located for cooling and for use in boilers where water is converted into steam
to drive turbines. An inadequate supply of water could result, among
other things, from periods of low rainfall or drought, the withdrawal of water
from the Tennessee River system by governmental entities, and events in bodies
of water not managed by TVA. While TVA manages the Tennessee River
and large portions of its tributary system in order to provide much of the water
necessary for the operation of its power plants, the U.S. Army Corps of
Engineers operates and manages other bodies of water upon which some TVA
facilities rely. Events at these non-TVA managed bodies of water or
their associated hydroelectric facilities may interfere with the flow of water
and may result in TVA having insufficient water to meet the needs of its
plants. If TVA has insufficient water to meet the needs of its
plants, TVA may be required to reduce generation at its affected facilities to
levels compatible with the available supply of water.
TVA’s
fuel and purchased power supplies might be disrupted.
TVA
purchases coal, uranium, natural gas, fuel oil, and electricity from a number of
suppliers. Disruption in the acquisition or delivery of fuel or
purchased power may result from a variety of physical and commercial events,
political developments, or environmental
regulations affecting TVA’s fuel and purchased power suppliers. If
one of TVA’s fuel or purchased power suppliers fails to perform under the terms
of its contract with TVA, TVA might have to purchase replacement fuel or power,
perhaps at a significantly higher price than TVA was entitled to pay under the
contract. In some circumstances, TVA may not be able to recover this
difference from the supplier. In addition, any disruption of TVA’s
fuel and purchased power supplies could require TVA to operate higher cost
plants, thereby adversely affecting TVA’s cash flows, results of operations, and
financial condition. Moreover, if TVA is unable to acquire enough
replacement power or fuel and does not have enough reserve generation capacity
available to offset the loss of power or fuel, TVA might not be able to supply
enough power to meet demand, resulting in power curtailments or even
blackouts.
TVA
may incur delays and additional costs in power plant construction and may be
unable to obtain necessary regulatory approval.
TVA is
completing the construction of Watts Bar Nuclear Unit 2, planning major upgrades
to and modernization of current generating plants, and evaluating construction
of more generating facilities in the future. These activities involve
some risks of schedule delays and overruns in the cost of labor and
materials. In addition, if TVA does not obtain the necessary
regulatory approvals, is otherwise unable to complete the development or
construction of a facility, decides to cancel construction of a facility, or
incurs delays or cost overruns in connection with constructing a facility, TVA’s
cash flows, financial condition, and results of operations could be negatively
affected. In addition, if construction projects are not completed
according to specifications, TVA may suffer, among other things, reduced plant
efficiency and higher operating costs.
Failure
to attract and retain an appropriately qualified workforce may negatively affect
TVA’s results of operations.
TVA’s
business depends on its ability to recruit and retain key executive officers as
well as skilled professional and technical employees. The inability
to attract and retain an appropriately qualified workforce could adversely
affect TVA’s ability to, among other things, operate and maintain generation and
transmission facilities, complete large construction projects such as Watts Bar
Nuclear Unit 2, and successfully implement its organizational transformation
efforts.
TVA
is involved in various legal and administrative proceedings whose outcomes may
affect TVA’s finances and operations.
TVA is
involved in various legal and administrative proceedings and is likely to become
involved in other legal proceedings in the future in the ordinary course of
business, as
a result of catastrophic events or otherwise. Although TVA cannot
predict the outcome of the individual matters in which TVA is involved or will
become involved, the resolution of these matters could require TVA to make
expenditures in excess of established reserves and in amounts that could have a
material adverse effect on TVA’s cash flows, results of operations, and
financial condition. Similarly, resolution of any such proceedings
could require TVA to change its business practices or procedures, which could
also have a material adverse effect on TVA’s cash flows, results of operations,
and financial condition.
TVA
is subject to a variety of market risks that could negatively affect TVA’s cash
flows, results of operations, and financial position.
TVA is
subject to a variety of market risks, including, but not limited to, commodity
price risk, investment price risk, interest rate risk, credit and counterparty
risk, and currency exchange rate risk.
•
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Commodity price
risk. Prices of commodities critical to TVA’s
operations, including coal, uranium, natural gas, fuel oil, crude oil,
construction materials, emission allowances, and electricity, have been
extremely volatile in recent years. If prices of these
commodities increase, TVA’s rates
may increase.
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•
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Investment price
risk. TVA is exposed to investment price risk in its
nuclear decommissioning trust, its asset retirement trust, and its pension
fund. If the value of the investments held in the nuclear
decommissioning trust or the pension fund decreases significantly, TVA
could be required to make substantial unplanned contributions to these
funds.
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•
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Interest rate
risk. Changes in interest rates could increase the
amount of interest that TVA pays on new bonds that it issues, decrease the
return that TVA receives on its short-term investments, decrease the value
of the investments in TVA’s pension fund and trusts, and increase the
losses on the mark-to-market valuation of certain derivative transactions
into which TVA has entered.
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•
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Credit and counterparty
risk. TVA is exposed to the risk that its counterparties
will not be able to perform their contractual obligations. If
TVA’s counterparties fail to perform their obligations, TVA’s cash flows,
results of operations, and financial condition could be adversely
affected. In addition, the failure of a counterparty to perform
could make it difficult for TVA to perform its obligations, particularly
if the counterparty is a supplier of electricity or fuel to
TVA.
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•
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Currency exchange rate
risk. Over the next three years, TVA plans to spend a
significant amount of capital on clean air projects, capacity expansion,
and other projects. A portion of this amount may be spent on
contracts that are denominated in a foreign currency. The value
of the U.S. Dollar compared with other currencies has fluctuated widely in
recent years, and, if not effectively managed, foreign currency exposure
could negatively impact TVA’s cash flows, results of operations, and
financial position.
|
TVA
may have to make significant unplanned contributions to fund its pension and
other post-retirement benefit
plans.
TVA’s
costs of providing pension benefits and other post-retirement
benefits depend upon a number of factors, including, but not limited
to:
•
|
Provisions
of the pension and post-retirement
benefits plan;
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•
|
Changing
employee demographics;
|
•
|
Rates
of increase in compensation levels;
|
•
|
Rates
of return on plan assets;
|
•
|
Discount
rates used in determining future benefit
obligations;
|
•
|
Rates
of increase in health care costs;
|
•
|
Levels
of interest rates used to measure the required minimum funding levels of
the plans;
|
•
|
Future
government regulation; and
|
•
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Contributions
made to the plans.
|
Any of
these factors or any number of these factors could increase TVA’s costs of
providing pension and other post-retirement
benefits and require TVA to make significant unplanned contributions to the
plans. Such contributions would negatively affect TVA’s cash flows,
results of operations, and financial condition.
Approaching
or reaching its debt ceiling could limit TVA’s ability to carry out its
business. Additionally, TVA’s debt ceiling could be made more
restrictive.
The TVA
Act provides that TVA can issue Bonds in an amount not to exceed $30 billion
outstanding at any time. At September 30, 2009, TVA had $22.8 billion
of Bonds outstanding (not including noncash items of foreign currency valuation
loss of $30 million and net discount on sale of Bonds of $224
million).
Approaching
or reaching the debt ceiling could adversely affect TVA’s business by limiting
TVA’s ability to borrow money and increasing the amount of debt needing to be
serviced. Also, Congress could lower the debt ceiling or broaden the
types of financial instruments that are covered by the
ceiling. Either of these scenarios could also restrict TVA’s ability
to further raise capital to maintain power program assets, to construct
additional generation facilities, or to meet regulatory
requirements. In addition, approaching or reaching the debt ceiling
could lead to increased legislative or regulatory oversight of TVA’s
activities.
TVA
may be unable to meet its current cash requirements if its access to the debt
markets is limited.
TVA uses
cash provided by operations together with proceeds from power program financings
to fund TVA’s current cash requirements. It is critical that TVA
continue to have access to the debt markets in order to meet its cash
requirements. The importance of having access to the debt markets is
underscored by the fact that TVA, unlike many utilities, relies almost entirely
on debt capital since it is not authorized to issue equity securities.
TVA
and owners of TVA securities could be impacted by a downgrade of TVA’s credit
rating.
A
downgrade in TVA’s credit rating could have material adverse effects on TVA’s
cash flows, results of operations, and financial condition as well as on
investors in TVA securities. Among other things, a downgrade could
have the following effects:
•
|
A
downgrade would increase TVA’s interest expense by increasing the interest
rates that TVA pays on new Bonds that it issues. An increase in
TVA’s interest expense would reduce the amount of cash available for other
purposes, which could result in the need to increase borrowings, to reduce
other expenses or capital investments, or to increase power
rates.
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•
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A
downgrade could result in TVA’s having to post collateral under certain
physical and financial contracts that contain rating
triggers.
|
•
|
A
downgrade below a contractual threshold could prevent TVA from borrowing
under two credit facilities totaling $2.0
billion.
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•
|
A
downgrade could lower the price of TVA securities in the secondary
market.
|
TVA
could lose the ability to use regulatory accounting and be required to write off
a significant amount of regulatory assets.
Under
current accounting standards, TVA is permitted to use regulatory
accounting. Accordingly, TVA records as assets certain costs that
would not be recorded as assets under GAAP for non-regulated
entities. As of September 30, 2009, TVA had $9.6 billion of
regulatory assets. If TVA loses its ability to use regulatory
accounting, TVA could be required to write-off its regulatory assets and
liabilities.
TVA’s
financial control system cannot guarantee that all control issues and instances
of fraud or errors will be detected.
No
financial control system, no matter how well designed and operated, can provide
absolute assurance that the objectives of the control system are met, and no
evaluation of financial controls can provide absolute assurance that all control
issues and instances of fraud or errors can be detected. The design
of any system of financial controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
Payment
of principal and interest on TVA securities is not guaranteed by the United
States.
Although
TVA is a corporate agency and instrumentality of the United States government,
TVA securities are not backed by the full faith and credit of the United
States. If TVA were to experience extreme financial difficulty and
were unable to make payments of principal or interest on its Bonds, the federal
government would not be legally obligated to prevent TVA from defaulting on its
obligations. Principal and interest on TVA securities are payable
solely from TVA’s net power proceeds. Net power proceeds are the
remainder of TVA’s gross power revenues after deducting the costs of operating,
maintaining, and administering its power properties and payments to states and
counties in lieu of taxes, but before deducting depreciation accruals or other
charges representing the amortization of capital expenditures, plus the net
proceeds from the sale or other disposition of any power facility or interest
therein.
The
market for TVA securities might be limited.
All of
TVA’s Bonds are listed on the New York Stock Exchange except for TVA’s discount
notes, which have maturities of less than one year, the 2009 Series A and B
power bonds, and the power bonds issued under TVA’s electronotes®
program, which is TVA’s medium-term retail notes program. In
addition, some of TVA’s Bonds are listed on foreign stock
exchanges.
Although
many of TVA’s Bonds are listed on stock exchanges, there can be no assurances
that any market will develop or continue to exist for any
Bonds. Additionally, no assurances can be made as to the ability of
the holders to sell their Bonds or as to the price at which holders will be able
to sell their Bonds. Future trading prices of Bonds will depend on
many factors, including prevailing interest rates, the then-current ratings
assigned to the Bonds, the amount of Bonds outstanding, the time remaining until
the maturity of the Bonds, the redemption features of the Bonds, the market for
similar securities, and the level, direction, and volatility of interest rates
generally, as well as the liquidity of the market for those securities.
If a
particular series of Bonds is offered through underwriters, those underwriters
may attempt to make a market in the Bonds. Dealers other than
underwriters may also make a market in TVA securities. However, the
underwriters and dealers are not obligated to make a market in any TVA
securities and may terminate any market-making activities at any time without
notice.
In
addition, legal limitations may affect the ability of banks and others to invest
in Bonds. For example, national banks may purchase TVA Bonds for
their own accounts in an amount not to exceed 10 percent of unimpaired capital
and surplus. Also, TVA Bonds are “obligations of a corporation which
is an instrumentality of the United States” within the meaning of section
7701(a)(19)(C)(ii) of the Internal Revenue Code for purposes of the 60 percent
of assets limitation applicable to U.S. building and loan
associations.
Not
applicable.
TVA holds personal property in its own
name but holds real property as agent for the United States of
America. TVA may acquire real property by negotiated purchase or by
eminent domain.
At September 30, 2009, generating
assets operated by TVA consisted of 59 coal-fired units, six nuclear units, 109
conventional hydroelectric units, four pumped storage units, 93 combustion
turbine units, six combined cycle units, nine diesel generator units, one
digester gas site, one biomass cofiring site, one wind energy site, and 15 solar
energy sites. See Item 1, Business — Power Supply for a chart
that indicates the location, capability, and in-service dates for each of these
properties, which chart is incorporated into this Item 2, Properties. As of September
30, 2009, 24 of the simple cycle combustion turbine units are leased by private
entities and leased back to TVA under long-term leases, and TVA leases the three
Caledonia combined cycle units under a long-term lease. In addition,
as of September 30, 2009, SSSL owned an undivided 90 percent interest in the
three Southaven combined cycle units, and TVA has entered into a lease with SSSL
under which TVA leases SSSL’s undivided 90 percent interest in the facility and
operates the entire facility through April 30, 2010. For additional
details, see Note 11. TVA is also in the process of constructing
additional generating assets. For a discussion of these assets, see
Item 1, Business — Future
Power Supply.
TVA’s
transmission system interconnects with systems of surrounding utilities and
consists primarily of the following assets:
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•
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Approximately
15,954 circuit miles of transmission lines (primarily 500 kilovolt and 161
kilovolt lines);
|
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•
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487
transmission substations, power switchyards, and switching stations;
and
|
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•
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66
individual interconnection points and 1,020 customer connection
points.
|
As of September 30, 2009, certain
qualified technological equipment and other software related to TVA’s
transmission system is leased by private entities and leased back to TVA under
long-term leases.
TVA operates and maintains 49 dams, and
TVA manages the following natural resource stewardship properties:
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•
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11,000
miles of reservoir shoreline;
|
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•
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293,000
acres of reservoir land;
|
|
•
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650,000
surface acres of water; and
|
|
•
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Over
100 public recreation facilities.
|
As part of its stewardship
responsibilities, TVA approval is required to be obtained before construction of
any obstruction affecting navigation, flood control, or public lands can be
constructed in or along the Tennessee River and its tributaries.
TVA has a variety of buildings
throughout its service area in addition to the buildings located at its
generation and transmission facilities, including office buildings, customer
service centers, power service centers, warehouses, visitor centers, and crew
quarters. The most significant of these buildings is the Knoxville
Office Complex. TVA also leases buildings, including its Chattanooga
Office Complex, which consists of approximately 1.2 million square feet of
office space. The initial term of TVA's lease of approximately 1.05
million square feet of the Chattanooga Office Complex expires on January 1,
2011. On February 8, 2008, TVA finalized an agreement to purchase
this portion of the Chattanooga Office Complex upon the expiration of the
existing lease term on January 1, 2011. The lease on the Monteagle
Place, the remaining portion of the Chattanooga Office Complex (approximately
131,979 square feet), expires on September 30, 2012. On May 18, 2009,
TVA finalized a purchase agreement for the Monteagle Place portion of the
Chattanooga Office Complex with closing to occur October 1, 2012, upon the
expiration of the existing lease term. TVA also owns a significant
number of buildings in Muscle Shoals, Alabama, and is currently evaluating
strategies for long-term solutions to further reduce its Muscle Shoals
portfolio.
Under the
TVA Act, TVA has broad authority to dispose of personal property but only
limited authority to dispose of real property. TVA’s primary sources
of authority to dispose of real property are briefly described
below:
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•
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Under
Section 31 of the TVA Act, TVA has authority to dispose of surplus real
property at a public auction.
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•
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Under
Section 4(k) of the TVA Act, TVA can dispose of real property for certain
specified purposes, including providing replacement lands for certain
entities whose lands were flooded or destroyed by dam or reservoir
construction and to grant easements and rights-of-way upon which are
located transmission or distribution
lines.
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•
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Under
Section 15d(g) of the TVA Act, TVA can dispose of real property in
connection with the construction of generating plants or other facilities
under certain circumstances.
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•
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Under
40 U.S.C. § 1314, TVA has authority to grant easements for rights-of-way
and other purposes.
|
In addition, the Basic Tennessee Valley
Authority Power Bond Resolution adopted by the TVA Board on October 6, 1960, as
amended on September 28, 1976, October 17, 1989, and March 25, 1992, prohibits
TVA from mortgaging any part of its power properties and from disposing of all
or any substantial portion of these properties unless TVA provides for a
continuance of the interest, principal, and sinking fund payments due and to
become due on all outstanding Bonds, or for the retirement of such
Bonds.
From time
to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings,
investigations, and other legal matters (“Legal Proceedings”) that have arisen
in the ordinary course of conducting TVA’s activities, as a result of
catastrophic events or otherwise. While the outcome of the Legal
Proceedings to which TVA is a party cannot be predicted with certainty, any
adverse outcome to a Legal Proceeding involving TVA may have a material adverse
effect on TVA’s cash flows, results of operations, and financial
condition.
For a
discussion of Legal Proceedings involving TVA, see Note 20 — Legal Proceedings and Note 23, which discussions
are incorporated into this Item 3 by reference.
Not
applicable.
Not
applicable.
The following selected financial data
for the years 2005 through 2009 should be read in conjunction with the audited
financial statements and notes thereto (collectively, the “Financial
Statements”) presented in Item 8, Financial Statements and Supplementary
Data. Certain reclassifications have been made to the 2005, 2006,
2007, and 2008 financial statement presentation to conform to the 2009
presentation.
Selected
Financial Data1,
2
For
the years ended September 30
(in
millions)
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Operating
revenues3
|
$ | 11,255 | $ | 10,382 | $ | 9,326 | $ | 8,983 | $ | 7,792 | ||||||||||
Net
income
|
$ | 726 | $ | 817 | $ | 423 | $ | 113 | $ | 85 | ||||||||||
Total
assets
|
$ | 40,017 | $ | 37,137 | $ | 33,732 | $ | 34,308 | $ | 34,473 | ||||||||||
Financial
Obligations
|
||||||||||||||||||||
Net
long-term debt, excluding current maturities
|
$ | 21,788 | $ | 20,404 | $ | 21,099 | $ | 19,544 | $ | 17,751 | ||||||||||
Capital
leases4
|
77 | 95 | 104 | 128 | 150 | |||||||||||||||
Leaseback
obligations
|
1,403 | 1,353 | 1,072 | 1,108 | 1,143 | |||||||||||||||
Energy
prepayment obligations
|
927 | 1,033 | 1,138 | 1,244 | 1,350 | |||||||||||||||
Total
long-term obligations
|
24,195 | 22,885 | 23,413 | 22,024 | 20,394 | |||||||||||||||
Discount
notes
|
844 | 185 | 1,422 | 2,376 | 2,469 | |||||||||||||||
Current
maturities of long-term debt, net
|
8 | 2,030 | 90 | 985 | 2,693 | |||||||||||||||
Total
short-term obligations
|
852 | 2,215 | 1,512 | 3,361 | 5,162 | |||||||||||||||
Total
financial obligations
|
$ | 25,047 | $ | 25,100 | $ | 24,925 | $ | 25,385 | $ | 25,556 | ||||||||||
Notes
(1) TVA’s
financial results for each year were affected by several special items
that TVA considers significant. See Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations for a
description of special items in 2009, 2008, and 2007. In addition,
during 2006, TVA adopted a new accounting methodology for conditional
asset retirement obligations that resulted in a cumulative effect charge
to income of $109 million and an increase in accumulated depreciation of
$20 million.
(2) See
Item 1A, Risk Factors and Note 20 for a discussion of risks and
contingencies that could affect TVA’s future financial
results.
(3) Prior
to 2007, TVA reported certain revenue not directly associated with revenue
derived from electric operations as Operating
revenues. This income of $10 million and $17 million for 2006
and 2005, respectively, has been reclassified from Operating
revenues to Other
income. Additionally, certain Operating
revenues related to income derived from electric operations were
recorded net of related expenses. Expenses of $15 million for 2005
have been reclassified from Operating
revenues to Operating
expenses.
(4) Included
in Accrued
Liabilities and Other liabilities
on the Balance Sheets.
|
(Dollars
in millions except where noted)
Distinguishing
Features of TVA’s Business
TVA operates the nation’s largest
public power system. In 2009, TVA provided electricity to 52 large
industrial customers, six federal customers, and 158 distributor customers that
serve nearly nine million people in seven southeastern states. TVA
generates almost all of its revenues from the sale of electricity, and in 2009
revenues from the sale of electricity totaled $11.1 billion. As a
wholly-owned agency and instrumentality of the United States, however, TVA
differs from other electric utilities in a number of ways. Some of
the more distinguishing features are discussed below.
Federally Defined
Service Area. TVA has a
defined service area established by federal law. Subject to certain
minor exceptions, TVA may not, without an act of Congress, enter into contracts
which would have the effect of making it or the distributor customers of its
power a source of power supply outside the area for which TVA or its distributor
customers were the primary source of power supply on July 1,
1957. This statutory provision is referred to as the “fence” because
it bounds TVA’s sales activities, essentially limiting TVA to power sales within
a defined service area. The Federal Power Act, primarily through its
anti-cherrypicking provision, prevents FERC from ordering TVA to provide access
to its transmission lines to others for the purpose of delivering power to
customers within its service area except for customers in Bristol,
Virginia.
Rate
Authority. Typically, a utility is
regulated by a public utility commission, which approves the rates the utility
may charge. TVA, however, is self-regulated with respect to
rates. The TVA Act gives the TVA Board sole responsibility for
establishing the rates TVA charges for power. These rates are not
subject to judicial review or review or approval by any state or federal
regulatory body. In setting TVA’s rates, however, the TVA Board is
charged by the TVA Act to have due regard for the objective that power be sold
at rates as low as are feasible.
Funding. TVA’s
operations were originally funded primarily with appropriations from
Congress. In 1959, however, Congress passed legislation that required
TVA’s power program to be self-financing from power revenues and proceeds from
power program financings. Until 1999, TVA continued to receive some
appropriations for certain multipurpose activities and for its stewardship
activities. Since 1999, however, TVA has not received any
appropriations from Congress for any activities and, as directed by Congress,
has funded essential stewardship activities primarily with power
revenues.
TVA, unlike investor-owned power
companies, is not authorized to raise capital by issuing equity
securities. TVA relies primarily on cash from operations and proceeds
from power program borrowings to fund its operations. The TVA Act
authorizes TVA to issue Bonds in an amount not to exceed $30 billion outstanding
at any given time. From time to time, legislation is proposed that
would expand the types of financial obligations that count towards TVA’s $30
billion debt ceiling. If Congress were to broaden the type of
financial instruments that are covered by the debt ceiling or to lower the debt
ceiling, TVA might not be able to raise enough capital to, among other things,
service its then-existing financial obligations, properly operate and maintain
its power assets, and provide for reinvestment in its power
program. At September 30, 2009, TVA had $22.8 billion of Bonds
outstanding (not including noncash items of foreign currency valuation loss of
$30 million and net discount on sale of Bonds of $224
million). Additionally, at September 30, 2009, TVA had $2.3 billion
of leaseback arrangements and power prepayment obligations
outstanding. For additional information regarding TVA’s sources of
funding, see Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources —
Sources of Liquidity.
Environmental
Stewardship Activities.
TVA’s mission includes managing the United States’ fifth largest river
system — the Tennessee River, its tributaries, and public lands along the
shoreline — to provide, among other things, year-round navigation, flood damage
reduction, affordable and reliable electricity, and, consistent with these
primary purposes, recreational opportunities, adequate water supply, improved
water quality, and economic development. There are 49 dams that
comprise TVA’s integrated reservoir system. The reservoir system
provides 800 miles of commercially navigable waterway and also provides
significant flood reduction benefits both within the Tennessee River system and
downstream on the lower Ohio and Mississippi Rivers. The reservoir
system also provides a water supply for residential and industrial customers, as
well as cooling water for some of TVA’s coal-fired and nuclear power
plants. TVA’s Environmental Policy provides objectives for an
integrated approach related to providing cleaner, reliable, and affordable
energy, supporting sustainable economic growth, and engaging in proactive
environmental stewardship. The Environmental Policy provides
additional direction in several environmental stewardship areas, including water
resource protection and improvements, sustainable land use, and natural resource
management. TVA also manages 293,000 acres of reservoir lands for
natural resource protection, recreation, and other purposes.
Economic
Development Activities. Since its beginnings in 1933, TVA has
promoted the development of the Tennessee Valley. TVA works with its
distributor customers, regional, state and local agencies, and communities to
showcase the advantages available to businesses locating or expanding in TVA’s
seven-state service area. At its October 30, 2008 meeting, the TVA
Board approved a new economic development initiative, the Valley Investment
Initiative. Under the Valley Investment Initiative, TVA and
distributors of TVA power will provide an incentive award to existing companies
in TVA’s seven-state service area that demonstrate a multi-year commitment to
sustained capital investment, the creation of quality jobs, compatible and
efficient power use, and a commitment to remain in the TVA service
area. Other incentives for development include manufacturing rates
for qualifying data centers, waiver of the Enhanced Growth Credit twelve-month
shutdown provision, and realignment of recruitment targets to match the current
economic and operational needs. Continued recruitment of desirable
companies and retention of the current industrial and manufacturing base
continue to be critical to TVA’s economic development mission.
TVA faced
several significant challenges in 2009. Economic weakness in the TVA
service area, together with milder summer weather, contributed to a seven
percent reduction in power sales as compared to 2008. The year was
also marked by the continuation of a global financial crisis which led to
periods of extreme volatility in world markets and impacted TVA’s investment
funds. In addition, the December 2008 ash spill at the Kingston
Fossil Plant and the January 2009 court decision ordering the installation of
certain emission controls on four coal-fired plants present significant
financial challenges for TVA.
TVA also
faces large capital requirements to maintain its power system infrastructure and
invest in new power assets, including cleaner energy sources. TVA
believes it is likely that laws or regulations will be passed in the near future
that will require electric utilities to reduce GHG emissions and obtain a
specified portion of their power supply from renewable
resources. TVA’s generating plants are among the oldest in the
nation, and it may not be economical to continue to operate some plants in the
future, particularly if new environmental laws or regulations are
passed. TVA is also planning to end the wet storage of fly ash and
gypsum at its coal-fired plants, an effort that will involve significant
investment.
Despite
these challenges, TVA experienced some positive business developments in 2009,
including the following items that contributed to TVA’s ability to accomplish
its mission:
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Drought
conditions in TVA’s service area began to ease in 2009, and rainfall in
the eastern Tennessee Valley was 103 percent of normal for the
year. As a result, TVA was able to increase lower cost
conventional hydroelectric generation by 64 percent in 2009 over 2008
levels.
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Average
prices for purchased power and natural gas declined by 36 percent and 61
percent, respectively, in 2009 as compared to
2008.
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For
the tenth straight year, TVA’s transmission system operated with 99.999
percent reliability in delivering electricity to customers.
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TVA
experienced improvements in safety in 2009 and performed in the top decile
in the utility industry.
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TVA
helped recruit Hemlock Semiconductor and Wacker Chemie to the TVA service
area. These companies announced capital investments of over
$2.2 billion and the expected creation of an estimated 1,000 jobs.
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TVA had
net income of $726 million in 2009. Operating revenues increased
approximately 8 percent for 2009 as compared to 2008, although sales
decreased approximately 7 percent during 2009. The increases in
revenues were primarily due to an increase in the FCA resulting from higher fuel
and purchased power costs and base rate increases that were effective October 1,
2008. Operating expenses increased approximately 13 percent due
primarily to an increase in depreciation, amortization, and accretion, while
interest expense decreased approximately 8 percent due to the decline in
interest rates.
Following is a more detailed discussion
of developments impacting TVA during 2009, as well as long-term challenges that
TVA is facing and initiatives it is undertaking.
TVA faced several challenges during
2009 that impacted its cash flows, results of operations, and financial
condition. The most significant of these challenges are related to
the Kingston ash spill, coal combustion product facilities, and a court ruling
in a lawsuit filed by the State of North Carolina requiring TVA to restrict
emissions from its coal-fired plants.
Kingston
Ash Spill
The
Event. On December 22, 2008, approximately five million cubic
yards of water and coal fly ash flowed out of the Kingston ash pond onto
approximately 300 acres, primarily Watts Bar Reservoir and shoreline property
owned by the United States and managed by TVA, but also structurally damaged
three homes, interrupted utility service, and blocked a local
road. Fly ash is a coal combustion product of a coal-fired
plant. Kingston used wet ash containment impoundments for fly
ash.
TVA is
conducting cleanup and recovery efforts in conjunction with federal and state
agencies. Under the May 11, 2009, Administrative Order and Agreement
of Consent (“Order and Agreement”) entered into by TVA and the EPA under CERCLA,
TVA retains its status as a lead federal agency, but TVA's work is subject to
review and approval by the EPA, in consultation with TDEC. Under the
Order and Agreement, response actions are classified into three categories:
time-critical removal; non-time-critical removal; and remedial
actions. Generally, removal of the ash from the Emory River is
time-critical. TVA estimates that this work will be completed in
2010. Removal
of the remaining ash is considered to be non-time-critical. TVA
estimates that this work will be completed in 2013. Once the removal
actions are completed, TVA will be required to assess the site and determine
whether any additional actions may be needed at Kingston or the surrounding
impacted area. This
assessment and any additional activities found to be necessary are considered
the remedial actions.
Insurance. TVA
has property and excess liability insurance programs in place which may cover
some of the Kingston ash spill costs. The insurers for each of these
programs have been notified of the event. Although three of the
insurers that provide liability insurance have denied coverage, TVA is working
with its insurers to provide information, as it becomes available, on the event
and its cause to determine applicable coverage. As a result, no
estimate for potential insurance recovery has been accrued at this
time.
Claims and
Litigation. Fourteen lawsuits based on the Kingston ash spill
have been filed, all of which are pending in the United States District Court
for the Eastern District of Tennessee. See Note 20 — Legal Proceedings and Note
23.
Financial
Impact. TVA has recorded an estimate in the amount of $933
million for the cost of cleanup related to this event. This amount
had been charged to expense during the nine month period ended June 30,
2009. However, due to actions of the TVA Board in August 2009, the
amount was reclassified as a regulatory asset during the fourth quarter and will
be charged to expense as it is collected in future rates over 15
years. Costs incurred through September 30, 2009, totaled $231
million. The $933 million estimate currently includes, among other
things, a reasonable estimate of costs related to ash dredging and processing,
ash disposition, infrastructure repair, dredge cell repair, root cause analysis,
certain legal and settlement costs, environmental impact studies and
remediation, human health assessments, community outreach and support,
regulatory oversight, cenosphere recovery, skimmer wall installation,
construction of temporary ash storage areas, dike reinforcement, project
management, and certain other remediation costs associated with the clean
up. If the actual amount of ash removed is more or less than the
estimate, the expense could change significantly as this affects the largest
cost components of the estimate. The cost of the removal of the ash
is in large part dependent on the final disposal plan, which is still in
development by TVA and regulatory authorities.
TVA has
revised the estimated cost of the cleanup over the course of the year consistent
with receipt of better information as the remediation work has
progressed. As work progresses and more information is available, TVA
will review its estimates and revise as appropriate. TVA currently
estimates the recovery process will be completed in 2013. As
such, TVA has accrued a portion of the estimate in current liabilities, with the
remaining portion shown as a long-term liability on TVA’s September 30, 2009
Balance Sheet.
Due to
the uncertainty at this time of the final methods of remediation, a range of
reasonable estimates has been developed by cost category and either the known
amounts, most likely scenarios, or the low end of the range for each category
has been accumulated and evaluated to determine the total
estimate. The costs related to ash loading, transport, and disposal
of all time critical ash and final disposition of dredge cell closures are the
ones most subject to change. It is not currently known exactly how
much ash will need to be removed. The range of estimated costs varies
from approximately $933 million to approximately $1.2 billion.
TVA has
not included the following categories of costs in the above estimate since it
has determined that these costs are currently either not probable, not
reasonably estimable, or not appropriately accounted for as part of the estimate
accrual: fines or regulatory directive actions, outcome of lawsuits, future
claims, long-term environmental impact costs, final long-term disposition of ash
processing area, associated capital asset purchases, ash handling and
disposition from current plant operations, costs of remediating any discovered
mixed waste during ash removal process, and other costs not meeting the
recognition criteria. As ash removal continues, it is possible that
other environmentally sensitive material potentially in the river sediment
before the ash spill may be uncovered. If other materials are identified,
additional remediation not included in the above estimates may be required.
Coal
Combustion Product Facilities
Six of
the eleven coal-fired plants operated by TVA use wet methods to collect fly
ash. The
other five plants use a dry collection method. TVA’s coal combustion
products (“CCP”) collection sites follow the permit requirements of the states
in which they are located. These 11 sites have CCP collection
facilities that have engineering dike systems that undergo daily visual
inspections, quarterly state inspections, and annual detailed engineering
inspections.
TVA
performed a preliminary reassessment of the potential hazard classifications of
the impoundments at each of its CCP facilities at the 11 coal-fired plants, as
well as at the now closed Watts Bar Fossil Plant. The preliminary
reassessment resulted in each of the CCP facilities being assigned a
classification. The classifications do not measure the structural
integrity of the facility or the possibility of whether a failure could
occur. Rather, they are designed
to identify where loss of life or significant economic or environmental damage
could occur in the event of a failure. Based on the Federal
Guidelines for Dam Safety criteria, impoundments at four of the 12 TVA sites are
rated in the “High” classification (These four sites are Bull Run, Colbert,
Cumberland,
and Widows Creek.) TVA submitted the results of the preliminary
reassessment to the EPA on July 14, 2009.
Additionally,
TVA retained an independent third-party engineering firm to perform a
multi-phased evaluation of the overall stability and safety of all existing
embankments associated with TVA’s wet CCP facilities. The first phase
of the evaluation, which is finished, involved a detailed inspection of all wet
CCP facilities, a detailed documentation review, and a determination of any
immediate actions necessary to reduce risks. The second phase of the
program, which is ongoing, includes geotechnical explorations, stability
analysis, studies, and risk mitigation steps such as performance monitoring,
designing repairs, developing planning documents, obtaining permits, and
implementing the lessons learned from the Kingston ash spill at TVA’s other wet
CCP facilities. As a part of this effort, an ongoing monitoring
program with third-party oversight is being implemented, and TVA employees are
receiving additional training in dam safety and monitoring.
At its
July 21, 2009 meeting, the TVA Board directed TVA to develop a remediation plan
covering TVA’s CCP facilities. At the August 20, 2009 TVA Board
meeting, TVA reported:
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A
new organization has been put into place to improve the management of CCP
and establish accountability for decisions involving CCP,
and
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TVA
is converting and eliminating its wet fly ash, bottom ash, and gypsum
facilities to dry storage facilities and remediating the CCP facilities
that were classified as “High” during the preliminary reassessment, such
that they would no longer need to be classified as
“High.”
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The
expected cost of the CCP work is between $1.5 billion and $2.0 billion, and the work is
expected to take between eight and 10 years.
Case
Brought by North Carolina Alleging Public Nuisance
TVA is
involved in a lawsuit filed by the State of North Carolina in connection with
emissions from TVA’s coal-fired power plants. TVA already has made
capital expenditures to decrease emissions from some of the facilities, but the
U.S. District Court for Eastern District of North Carolina has ordered
significant additional investments and compliance in a time frame that is
shorter than TVA had originally planned. TVA’s current estimate of
costs to comply with the court order is $1.7 billion, of which $1.1 billion
would be for unplanned investment. Management is evaluating
alternatives which could change these amounts in the
future. Additionally, TVA has appealed the court’s
decision. See Item 1, Business — Environmental Matters and
Note 20 — Legal
Proceedings.
TVA faces several challenges that may
impact its cash flows, results of operations, and financial condition in the
future. The most significant of these challenges are discussed
below.
Meeting
the Power Needs in TVA’s Service Area
Power
sales in TVA’s service area grew at an average of 2 percent per year from 2001
to 2008. During 2009, power sales decreased about 7 percent from 2008
levels. For 2010, TVA has forecasted an additional 2 percent decline
in load and sales growth from 2009. This decline is due principally
to the recession. Although there are many additional drivers that
contribute to lower sales growth and lower load, such as the loss of two
distributors, energy efficiency, and more efficient industrial and mechanical
equipment, loads remain highly dependent on the economic conditions in TVA’s
service area. TVA is not expecting economic conditions to improve
quickly, but does expect stabilization and a gradual increase from current
levels of electricity usage.
In addition to the
forecasted increased longer-term demand, TVA faces challenges in providing
reliable and economic power supply due to the age of its coal-fired generation
fleet. On average, TVA’s coal-fired generation fleet is among the
oldest of any utility in the southeastern United States. As of
September 30, 2009, the weighted average age of TVA’s coal-fired generation
assets was 47 years. During recent years, TVA has on average,
invested less in maintaining its generation assets than surrounding
utilities. Although TVA is planning to increase its maintenance
expenditures on its generating assets in 2010, it may not be economical to
improve the reliability of some units in light of their age and current
condition.
TVA
anticipates that clean air regulations will require that all coal-fired plants
eventually have clean air controls, consisting of scrubbers and SCRs for SO2, NOx, and
mercury control. Also, TVA expects that legislation will eventually
require it to reduce CO2 emissions
or purchase CO2
allowances. Although TVA uses scrubbers on its largest generating
units and low sulfur coal on other units to remove SO2,
and SCRs and other controls to reduce NOx emissions,
several of TVA’s older coal-fired plants do not have clean air controls, and their lower
efficiency leads to higher CO2 emission
rates. Some of these less efficient units have been less economical
to use in recent periods. Due to the age, lower capacity, and lower
efficiency of some plants, it may not be economical to install new clean air
controls; accordingly, TVA may choose to retire some coal-fired
units.
TVA plans
to meet future power needs primarily through:
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New
Generation. TVA intends to add new generation
assets. This intention is reflected in TVA’s decision to
complete the construction of Watts Bar Unit 2 and to complete combined
cycle facilities at Lagoon Creek and John Sevier. TVA plans to
consider other opportunities to add new generation from time to
time. Market conditions, including the volatility of the price
of construction materials and the potential shortage of skilled craft
labor, may add uncertainties to the cost and schedule of new
construction.
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Power
Purchases. Purchasing power from others will likely
remain a component of how TVA addresses the power needs of its service
area. The Strategic Plan establishes a goal of balancing
production capabilities with power supply requirements by promoting the
conservation and efficient use of electricity and, when necessary, buying,
building, and/or leasing assets or entering into purchased power
agreements. Achieving this goal will allow TVA to reduce its
reliance on purchased power.
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Future
Contributions to TVA Investment Funds
TVA’s NDT
and pension funds have been adversely affected by the turmoil in the financial
markets during 2008 and 2009. The NDT portfolio decreased in value by
$241 million in 2008, and an additional $7 million in 2009. As of
September 30, 2009, the NDT was 95 percent funded. TVA submitted a
NDT funding assurance plan to the NRC during 2009 utilizing the external sinking
fund method as described in the NRC’s regulations. The plan is based
on estimated positive long-term investment performance above an anticipated
increase in the decommissioning liability over the remaining lives of TVA’s
nuclear units. The funding assurance plan provides mechanisms to
address this shortfall under a schedule with the goal of ensuring sufficient
funds are available when the nuclear plants are eventually
decommissioned.
TVA plans
to make a contribution of $21 million to the NDT in 2010. If market
conditions improve, this and future contributions could be less. If
market conditions in the future do not improve or continue to deteriorate, TVA
may be required to make additional contributions to the NDT. TVA may
also utilize any other financial assurance method or combination of methods
described in the NRC’s regulations to provide funding assurance for
decommissioning.
The
pension plan experienced dramatic declines in assets values over the past two
years due to much lower than expected asset returns, which have affected the
funded status. In 2008, asset values declined $1.8
billion. While financial markets improved in 2009, the plan remains
below 100 percent funded. This is due in part to the approximately
$600 million of benefits that are being paid out each year. To help
improve the funded status of the plan, TVA made a discretionary pension
contribution of $1.0 billion in September 2009. If investment asset
returns are at or above expectations, no further contributions will be made from
2010 through 2013. However, if actual returns continue to be flat or
lower than expectations or benefit payments rise significantly, additional
contributions to the plan over the next few years may be necessary.
TVA’s investment policies are based on
the objective of meeting long-term obligations, and the allocation of
investments is based on the assumption of encountering distressed market
conditions from time to time. TVA does not anticipate making
significant changes in its basic investment policies as a result of market
conditions over the last 18 months. See Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Activities —
Investment Price
Risk.
Debt Ceiling
The TVA
Act specifies that TVA’s Bonds may not exceed $30 billion outstanding at one
time. As of September 30, 2009, TVA had $22.8 billion of Bonds
outstanding (not including noncash items of foreign currency valuation loss of
$30 million and net discount on sale of Bonds of $224
million). Increased future capital expenditures along with a
restrictive debt ceiling may pose a challenge to TVA’s ability to maintain low
and competitive power rates.
Environmental Regulation
TVA
expects increased environmental regulation in the future, including but not
limited to the regulation of mercury and the emission of GHGs such as CO2. TVA
has considered, and intends to continue considering, fuel mix in making
decisions about additional generation. The restart of Browns Ferry
Unit 1, construction to complete Watts Bar Unit 2, the filing of a Combined
Construction and Operating License Application for two new units at the
Bellefonte Nuclear Plant (“Bellefonte”), and the reactivation of the
construction permits for existing Bellefonte units are examples of TVA’s
activities to pursue or consider generation sources that do not emit
GHGs. The nature or level of future regulation of GHGs is unclear at
this time. Accordingly, the costs associated with such regulation are
currently unknown but could be substantial. TVA would have to recover
such costs in rates or pursue some other action which, among other options,
might include removing some coal-fired units from service.
Renewable Portfolio
There is
currently pending federal legislation involving renewable energy and energy
efficiency. Depending on the bill that gets enacted, TVA might have
to ensure that, over the CY 2011 to CY 2039 timeframe, anywhere from 3 percent
to 20 percent of the electricity it sells is produced by renewable sources (as
defined by Congress), or make alternative compliance payments for any
deficiencies. In addition, H.R. 2454, American Clean Energy and
Security Act of 2009, which was passed by the House of Representatives, would
cut U.S. GHG emissions 17 percent by CY 2020 from CY 2005 levels and 83 percent
by CY 2050. Utilities are a source of GHG emissions and would likely
be impacted by such legislation. Under most proposed legislation,
renewable power generation resources include solar, wind, incremental
hydroelectric, biomass, and landfill gas. Generating power with
renewable sources instead of coal-fired plants could help reduce the CO2 intensity
of TVA’s generation. Power generated using renewable sources, with
current technologies, may not be economically competitive compared to existing
power generation assets. Technology advancements will be needed to
address some of the operational issues associated with renewable energy, such as
energy storage to address intermittency and interconnection technologies to
address onsite, non-grid connected renewables and efficiencies.
Most renewable energy resources are
geographically specific. Some regions of the United States have an
abundance of wind and solar resources, whereas other regions have hydroelectric
resources. Regional differences and limitations play a primary role
in the types and amount of renewable and clean energy developed across the
country. Within the area served by TVA, two of the most abundant
renewable resources are hydroelectric and biomass. Feasible wind
energy in this region is primarily associated with mountain top and ridgeline
installations, and the total potential capacity is limited when compared to
other parts of the nation where wind energy is more abundant. If TVA
is required to increase its use of renewable resources and the cost of doing so
is greater than the costs of other sources of generation, TVA’s costs may
increase significantly.
Organizational
Transformation
Following the Kingston ash spill on
December 22, 2008, the TVA Board directed management to develop an extensive
remediation plan to address deficiencies in TVA’s control systems, operating
standards, and corporate culture. In response to these concerns, TVA
has embarked on an agency-wide organization effectiveness initiative (“OEI”) to
transform TVA into a more effective and accountable operation. TVA
began by creating a new Corporate Governance and Compliance organization and a
new senior vice president position, reporting directly to the Chief Financial
Officer, to lead TVA’s organizational effectiveness efforts. The
diagnostic phase of the OEI, supported by TVA staff and industry experts, was
launched in early September 2009 and began with a thorough and deliberate review
of six key areas: governance and accountability, organizational structure,
operating policies and procedures, skills and capabilities, rewards and
recognition, and change effectiveness. The design and implementation
planning phases of the initiative will continue throughout the first quarter of
2010 with specific improvement programs anticipated to begin in the second
quarter of 2010.
Inflation
The
economy has been experiencing a very deep recession which has led to
unemployment and low capacity usage. Given the current level of idle
resources, inflationary pressures remain low. However, a strong,
sustained recovery with increasing labor, construction, and commodity costs, as
well as high interest rates, could result in higher costs for TVA and pressure
to increase power rates. Periods of robust growth might also increase
the need for TVA to add generation assets, even as the cost of construction is
rising. However, TVA expects that the impact of rising costs could be
mitigated to some extent by increasing electricity
sales. Additionally, if growth is less robust, costs might increase
more slowly and TVA may not have to add as much new generating
capacity.
Electric Vehicles
TVA could
be impacted from increased manufacture and eventual adoption of Plug-in Hybrid
Electric Vehicles (“PHEV”) and full battery electric
vehicles. Potential impacts include overall faster growth in energy
demand, unintended increased peak hour demand due to urban center
parking/charging station design and daytime use, and additional impact on the
transmission and distribution infrastructure such as increased congestion or
load limits. There is the potential to improve system load factor if
most PHEV charging activity occurs off-peak. However, technology
adoption rates for electric transportation may be difficult to predict and
introduce a new source of forecast uncertainty.
Sources
of Liquidity
To meet
cash needs and contingencies, TVA depends on various sources of
liquidity. TVA’s primary sources of liquidity are cash from
operations and proceeds from the issuance of short-term and long-term
debt. TVA’s current liabilities exceed current assets because
accounts payable significantly exceed accounts receivable, and because of the
use of short-term debt to fund short-term cash needs and scheduled maturities of
long-term debt. The daily balance of cash and cash equivalents
maintained is based on near-term expectations for cash expenditures and funding
needs.
Financial
markets experienced extreme volatility in 2008, and continued to experience
extreme volatility in 2009 amid negative developments in housing and
mortgage-related activities, weakness of major financial institutions,
government actions, and negative economic developments. These
conditions have resulted in disruptions in credit and lending activities,
particularly in the short-term credit markets through which corporate
institutions borrow and lend to each other. Disruptions in the
short-term credit markets have the potential to impact TVA because TVA uses
short-term debt to meet working capital needs, and because it typically invests
its cash holdings in the short-term debt securities of other
institutions.
TVA has
not experienced difficulty in issuing short-term debt, or in refunding maturing
debt, despite the disruptions in the credit markets. Throughout the
period of market volatility, TVA has experienced strong demand for its
short-term discount notes, and has been able to issue discount notes at
competitive rates. TVA expects continued demand for TVA’s short-term
debt securities.
Despite
the conditions in the credit markets, TVA issued $377 million of electronotes®
and almost $2.0 billion of other power bonds in 2009. TVA believes it
would be able to issue additional long-term debt if needed.
In
addition to cash from operations and proceeds from the issuance of short-term
and long-term debt, TVA’s sources of liquidity include a $150 million credit
facility with the U.S. Treasury, two credit facilities totaling $2.0 billion
with a national bank, and occasional proceeds from other financing arrangements
including call monetization transactions, sales of assets, and sales of
receivables and loans. Management
expects these sources to provide more than adequate liquidity to TVA for the
foreseeable future.
Issuance of
Debt. The TVA Act authorizes TVA to issue Bonds in an amount
not to exceed $30 billion outstanding at any time. At September 30,
2009, TVA had only two types of Bonds outstanding: power bonds and discount
notes. Power bonds have maturities of between one and 50 years, and
discount notes have maturities of less than one year. Power bonds and
discount notes rank on parity and have first priority of payment out of net
power proceeds. Net power proceeds are defined as the remainder of
TVA’s gross power revenues after deducting the costs of operating, maintaining,
and administering its power properties and payments to states and counties in
lieu of taxes, but before deducting depreciation accruals or other charges
representing the amortization of capital expenditures, plus the net proceeds
from the sale or other disposition of any power facility or interest
therein. See Note 1 — General.
Power bonds and discount notes are both
issued pursuant to section 15d of the TVA Act and pursuant to the Basic
Tennessee Valley Authority Power Bond Resolution adopted by the TVA Board on
October 6, 1960, as amended on September 28, 1976, October 17, 1989, and March
25, 1992 (the “Basic Resolution”). The TVA Act and the Basic
Resolution each contain two bond tests: the rate test and the bondholder
protection test.
Under the
rate test, TVA must charge rates for power which will produce gross revenues
sufficient to provide funds for:
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Operation,
maintenance, and administration of its power
system;
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|
Payments
to states and counties in lieu of
taxes;
|
•
|
Debt
service on outstanding Bonds;
|
•
|
Payments
to the U.S. Treasury as a repayment of and a return on the Power
Facilities Appropriation Investment;
and
|
•
|
Such
additional margin as the TVA Board may consider desirable for investment
in power system assets, retirement of outstanding Bonds in advance of
maturity, additional reduction of the Power Facility Appropriation
Investment, and other purposes connected with TVA’s power business, having
due regard for the primary objectives of the TVA Act, including the
objective that power shall be sold at rates as low as are
feasible.
|
Under the
bondholder protection test, TVA must, in successive five-year periods, use an
amount of net power proceeds at least equal to the sum of:
•
|
The
depreciation accruals and other charges representing the amortization of
capital expenditures, and
|
•
|
The
net proceeds from any disposition of power
facilities,
|
for
either
•
|
The
reduction of its capital obligations (including Bonds and the Power
Facility Appropriation Investment),
or
|
•
|
Investment
in power assets.
|
TVA must
next meet the bondholder protection test for the five-year period ending
September 30, 2010.
As discussed above, TVA uses proceeds
from the issuance of discount notes, in addition to other sources of liquidity,
to fund working capital requirements. During 2009, 2008, and 2007,
the average outstanding balance of discount notes was $1.7 billion, $767
million, and $2.3 billion, respectively, and the weighted average interest rate
on discount notes was 0.32 percent, 3.71 percent, and 5.17 percent,
respectively. At September 30, 2009, $844 million of discount notes
were outstanding with a weighted average interest rate of 0.06
percent. The discount notes are not listed on any stock
exchange.
TVA issues power bonds primarily to
refinance previously-issued power bonds as they mature. During 2009
and 2008, TVA issued $2.4 billion and $2.1 billion of power bonds, respectively,
and redeemed $2.9 billion and $689 million of power bonds,
respectively. At September 30, 2009, outstanding power bonds
(including current maturities of long-term debt) consisted of the
following:
Outstanding
Power Bonds
As
of September 30, 2009
|
||||||||||
CUSIP
or Other Identifier
|
Maturity
|
Coupon
Rate
|
Principal
Amount
1
|
Stock
Exchange Listings
|
||||||
electronotes®
|
03/15/2018
- 01/15/2029
|
2.650% - 5.500 | %2 | $ | 479 |
None
|
||||
880591DN9
|
01/18/2011
|
5.625 | % | 1,000 |
New
York, Luxembourg
|
|||||
880591DL3
|
05/23/2012
|
7.140 | % | 29 |
New
York
|
|||||
880591DT6
|
05/23/2012
|
6.790 | % | 1,486 |
New
York
|
|||||
880591CW0
|
03/15/2013
|
6.000 | % | 1,359 |
New
York, Hong Kong, Luxembourg, Singapore
|
|||||
880591DW9
|
08/01/2013
|
4.750 | % | 940 |
New
York, Luxembourg
|
|||||
880591DY5
|
06/15/2015
|
4.375 | % | 1,000 |
New
York, Luxembourg
|
|||||
880591EE8
|
11/15/2015
|
2.250 | % | 21 |
None
|
|||||
880591DS8
|
12/15/2016
|
4.875 | % | 524 |
New
York
|
|||||
880591EA6
|
07/18/2017
|
5.500 | % | 1,000 |
New
York, Luxembourg
|
|||||
880591CU4
|
12/15/2017
|
6.250 | % | 650 |
New
York
|
|||||
880591EC2
|
04/01/2018
|
4.500 | % | 1,000 |
New
York, Luxembourg
|
|||||
880591DC3
|
06/07/2021
|
5.805 | %3 | 320 |
New
York, Luxembourg
|
|||||
880591CJ9
|
11/01/2025
|
6.750 | % | 1,350 |
New
York, Hong Kong, Luxembourg, Singapore
|
|||||
880591300
|
06/01/2028
|
4.728 | % | 330 |
New
York
|
|||||
880591409
|
05/01/2029
|
4.500 | % | 274 |
New
York
|
|||||
880591DM1
|
05/01/2030
|
7.125 | % | 1,000 |
New
York, Luxembourg
|
|||||
880591DP4
|
06/07/2032
|
6.587 | %3 | 399 |
New
York, Luxembourg
|
|||||
880591DV1
|
07/15/2033
|
4.700 | % | 472 |
New
York, Luxembourg
|
|||||
880591EF5
|
06/15/2034
|
3.770 | % | 450 |
None
|
|||||
880591DX7
|
06/15/2035
|
4.650 | % | 436 |
New
York
|
|||||
880591CK6
|
04/01/2036
|
5.980 | % | 121 |
New
York
|
|||||
880591CS9
|
04/01/2036
|
5.880 | % | 1,500 |
New
York
|
|||||
880591CP5
|
01/15/2038
|
6.150 | % | 1,000 |
New
York
|
|||||
880591ED0
|
06/15/2038
|
5.500 | % | 500 |
New
York
|
|||||
880591EH1
|
09/15/2039
|
5.250 | % | 1,500 |
New
York
|
|||||
880591BL5
|
04/15/2042
|
8.250 | % | 1,000 |
New
York
|
|||||
880591DU3
|
06/07/2043
|
4.962 | %3 | 240 |
New
York, Luxembourg
|
|||||
88059CF7
|
07/15/2045
|
6.235 | % | 140 |
New
York
|
|||||
880591EB4
|
01/15/2048
|
4.875 | % | 500 |
New
York, Luxembourg
|
|||||
880591DZ2
|
04/01/2056
|
5.375 | % | 1,000 |
New
York
|
|||||
Subtotal
|
22,020 | |||||||||
Unamortized
discounts, premiums, and other
|
(224 | ) | ||||||||
Total
outstanding power bonds, net
|
$ | 21,796 | ||||||||
Notes
(1) The
above table includes net exchange losses from currency transactions of $30
million at September 30, 2009.
(2) The
weighted average interest rate of TVA’s outstanding electronotes®
was 4.58 percent at September 30, 2009.
(3) The
coupon rate represents TVA’s effective interest
rate.
|
As of September 30, 2009, all of TVA’s
Bonds were rated by at least one rating agency except for two issues of power
bonds and TVA’s discount notes. TVA’s rated Bonds are currently rated
“Aaa” by Moody’s Investors Service and/or “AAA” by Standard & Poor’s and/or
Fitch Ratings, which are the highest ratings assigned by these
agencies. The ratings are not recommendations to buy, sell, or hold
any TVA securities and may be subject to revision or withdrawal at any time by
the rating agencies. Ratings are assigned independently, and each
should be evaluated as such.
For additional information about TVA
debt issuance activity and debt instruments issued and outstanding as of
September 30, 2009 and 2008, including identifiers, rates, maturities,
outstanding principal amounts, and redemption features, see Note 10.
Credit Facility
Agreements. TVA
and the U.S. Treasury have entered into a memorandum of understanding under
which the U.S. Treasury provides TVA with a $150 million credit
facility. This credit facility matures on September 30, 2010, and is expected
to be renewed. This arrangement is pursuant to the TVA
Act. Access to this credit facility or other similar financing
arrangements has been available to TVA since 1959. TVA plans to use
the U.S. Treasury credit facility as a secondary source of
liquidity. The interest rate on any borrowing under this facility is
based on the average rate on outstanding marketable obligations of the United
States with maturities from date of issue of one year or less. There
were no outstanding borrowings under the facility at September 30, 2009.
TVA also
has short-term funding available in the form of two short-term revolving credit
facilities, one of which is a $1.0 billion facility
that matures on May 12, 2010, and the other of which is a $1.0 billion facility
that matures on November 8, 2010. The credit facilities accommodate
the issuance of letters of credit. The interest rate on any borrowing
and the fees on any letter of credit under these facilities are variable 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 $2.0 billion which
TVA has not borrowed or committed under letters of credit. The fee
may fluctuate depending on the non-enhanced credit ratings on TVA’s senior
unsecured long-term debt. At September 30, 2009, there were $103
million of letters of credit outstanding under the facilities and there were no
outstanding borrowings. TVA anticipates renewing each credit facility
as it matures. See Note 10 — Short-Term Debt.
Call Monetization
Transactions. TVA has entered into swaption transactions to
monetize the value of call provisions on certain of its Bond
issues. A swaption essentially grants a third party the right to
enter into a swap agreement with TVA under which TVA receives a floating rate of
interest and pays the third party a fixed rate of interest equal to the interest
rate on the Bond issue whose call provision TVA monetized. Through
September 30, 2009, TVA has entered into four swaption transactions that
generated proceeds of $261 million.
•
|
In
2003, TVA monetized the call provisions on a $1.0 billion
Bond issue and a $476 million Bond issue by entering into swaption
agreements with a third party in exchange for $175 million and $81
million, respectively.
|
•
|
In
2005, TVA monetized the call provisions on two Bond issues ($42 million
total par value) by entering into swaption agreements with a third party
in exchange for $5 million.
|
For more information regarding TVA’s
call monetization transactions, see Note 12 — Derivatives Not Receiving Hedge
Accounting Treatment — Swaption and Interest Rate
Swaps.
Sale
of Interest in TVA Generating Facility. Seven States Power
Corporation (“SSPC”), through its subsidiary, SSSL, purchased an undivided 90
percent interest from TVA in a three-unit, 792-MW summer net capability combined
cycle combustion turbine facility in Southaven, Mississippi. SSSL paid TVA
approximately $420 million for its interest in the facility. SSSL and
TVA have entered into an agreement under which TVA leases SSSL’s undivided 90
percent interest in the facility and operates the entire facility through April
30, 2010. The current agreement also requires TVA to buy back SSSL’s
interest in the facility if long-term operational and power sales arrangements
for the facility among TVA, SSSL, and SSPC are not in place by April 30,
2010. Because of TVA’s continued ownership interest in the facility
as well as buy-back provisions, the transaction did not qualify as a sale and
accordingly has been recorded as a leaseback obligation. As of
November 25, 2009, long-term arrangements have not been agreed upon. Management
is unable to predict at this time whether such arrangements will be finalized by
April 30, 2010. See Note 11.
A major
source of TVA’s liquidity is operating cash flows resulting from the
generation and
sales of electricity. A summary of cash flow components for the years
ended September 30 follows:
Summary
Cash Flows
For
the years ended September 30
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
provided by (used in):
|
||||||||||||
Operating
activities
|
$ | 2,141 | $ | 1,957 | $ | 1,788 | ||||||
Investing
activities
|
(2,265 | ) | (2,299 | ) | (1,686 | ) | ||||||
Financing
activities
|
112 | 390 | (473 | ) | ||||||||
Net
(decrease) increase in cash and cash equivalents
|
$ | (12 | ) | $ | 48 | $ | (371 | ) |
Operating
Activities
2009
Compared to 2008
Net cash
flows from operating activities increased $184 million in 2009 compared to
2008. This increase resulted primarily from an increase in operating
revenues as a result of higher base rates and FCA revenues as well as from lower
cash fuel costs. See Results of
Operations. This increase was partially offset by a $1.0 billion
contribution in 2009 to TVA’s pension fund as an advance on contributions for
2010 through 2013.
2008
Compared to 2007
Net cash flows from operating
activities increased $169 million in 2008 compared to 2007. This
increase was primarily due to higher operating revenues as a result of higher
base rates and FCA revenues. See Results of
Operations. This increase in revenues was partially offset by
an increase in cash paid for fuel and purchased power, an increase in cash paid
for interest, an increase in cash used by working capital, an increase in
pension contributions due to the prepayment of 2009 pension contributions in
September 2008, and a decrease in cash provided by deferred items primarily due
to funds collected in rates in 2007 that were used to fund future
generation. See Note 1 — Reserve for Future
Generation.
Investing
Activities
The
majority of TVA’s investing cash flows are related to investments in property,
plant, and equipment for new generating assets as well as additions and upgrades
to existing facilities. A summary of changes in investing cash flows
is provided below.
2009
Compared to 2008
Net cash
flows used in investing activities in 2009 decreased $34 million compared to
2008. The decrease primarily reflects the absence of the acquisition
of new generating assets in 2009 compared to the $466 million purchase in 2008
of the Southaven combined-cycle facility. This absence was partially
offset by a $263 million increase in investments to existing facilities, a $110
million increase in expenditures for the enrichment and fabrication of nuclear
fuel related to higher prices paid for enriched uranium and the normal year to
year variability resulting from the timing of refueling outages at the nuclear
plants, and a $17 million decrease during 2009 in collateral held by TVA in
connection with a swap agreement as compared to a $25 million increase in
collateral held in 2008.
2008
Compared to 2007
Net cash
flows used in investing activities in 2008 increased $613 million compared to
2007. The increase resulted primarily from a $355 million increase in
combustion turbine acquisitions, a $129 million increase in investments to
existing facilities, and a $119 million increase in expenditures for the
enrichment and fabrication of nuclear fuel related to a buildup of fuel for
strategic inventory purposes.
Financing
Activities
2009
Compared to 2008
Net cash flows provided by financing
activities decreased $278 million in 2009 compared to 2008. The
decrease resulted primarily from a $2.2 billion increase in redemptions and
repurchases of long-term debt, with long-term debt of $2.9 billion retired in
2009, and a $221 million reduction in proceeds primarily from the sale/leaseback
of the Southaven combined-cycle facility. These items were partially
offset by a $264 million increase in long-term debt issues, reflecting the
issuance of $2.4 billion of long-term debt in 2009, and net issuance of $659
million of short-term debt in 2009 as compared to the net redemption of $1.2
billion of short-term debt in 2008.
2008
Compared to 2007
Net cash flows provided by financing
activities were $390 million in 2008 compared to net cash used by financing
activities of $473 million in 2007. The $863 million change was
primarily the result of a $1.1 billion increase in long-term debt issuances in
2008 as compared to 2007 and proceeds in 2008 of $325 million from the
sale/leaseback of the Southaven combined-cycle facility. These items
were partially offset by a $282 million increase in the net redemption of
short-term debt and a $219 million increase in redemptions and repurchases of
long-term debt, with long-term debt of $689 million retired in
2008.
Cash Requirements and Contractual Obligations
The future planned construction
expenditures for property, plant, and equipment additions, including clean air
projects and new generation, are estimated to be as follows:
Future
Planned Construction Expenditures1
As
of September 30
|
||||||||||||||||||||||||
Actual
|
Estimated
Construction Expenditures
|
|||||||||||||||||||||||
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
|||||||||||||||||||
Watts
Bar Unit 2
|
$ | 477 | $ | 681 | $ | 635 | $ | 416 | $ | — | $ | — | ||||||||||||
Other
capacity expansion expenditures
|
348 | 484 | 727 | 1,195 | 1,695 | 1,867 | ||||||||||||||||||
Environmental
expenditures
|
171 | 145 | 297 | 530 | 1,475 | 1,286 | ||||||||||||||||||
Ash
pond remediation
|
5 | 181 | 216 | 228 | 114 | 127 | ||||||||||||||||||
Transmission
expenditures
|
230 | 234 | 228 | 283 | 284 | 345 | ||||||||||||||||||
Other
capital expenditures 2
|
534 | 527 | 611 | 612 | 627 | 641 | ||||||||||||||||||
Total
capital projects requirements
|
$ | 1,765 | 3 | $ | 2,252 | $ | 2,714 | $ | 3,264 | $ | 4,195 | $ | 4,266 | |||||||||||
Notes
(1) TVA
plans to fund these expenditures with power revenues and proceeds from
power program financings. This table shows only expenditures that are
currently planned. Additional expenditures may be required for TVA
to meet the anticipated growth in demand for power in its service
area.
(2) Other
capital expenditures are primarily associated with short lead time
construction projects aimed at the continued safe and reliable operation
of generating assets.
(3) The
numbers above exclude allowance for funds used during construction of $24
million and includes items accrued of $18 million.
|
TVA conducts a continuing review of its
construction expenditures and financing programs. The amounts shown
in the table above are forward-looking amounts based on a number of assumptions
and are subject to various uncertainties. Amounts may differ
materially based upon a number of factors, including, but not limited to,
changes in assumptions about system load growth, environmental regulation, rates
of inflation, total cost of major projects, and availability and cost of
external sources of capital. See Forward-Looking
Information.
Management does not anticipate that TVA
will substantially change its strategy for meeting long-term power supply
needs. TVA’s primary sources of funding for new generation
investments are expected to continue to be cash from operations and power
program financings.
In the near term, TVA may be negatively
impacted by investments in new generation, such as Watts Bar Unit 2 and the John
Sevier Combined Cycle Facility, that are not expected to provide a cash return
until put into service.
TVA also has certain obligations and
commitments to make future payments under contracts. The following
table sets forth TVA’s estimates of future payments as of September 30,
2009. See Note 10, Note 11, and Note 14 for a further description
of these obligations and commitments.
Commitments
and Contingencies
Payments
due in the year ending September 30
|
||||||||||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
Debt1
|
$ | 852 | $ | 1,008 | $ | 1,523 | $ | 2,308 | $ | 32 | $ | 17,111 | $ | 22,834 | ||||||||||||||
Interest
payments relating to debt
|
1,254 | 1,226 | 1,198 | 1,054 | 968 | 17,157 | 22,857 | |||||||||||||||||||||
Lease
obligations
|
||||||||||||||||||||||||||||
Capital
|
488 | 54 | 6 | — | — | 3 | 551 | |||||||||||||||||||||
Non-cancelable
operating
|
52 | 43 | 37 | 31 | 28 | 195 | 386 | |||||||||||||||||||||
Purchase
obligations
|
||||||||||||||||||||||||||||
Power
|
274 | 272 | 258 | 203 | 198 | 6,200 | 7,405 | |||||||||||||||||||||
Fuel
|
2,209 | 1,592 | 1,160 | 938 | 832 | 1,836 | 8,567 | |||||||||||||||||||||
Other
|
50 | 48 | 37 | 30 | 27 | 156 | 348 | |||||||||||||||||||||
Expenditures
for emission control commitments2
|
438 | 378 | 455 | 325 | 109 | — | 1,705 | |||||||||||||||||||||
Litigation
settlement
|
3 | 3 | 3 | 3 | 3 | — | 15 | |||||||||||||||||||||
Environmental
cleanup costs-Kingston ash spill
|
348 | 259 | 59 | 36 | — | — | 702 | |||||||||||||||||||||
Payments
on other financings
|
89 | 94 | 98 | 99 | 100 | 818 | 1,298 | |||||||||||||||||||||
Payments
to U.S. Treasury
|
||||||||||||||||||||||||||||
Return
of Power Facility
Appropriation
Investment
|
20 | 20 | 20 | 20 | 10 | — | 90 | |||||||||||||||||||||
Return
on Power Facility
Appropriation
Investment
|
9 | 21 | 22 | 21 | 19 | 253 | 345 | |||||||||||||||||||||
Total
|
$ | 6,086 | $ | 5,018 | $ | 4,876 | $ | 5,068 | $ | 2,326 | $ | 43,729 | $ | 67,103 | ||||||||||||||
Notes
(1) Does
not include noncash items of foreign currency valuation loss of $30
million and net discount on sale of Bonds of $224 million.
(2) Expenditures
for emission control commitments represent TVA’s current estimate of costs
that may be incurred as a result of the court order in the case
brought by North Carolina alleging publice nuisance. Management is
evaluating
alternatives which could change these amounts in the future. See Note
20 — Legal Proceedings —
Case Brought by North Carolina Alleging Public Nuisance.
|
In
addition to the cash requirements above, TVA has contractual obligations in the
form of revenue discounts related to energy prepayments.
Energy
Prepayment Obligations
|
||||||||||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
Energy
Prepayment Obligations
|
$ | 105 | $ | 105 | $ | 105 | $ | 102 | $ | 100 | $ | 410 | $ | 927 |
Sales
of Electricity
Sales of electricity accounted for
substantially all of TVA’s operating revenues in 2009, 2008, and
2007. TVA sells power at wholesale to distributor customers,
consisting of municipalities and cooperatives that resell the power to their
customers at retail rates. TVA also sells power to directly served
customers, consisting primarily of federal agencies and customers with large or
unusual loads. In addition, power that is excess to the needs of the
TVA system is sold under exchange power arrangements with other electric
systems. The following table compares TVA’s energy sales statistics
for 2009, 2008, and 2007.
Sales
of Electricity
For
the years ended September 30
|
||||||||||||||||||||
(millions
of kWh)
|
||||||||||||||||||||
2009
|
Percent
Change
|
2008
|
Percent
Change
|
2007
|
||||||||||||||||
Municipalities
and cooperatives
|
133,078 | (4.7 | %) | 139,596 | (2.0 | %) | 142,461 | |||||||||||||
Industries
directly served
|
28,718 | (17.2 | %) | 34,695 | 11.9 | % | 30,993 | |||||||||||||
Federal
agencies and other
|
2,008 | (0.2 | %) | 2,013 | (3.0 | %) | 2,075 | |||||||||||||
Total
sales of electricity
|
163,804 | (7.1 | %) | 176,304 | 0.4 | % | 175,529 | |||||||||||||
Heating
degree days
|
3,403 | 9.5 | % | 3,109 | (0.4 | %) | 3,123 | |||||||||||||
Cooling
degree days
|
1,829 | (8.1 | %) | 1,990 | (15.7 | %) | 2,361 | |||||||||||||
Combined
degree days
|
5,232 | 2.6 | % | 5,099 | (7.0 | %) | 5,484 | |||||||||||||
|
2009
Compared to 2008
|
The 6,518 million
kilowatt-hour decrease in sales to Municipalities
and cooperatives was primarily due to
a decrease in demand among the commercial and industrial customers of
TVA’s distributors as a result of the economic downturn. Several of
these commercial and industrial customers have experienced less demand as a
result of layoffs and decreased production. Additionally, several
more have shut down plants. Sales to the residential customers of
TVA’s distributors also experienced a slight decline in 2009. The
decrease in sales to residential customers was primarily due to a milder summer
compared to 2008.
The 5,977
million kilowatt-hour decrease in sales to Industries directly
served was primarily due to the same items mentioned above related to the
downturn in the economy.
The
decrease in sales to Federal agencies and other
was primarily attributable to a decrease in off-system sales and was
partially offset by an increase in sales to federal agencies directly served due
to increased demand by two federal agencies.
|
2008
Compared to 2007
|
The 3,702
million kilowatt-hour increase in sales to Industries directly
served was primarily due to increased sales to TVA’s two largest
industrial customers, and increased sales to one other large customer due to
increased demand since becoming a directly served customer in October
2006. These three customers accounted for 86 percent of the increase
in sales to Industries
directly served.
The 2,865
million kilowatt-hour decrease in sales to Municipalities and
cooperatives was primarily due to a decrease in sales to residential
customers as result of a decrease in combined degree days of 385 days, or 7.0
percent. The unfavorable weather effects were partially offset by the
addition of a new municipal and cooperative customer (Bristol Virginia
Utilities) beginning in January 2008 and an additional day of sales in 2008 due
to leap year.
The 62
million kilowatt hour decrease in sales to Federal agencies and other
was primarily attributable to a 102 million kilowatt-hour decrease in
off-system sales reflecting decreased generation available for sale and market
opportunities. The decrease in off-system sales was partially offset
by a 40 million kilowatt-hour increase in sales to federal agencies directly
served due to increased demand load among federal agencies.
|
Financial
Results
|
The following table compares operating
results for 2009, 2008, and 2007:
Summary
Statements of Income
For
the years ended September 30
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
revenues
|
$ | 11,255 | $ | 10,382 | $ | 9,326 | ||||||
Revenue
capitalized during pre-commercial plant operations
|
— | — | (57 | ) | ||||||||
Operating
expenses
|
(9,282 | ) | (8,198 | ) | (7,726 | ) | ||||||
Operating
income
|
1,973 | 2,184 | 1,543 | |||||||||
Other
income, net
|
25 | 9 | 71 | |||||||||
Unrealized
gain on derivative contracts, net
|
— | — | 41 | |||||||||
Interest
expense, net
|
(1,272 | ) | (1,376 | ) | (1,232 | ) | ||||||
Net
income
|
$ | 726 | $ | 817 | $ | 423 | ||||||
Operating
Revenues. Operating revenues during 2009, 2008, and 2007
consisted of the following:
Operating
Revenue
For
the years ended September 30
|
||||||||||||||||||||
2009
|
Percent
Change
|
2008
|
Percent
Change
|
2007
|
||||||||||||||||
Operating
revenues
|
||||||||||||||||||||
Municipalities
and cooperatives
|
$ | 9,644 | 11.4 | % | $ | 8,659 | 10.3 | % | $ | 7,847 | ||||||||||
Industries
directly served
|
1,367 | (7.1 | %) | 1,472 | 20.6 | % | 1,221 | |||||||||||||
Federal
agencies and other
|
131 | 8.3 | % | 121 | 8.0 | % | 112 | |||||||||||||
Other
revenue
|
113 | (13.1 | %) | 130 | (11.0 | %) | 146 | |||||||||||||
Total
operating revenues
|
$ | 11,255 | 8.4 | % | $ | 10,382 | 11.3 | % | $ | 9,326 |
Operating revenues increased $873
million or 8.4 percent in 2009 compared to 2008, and $1.1 billion or 11.3
percent in 2008 compared to 2007 due to the following:
Variance
2009 vs. 2008
|
Variance
2008 vs. 2007
|
|||||||
Base
rate changes
|
$ | 754 | $ | 389 | ||||
FCA
rate changes
|
742 | 701 | ||||||
Volume
|
(598 | ) | (13 | ) | ||||
Off
system sales
|
(8 | ) | (5 | ) | ||||
Other
revenue
|
(17 | ) | (16 | ) | ||||
Total
|
$ | 873 | $ | 1,056 |
2009
Compared to 2008
Significant
items contributing to the $873 million increase in operating revenues
included:
|
•
|
A
$985 million increase in revenue from Municipalities and
cooperatives primarily due to an increase in average base rates of
9.1 percent due to base rate increases effective April 1, 2008 and October
1, 2008, which together provided $689 million in additional
revenue. FCA rate increases provided an additional $669 million
in revenue. These increases were partially offset by a decline
in sales volume of 4.7 percent, which reduced revenues by $373
million.
|
|
•
|
A
$105 million decrease in revenue from Industries directly
served primarily due to decreased sales volume of 17.2 percent,
which reduced revenues by $230 million. This decrease was
partially offset by FCA rate increases which provided $63 million in
additional revenue, and an increase in average base rates of 5.6 percent
which provided $62 million in additional
revenues.
|
|
•
|
A
$10 million increase in revenue from Federal agencies and
other as a result of an $18 million increase in revenues from
federal agencies directly served primarily due to the FCA rate increases
and increased volume. This increase was partially offset by a
decrease in off-system sales of $8 million due to decreased
volume.
|
|
•
|
A
$17 million decrease in other revenue primarily due to a $14 million
decrease in wheeling revenues and a $3 million decrease in revenues from
the sale of emission allowances.
|
2008
Compared to 2007
Significant
items contributing to the $1.1 billion increase in operating revenues
included:
|
•
|
An
$812 million increase in revenue from Municipalities and
cooperatives primarily due to FCA revenues, which provided $605
million in additional revenues, and base
rate increases averaging 4.8 percent, which
provided $363 million in additional revenues. These increases
were partially offset by a decrease in sales volume of 2.0 percent, which
reduced revenues by $156 million. The decline in sales volume
resulted primarily from milder weather (7 percent fewer heating and
cooling degree days) in 2008.
|
|
•
|
A
$251 million increase in revenue from Industries directly
served as a result of increased sales volume of 11.9 percent, the
FCA, and fluctuations in rates. These items contributed to
increased revenue of $141 million,
$88 million, and $22 million,
respectively.
|
|
•
|
A
$9 million increase in revenue from Federal agencies and
other as a result of a $14 million increase in revenues from
federal agencies directly served due to the FCA rate increases, increased
sales volume of 2.3 percent, and an increase in average base rates of 4.1
percent. The increase in revenues from federal agencies
directly served was partially offset by a $5 million decrease in
off-system sales reflecting decreased sales volume of 33.1 percent
partially offset by an increase in average base rates of 6.7
percent.
|
These
items were partially offset by a $16 million decrease in Other revenue primarily
due to decreased revenues from wheeling activity and the inclusion in 2007 of
sales of salvage inventory primarily related to Bellefonte Nuclear Plant that
did not reoccur in 2008.
During
2007 there was also a $57 million revenue offset related to the Browns Ferry
Unit 1 pre-commercial plant operations. See Note 1 — Capitalized Revenue During
Pre-Commercial Plant Operations.
Operating Expenses. A table
of operating expenses for 2009, 2008, and 2007 follows:
TVA
Operating Expenses
For
the years ended September 30
|
||||||||||||||||||||
2009
|
Percent
Change
|
2008
|
Percent
Change
|
2007
|
||||||||||||||||
Operating
expenses
|
||||||||||||||||||||
Fuel
and purchased power
|
$ | 4,745 | 13.6 | % | $ | 4,176 | 21.1 | % | $ | 3,449 | ||||||||||
Operating
and maintenance
|
2,395 | 3.8 | % | 2,307 | (2.0 | %) | 2,353 | |||||||||||||
Depreciation,
amortization, and accretion
|
1,598 | 30.6 | % | 1,224 | (16.9 | %) | 1,473 | |||||||||||||
Tax
equivalents
|
544 | 10.8 | % | 491 | 8.9 | % | 451 | |||||||||||||
Total
operating expenses
|
$ | 9,282 | 13.2 | % | $ | 8,198 | 6.1 | % | $ | 7,726 | ||||||||||
2009
Compared to 2008
Significant drivers contributing to the
$1.1 billion increase in total operating expenses included:
Fuel and purchased
power expense increased $569 million due to:
|
•
|
A
$717 million increase in fuel and purchased power expense due to deferred
fuel expense to be returned to customers in 2010 as part of the FCA
mechanism.
|
|
•
|
A
$113 million decrease in fuel expense resulting from a decrease in net
thermal generation of 12 percent, which reduced fuel expense by $295
million. The decrease in net thermal generation was due to
lower demand, an increase in conventional hydroelectric generation of 4.7
billion kWh or 64 percent, and the decision to purchase more power due to
favorable market prices. The aggregate fuel cost per
kilowatt-hour net thermal generation increased 8.8 percent and resulted in
an increase of $182 million in fuel expense. The higher fuel
cost was primarily due to higher prices for coal and was partially offset
by lower prices for natural gas.
|
|
•
|
A
$35 million decrease in purchased power expense primarily due to a
decrease in the average price of purchased power of 36 percent in 2009
compared to 2008, which resulted in a $529 million reduction in
expense. This decrease was partially offset by an increase in
purchased power volume of 5.7 percent, which increased purchased power
expense by $80 million. Purchased power expense also increased
$414 million due to net realized losses related to natural gas derivatives
compared to net realized gains on these derivative contracts in
2008.
|
Operating and maintenance
expense increased $88 million primarily due to a $44 million increase in
operating and
maintenance expense at nuclear plants due to increased number of
personnel, an increase in forced maintenance outages at Browns Ferry and
Sequoyah Nuclear Plants, and an increase in amortization of deferred nuclear
outage costs. TVA also experienced increased costs of $25 million
primarily due to studies related to future uses of the Bellefonte Nuclear Plant,
increased costs for reagents of $15 million largely due to increased volume as a
result of additional SCR capacity online in 2009, increased administrative costs
of $13 million due to increased insurance costs and increased expenses related
to new information technology implementation in the third quarter of 2008, and
increased costs of $14 million to support energy efficiency and demand response
initiatives.
These increases were partially offset
by a $29 million decrease in operating and maintenance expenses at coal-fired
and combustion turbine plants largely due to repair and recovery work at
Paradise Fossil Plant in 2008 that did not reoccur in 2009, partial write-downs
of scrubber projects at Bull Run and John Sevier Fossil Plants in 2008 that did
not reoccur in 2009, and a decrease in outage costs due to 573 outage days in
2009 compared to the 889 outage days in 2008. These decreases were
partially offset by the cost of studies primarily related to ash remediation and
expenditures related to the discharge event at Widows Creek Fossil
Plant.
Depreciation, amortization,
and accretion expense increased $374 million primarily due to inclusion
in 2008 of a one-time adjustment to Depreciation, amortization,
and accretion expense of $350 million related to a change in regulatory
accounting for non-nuclear asset retirement obligations. See Note 6 —
Non-Nuclear Decommissioning
Costs. In addition, depreciation expense increased $24 million
primarily due to an increase in depreciation rates on transmission and
substation equipment as a result of an external depreciation cost study
implemented in the fourth quarter of 2008.
Tax equivalents
payments increased $53 million 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 2008 compared to 2007.
Other Income,
Net. The $16 million increase in Other income, net
was largely attributable to a decrease in realized and unrealized losses
on TVA’s supplemental executive retirement plan funds and a $4 million
write-off of two economic development investments in the fourth quarter of
2008 not present in 2009. See Note
15.
|
2008
Compared to 2007
Significant drivers contributing to the
$472 million increase in total operating expenses included:
Fuel and purchased
power expense increased $727 million due to:
|
•
|
A
$330 million increase in fuel expense resulting from an increase in the
aggregate fuel cost per kilowatt-hour net thermal generation of 10.9
percent, which resulted in $275 million in additional
expense. Increased net generation at coal-fired, combustion
turbine, and nuclear plants of 2.9 percent resulted in an additional $55
million in expense.
|
|
•
|
A
$128 million increase in purchased power expense resulting from an
increase in the average price of purchased power of 22 percent, which
resulted in $251 million in additional expense. This increase
was partially offset by a 5.7 percent decrease in volume of purchased
power, which resulted in a decrease of $68 million in purchased power
expense. Although purchased power volume decreased in 2008
compared to 2007, TVA purchased significantly more power than planned due
to decreased hydro-electric generation of 26.1 percent as a result of
ongoing drought conditions in 2008. Purchased power expense
also decreased $55 million due to net realized gains related to natural
gas derivatives compared to net realized losses on these derivative
contracts in 2007.
|
|
•
|
A
$269 million increase in fuel and purchased power expense due to a lower
amount of fuel and purchased power expenses deferred in 2008 compared to
2007 to be recovered as part of the FCA mechanism in future
periods.
|
Operating and maintenance
expense decreased $46 million primarily due to a $61 million decrease in
pension costs as a result of a 0.35 percent higher discount rate used to
estimate pension costs during 2008 as compared to 2007. TVA also
experienced a $21 million reduction in costs related to power system operations
and river operations due to a decrease in operating and maintenance projects and
a reduction in personnel as part of TVA’s efforts to reduce non-fuel operating
and maintenance expense; a $15 million decrease in expenses related to nuclear
generation and development studies at Watts Bar Unit 2 in 2007 not present in
2008; a $12 million decrease in write-offs for impaired assets primarily due to
a significant write-off of a scrubber project at Colbert in 2007; and a $7
million decrease in expenses at coal-fired and combustion turbine plants largely
due to a decrease in planned outages in 2008 compared to 2007.
These decreases were partially offset
by a $62 million increase in operating and maintenance expense at nuclear plants
due to increased cost of operating Browns Ferry Unit 1, which did not begin
commercial operation until August 2007, various forced maintenance outages, and
increased costs at Browns Ferry Nuclear Plant related to maintenance projects
undertaken in 2008 to improve plant performance and reliability in an effort to
reduce future unplanned outages.
Depreciation, amortization,
and accretion expense decreased $249 million primarily because of a
decrease in Depreciation
and accretion expense related to a change in regulatory accounting for
non-nuclear asset retirement obligations. In August 2008, the TVA
Board approved a potential funding source through rates for non-nuclear
decommissioning costs through the accumulation of assets in an asset retirement
trust. As a result, all cumulative costs that had been incurred
previously were reclassified to a regulatory asset. This adjustment
totaled $350 million and was a one-time decrease to depreciation, amortization,
and accretion expense in 2008. This decrease was partially offset by
an increase in depreciation expense primarily due to increases in completed
plant accounts as a result of net plant additions and an increase in
depreciation rates at several of TVA’s facilities.
Tax equivalents
payments increased $40 million 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.
Other Income,
Net. The $62 million decrease in Other income, net was
largely attributable to decreased interest income from short-term investments,
realized and unrealized losses on TVA’s supplemental executive retirement plan
funds and restricted investments related to the collateral held by TVA, and a
decrease in external business revenues. TVA also recognized $4
million in expense due to the write-off of two economic development investments
in the fourth quarter of 2008.
Unrealized Gain on Derivative
Contracts, Net. The decrease in Unrealized gain on derivative
contracts, net was attributable to a change in ratemaking
methodology. Beginning in 2008, TVA began using regulatory accounting
treatment for swaps and swaptions related to call monetization transactions to
reflect that the gain or loss is included in the ratemaking formula when these
transactions actually settle. This treatment removes the non-cash
impacts to TVA’s earnings that result from marking the value of these
instruments to market each quarter. The values of the swaps and
swaptions for 2008 were recorded on TVA’s balance sheet, and no income was
recognized. However, TVA recognized $41 million as Unrealized gain on derivative
contracts, net during 2007.
Interest
Expense. Interest expense, outstanding debt, and interest
rates during 2009, 2008, and 2007 were as follows:
Interest
Expense
For
the years ended September 30
|
||||||||||||||||||||
2009
|
Percent
Change
|
2008
|
Percent
Change
|
2007
|
||||||||||||||||
Interest
expense
|
||||||||||||||||||||
Interest
on debt and leaseback obligations
|
$ | 1,292 | (5.9 | %) | $ | 1,373 | (1.2 | %) | $ | 1,390 | ||||||||||
Amortization
of debt discount, issue, and reacquisition costs, net
|
20 | 0.0 | % | 20 | 5.3 | % | 19 | |||||||||||||
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(40 | ) | 135.3 | % | (17 | ) | (90.4 | %) | (177 | ) | ||||||||||
Net
interest expense
|
$ | 1,272 | (7.6 | %) | $ | 1,376 | 11.7 | % | $ | 1,232 | ||||||||||
2009 |
Percent
Change
|
2008 |
Percent
Change
|
2007 | ||||||||||||||||
Interest
rates (average)
|
||||||||||||||||||||
Long-term
|
5.62 | (6.3 | %) | 6.00 | (0.3 | %) | 6.02 | |||||||||||||
Discount
notes
|
0.32 | (91.4 | %) | 3.71 | (28.2 | %) | 5.17 | |||||||||||||
Blended
|
5.25 | (11.3 | %) | 5.92 | (0.3 | %) | 5.94 |
2009
Compared to 2008
Significant
items contributing to the $104 million decrease in net interest expense included
a decrease in interest on debt of $90 million primarily due to a decrease in the
average interest rates on short and long-term debt in 2009. Interest
expense was also reduced $23 million due to an increase in the construction work
in progress base used to calculate AFUDC as a result of ongoing construction
activities at Watts Bar Unit 2. This resulted in higher amounts of
interest capitalized in 2009 compared to 2008. These decreases in
interest expense were partially offset by an increase in interest on leaseback
obligations of $9 million primarily due to the addition of the Southaven
leaseback obligation.
2008
Compared to 2007
Significant items contributing to the
$144 million increase in net interest expense included a $160 million decrease
in capitalized interest on construction projects and nuclear fuel expenditures
primarily due to the change in ratemaking methodology regarding AFUDC and an
increase of $1.5 billion in the average balance of long-term outstanding debt in
2008. These items were partially offset by a decrease in the average
long-term interest rate from 6.02 percent in 2007 to 6.00 percent in 2008, a
decrease in the average discount notes interest rate from 5.17 percent in 2007
to 3.71 percent in 2008, and a decrease of $1.5 billion in the average balance
of discount notes outstanding in 2008.
In
February 1997, TVA entered into a purchased power agreement with Choctaw
Generation, Inc. (subsequently assigned to Choctaw Generation, L.P. (“Choctaw”))
to purchase all the power generated from its facility. Before July 2009, TVA did
not have access to certain financial records of Choctaw and was unable to
determine if Choctaw met the definition of a variable interest
entity. In July 2009, TVA obtained access to certain financial
records of Choctaw. Based on the financial information received, TVA
updated its assessment of its contractual relationship with Choctaw and
determined that Choctaw did not meet the definition of a variable interest
entity. As a result, TVA is not required to consolidate Choctaw’s
balance sheet, results of operations, and cash flows. TVA’s future
contractual cash commitments under this purchase power agreement are disclosed
in Note 20 — Commitments —
Power Purchase Obligations.
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 GAAP, TVA is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
amounts of revenues and expenses reported during the reporting
period. Each of these estimates varies in regard to the level of
judgment involved and its potential impact on TVA’s financial
results. Estimates are deemed critical either when a different
estimate could have reasonably been used, or where changes in the estimate are
reasonably likely to occur from period to period, and such use or change would
materially impact TVA’s financial condition, changes in financial position, or
results of operations. TVA’s critical accounting policies are also
discussed in Note 1.
Regulatory
Accounting
TVA’s Board is authorized by the TVA
Act to set rates for power sold to its customers; thus, TVA is “self
regulated.” Additionally, TVA’s regulated rates are designed to
recover its costs of providing electricity. 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. As a result of these factors, TVA records certain assets
and liabilities that result from the regulated ratemaking process that would not
be recorded under GAAP for non-regulated entities. Regulatory assets
generally represent incurred costs that have been deferred because such costs
are probable of future recovery in customer rates. Regulatory
liabilities generally represent obligations to make refunds to customers for
previous collections for costs that are not likely to be
incurred. TVA assesses whether the regulatory assets are probable of
future recovery by considering factors such as applicable regulatory changes,
potential legislation, and changes in technology. Based on these
assessments, TVA believes the existing regulatory assets are probable of
recovery. This determination reflects the current regulatory and
political environment and is subject to change in the future. The
timeframe over which the regulatory assets and liabilities are recovered is
subject to annual TVA Board approval. If future recovery of
regulatory assets ceases to be probable, TVA would be required to write off
these costs and recognize them in earnings. See Note 6.
Environmental
Cleanup Costs - Kingston Ash Spill
Environmental
clean-up costs related to the Kingston ash spill are based upon estimates of the
incremental direct costs of the remediation effort, including costs of
compensation and benefits for those employees who are expected to devote a
significant amount of time directly to the remediation effort, to the extent of
the time expected to be spent directly on the remediation
effort. Such amounts are included in the estimate when it is probable
that a liability has been incurred as of the financial statement date and the
amount of loss can be reasonably estimated. When both of those
recognition criteria are met and the estimated loss is a range, TVA accrues the
amount that appears to be a better estimate than any other estimate within the
range, or accrues the minimum amount in the range if no amount within the range
is a better estimate than any other amount. If the actual costs
materially differ from the estimate, TVA’s results of operations, financial
condition, and cash flows could be materially affected.
As of
September 30, 2009, the costs included in the environmental cleanup estimate for
Kingston included ash dredging and processing, ash disposition, infrastructure
repair, dredge cell repair, root cause analysis, certain legal and settlement
costs, environmental impact studies and remediation, human health assessments,
community outreach and support, regulatory oversight, cenosphere recovery,
skimmer wall installation, construction of temporary ash storage areas, dike
reinforcement, project management, and certain other remediation costs
associated with the clean up. As of September 30, 2009, TVA estimates
that these costs will range from $933 million to $1.2
billion. Based on the likelihood of multiple scenarios, TVA has
accrued $933 million of remediation costs. TVA has deferred the $933
million cost estimate as a regulatory asset and will amortize such costs into
operating expenses over a 15-year period beginning in 2010 as such amounts are
collected in rates.
The
following categories could have a significant effect on estimates related to the
Kingston ash spill remediation costs:
•
|
Ash
Disposition Volume – The method and amount of coal ash removal and storage
related to the clean up could vary under different
scenarios. Currently, TVA estimates it will transport between
3.0 and 9.0 million cubic yards of coal ash off site. Under the
most likely scenario, TVA would remove 5.4 million cubic yards of coal ash
from the site of the ash spill.
|
•
|
Ash
Disposition Costs – TVA’s costs related to loading, transporting, and
disposing of coal ash are based on actual tonnage. In
estimating how many tons TVA will have to dispose of, TVA applies a
conversion factor to the cubic yards of ash in each of the disposal
scenarios based on the density of ash materials. Sampling and
lab analysis have shown the density of ash materials varies significantly
based on several factors. In estimating the ash
disposition costs, TVA has used a conversion factor of approximately 1.3
tons per cubic yard of ash. The conversion factor is multiplied
by the cost in determining the cost estimate; therefore, a higher or lower
conversion factor could significantly affect the cost
estimate.
|
•
|
Excluded
Costs – TVA has not included the following categories of costs because it
has determined that these costs are currently either not probable, not
reasonably estimable, or not appropriately accounted for as part of the
expense accrual: fines or regulatory directive actions, outcome of
lawsuits, future claims, long-term environmental impact costs, final
long-term disposition of ash processing area, associated capital asset
purchases, ash handling and disposition from current plant operations,
costs of remediating any discovered mixed waste during ash removal
process, and other costs not meeting the recognition
criteria. See Note 7.
|
Revenue Recognition
Revenues from power sales are recorded
as power is delivered to customers. TVA is primarily a wholesale
provider of power to distributor customers (distributors) that resell the power
to end users at retail rates. Under TVA’s end-use billing
arrangements with distributors, TVA relies on the distributors to report their
end-use sales. Because of the delay between the wholesale delivery of
power to the customer and the report of end-use sales to TVA, TVA must estimate
the unbilled revenue at the end of each financial reporting
period. TVA accrues estimated unbilled revenues for power sales
provided to customers for the period of time from the meter-read date to the end
of the month. The methodology for estimating unbilled revenue from
electricity sales uses the distributors’ meter readings for the current billing
period and an estimated rate based on the distributors’ end-use customers’
historical usage and product mix. These rates can vary from
historical trends. See Note 1 — Revenues.
Asset
Retirement Obligations
TVA recognizes legal obligations
associated with the future retirement of certain tangible long-lived
assets. These obligations relate to fossil-fired generating plants,
nuclear generating plants, hydroelectric generating plants/dams, transmission
structures, and other property-related assets. These other
property-related assets include, but are not limited to, easements, leases, and
coal rights. Activities involved with retiring these assets could
include decontamination and demolition of structures, removal and disposal of
wastes, and site reclamation. Revisions to the amount and timing of
certain cash flow estimates of asset retirement obligations may be made based on
engineering studies. For nuclear assets, the studies are performed
annually in accordance with NRC requirements. For non-nuclear
obligations, revisions are made whenever factors indicate that the timing or
amounts of estimated cash flows have changed. Any accretion or
depreciation expense related to these liabilities and assets are charged to a
regulatory asset. See Note 9.
Nuclear
Decommissioning. Utilities that own and operate nuclear plants
are required to use different procedures in estimating nuclear decommissioning
costs under GAAP than those that are used in estimating nuclear decommissioning
costs that are reported to the NRC. The two sets of procedures
produce different estimates for the costs of decommissioning primarily because
of the difference in the discount rates used to calculate the present value of
decommissioning costs. At September 30, 2009, the present value of
the estimated future nuclear decommissioning cost under GAAP was $1.8 billion
and was included in Asset retirement
obligations, and the unamortized regulatory asset of $909 million was
included in Other
regulatory assets. Under the NRC’s regulations, the present
value of the estimated future nuclear decommissioning cost was $885 million at
September 30, 2009. This decommissioning cost estimate is based on
NRC’s requirements for removing a plant from service, releasing the property for
unrestricted use, and terminating the operating license. The actual
decommissioning costs may vary from the derived estimates because of changes in
current assumptions, such as the assumed dates of decommissioning, changes in
regulatory requirements, changes in technology, and changes in the cost of
labor, materials, and equipment.
TVA maintains a nuclear decommissioning
trust to provide funding for the ultimate decommissioning of its nuclear power
plants. The trust’s funds are invested in securities generally
designed to achieve a return in line with overall equity market
performance. The assets of the trust are invested in debt and equity
securities and certain derivative instruments. The derivative
instruments are used across various asset classes to achieve a desired
investment structure. The balance in the trust as of September 30,
2009, is less than the present value of the estimated future nuclear
decommissioning costs under both the NRC methodology and under
GAAP.
The following key assumptions can have
a significant effect on estimates related to the nuclear decommissioning
costs:
•
|
Timing
– In projecting decommissioning costs, two assumptions must be made to
estimate the timing of plant decommissioning. First, the date
of the plant’s retirement must be estimated. At a multiple unit
site, the expiration of the unit with the latest to expire operating
license is typically used for this purpose, or an assumption could be made
that the plant will be relicensed and operate for some time beyond the
original license term. Second, an assumption must be made
whether decommissioning will begin immediately upon plant retirement, or
whether the plant will be held in SAFSTOR status – a status authorized by
applicable regulations which allows for a nuclear facility to be
maintained and monitored in a condition that allows the radioactivity to
decay, after which the facility is decommissioned and
dismantled. While the impact of these assumptions cannot be
determined with precision, assuming either license extension or use of
SAFSTOR status can significantly decrease the present value of these
obligations.
|
•
|
Technology
and Regulation – There is limited experience with actual decommissioning
of large nuclear facilities. Changes in technology and
experience as well as changes in regulations regarding nuclear
decommissioning could cause cost estimates to change
significantly. TVA’s cost studies assume current technology and
regulations.
|
•
|
Discount
Rate – TVA uses a blended rate of 5.3 percent to calculate the present
value of the weighted estimated cash flows required to satisfy TVA’s
decommissioning obligation.
|
•
|
Investment
Rate of Return – TVA assumes that its decommissioning investments will
achieve a rate of return that is 5 percent greater than the rate of
inflation. This results in a 9.2 percent estimated investment
rate of return for all periods
presented.
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•
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Cost
Escalation Factors – TVA’s decommissioning estimates include an assumption
that decommissioning costs will escalate over present cost levels by 4
percent annually.
|
Non-Nuclear
Decommissioning. The present value of the estimated future
non-nuclear decommissioning cost was $846 million at September 30,
2009. This decommissioning cost estimate involves estimating the
amount and timing of future expenditures and making judgments concerning whether
or not such costs are considered a legal obligation. Estimating the
amount and timing of future expenditures includes, among other things, making
projections of the timing and duration of the asset retirement process and how
costs will escalate with inflation. The actual decommissioning costs
may vary from the derived estimates because of changes in current assumptions,
such as the assumed dates of decommissioning, changes in regulatory
requirements, changes in technology, and changes in the cost of labor,
materials, and equipment.
TVA maintains an ART to provide funding
for the ultimate decommissioning of its non-nuclear power plants. The
trust’s funds are invested in securities generally designed to achieve a return
in line with fixed-income market performance. The assets of the fund
are invested in fixed income securities directly and indirectly through
commingled funds. Estimates involved in determining if additional
funding will be made to the ART include inflation rate and rate of return
projections on the fund investments.
The
following key assumptions can have a significant effect on estimates related to
the non-nuclear decommissioning costs:
•
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Timing
– In projecting non-nuclear decommissioning costs, the date of the plant’s
retirement must be estimated. TVA uses a probability-weighted
scenario approach based on management assumptions, type of plant, number
of units, and other factors to estimate the expected retirement time
period. In instances where the retirement of a specific plant
asset differs from the anticipated plant closure date, the anticipated
retirement date of that specific asset is used. Additionally,
TVA expects to incur certain ongoing costs subsequent to the initial plant
retirement.
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•
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Technology
and Regulation – Changes in technology and experience as well as changes
in regulations regarding non-nuclear decommissioning could cause cost
estimates to change significantly. TVA’s cost studies generally
assume current technology and regulations. Specific to the coal
combustion product facilities, TVA assumes that any future closures will
require more costly materials and processes than what is legally required
as of September 30, 2009.
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•
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Discount
Rate – TVA uses its incremental lending rate over a period consistent with
the remaining timeframe until the costs are expected to be incurred to
calculate the present value of the weighted estimated cash flows required
to satisfy TVA’s non-nuclear decommissioning obligation. As of
September 30, 2009, the discount rates used in the calculations range from
1.3 percent to 5.7 percent.
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•
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Investment
Rate of Return – TVA assumes that its non-nuclear decommissioning fund
will achieve a rate of return that is 4 percent greater than the rate of
inflation. This results in a 7.75 percent estimated investment
rate of return for all periods
presented.
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•
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Cost
Escalation Factors – TVA’s non-nuclear decommissioning estimates include
an assumption that decommissioning costs will escalate over present cost
levels at rates between 2.5 percent and 4.0 percent
annually.
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Pension
and Other Post-retirement
Benefits
TVA sponsors a defined benefit pension
plan that is qualified under IRS rules and covers substantially all of its
full-time annual employees. The TVA Retirement System (“TVARS”), a
separate legal entity governed by its own board of directors, administers
TVA-sponsored retirement plans. TVA also provides a supplemental
executive retirement plan to certain executives in critical positions that
provides supplemental pension benefits tied to compensation levels that exceed
limits imposed by IRS rules applicable to the qualified defined benefit pension
plan. Additionally, TVA provides post-retirement health care benefits
for most of its full-time employees who reach retirement age while still working
for TVA. TVA’s costs of providing these benefits are impacted by
numerous factors including the provisions of the plans, changing employee
demographics, and various actuarial calculations, assumptions, and accounting
mechanisms. The most significant of these factors are discussed
below.
Expected
Return on Plan Assets. The qualified
defined benefit pension plan is the only plan that is funded with qualified plan
assets. The expected return on pension plan assets used to develop
net pension expense was 8.00 percent, 8.75 percent, and 8.75 percent during
2009, 2008, and 2007, respectively, and is determined at the beginning of the
period. Changes in the rates are generally based on studies performed
by third party professional asset managers. A higher expected rate of
return decreases net periodic pension expense. TVA adjusted the
expected rate of return to 7.75 percent for 2010 based on a recent
asset/liability study performed by third party professional asset
managers. The 2010 expected rate of return also reflects a change in
the allocation policy of TVARS assets to shift a portion of target allocations
from equities to fixed income. The change in the TVARS asset
allocation policy was based on a recommendation by the TVARS investment
consultant. The change in the expected return on pension plan assets
discussed above does not affect TVA’s post-retirement benefits plan because TVA
does not separately set aside assets to fund such benefits. TVA funds
its post-retirement plan benefits on an as-paid basis. This change
also does not impact the supplemental executive retirement plan as any assets
set aside for that plan are not considered plan assets under
GAAP. The actuarial loss related to the difference between expected
and actual return on pension plan assets for 2009 was $544
million. This amount has been recognized as a regulatory
asset.
Discount
Rate. In the
case of selecting an assumed discount rate, TVA reviews market yields on
high-quality corporate debt and long-term obligations of the U.S. Treasury and
endeavors to match, through the use of a hypothetical bond portfolio, instrument
maturities with the maturities of its pension obligations in accordance with the
prevailing accounting standards. In addition, TVA looks at published
pension spot yield curves and applies expected cash flows to the curve to
approximate the rate expected to settle the projected benefit
payments. The discount rates used to determine net pension cost were
7.5 percent, 6.25 percent, and 5.90 percent during 2009, 2008, and 2007,
respectively. The discount rate is determined at the beginning of the
period. TVA plans to use a discount rate of 5.75 percent in the
determination of 2010 net periodic pension expense and also used this rate to
value plan obligations at the end of 2009. Changes in the discount
rate for 2009 were due to decreased long-term interest rates. The
discount rate is somewhat volatile because it is determined based upon the
prevailing rate as of the measurement date. The discount rate used to
determine the post-retirement benefits costs is the same rate used to determine
pension benefits costs due to a similar expected duration of the post-retirement
and pension benefit obligations. A higher discount rate decreases the
plan obligations and correspondingly decreases the net periodic pension and
post-retirement benefits expense for those plans where actuarial losses are
being amortized. On the other hand, a lower discount rate increases
net periodic pension and post-retirement benefits costs and thus reduces TVA’s
profitability.
The expected rate of return on pension
plan assets and the discount rate, as well as the amortization of actuarial
gains and losses, were determined in accordance with consistent methodologies,
as described in Note 18.
Mortality. Mortality
assumptions are based on the results obtained from a recent actual company
experience study performed which included retirees as well as other plan
participants. TVA obtained an updated study in 2008 and, accordingly,
adjusted the mortality rates from the 1983 Group Annuity Mortality Tables to the
RP-2000 Mortality Tables.
Cost of
Living Adjustment. The cost of living
adjustment (“COLA”) is generally indexed against the Consumer Price Index
(“CPI”), subject to a floor and ceiling. The CPI fell during 2009,
and current economic forecasts project slow growth in the CPI through CY
2015. Additionally, the COLA had been temporarily reduced for current
retirees and deferred to age 60 for employees retiring on or after January 1,
2010. As a result of these COLA benefit reductions and low
inflationary expectations, TVA reduced the COLA assumption from 3.0 percent to
2.5 percent at September 30, 2009.
Sensitivity
of Costs to Changes in Assumptions. The following
chart reflects the sensitivity of pension costs to changes in certain actuarial
assumptions:
Sensitivity
of Pension Costs to Changes in Assumptions
|
||||||||||||
Actuarial
Assumption
|
Change
in Assumption
|
Impact
on 2010 Pension Cost
|
Impact
on 2009 Projected Benefit Obligation
|
|||||||||
(Increase
in millions)
|
||||||||||||
Discount
rate
|
(0.25 | %) | $ | 14 | $ | 243 | ||||||
Rate
of return on plan assets
|
(0.25 | %) | $ | 17 |
NA
|
|||||||
Each fluctuation above assumes that the
other components of the calculation are held constant and excludes any impact
for unamortized actuarial gains or losses.
The following chart reflects the
sensitivity of post-retirement benefit costs to changes in the health care cost
trend rate:
Sensitivity
of Post-retirement Benefit Costs to Changes in Assumptions
|
||||||||
(Increase
in millions)
|
1%
Increase
|
1%
Decrease
|
||||||
Effect
on total of service and interest cost components
|
$ | 5 | $ | (6 | ) | |||
Effect
on end-of-year accumulated post-retirement benefit
obligation
|
$ | 66 | $ | 74 |
Each fluctuation above assumes that the
other components of the calculation are held constant and excludes any impact
for unamortized actuarial gains or losses.
Accounting
Mechanisms. In accordance with current accounting
methodologies, TVA utilizes a number of accounting mechanisms that reduce the
volatility of reported pension expense. Differences between actuarial
assumptions and actual plan results are deferred and are amortized into periodic
expense only when the accumulated differences exceed 10 percent of the greater
of the projected benefit obligation or the market-related value of plan
assets. If necessary, the excess is amortized over the average
remaining service period of active employees.
Additionally, TVA recognizes the impact
of asset performance on pension expense over a three-year phase-in period
through a “market-related” value of assets calculation. Since the
market-related value of assets recognizes investment gains and losses over a
three year period, the future value of assets will be impacted as previously
deferred gains or losses are recognized. As a result, the losses that
the pension plan assets experienced in the current year may have an adverse
impact on pension expense in future years depending on whether the actuarial
losses at each measurement date exceed the 10 percent corridor in accordance
with current accounting methodologies. See Note 18 for a discussion
of obligations and funded status.
Expected
Contributions. TVA expects to
contribute $7 million to its supplemental executive retirement plan and $37
million to its post-retirement health
care benefit plans in 2010. TVA made a contribution to the qualified
defined benefit pension plan on September 24, 2009, of $1.0 billion that
constitutes an advance of contributions for 2010 through 2013.
Fuel
Cost Adjustment
In August
2009, the TVA Board approved a revision to the FCA formula. Starting
with the October 1, 2009 billing period, all adjustments to the FCA will be made
on a monthly basis instead of a quarterly basis. This will allow for
the FCA rate to be more closely aligned with TVA’s costs. Likewise,
the FCA formula also contains a deferred account which is used to reconcile the
difference between actual and forecasted fuel costs in the FCA. The
difference between the amounts is included in the deferred account and 50
percent of the account will be disbursed or collected on a monthly basis instead
of a quarterly basis. This change to a monthly FCA will result in
smaller reconciliations and faster liquidation of any balances in the
account. With the move to the monthly FCA formula on October 1, 2009,
the remaining balance in the existing deferred liability account balance from
the quarterly FCA of approximately $822 will be liquidated over a nine-month period from
October 1, 2009 through June 30, 2010.
Wholesale
Rate Structure
On July
8, 2009, in accordance with the rate change provisions of its wholesale power
contracts, TVA issued a letter to its distributor customers proposing the
implementation of a new rate structure in 2010. This letter initiated
a required negotiation period during which TVA is seeking to reach agreement
with distributors on the proposed changes to wholesale and retail
rates. The proposed changes are not intended to provide additional
revenue for TVA; however, individual distributors and end-use customers may see
some effects on their bills. The proposed rate structures would
provide price signals to distributors and end-use customers to shift energy
usage from high cost periods to less expensive periods. For
distributors, the wholesale rates would initially be a demand and energy rate
with an option for a time-of-use rate. TVA is proposing to have all
distributors on a time-of-use wholesale rate structure by no later than April
2012. For directly served customers and distributor-served customers
with loads in excess of 5 MW, TVA is proposing a time-of-use rate
structure. Under the power contract rate change provisions, if
agreement is not reached by January 4, 2010, the TVA Board may thereafter, upon
not less than 30 days’ notice, place into effect the changes that it determines
to be appropriate.
TVA faces
several challenges in implementing time-of-use rates. Although
metering is in place today to facilitate implementation at the wholesale level,
additional metering and infrastructure will be needed to pass through the
time-of-use pricing signals at the retail level. TVA is working with
distributors to explore how additional metering and infrastructure resources can
best be acquired in a cost-effective manner. In addition, there will
be additional administration costs associated with implementing the time-of-use
rates. Billing, metering, communication, and data management systems
will have to be modified (and in some cases acquired) to read, communicate, and
ultimately generate customer bills.
Environmental
Cleanup Costs - Kingston Ash Spill
In August
2009, the TVA
Board approved the use of regulatory accounting treatment for current and future
incurred costs and future estimated costs related to the environmental cleanup
of the Kingston ash spill. These costs had previously been expensed
as part of operations when such costs were deemed to be probable and
estimable. Therefore, all cumulative costs incurred or estimated
since the spill in December 2008 were recaptured as a regulatory asset as of
September 30, 2009. The offset to this adjustment was a one-time
decrease to operating expenses. The costs will be recovered and
amortized into operating expenses over a 15-year period beginning in 2010 as
amounts are collected in rates. Any changes to the estimated cost
will be deferred as estimates are revised and future years’ rates will reflect
those adjustments prospectively over the remaining portion of the 15-year
period. TVA believes it is reasonable to conclude that it can collect
these expenses in its rates over this period. See Note 7.
Non-Nuclear
Decommissioning Costs
In August
2008, The TVA
Board approved deferring costs related to the future closure and retirement of
TVA's non-nuclear long-lived assets under various legal requirements as allowed
under GAAP. These costs had previously been included in rates as the
ARO was accreted and the asset was depreciated. These costs did not
previously meet the asset recognition criteria under GAAP guidance in effect at
the date the costs were incurred. Because of the establishment of the
ART and the approval of the funding in rates as part of the TVA Board’s budget
and ratemaking process, these costs met asset recognition criteria in the fourth
quarter of 2008. Accordingly, all cumulative ARO costs were
recaptured as a regulatory asset as of September 30, 2008. The
regulatory asset initially created related to this adjustment totaled $350
million. The offset to this adjustment was a one-time decrease to
depreciation, amortization, and accretion expense. See Note 6 — Non-Nuclear Decommissioning
Costs.
Nuclear
Outage Costs
TVA’s
investment in the fuel used in its nuclear units is being amortized and
accounted for as a component of fuel expense. Nuclear refueling
outage and maintenance costs already incurred have historically been deferred as
a regulatory asset and amortized on a straight-line basis over the estimated
period until the next refueling outage. In August 2009, the TVA Board
approved changing this methodology for rate setting
purposes. Beginning in 2010, amounts will no longer be
deferred. Outage costs will be expensed as incurred, and previously
deferred costs will continue to be amortized.
Investments
TVA’s investments classified as trading
consist of amounts held in the NDT, the ART, and the SERP. These
assets are generally measured at fair value based on quoted market prices or
other observable market data such as interest rate indices. TVA's
investments are primarily U.S. equities, international equities, REITs, fixed
income investments, high-yield fixed income investments, U.S. Treasury
inflation-protected securities, commodities, currencies, derivative instruments,
and other investments. Commingled funds are used to gain exposure to
certain investments. TVA has classified all of these trading
securities as either Level 1 or Level 2 valuations. The application
of CVAs did not materially affect the fair values of TVA’s investments at
September 30, 2009. See Note 13 for a discussion of valuation
levels.
Vendor-provided prices for TVA’s
investments are subjected to automated tolerance checks by TVA’s investment
portfolio trustee to identify and avoid, where possible, the use of inaccurate
prices. Any questionable prices identified are reported to the vendor
which provided the price. If the prices are validated, the primary
pricing source is used. If not, a secondary source price which has
passed the applicable tolerance check is used (or queried with the vendor if it
is out of tolerance), resulting in either the use of a secondary price, where
validated, or the last reported default price, as in the case of a missing
price. For monthly valued accounts, where secondary price sources are
available, an automated inter-source tolerance report identifies prices with an
inter-vendor pricing variance of over 2 percent at an asset class
level. For daily valued accounts, each security is assigned, where
possible, an indicative major market index, against which daily price movements
are automatically compared. Tolerance thresholds are established by
asset class. Prices found to be outside of the applicable tolerance
threshold are reported and queried with vendors as described above.
Derivatives
TVA is currently a party to the
following types of derivatives:
|
•
|
Currency
swaps
|
|
•
|
Swaption
|
|
•
|
Interest
rate swaps
|
|
•
|
Coal
contracts with volume options
|
|
•
|
Commodity
derivatives under the FTP (swaps, futures, options on futures, and other
financial instruments)
|
Commodity derivatives under the FTP are
classified as Level 1 and Level 2 valuations. Currency swaps and
interest rate swaps are classified as Level 2 valuations. The
swaption and coal contracts with volume options are classified as Level 3
valuations.
Currency Swaps, Swaption,
and Interest Rate Swaps. TVA has three
currency swaps, one swaption, and three “fixed for floating” interest rate
swaps. The currency swaps and interest rate swaps are classified as
Level 2 valuations as the rate curves and interest rates affecting the fair
value of the contracts are based on observable data. While most of
the fair value measurement is based on observable inputs, volatility for TVA’s
swaption is generally unobservable. Therefore, the valuation is
derived from an observable volatility measure with adjustments. The
application of CVAs resulted in a decrease of $2 million in the fair value of
the swaption and interest rate swaps, and did not materially affect the fair
values of the currency swaps at September 30, 2009.
Coal Contracts with Volume
Options. The fair value of this derivative portfolio is valued
using internal models. The significant inputs to these models are
price indications such as quoted spot prices and implied forward
prices. The pricing model is based on significant unobservable
inputs, similar products, or products priced in different time
periods. TVA designs price curves and valuation models based on the
best available information and industry accepted practices. As a
result, these valuations are classified as Level 3
valuations. Additionally, any settlement fees related to early
termination of coal supply contracts are included at the contractual
amount. The application of CVAs resulted in a decrease of $5 million
in the fair values of coal contracts in an asset position at September 30,
2009.
Commodity Derivatives under
the Financial Trading Program. TVA
uses quoted NYMEX prices in its determination of the fair value of these
contracts. Contracts settled on the NYMEX are classified as Level 1
valuations. These are primarily natural gas futures, fuel oil
futures, crude oil futures, and natural gas option
contracts. Contracts where nonperformance risk exists outside of the
exit price are measured with the incorporation of CVAs and are classified as
Level 2 valuations. These are primarily natural gas, fuel oil, and
crude oil swap contracts. The application of CVAs did not materially
affect the fair value of these assets and liabilities at September 30,
2009.
TVA maintains policies and procedures
to value commodity contracts using what is believed to be the best and most
relevant data available. In addition, TVA’s risk management group
reviews valuations and pricing data. TVA retains independent pricing
vendors to assist in valuing certain instruments without market
liquidity.
Fair Value Considerations
In determining the fair value of its
financial instruments, TVA considers the source of observable market data
inputs, liquidity of the instrument, credit risk, and risk of nonperformance of
itself or the counterparty to the contract. The conditions and
criteria used to assess these factors are described below.
Sources of Market
Assumptions. TVA derives its
financial instrument market assumptions from market data sources (e.g., NYMEX,
Moody’s). In some cases, where market data is not readily available,
TVA uses comparable market sources and empirical evidence to derive market
assumptions and determine a financial instrument's fair value.
Market Liquidity. Market liquidity
is assessed by TVA based on criteria as to whether the financial instrument
trades in an active or inactive market. An active market can be
defined as a spot market/settlement mechanism environment and also a potential
forward/futures market that is based on the activity in the forward/futures
market. A financial instrument is considered to be in an active
market if the prices are fully transparent to the market participants, the
prices can be measured by market bid and ask quotes, the market has a relatively
high trading volume as compared to TVA's current trading volume, and the market
has a significant number of market participants that will allow the market to
rapidly absorb the quantity of the assets traded without significantly affecting
the market price. Other factors TVA considers when determining
whether a market is active or inactive include the presence of government or
regulatory control over pricing that could make it difficult to establish a
market based price upon entering into a transaction.
Nonperformance
Risk. In determining
the potential impact of nonperformance risk, which includes credit risk, TVA
considers changes in current market conditions, readily available information on
nonperformance risk, letters of credit, collateral, other arrangements
available, and the nature of master netting arrangements. TVA is
counterparty to currency swaps, a swaption, interest rate swaps, coal contracts,
commodity derivatives, and other derivatives which subject TVA to nonperformance
risk. Nonperformance risk on the majority of investments and certain
exchange-traded instruments held by TVA is incorporated into the exit price that
is derived from quoted market data that is used to mark the investment to
market.
Nonperformance risk for most of TVA’s
derivative instruments is an adjustment to the initial asset/liability fair
value. TVA adjusts for nonperformance risk, both of TVA (for
liabilities) and the counterparty (for assets) by applying a CVA. TVA
determines an appropriate CVA for each applicable financial instrument based on
the term of the instrument and TVA’s or counterparty’s credit rating as obtained
from Moody’s. For companies that do not have an observable credit
rating, TVA uses internal analysis to assign a comparable rating to the
company. TVA discounts each financial instrument using the historical
default rate (as reported by Moody’s for the years CY 1983 to CY 2008) for
companies with a similar credit rating over a time period consistent with the
remaining term of the contract.
All derivative instruments are analyzed
individually and are subject to unique risk exposures. At September
30, 2009, the aggregate counterparty credit risk adjustments applied to TVA's
derivative asset and liability positions were decreases of $6 million and $2
million, respectively.
Collateral. TVA’s interest rate
swaps, two of its currency swaps, and its swaption contain contract provisions
that require a party to post collateral (in a form such as cash or a letter of
credit) when the party’s liability balance under the agreement exceeds a certain
threshold. See Note 12 — Collateral for a discussion
of collateral related to TVA’s derivative liabilities.
Level 3
Information. Unrealized
losses (gains) on contracts classified as Level 3 valuations are included in
regulatory assets (liabilities) until the contracts are settled. TVA
experienced significant unrealized losses on coal contracts with volume options
due to significant declines in coal market prices during the year ended
September 30, 2009. TVA also experienced unrealized losses on the
swaption liability due to decreases in interest rates during the year ended
September 30, 2009. Unrealized losses on these instruments did not
have a material effect on liquidity or capital resources. TVA
recognized a loss of $37 million related to the termination of coal supply
contracts during the year ended September 30,
2009. There were no realized gains (losses) during the year ended
September 30, 2009. At September 30, 2009, Level 3 valuations
represent 8 percent of total assets measured at fair value and 63 percent of
total liabilities measured at fair value.
The following accounting standards
and interpretations became effective for TVA during 2009.
Accounting Standards
Codification. In June 2009, the FASB issued changes to the
authoritative hierarchy of GAAP. The
guidance establishes the FASB Accounting Standards Codification (“ASC”) as the
source of authoritative generally accepted accounting principles to be applied
by nongovernmental entities. Filings to the SEC are made in
accordance with GAAP. Accordingly, even though TVA is a government
agency, the changes will apply to TVA’s SEC filings. All guidance
contained in the ASC carries the same level of authority. These
changes became effective for TVA beginning with the financial statements issued
for the year ended September 30, 2009. The adoption of this guidance
changed certain financial statement disclosures but did not materially impact
TVA’s financial condition, results of operations, or cash flows.
Fair Value
Measurements. In September 2006, FASB issued guidance for
measuring assets and liabilities that currently require fair value
measurement. The guidance 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. The guidance 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. The guidance establishes a fair value hierarchy that
prioritizes the information used to develop measurement
assumptions. These changes became effective for TVA on October 1,
2008. See Note 13 for additional information.
In February 2008, FASB issued guidance
that delays the effective date of the fair value accounting changes 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
guidance delays the effective date until fiscal years beginning after November
15, 2008, and interim periods within those fiscal years for items within the
scope of this guidance. TVA has utilized the deferral portion of this
guidance for all nonfinancial assets and liabilities within its scope and is
currently evaluating the future related impact.
In October 2008, FASB issued guidance
for determining the fair value of a financial asset when the market for that
asset is not active. The guidance emphasizes that determining fair
value in an inactive market depends on the facts and circumstances and may
require the use of significant judgment. The guidance was effective
upon issuance, including prior periods for which financial statements have not
been issued, and became effective for TVA on October 1, 2008. The
adoption of this guidance did not materially impact TVA’s financial condition,
results of operations, or cash flows.
In April 2009, FASB issued guidance
regarding determining the fair value when the volume and level of activity for
the asset or liability have significantly decreased and identifying transactions
that are not orderly. The guidance clarifies the application of fair
value measurements in inactive markets and distressed or forced transactions,
issues guidance on identifying circumstances that indicate a transaction is not
orderly, and changes certain disclosure requirements regarding fair value
measurements. These changes became effective for TVA as of April 1,
2009. The adoption of this guidance changed certain financial
statement disclosures but did not materially impact TVA’s financial condition,
results of operations, or cash flows.
In April
2009, FASB issued guidance regarding interim disclosures about fair value of
financial instruments. The guidance requires summarized disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial
statements. The changes are effective for interim and annual
reporting periods ending after June 15, 2009. At initial adoption,
application of these changes is not required for earlier periods that are
presented for comparative purposes. The disclosure provisions of this
guidance became effective for TVA as of April 1, 2009. The adoption
of this guidance changed certain financial statement disclosures but did not
materially impact TVA’s financial condition, results of operations, or cash
flows.
See Note
13 for related fair value disclosures.
Fair Value
Option. In February 2007, FASB issued guidance regarding the
fair value of financial assets and financial liabilities. This guidance permits an
entity to choose to measure many financial instruments and certain other
items at fair value. The fair value option established by the
guidance 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 for which the fair value
option has been elected in earnings at each subsequent reporting
date. Most of the provisions are elective. The guidance
became effective for TVA on October 1, 2008. As allowed by the
statement, TVA did not elect the fair value option for the measurement of any
eligible assets or liabilities. As a result, the adoption of these
changes did not materially impact TVA’s financial condition, results of
operations, or cash flows.
Offsetting
Amounts. In April 2007, FASB issued guidance addressing
modifications to accounting for the presentation of certain contract
amounts. The guidance 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 became effective
for TVA as of October 1, 2008. The adoption of these changes did not
materially impact TVA’s financial position, results of operations, or cash
flows.
Disclosures about Transfers
of Financial Assets and Interests in Variable Interest
Entities. In December 2008, FASB issued guidance regarding
disclosures about transfers of financial assets and interests in variable
interest entities (“VIEs”). This guidance requires
public entities to provide additional disclosures about transfers of financial
assets. It also expands the required disclosures pertaining to an
enterprise's involvement with VIEs and is intended to provide more transparent
information related to that involvement. The new disclosure
requirements include additional information regarding consolidated VIEs, as well
as a requirement for sponsors of a VIE to disclose certain information even if
they do not hold a significant financial interest in the VIE. These
disclosure provisions became effective for TVA as of October 1,
2008. The adoption of this guidance did not materially impact TVA’s
financial condition, results of operations, or cash flows.
Derivative Instruments and
Hedging Activities. In March 2008, FASB issued guidance
regarding disclosures about derivative instruments and hedging activities, which
amends and expands the disclosure requirements. These changes became
effective for TVA as of January 1, 2009. The adoption of this
guidance changed certain financial statement disclosures but did not materially
impact TVA’s financial condition, results of operations, or cash
flows. See Note 12 for related disclosures.
Subsequent
Events. In May 2009, FASB issued guidance regarding accounting
for subsequent events. The guidance establishes principles and
requirements for the period for which management must evaluate events and
transactions subsequent to the balance sheet date for potential recognition or
disclosure in its financial statements, the circumstances under which an entity
should recognize such events and transactions, and the related
disclosures. These changes became effective for the three month
period ending June 30, 2009. The adoption of this guidance changed
certain financial statement disclosures but did not materially impact TVA’s
financial condition, results of operations, or cash flows. See Note
23 for related disclosures.
The following accounting standards
have been issued, but as of September 30, 2009, were not effective and had not
been adopted by TVA.
Business
Combinations. In December 2007, FASB issued guidance that
changes the accounting for business combinations. The guidance
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including non-controlling interests,
contingent consideration, and certain acquired contingencies. The
guidance also requires acquisition-related transaction expenses and
restructuring costs to be expensed as incurred rather than capitalized as a
component of the business combination. In April 2009, FASB issued
additional guidance to amend and clarify
the initial recognition and measurement, subsequent measurement and accounting,
and related disclosures arising from contingencies in a business
combination. The
provisions of these changes are effective as of the beginning of an entity’s
first fiscal year that begins on or after December 15, 2008. Early
adoption is prohibited. This guidance became effective for TVA as of
October 1, 2009. TVA expects that these changes could impact the
accounting for any businesses acquired after the effective date of these
pronouncements.
Noncontrolling
Interests. In December 2007, FASB issued guidance that
introduces significant changes in the accounting for noncontrolling interests
(formerly minority interests) in a partially-owned consolidated
subsidiary. The guidance also changes the accounting for and
reporting for the deconsolidation of a subsidiary. The guidance
requires that a noncontrolling interest in a consolidated subsidiary be
displayed in the consolidated statement of financial position as a separate
component of equity. The guidance also requires that earnings
attributed to the noncontrolling interests be reported as part of consolidated
earnings, and requires disclosure of the attribution of consolidated earnings to
the controlling and noncontrolling interests on the face of the consolidated
income statement. These changes became effective for TVA as of
October 1, 2009. TVA expects that these changes could impact the
accounting for any noncontrolling interests acquired after the effective date of
this pronouncement.
Employers’ Disclosures about
Post-retirement Benefit Plan
Assets. In
December 2008, FASB issued guidance that changes employers’ disclosures about
post-retirement benefit
plan assets. The guidance requires that an employer disclose the
following information about the plan assets: (1) information regarding how
investment allocation decisions are made; (2) the major categories of plan
assets; (3) information about the inputs and valuation techniques used to
measure fair value of the plan assets; (4) the effect of fair value measurements
using significant unobservable inputs on changes in plan assets for the period;
and (5) significant concentrations of risk within plan assets. These
changes will be effective for fiscal years ending after December 15, 2009, with
early application permitted. At initial adoption, application of
these changes would not be required for earlier periods that are presented for
comparative purposes. TVA is currently evaluating the potential
impact of adopting these changes on its disclosures in the financial
statements. The adoption of this guidance is not expected to
materially impact TVA’s financial position, results of operations, or cash
flows.
Transfers of Financial
Assets. In June 2009, FASB issued guidance regarding
accounting for transfers of financial assets. This guidance
eliminates the concept of a qualifying special-purpose entity (“QSPE”) and
subjects those entities to the same consolidation guidance as other
VIEs. The guidance changes the eligibility criteria for certain
transactions to qualify for sale accounting and the accounting for certain
transfers. The guidance also establishes broad disclosure objectives
and requires extensive specific disclosure requirements related to the
transfers. These changes will become effective for TVA for any
transfers of financial assets occurring on or after October 1,
2010. TVA is currently evaluating the potential impact of the
requirements of this guidance on its financial position, results of operations,
cash flows, and disclosures in its financial statements.
Variable Interest
Entities. In June 2009, FASB issued guidance that changes the
consolidation guidance for VIEs. The guidance eliminates the
consolidation scope exception for QSPEs. The statement amends the
triggering events to determine if an entity is a VIE, establishes a primarily
qualitative model for determining the primary beneficiary of the VIE, and
requires on-going assessment of whether the reporting entity is the primary
beneficiary. These changes will become effective for TVA on October
1, 2010, and will apply to all entities determined to be VIEs as of and
subsequent to the date of adoption. TVA is currently evaluating the
potential impact of the requirements of these changes on its financial position,
results of operations, cash flows, and disclosures in its financial
statements.
Fair Value Measurements of
Liabilities. In August 2009, FASB issued guidance regarding
fair value measurements of liabilities. The
guidance clarifies how the fair value of a liability should be measured when a
quoted price in an active market for the identical liability either is or is not
available. Additionally, the guidance clarifies how to consider a
restriction when estimating the fair value of a liability and the appropriate
level within the fair value disclosure hierarchy in which the various
measurement techniques result. These changes will become effective
for TVA beginning with the financial statements issued for the three months
ending December 31, 2009. TVA is currently evaluating the potential
impact of the requirements of these changes on its financial position, results
of operations, cash flows, and disclosures in its financial
statements.
Fair Value Measurements of
Investments. In September 2009, FASB issued guidance regarding
fair value measurements for certain alternative investments, such as interests
in hedge funds, private equity funds, real estate funds, venture capital funds,
offshore fund vehicles, and funds of funds. The guidance allows
reporting entities to use net asset value per share to estimate the fair value
of these investments as a practical expedient. The guidance also
requires disclosures by major category of investment about the attributes of the
investments, such as the nature of any restrictions on the investor's ability to
redeem its investments at the measurement date, any unfunded commitments, and
the investment strategies of the investees. The new guidance will
become effective for TVA beginning with the financial statements issued for the
three months ending December 31, 2009. TVA is currently evaluating
the potential impact of these changes on its financial position, results of
operations, cash flows, and disclosures in its financial
statements.
Proposed
Legislation and Regulation
On January 14, 2009, Representative
Nick J. Rahall from West Virginia introduced H.R. 493, a bill which would direct
the Secretary of the Interior to promulgate regulations concerning the storage
and disposal of coal ash. This bill draws on the regulatory model for
impoundments that is used for coal slurry management under the Surface Mining
Control and Reclamation Act of 1977. TVA understands that, at this
time, further action on this bill has been postponed awaiting issuance of new
federal regulations by the EPA. Additional regulatory and legislative
proposals to regulate coal combustion product facilities are
possible.
On June 26, 2009, the House of
Representatives passed H.R. 2454, the American Clean Energy and Security Act of
2009. This bill is a comprehensive energy and climate change
bill. Its major impact would be the establishment of new requirements
for the reduction of GHG emissions from a wide-range of sources, including
electric utilities. Under a new “cap and
trade” program, allowances would be provided directly to retail electric
suppliers, with requirements on such suppliers to utilize such allowances in a
manner that would minimize the rate impacts on their retail
customers.
H.R. 2454 would also establish a
Federal Combined Efficiency and Renewable Electricity Standard (“CERES”), under
which covered retail electric utilities would be required to meet a qualifying
renewable energy/energy efficiency percentage of 20 percent by CY
2020. As presently drafted, the CERES would apply to TVA with respect
to its sales to its directly-served customers and to the larger distributors of
TVA power. In addition, on June 17, 2009, the Senate Energy and
Natural Resources Committee agreed upon original committee bill S.1462,
supported by both Chairman Jeff Bingaman and Ranking Member Lisa Murkowski,
which would establish a qualifying renewable electricity/energy efficiency
percentage of 15 percent by CY 2021. Like its House counterpart, the
Senate version would apply to TVA with respect to its sales to its
directly-served customers and to the larger distributors of TVA
power.
In a
similar effort to address GHG and climate change issues, on November 5, 2009,
the Senate Environment and Public Works Committee ordered S.1733, the Clean
Energy Jobs and American Power Act, to be reported to the
Senate. This bill is expected to be further revised before being
considered by the Senate as a whole.
On April 24, 2009, the EPA published a
proposal with two distinct findings regarding GHGs under the CAA. The
EPA is proposing to find that the current and projected concentrations of six
key GHGs in the atmosphere threaten the public health and welfare of current and
future generations. This is referred to as the endangerment
finding. The EPA is further proposing to find that the combined
emissions of GHGs from new motor vehicles and motor vehicle engines contribute
to the atmospheric concentrations of the key GHGs and hence to the threat of
climate change. This is referred to as the cause or contribute
findings. If the EPA proposals become final, these findings would
allow regulation of CO2 and other
GHGs under the CAA and would require the EPA to issue emissions limits for GHGs
from automobiles and light trucks. The endangerment finding is
similar to findings that trigger regulation of other sources, including
stationary sources such as electricity generating facilities, and could lead to
regulation of GHG emissions from electric generating facilities and other
sources.
For a discussion of additional
environmental legislation and regulation, see Item 1, Business — Environmental Matters.
TVA cannot accurately predict whether
the initiatives discussed above will become law in the future and, if so, in
what form and what their impact would be on TVA. Moreover, given the
nature of the legislative process, it is possible that new legislation or a
change to existing legislation that has a significant impact on TVA’s activities
could become law with little or no advance notice. As a federal
entity, the very nature of TVA can be changed by legislation. For a
discussion of the potential impact of legislation and regulation on TVA, see
Item 1A, Risk Factors in this Annual Report.
See Item
1, Business —
Environmental
Matters, which discussion is
incorporated into this Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
From time to time, TVA is party to or
otherwise involved in Legal Proceedings that have risen in the ordinary course
of conducting its activities, as a result of catastrophic events or
otherwise. These Legal Proceedings include the matters discussed in
Note 20 — Legal Proceedings and Note 23. TVA
had accrued approximately $16 million and $46 million with respect to the Legal
Proceedings described in Note 20 — Legal Proceedings and Note 23, as of September 30,
2009, and 2008, respectively, as well as less than $1 million as of September
30, 2009, and $5 million as of September 30, 2008, with respect to other Legal
Proceedings that have arisen in the ordinary course of TVA’s
business. No assurance can be given that TVA will not be subject to
significant additional claims and liabilities. If actual liabilities
significantly exceed the estimates made, TVA’s results of operations, liquidity,
and financial condition could be materially adversely affected.
For a discussion of TVA’s current Legal
Proceedings, see Note 20 — Legal Proceedings and Note 23, which discussions are
incorporated into this Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
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. Other than certain derivatives instruments in its investment
funds, it is TVA’s
policy to enter into these derivative transactions solely for hedging purposes
and not for speculative purposes. See Note 12 for more information
regarding TVA’s derivative transactions.
Risk
Governance
The Enterprise Risk Council (“ERC”) was
created in 2005 to strengthen and formalize TVA’s enterprise-wide risk
management efforts. The ERC is responsible for the highest level of
risk oversight at TVA and is also responsible for communicating enterprise-wide
risks with policy implications to the TVA Board or a designated TVA Board
committee. The ERC’s current members are the president and chief
executive officer (chair), the chief financial officer and chief risk officer,
the chief operating officer, the General Counsel, and a designated
representative from the Office of the Inspector General (“OIG”) as an advisory
member.
The ERC has established a subordinate
Risk Management Steering Committee (“RMSC”). The RMSC is responsible
for (1) reviewing risk management policies to ensure their consistency with
TVA’s Enterprise Risk Management (“ERM”) policies and guidelines, (2) reviewing
Strategic Business Unit risks and emerging issues, (3) providing executive
guidance and support in enterprise risk assessments and risk management plans,
(4) recommending enterprise risks for approval to the ERC, (5) recommending
general risk management processes and methodologies for the enterprise, and (6)
sponsoring special projects related to cross-functional risk management
activities.
TVA has a designated ERM organization
within its Financial Services organization, responsible for (1) coordinating
risk assessment efforts at TVA organizations, (2) facilitating enterprise risk
discussions with the risk subject matter experts, at the RMSC, ERC, and TVA
Board levels, and (3) developing and improving risk governance structure and
risk assessment processes and methodologies.
TVA has cataloged major short-term and
long-term enterprise level risks across the organization. A discussion of
significant risks is presented in Item 1A, Risk Factors. ERM is an
on-going effort at TVA. As such, it will continue to evolve in a
manner intended to best support TVA's mission.
Commodity Price
Risk
TVA is exposed to effects of market
fluctuations in the price of commodities that are critical to its operations,
including coal, uranium, natural gas, fuel oil, crude oil, construction
materials, emission allowances, and electricity. TVA’s commodity
price risk is substantially mitigated by its cost-based rates, including its
automatic FCA mechnism. To manage cost volatility for its wholesale
and direct-served customers, TVA has established a Financial Trading Program
(“FTP”). Under the FTP, TVA currently hedges the risks associated
with the price of natural gas, fuel oil, and crude oil. TVA is
prohibited from taking speculative positions in its FTP.
In its previous SEC reports, TVA used
value at risk (“VaR”) as a measure of commodity price risk. While the
VaR approach is a reasonable approach for measuring the risks of portfolios that
are primarily speculative in nature, it is less informative when used to measure
the risks of hedging programs. Given that (1) TVA has a policy of not
entering into speculative commodity positions and (2) TVA’s exposure to
commodity prices is substantially mitigated by its cost-based rates, including
its automatic FCA mechanism, TVA is discontinuing the use of VaR in this Annual
Report and in future SEC reports in favor of a sensitivity analysis of its
commodity positions in its FTP.
Following is a discussion of the impact
on the value of TVA’s natural gas, fuel oil, and crude oil derivative positions
in its FTP that would result from hypothetical changes in commodity
prices:
Natural Gas. A
hypothetical 10 percent decline in market prices of TVA’s natural gas trading
derivative instruments as of September 30, 2009, 2008, and 2007, would have
resulted in a decrease of approximately $94 million, $73 million, and $14
million, respectively, in the fair value of these instruments on these
dates. The $21 million increase from September 30, 2008, to
September 30, 2009, resulted primarily from an increase in physical volumes
hedged of 63 million mmBtu. The $59 million increase from September
30, 2007, to September 30, 2008, resulted primarily from an increase in physical
volumes hedged of 66 million mmBtu.
Fuel Oil. A
hypothetical 10 percent decline in market prices of TVA’s fuel oil trading
derivative instruments as of September 30, 2009, would have resulted in a
decrease of approximately $13 million in the fair value of these instruments on
this date. As of September 30, 2008 and 2007, TVA had no fuel oil
trading derivative instruments outstanding.
Crude Oil. A
hypothetical 10 percent decline in market prices of TVA’s crude oil derivative
instruments as of September 30, 2009, would have resulted in a decrease of
approximately $5 million in the fair value of these instruments on this
date. As of September 30, 2008 and 2007, TVA had no crude oil trading
derivative instruments outstanding.
Investment Price
Risk
TVA’s investment price risk relates
primarily to investments in TVA’s NDT, asset retirement trust, and pension
plan.
Nuclear
Decommissioning Trust
The nuclear decommissioning trust is
generally designed to achieve a return in line with overall equity market
performance. The assets of the trust are invested in debt and equity
securities and certain derivative instruments including forwards, futures,
options, and swaps, and through these investments the trust has exposure to U.S.
equities, international equities, real estate investment trusts, high-yield
debt, U.S. Treasury inflation-protected securities, commodities, and
currencies. As of September 30, 2009 and 2008, an immediate 10
percent decrease in the price of the investments in the trust would have reduced
the value of the trust by $84 million and $85 million,
respectively. The $1 million decrease resulted from a decrease in the
value of the investments in the trust from $845 million at September 30, 2008,
to $838 million at September 30, 2009. See Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and
Estimates — Nuclear Decommissioning for more information regarding TVA’s
NDT.
Asset
Retirement Trust
The ART is presently invested to
achieve a return in line with fixed income market performance. The assets of the
trust are invested in fixed income securities directly and indirectly through
commingled funds. As of September 30, 2009 and 2008, an immediate 10
percent decrease in the price of the investments in the trust would have reduced
the value of the trust by $12 million and $8 million,
respectively. The $4 million increase resulted from an increase in
the value of the investments in the trust from $81 million at September 30,
2008, to $120 million at September 30, 2009.
Pension
Fund
The assets in TVA’s pension plan are
primarily stocks and bonds. TVARS targets an asset allocation policy
for its pension plan assets of 45 percent equity securities including U.S. and
non U.S. equities, 40 percent fixed income securities, and 15 percent
alternative investments including private equity, private real estate,
distressed debt, and timber. The pension plan assets are invested in
equity securities, debt securities, U.S. equities, international equities, real
estate investment trusts, private real estate, timber, investment-grade debt,
high-yield debt, U.S. Treasury inflation-protected securities, commodities, and
currencies. Derivative instruments such as futures, options, swaps,
and forwards may be used to gain or adjust exposure to asset classes, but may
not be used to leverage the portfolio. As of September 30, 2009 and
2008, an immediate 10 percent decrease in the value of the investments in the
fund would have reduced the value of the fund by approximately $660 million and
$622 million, respectively. The $38 million decrease resulted from a
decrease in the value of the investments in the pension fund from $6.6 billion
at September 30, 2009, to $6.2 billion at September 30, 2008. See
Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Critical
Accounting Policies and Estimates — Pension and Other Post-retirement Benefits and Note
18 for additional information regarding TVA’s pension fund.
Interest Rate
Risk
TVA’s interest rate risk is related
primarily to its short-term investments, Bonds, swaption transaction, and
interest rate swaps related to three of TVA’s swaption
transactions.
Short-Term
Investments
At September 30, 2009, TVA had $201
million of cash and cash equivalents, and the average balance of cash and cash
equivalents for 2009 was $471 million. The average interest rate that
TVA received on its short-term investments during 2009 was less than 1
percent. If the rates of interest that TVA received on its short-term
investments during 2009 were zero percent, TVA would have received approximately
$3 million less in interest from its short-term investments during
2009. At September 30, 2008, TVA had $213 million of cash and cash
equivalents, and the average balance of cash and cash equivalents for 2008 was
$357 million. If the rates of interest that TVA received on its
short-term investments
during 2008 had been one percentage point lower than the rates of interest that
TVA actually received on these investments, TVA would have received
approximately $4 million less in interest from its short-term investments during
2008. In addition to affecting the amount of interest that TVA
receives from its short-term investments, changes in interest rates could affect
the value of TVA’s investments in its pension fund, asset retirement trust, and
nuclear decommissioning trust. See Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Risk Management Activities —
Investment Price Risk.
Debt
Portfolio
Short-Term
Debt. At September 30, 2009, TVA’s short-term borrowings were
$844 million, and the current maturities of long-term debt were $8
million. Based on TVA’s interest rate exposure at September 30, 2009,
an immediate one percentage point increase in interest rates would result in an
increase of $9 million in TVA’s short-term interest expense during
2010. This calculation assumes that the balance of short-term debt
during 2010 equals the short-term debt balance at September 30, 2009, plus an
amount representing the refinancing of current maturities of long-term
debt. At September 30, 2008, TVA’s short-term borrowings were $185
million, and the current maturities of long-term debt were $2.0
billion. Based on TVA’s interest rate exposure at September 30, 2008,
an immediate one percentage point increase in interest rates would have resulted
in an increase of $22 million in TVA’s short-term interest expense during
2009. This calculation assumes that the balance of short-term debt
during 2009 equaled the short-term debt balance at September 30, 2008, plus an
amount representing the refinancing of current maturities of long-term
debt. The $13 million decrease from September 30, 2008, to September
30, 2009, resulted primarily from a reduction in the amount of current
maturities of long term-debt outstanding as of September 30, 2009, as compared
to September 30, 2008, partially offset by an increase in the amount of
short-term borrowings outstanding.
Long-Term Debt. At
September 30, 2009 and 2008, the interest rates on all of TVA’s outstanding
long-term debt were fixed. Accordingly, an immediate one percentage
point increase in interest rates would not have affected TVA’s interest expense
associated with its long-term debt. When TVA’s long-term debt matures
or is redeemed, however, TVA typically refinances this debt by issuing
additional long-term debt. Accordingly, if interest rates are high
when TVA issues this additional long-term debt, TVA’s cash flows, results of
operations, and financial condition may be adversely affected. This
risk is somewhat mitigated by the fact that TVA’s debt portfolio is diversified
in terms of maturities and has a long average life. As of September
30, 2009 and 2008, the average life of TVA’s debt portfolio was 17.5 years and
15.8 years, respectively. A schedule of TVA’s debt maturities is
contained in Note 10.
Swaption
and Interest Rate Swap Agreements
Changes
in interest rates also affect the mark-to-market valuation of TVA’s swaption
agreement and interest rate swaps. Net unrealized gains and losses on
these transactions are reflected on TVA’s Balance Sheets in a regulatory asset
account, and realized gains and losses are reflected in
earnings. Based on TVA’s interest rate exposure at September 30,
2009, an immediate one percentage point decrease in interest rates would have
increased the interest rate swap liabilities by $151 million. Due to
the low interest rate environment and the nature of the swaption, a full
percentage point decrease in rates could not be used to determine the change in
the swaption liability. However,
an immediate decrease of almost half a percentage point in interest rates would
have increased the swaption liability by $715 million at September 30, 2009.
Based on
TVA’s interest rate exposure at September 30, 2008, an immediate one percentage
point decrease in interest rates would have increased the interest rate swap
liabilities by $124 million and would have increased the swaption liability by
$229 million. The larger increases in interest rate swap liabilities
and swaption liabilities at September 30, 2009, as compared to September 30,
2008, resulted primarily from the interest rate levels and the shape of the
yield curve on these dates.
Currency Exchange Rate
Risk
As of September 30, 2009 and 2008, TVA
had three issues of Bonds outstanding whose principal and interest payments were
denominated in British pounds sterling. TVA issued these Bonds in
amounts of £200 million, £250 million, and £150 million in 1999, 2001, and 2003,
respectively. When TVA issued these Bonds, it hedged its currency
exchange rate risk by entering into currency swap
agreements. Accordingly, as of September 30, 2009 and 2008, a 10
percent change in the British pound sterling-U.S. dollar exchange rate would not
have had a material impact on TVA’s cash flows, results of operations, or
financial position.
Credit
Risk
Credit risk is the exposure to economic
loss that would occur as a result of a counterparty’s nonperformance of its
contractual obligations. Where exposed to credit risk, TVA analyzes
the counterparty’s financial condition prior to entering into an agreement,
establishes credit limits, monitors the appropriateness of those limits, as well
as any changes in the creditworthiness of the counterparty on an ongoing basis,
and employs credit mitigation measures, such as collateral or prepayment
arrangements and master purchase and sale agreements, to mitigate credit
risk.
Credit
of Customers
The majority of TVA’s credit risk is
limited to trade accounts receivable from delivered power sales to municipal and
cooperative distributor customers, all located in the Tennessee Valley
region. To a lesser extent, TVA is exposed to credit risk from
industries and federal agencies directly served and from exchange power
arrangements with a small number of investor-owned regional utilities related to
either delivered power or the replacement of open positions of longer-term
purchased power or fuel agreements. As previously mentioned in Item
1, Business — Customers —
Other Customers, power sales to USEC represented 5 percent of TVA’s total
operating revenues in 2009. USEC’s senior unsecured credit ratings
are currently ‘CCC’ by Standard & Poor’s and ‘Caa1’ by Moody’s Investors
Service. As a result of USEC’s credit ratings, it has provided credit
assurance to TVA under the terms of its power contract.
TVA had concentrations of accounts
receivable from seven customers that represented 41 percent and 40 percent of
total accounts receivable as of September 30, 2009 and 2008,
respectively.
The table below summarizes TVA’s
customer credit risk from trade accounts receivable as of September 30, 2009 and
2008:
Customer
Credit Risk
As
of September 30
|
||||||||
2009
|
2008
|
|||||||
Trade
Accounts Receivable 1
|
||||||||
Investment
grade
|
||||||||
Municipalities
and cooperative distributor customers
|
$ | 790 | $ | 868 | ||||
Exchange
power arrangements
|
2 | 4 | ||||||
Industries
and federal agencies directly served
|
26 | 46 | ||||||
Internally
rated - investment grade
|
||||||||
Municipalities
and cooperative distributor customers
|
417 | 430 | ||||||
Industries
and federal agencies directly served
|
— | 3 | ||||||
Non-investment
grade
|
||||||||
Industries
and federal agencies directly served
|
5 | 20 | ||||||
Internally
rated - non-investment grade
|
||||||||
Exchange
power arrangements
|
— | 1 | ||||||
Industries
and federal agencies directly served
|
9 | 9 | ||||||
Subtotal
|
1,249 | 1,381 | ||||||
Other
Accounts Receivable
|
||||||||
Miscellaneous
accounts
|
56 | 26 | ||||||
Provision
for uncollectible accounts
|
(2 | ) | (2 | ) | ||||
Subtotal
|
54 | 24 | ||||||
Total
|
$ | 1,303 | $ | 1,405 | ||||
Note
(1) Includes
unbilled power receivables of $940 million and $1.0 billion in 2009 and
2008, respectively.
|
Credit
of Other Counterparties
In addition to being exposed to
economic loss due to the nonperformance of TVA’s customers, TVA is exposed to
economic loss because of the nonperformance of its other counterparties,
including suppliers and counterparties to its derivative
contracts. Where exposed to performance risk, TVA analyzes the
counterparty’s financial condition prior to entering into an agreement and
employs performance assurance measures, such as parent guarantees, letters of
credit, cash deposits, or performance bonds, to mitigate the
risk.
TVA has various agreements under which
it has exposure to various institutions with which it does
business. Most of these are not material on a net exposure
basis. Policies and procedures for counterparty credit review have
generally protected TVA against significant exposure to institutions in poor
financial condition due to current market and economic conditions.
Credit of
Suppliers. If one of TVA’s fuel or purchased power suppliers
fails to perform under the terms of its contract with TVA, TVA might lose the
money that it paid to the supplier under the contract and have to purchase
replacement fuel or power on the spot market, perhaps at a significantly higher
price than TVA was entitled to pay under the
contract. In addition, TVA might not be able to acquire replacement
fuel or power in a timely manner and thus might be unable to satisfy its own
obligations to deliver power. As mentioned in Item 1, Business —
Power Supply — Purchased Power
and Other Agreements, TVA has a power purchase agreement with Choctaw
that expires on March 31, 2032. Choctaw’s senior secured credit
ratings are currently ‘BB’ by Standard & Poor’s and ‘Ba3’ with Moody’s
Investors Service. As a result of Choctaw’s credit ratings, the
company has provided credit assurance to TVA, per the terms of its
agreement.
Credit of Derivative
Counterparties. TVA has entered into derivative contracts for
hedging purposes, and TVA’s NDT and pension fund have entered into derivative
contracts for investment purposes. If a counterparty to one of TVA’s
hedging transactions defaults, TVA might incur substantial costs in connection
with entering into a replacement hedging transaction. If a
counterparty to the derivative contracts into which the NDT and the pension fund
have entered for investment purposes defaults, the value of the investment could
decline significantly, or perhaps become worthless.
Credit
of TVA
A downgrade in TVA’s credit rating
could have material adverse effects on TVA's cash flows, results of operations,
and financial condition and would harm investors in TVA securities. Among
other things, a downgrade could have the following effects:
•
|
A
downgrade would increase TVA’s interest expense by increasing the interest
rates that TVA pays on debt securities that it issues. An
increase in TVA’s interest expense would reduce the amount of cash
available for other purposes, which could result in the need to increase
borrowings, to reduce other expenses or capital investments, or to
increase electricity rates.
|
•
|
A
downgrade could result in TVA having to post additional collateral under
certain physical and financial contracts that contain rating
triggers.
|
•
|
A
downgrade below a contractual threshold could prevent TVA from borrowing
under two credit facilities totaling $2.0
billion.
|
•
|
A
downgrade could lower the price of TVA securities in the secondary market,
thereby hurting investors who sell TVA securities after the downgrade and
diminishing the attractiveness and marketability of TVA
Bonds.
|
For a discussion of factors that could
lead to a downgrade in TVA’s credit rating, see Item 1A, Risk
Factors.
See Note
23, which discussion is incorporated into this Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Quantitative and qualitative
disclosures about market risk are reported in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Risk Management Activities,
which discussion is incorporated into this Item 7A, Quantitative and Qualitative
Disclosures About Market Risk.
TENNESSEE
VALLEY AUTHORITY
For
the years ended September 30
(in
millions)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
revenues
|
||||||||||||
Sales
of electricity
|
||||||||||||
Municipalities
and cooperatives
|
$ | 9,644 | $ | 8,659 | $ | 7,847 | ||||||
Industries
directly served
|
1,367 | 1,472 | 1,221 | |||||||||
Federal
agencies and other
|
131 | 121 | 112 | |||||||||
Other
revenue
|
113 | 130 | 146 | |||||||||
Operating
revenues
|
11,255 | 10,382 | 9,326 | |||||||||
Revenue
capitalized during pre-commercial plant operations
|
– | – | (57 | ) | ||||||||
Net
operating revenues
|
11,255 | 10,382 | 9,269 | |||||||||
Operating
expenses
|
||||||||||||
Fuel
and purchased power
|
4,745 | 4,176 | 3,449 | |||||||||
Operating
and maintenance
|
2,395 | 2,307 | 2,353 | |||||||||
Depreciation,
amortization, and accretion
|
1,598 | 1,224 | 1,473 | |||||||||
Tax
equivalents
|
544 | 491 | 451 | |||||||||
Total
operating expenses
|
9,282 | 8,198 | 7,726 | |||||||||
Operating
income
|
1,973 | 2,184 | 1,543 | |||||||||
Other
income, net
|
25 | 9 | 71 | |||||||||
Unrealized
gain on derivative contracts, net
|
— | — | 41 | |||||||||
Interest
expense
|
||||||||||||
Interest
on debt and leaseback obligations
|
1,292 | 1,373 | 1,390 | |||||||||
Amortization
of debt discount, issue, and reacquisition costs, net
|
20 | 20 | 19 | |||||||||
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(40 | ) | (17 | ) | (177 | ) | ||||||
Net
interest expense
|
1,272 | 1,376 | 1,232 | |||||||||
Net
income
|
$ | 726 | $ | 817 | $ | 423 | ||||||
The
accompanying notes are an integral part of these financial
statements.
|
TENNESSEE
VALLEY AUTHORITY
At
September 30
(in
millions)
|
||||||||
ASSETS
|
||||||||
2009
|
2008
|
|||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 201 | $ | 213 | ||||
Restricted
cash and investments
|
— | 106 | ||||||
Accounts
receivable, net
|
1,303 | 1,405 | ||||||
Inventories
and other, net
|
961 | 779 | ||||||
Total
current assets
|
2,465 | 2,503 | ||||||
Property,
plant, and equipment
|
||||||||
Completed
plant
|
41,286 | 40,079 | ||||||
Less
accumulated depreciation
|
(18,086 | ) | (16,983 | ) | ||||
Net
completed plant
|
23,200 | 23,096 | ||||||
Construction
in progress
|
2,600 | 1,892 | ||||||
Nuclear
fuel and capital leases
|
961 | 791 | ||||||
Total
property, plant, and equipment, net
|
26,761 | 25,779 | ||||||
Investment
funds
|
983 | 956 | ||||||
Regulatory
and other long-term assets
|
||||||||
Deferred
nuclear generating units
|
2,347 | 2,738 | ||||||
Other
regulatory assets
|
7,287 | 4,166 | ||||||
Subtotal
|
9,634 | 6,904 | ||||||
Other
long-term assets
|
174 | 995 | ||||||
Total
regulatory and other long-term assets
|
9,808 | 7,899 | ||||||
Total
assets
|
$ | 40,017 | $ | 37,137 | ||||
LIABILITIES
AND PROPRIETARY CAPITAL
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 2,108 | $ | 1,333 | ||||
Environmental
cleanup costs - Kingston ash spill
|
348 | – | ||||||
Collateral
funds held
|
– | 103 | ||||||
Accrued
interest
|
401 | 441 | ||||||
Current
portion of leaseback obligations
|
463 | 54 | ||||||
Current
portion of energy prepayment obligations
|
105 | 106 | ||||||
Short-term
debt, net
|
844 | 185 | ||||||
Current
maturities of long-term debt
|
8 | 2,030 | ||||||
Total
current liabilities
|
4,277 | 4,252 | ||||||
Other
liabilities
|
||||||||
Other
liabilities
|
4,805 | 3,514 | ||||||
Regulatory
liabilities
|
130 | 860 | ||||||
Environmental
cleanup costs - Kingston ash spill
|
354 | – | ||||||
Asset
retirement obligations
|
2,683 | 2,318 | ||||||
Leaseback
obligations
|
940 | 1,299 | ||||||
Energy
prepayment obligations
|
822 | 927 | ||||||
Total
other liabilities
|
9,734 | 8,918 | ||||||
Long-term
debt, net
|
21,788 | 20,404 | ||||||
Total
liabilities
|
35,799 | 33,574 | ||||||
Commitments and contingencies
(Note 20)
|
||||||||
Proprietary
capital
|
||||||||
Appropriation
investment
|
4,703 | 4,723 | ||||||
Retained
earnings
|
3,291 | 2,571 | ||||||
Accumulated
other comprehensive loss
|
(75 | ) | (37 | ) | ||||
Accumulated
net expense of stewardship programs
|
(3,701 | ) | (3,694 | ) | ||||
Total
proprietary capital
|
4,218 | 3,563 | ||||||
Total
liabilities and proprietary capital
|
$ | 40,017 | $ | 37,137 | ||||
The
accompanying notes are an integral part of these financial
statements.
|
TENNESSEE
VALLEY AUTHORITY
For
the years ended September 30
(in
millions)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities
|
||||||||||||
Net
income
|
$ | 726 | $ | 817 | $ | 423 | ||||||
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||||
Depreciation,
amortization, and accretion
|
1,618 | 1,244 | 1,492 | |||||||||
Nuclear
refueling outage amortization
|
122 | 107 | 86 | |||||||||
Amortization
of nuclear fuel
|
216 | 189 | 137 | |||||||||
Non-cash
retirement benefit expense
|
146 | 145 | 201 | |||||||||
Net
unrealized gain on derivative contracts
|
— | — | (41 | ) | ||||||||
Prepayment
credits applied to revenue
|
(105 | ) | (105 | ) | (105 | ) | ||||||
Fuel
cost adjustment deferral
|
850 | 123 | (150 | ) | ||||||||
Changes
in current assets and liabilities
|
||||||||||||
Accounts
receivable, net
|
90 | (59 | ) | (144 | ) | |||||||
Inventories
and other, net
|
(182 | ) | (138 | ) | (98 | ) | ||||||
Accounts
payable and accrued liabilities
|
72 | (88 | ) | 103 | ||||||||
Accrued
interest
|
(40 | ) | 35 | 4 | ||||||||
Pension
contributions
|
(1,005 | ) | (165 | ) | (75 | ) | ||||||
Refueling
outage costs
|
(128 | ) | (150 | ) | (96 | ) | ||||||
Environmental
cleanup costs – Kingston ash spill
|
(231 | ) | — | — | ||||||||
Other,
net
|
(8 | ) | 2 | 51 | ||||||||
Net
cash provided by operating activities
|
2,141 | 1,957 | 1,788 | |||||||||
Cash
flows from investing activities
|
||||||||||||
Construction
expenditures
|
(1,771 | ) | (1,508 | ) | (1,379 | ) | ||||||
Combustion
turbine asset acquisitions
|
— | (466 | ) | (111 | ) | |||||||
Nuclear
fuel expenditures
|
(432 | ) | (322 | ) | (203 | ) | ||||||
Change
in restricted cash and investments
|
(17 | ) | 25 | 48 | ||||||||
Purchases
of investments
|
(42 | ) | (39 | ) | (44 | ) | ||||||
Loans
and other receivables
|
||||||||||||
Advances
|
(13 | ) | (6 | ) | (16 | ) | ||||||
Repayments
|
11 | 13 | 16 | |||||||||
Other,
net
|
(1 | ) | 4 | 3 | ||||||||
Net
cash used in investing activities
|
(2,265 | ) | (2,299 | ) | (1,686 | ) | ||||||
Cash
flows from financing activities
|
||||||||||||
Long-term
debt
|
||||||||||||
Issues
|
2,369 | 2,105 | 1,040 | |||||||||
Redemptions
and repurchases
|
(2,874 | ) | (689 | ) | (470 | ) | ||||||
Short-term
debt issues (redemptions), net
|
659 | (1,237 | ) | (955 | ) | |||||||
Proceeds
from sale/leaseback financing
|
104 | 325 | – | |||||||||
Payments
on leases and leaseback financing
|
(79 | ) | (43 | ) | (37 | ) | ||||||
Financing
costs, net
|
(33 | ) | (32 | ) | (11 | ) | ||||||
Payments
to U.S. Treasury
|
(33 | ) | (40 | ) | (40 | ) | ||||||
Other
|
(1 | ) | 1 | – | ||||||||
Net
cash provided by (used in) financing activities
|
112 | 390 | (473 | ) | ||||||||
Net
change in cash and cash equivalents
|
(12 | ) | 48 | (371 | ) | |||||||
Cash
and cash equivalents at beginning of year
|
213 | 165 | 536 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 201 | $ | 213 | $ | 165 | ||||||
See
Note 16 for supplemental cash flow information.
The
accompanying notes are an integral part of these financial
statements.
|
TENNESSEE
VALLEY AUTHORITY
For
the years ended September 30
(in
millions)
|
||||||||||||||||||||||||
Appropriation
Investment
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated
Net Expense of Stewardship Programs
|
Total
|
Comprehensive
Income (Loss)
|
|||||||||||||||||||
Balance
at September 30, 2006
|
$ | 4,763 | $ | 1,349 | $ | 43 | $ | (3,672 | ) | $ | 2,483 | |||||||||||||
Net
income (loss)
|
– | 434 | – | (11 | ) | 423 | $ | 423 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (20 | ) | – | – | (20 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss
|
– | – | (62 | ) | – | (62 | ) | (62 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(20 | ) | – | – | – | (20 | ) | – | ||||||||||||||||
Balance
at September 30, 2007
|
$ | 4,743 | $ | 1,763 | $ | (19 | ) | $ | (3,683 | ) | $ | 2,804 | $ | 361 | ||||||||||
Net
income (loss)
|
– | 828 | – | (11 | ) | 817 | $ | 817 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (20 | ) | – | – | (20 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss
|
– | – | (18 | ) | – | (18 | ) | (18 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(20 | ) | – | – | – | (20 | ) | – | ||||||||||||||||
Balance
at September 30, 2008
|
$ | 4,723 | $ | 2,571 | $ | (37 | ) | $ | (3,694 | ) | $ | 3,563 | $ | 799 | ||||||||||
Net
income (loss)
|
– | 733 | – | (7 | ) | 726 | $ | 726 | ||||||||||||||||
Return
on Power Facility Appropriation Investment
|
– | (13 | ) | – | – | (13 | ) | – | ||||||||||||||||
Accumulated
other comprehensive loss
|
– | – | (38 | ) | – | (38 | ) | (38 | ) | |||||||||||||||
Return
of Power Facility Appropriation Investment
|
(20 | ) | – | – | – | (20 | ) | – | ||||||||||||||||
Balance
at September 30, 2009
|
$ | 4,703 | $ | 3,291 | $ | (75 | ) | $ | (3,701 | ) | $ | 4,218 | $ | 688 | ||||||||||
The
accompanying notes are an integral part of these financial
statements.
|
(Dollars
in millions except where noted)
Note No.
|
Page No.
|
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1
|
85
|
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2
|
91
|
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3
|
94
|
|||
4
|
94
|
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5
|
95
|
|||
6
|
95
|
|||
7
|
98
|
|||
8
|
99
|
|||
9
|
99
|
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10
|
100
|
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11
|
106
|
|||
12
|
107
|
|||
13
|
114
|
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14
|
118
|
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15
|
120
|
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16
|
120
|
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17
|
120
|
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18
|
120
|
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19
|
128
|
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20
|
129
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21
|
138
|
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22
|
138
|
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23
|
139
|
General
In response to a proposal by President
Franklin D. Roosevelt, in 1933, the U.S. Congress created the Tennessee Valley
Authority (“TVA”), a government corporation. TVA
was created, among other things, to improve navigation on the Tennessee River,
reduce the damage from destructive flood waters within the Tennessee River
System and downstream on the lower Ohio and Mississippi Rivers, further the
economic development of TVA’s service area in the southeastern United States,
and sell the electricity generated at the facilities TVA operates.
Today, TVA operates the nation’s
largest public power system and supplies power in most of Tennessee, northern
Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of
northern Georgia, western North Carolina, and southwestern Virginia to a
population of nearly nine million people.
TVA also manages the Tennessee River
and its tributaries — the United States’ fifth largest river system — to
provide, among other things, year-round navigation, flood damage reduction, and
affordable and reliable electricity. Consistent with these primary
purposes, TVA also manages the river system to provide recreational
opportunities, adequate water supply, improved water quality, and economic
development.
The power program has historically been
separate and distinct from the stewardship programs. It is required
to be self-supporting from power revenues and proceeds from power financings,
such as proceeds from the issuance of bonds, notes, and other evidences of
indebtedness (“Bonds”). Although TVA does not currently receive
congressional appropriations, it is required to make annual payments to the U.S.
Treasury in repayment of, and as a return on, the government’s appropriation
investment in TVA power facilities (the “Power Facility Appropriation
Investment”). In the 1998 Energy and Water Development Appropriations
Act, Congress directed TVA to fund essential stewardship activities related to
its management of the Tennessee River system and TVA properties with power funds
in the event that there were insufficient appropriations or other available
funds to pay for such activities in any fiscal year. Congress has not
provided any appropriations to TVA to fund such activities since
1999. Consequently, during 2000, TVA began paying for essential
stewardship activities primarily with power revenues,
with the
remainder funded with user fees and other forms of revenues derived in
connection with those activities. These activities related to
stewardship properties do not meet the criteria of an operating segment under
GAAP. Accordingly, these assets and properties are included as part
of the power program, TVA’s only operating segment.
Power rates are established by the TVA
board of directors (“TVA Board”) as authorized by the Tennessee Valley Authority
Act of 1933, as
amended, 16 U.S.C. §§ 831-831ee (as amended, the “TVA
Act”). The TVA Act requires TVA to charge rates for power that will
produce gross revenues sufficient to provide funds for operation, maintenance,
and administration of its power system; payments to states and counties in lieu
of taxes; debt service on outstanding indebtedness; payments to the U.S.
Treasury in repayment of and as a return on the Power Facility Appropriation
Investment; and such additional margin as the TVA Board may consider desirable
for investment in power system assets, retirement of outstanding Bonds in
advance of maturity, additional reduction of the Power Facility Appropriation
Investment, and other purposes connected with TVA’s power
business. In setting TVA’s rates, the TVA Board is charged by the TVA
Act to have due regard for the primary objectives of the TVA Act, including the
objective that power shall be sold at rates as low as are
feasible. Rates set by the TVA Board are not subject to review or
approval by any state or federal regulatory body.
Fiscal
Year
Unless otherwise indicated, years
(2009, 2008, etc.) refer to TVA’s fiscal years ended September 30.
Cost-Based
Regulation
Under GAAP, TVA is entitled to use
regulatory accounting. TVA’s Board is authorized by the TVA Act to
set rates for power sold to its customers; thus, TVA is “self
regulated.” Additionally, TVA’s regulated rates are designed to
recover its costs of providing electricity. 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. As a result of these factors, TVA records certain assets
and liabilities that result from the regulated ratemaking process that would not
be recorded under GAAP for non-regulated entities. Regulatory assets
generally represent incurred costs that have been deferred because such costs
are probable of future recovery in customer rates. Regulatory
liabilities generally represent obligations to make refunds to customers for
previous collections for costs that are not likely to be incurred or deferral of
gains that will be credited to customers in future
periods. Management assesses whether the regulatory assets are
probable of future recovery by considering factors such as applicable regulatory
changes, potential legislation, and changes in technology. Based on
these assessments, management believes the existing regulatory assets are
probable of recovery. This determination reflects the current
regulatory and political environment and is subject to change in the
future. If future recovery of regulatory assets ceases to be
probable, or any of the other factors described above cease to be applicable,
TVA would no longer be considered to be a regulated entity and would be required
to write off these costs. Most regulatory asset or liability
write-offs would be required to be recognized in earnings in the period in which
future recovery ceases to be probable.
Management Estimates
TVA prepares its financial statements
in conformity with GAAP in the United States applied on a consistent
basis. In some cases, management may make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the related amounts of revenues and expenses during the reporting
period. Actual results could differ from these
estimates.
Cash
and Cash Equivalents
Cash and cash
equivalents include the cash available in TVA’s commercial bank accounts
and U.S. Treasury accounts, as well as short-term securities held for the
primary purpose of general liquidity. Such securities mature within
three months from the original date of issuance.
Restricted
Cash and Investments
As of
September 30, 2008, TVA had $106 million in Restricted cash and
investments on its Balance Sheets primarily related to collateral posted
with TVA by a swap counterparty. Due to the changing economic
environment and the terms of the swap agreement, previously posted funds were
returned to the counterparty. At September 30, 2009, TVA had no Restricted cash and
investments on its Balance Sheet.
Allowance
for Uncollectible Accounts
The allowance for uncollectible
accounts reflects TVA’s estimate of probable losses inherent in the accounts
receivable, unbilled revenue, and loans receivable balances. TVA
determines the allowance based on known accounts, historical experience, and
other currently available information including events such as customer
bankruptcy and/or a customer failing to fulfill payment arrangements after 90
days. TVA’s corporate credit department is consulted to assess the
financial condition of customers and the credit quality of the
accounts. The allowance for uncollectible accounts was $2 million at
September 30, 2009, and 2008, for accounts receivable. Additionally,
loans receivable of $77 million and $75 million as of September 30, 2009, and
2008, respectively, are included in Other long-term assets,
and reported net of allowances for uncollectible accounts of $13 million
as of both September 30, 2009, and 2008.
Revenues
Revenues from power sales are recorded
as power is delivered to customers. In addition to power sales invoiced and
recorded during the month, TVA accrues estimated unbilled revenues for power
sales provided to customers for the period of time from the meter-read date to
the end of the month. Components of the unbilled revenue include
wholesale meter readings at estimated rates based on the historical usage and
product mix and sales of excess generation at market rates. These
factors can vary from historical trends. Exchange power sales are
presented in the accompanying Statements of Income as a component of Sales of electricity-Federal
agencies and other. Exchange power sales are sales of excess power after
meeting TVA native load and direct served requirements. (Native load
refers to the customers on whose behalf a company, by statute, franchise,
regulatory requirement, or contract, has undertaken an obligation to
serve.)
Reserve
for Future Generation
During the first quarter of 2007, TVA
began collecting in rates amounts intended to fund future generation based on
the need for additional generating capacity that would be required to meet
future power demand in its service area. Because these amounts were intended to
fund future costs, they were originally deferred as a regulatory
liability. The funds were based on a predetermined rate applied to
electricity sales approved as part of TVA’s 2007 budget. Collections for 2007
amounted to $76 million. Following the purchase of two combustion
turbine facilities, these funds were applied as credits to Completed plant and are
reflected on the September 30, 2009, and September 30, 2008, Balance
Sheets. These funds collected for future generation are amortized to
revenue in order to match revenue with the corresponding depreciation expense of
the purchased assets on the Statement of Income. This revenue
recognition process began when the assets were placed into
service. The reserve for future generation was not extended beyond
2007.
Inventories
Certain Fuel, Materials, and
Supplies. Coal, oil, limestone, tire-based fuel inventories,
and materials and supplies inventories are valued using an average unit cost
method. A new average cost is computed after each transaction, and
inventory issuances are priced at the latest moving weighted average unit
cost. At September 30, 2009 and 2008, TVA had $535 million and $381
million, respectively, in fuel inventories and $372 million and $347 million,
respectively, in materials and supplies inventory.
Allowance for Inventory
Obsolescence. TVA reviews supply and material inventories by
category and usage on a periodic basis. Each category is assigned a
probability of becoming obsolete based on the type of material and historical
usage data. Based on the estimated value of the inventory, TVA
adjusts its allowance for inventory obsolescence. The allowance for
surplus and obsolete inventory was $50 million and $47 million at September 30,
2009, and 2008, respectively.
Emission
Allowances. TVA has emission allowances for sulfur dioxide
(“SO2”) and
nitrogen oxides (“NOx”) which
are accounted for as inventory. The average cost of allowances used
each month is charged to operating expense based on tons of SO2 and
NOx
emitted during the respective compliance periods. Allowances granted
to TVA by the EPA are recorded at zero cost.
Property,
Plant, and Equipment, and Depreciation
Additions to plant are recorded at
cost, which includes direct and indirect costs and an allowance for funds used
during construction (“AFUDC”). The cost of current repairs and minor
replacements is charged to operating expense. Nuclear fuel
inventories, which are included in Property, plant, and
equipment, are valued using the average cost method for raw materials and
the specific identification method for nuclear fuel in a
reactor. Amortization of nuclear fuel in a reactor is calculated on a
units-of-production basis and is included in fuel expense.
TVA accounts for its properties’
depreciation using the composite depreciation convention of
accounting. Accordingly, the original cost of property retired, less
salvage value, is charged to accumulated depreciation. Depreciation
is generally computed on a straight-line basis over the estimated service lives
of the various classes of assets. Depreciation expense expressed as a
percentage of the average annual depreciable completed plant was 2.81 percent
for 2009, 2.97 percent for 2008, and 2.90 percent for 2007. Average
depreciation rates by asset class are as follows:
TVA
Property, Plant, and Equipment Depreciation Rates
As
of September 30
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Asset
Class:
|
(percent)
|
|||||||||||
Nuclear
|
2.59 | 2.57 | 2.29 | |||||||||
Coal-Fired
|
3.22 | 3.44 | 3.59 | |||||||||
Hydroelectric
|
1.65 | 1.72 | 1.82 | |||||||||
Combustion
turbine/diesel generators
|
4.09 | 4.39 | 4.70 | |||||||||
Transmission
|
3.40 | 2.74 | 2.53 | |||||||||
Other
|
4.91 | 6.38 | 7.05 |
Depreciation rates are determined based
on an external depreciation study. TVA obtained and implemented a new
study during the fourth quarter of 2008. Rates were changed
prospectively as a change in estimate. The effect of the change in
rates related to this study was a $3 million decrease in depreciation expense
for the year ended September 30, 2008. Depreciation expense for the
years ended September 30, 2009, 2008, and 2007, was $1.2 billion, $1.1 billion,
and $1.0 billion, respectively.
Property, plant, and
equipment also includes assets recorded under capital lease agreements
which primarily consist of office facilities of $35 million and $34 million as
of September 30, 2009, and 2008, respectively, and fuel fabrication and blending
facilities of $28 million and $34 million as of September 30, 2009, and 2008,
respectively.
Decommissioning
Costs
TVA recognizes legal obligations
associated with the future retirement of certain tangible long-lived
assets. These obligations relate to fossil-fired generating plants,
nuclear generating plants, hydroelectric generating plants/dams, transmission
structures, and other property-related assets. These other
property-related assets include, but are not limited to, easements, leases, and
coal rights. Activities involved with retiring these assets could
include decontamination and demolition of structures, removal and disposal of
wastes, and site reclamation. Revisions to the estimates
of asset retirement obligations are made whenever factors indicate that the
timing or amounts of estimated cash flows have changed. Any
accretion or depreciation expense related to these liabilities and assets are
charged to a regulatory asset. See Note 6 — Nuclear Decommissioning Costs
and Non-Nuclear
Decommissioning Costs.
Blended
Low Enriched Uranium Program
Under the blended low enriched uranium
(“BLEU”) program, TVA, the Department of Energy (“DOE”), and some nuclear fuel
contractors have entered into agreements providing for surplus highly enriched
uranium to be blended with other uranium down to a level that allows the blended
uranium to be fabricated into fuel that can be used in nuclear power
plants. This blended nuclear fuel was first loaded in a Browns Ferry
reactor in 2005, which initiated the amortization of the costs of the BLEU fuel
assemblies to nuclear fuel expense. TVA expects to continue to use
the blended nuclear fuel to reload the Browns Ferry reactors through
2016. BLEU fuel was first loaded into Sequoyah Unit 2 in May 2008 and
is expected to be loaded again in CY 2010 and CY 2011.
Under the terms of an interagency
agreement between TVA and DOE, DOE supplies off-specification, highly enriched
uranium materials to the appropriate third party fuel processors for processing
into usable fuel for TVA. In exchange, DOE will participate to a
degree in the savings generated by TVA’s use of this blended nuclear
fuel. Over the life of the program, TVA projects that DOE’s share of
savings generated by TVA’s use of this blended nuclear fuel could result in
future payments to DOE of as much as $359 million. TVA anticipates
these future payments could begin in 2010 and last until 2016. TVA
accrued an obligation related to the portion of the ultimate future payments
estimated to be attributable to the BLEU fuel currently in use. As of
September 30, 2009, this obligation was $30 million.
The third party fuel processors own the
conversion and processing facilities and will retain title to all land,
property, plant, and equipment used in the BLEU fuel
program. However, the fuel fabrication contract qualifies as a
capital lease, and TVA recognized a capital lease asset and corresponding lease
obligation related to amounts paid or payable to the processor.
Investment
Funds
Investment funds
consist primarily of trust funds designated to fund nuclear decommissioning
requirements (see Note 20 — Contingencies — Decommissioning
Costs), asset retirement obligations (see Note 6 — Non-Nuclear Decommissioning
Costs), and the supplemental executive retirement plan (“SERP”) (see Note
18 — Overview of Plans and
Benefits — Supplemental
Executive Retirement Plan). Nuclear decommissioning funds and
SERP funds, which are classified as trading, are invested in portfolios of
securities generally designed to earn returns in line with overall equity market
performance. Asset retirement funds, which are classified as trading,
are invested in securities and commingled funds designed to earn returns in line
with fixed-income market performance.
Energy
Prepayment Obligations and Discounts on Sales
During 2002, TVA introduced an energy
prepayment program, the discounted energy units (“DEU”)
program. Under this program, TVA customers could purchase DEUs
generally in $1 million increments, and each DEU entitles the purchaser to a
$0.025/kilowatt-hour discount on a specified quantity of firm power over a
period of years (five, 10, 15, or 20) for each kilowatt-hour in the prepaid
block. The remainder of the price of the kilowatt-hours delivered to
the customer is due upon billing. TVA’s DEU program allowed customers
to use cash on hand to prepay TVA for some of their power needs, providing
funding to TVA and a savings to customers in the form of a discount on future
purchases. The distributor customer receives a discount on a
specified volume of firm energy purchased. The supplement to the
power contract specifies the discount rate (2.5 cents per kilowatt-hour), the
monthly block of kilowatt-hours to which the discount applies, the number of
years (term), and contingencies upon contract termination.
TVA has not offered the DEU program
since 2005. Total sales for the program since inception have been
approximately $55 million. TVA is accounting for the prepayment
proceeds as unearned revenue and is reporting the obligations to deliver power
as Energy prepayment
obligations and Current portion of energy
prepayment obligations on the September 30, 2009, and 2008, Balance
Sheets.
TVA
recognizes revenue as electricity is delivered to customers, based on the ratio
of units of kilowatt-hours delivered to total units of kilowatt-hours under
contract. As of September 30, 2009, approximately $37 million has
been applied against power billings on a cumulative basis during the life of the
program, of which approximately $5 million was recognized as noncash revenue
during 2009 and $6 million during each of 2008 and 2007.
In 2004, TVA and its largest customer,
Memphis Light, Gas and Water Division (“MLGW”), entered into an energy
prepayment agreement under which MLGW prepaid TVA $1.5 billion for the future
costs of electricity to be delivered by TVA to MLGW over a period of 180
months. TVA accounted for the prepayment as unearned revenue and is
reporting the obligation to deliver power under this arrangement as Energy prepayment
obligations and Current portion of energy
prepayment obligations on the September 30, 2009, and 2008, Balance
Sheets. TVA expects to recognize approximately $100 million of
noncash revenue in each year of the arrangement as electricity is delivered to
MLGW based on the ratio of units of kilowatt-hours delivered to total units of
kilowatt-hours under contract. As of September 30, 2009, $590 million
had been recognized as noncash revenue on a cumulative basis during the life of
the agreement, $100 million of which was recognized as noncash revenue during
each of 2009, 2008, and 2007.
Discounts for both programs amounted to
$47 million for each of the years ended September 30, 2009, 2008, and
2007.
Insurance
Although TVA uses private companies to
administer its health-care plans for eligible active and retired employees not
covered by Medicare, TVA does not purchase health insurance. Third
party actuarial specialists assist TVA in determining certain liabilities for
self-assumed claims. TVA recovers the costs of losses through power
rates and through adjustments to the participants’ contributions to their
benefit plans. These liabilities are included in Other liabilities on
the Balance Sheets.
TVA purchases nuclear liability
insurance, nuclear property, decommissioning, and decontamination insurance, and
nuclear accidental outage insurance. See Note 20 — Contingencies — Nuclear
Insurance.
The Federal Employees’ Compensation Act
governs liability to employees for service-connected injuries. TVA
purchases excess workers' compensation insurance above a self insured
retention.
TVA
purchases excess liability insurance for aviation, auto, marine, and general
liability exposures. TVA purchases property insurance for certain
conventional (non-nuclear) assets as well as outage insurance (business
interruption) for selected conventional generating assets. During
2009, TVA experienced an unplanned outage at Widows Creek Fossil Plant due to a
generator failure. Under the terms of its outage insurance policy,
TVA recovered $14 million which has been included as a reduction of Fuel and purchased power
expense.
TVA also
purchases liability insurance which provides coverage for its directors and
officers subject to the terms and conditions of the policy. Each of
the insurance policies purchased contains deductibles or self insured
retentions. The limits, terms, conditions, and deductibles are
comparable to those carried by other utilities of similar size. TVA
recovers the costs of losses through power rates.
Operation
of dams, transmission facilities, and generating facilities involves inherent
risks which may present potential exposures in excess of insurance
coverage.
TVA has
property and excess liability insurance programs in place which may cover some
of the Kingston ash spill costs. The insurers for each of these
programs have been notified of the event. Although three of the
insurers that provide liability insurance have denied coverage, TVA is working
with its insurers to provide information, as it becomes available, on the event
and its cause to determine applicable coverage. As a result, no
estimate for potential insurance recovery has been accrued at this
time.
Capitalized
Revenue During Pre-Commercial Plant Operations
As part of the process of restarting
Browns Ferry Unit 1, TVA commenced pre-commercial plant operations on June 2,
2007. The pre-commercial plant operations period ended July 31, 2007,
and commercial operations began on August 1, 2007. The electricity
produced during the pre-commercial plant operations period was used to serve the
demands of the system; therefore, TVA calculated estimates of revenue realized
from such pre-commercial generation based on the guidance provided by FERC
regulations. The calculated revenue of $57 million was capitalized to
offset project costs and is reported as a contra-revenue account on the income
statement. During this same period, TVA capitalized operating costs,
including fuel, of over $9 million.
Allowance
for Funds Used During Construction
AFUDC capitalized during the year ended
September 30, 2009, was $40 million as compared with $17 million capitalized
during the year ended September 30, 2008. TVA capitalizes interest as
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. Since
October 1, 2007, interest on funds invested in capital projects has been
capitalized only for projects with (1) an expected total project cost of $1.0 billion or more,
and (2) an estimated construction period of at least three years in
duration. The adoption of this new criteria has greatly reduced the
number of qualifying projects, which was approximately 800 at September 30,
2007.
Only the
Watts Bar Nuclear Plant Unit 2 (“Watts Bar Unit 2”) construction met the new
AFUDC criteria during the year ended September 30, 2009. The
accumulated balance of costs for qualifying projects, which is used to calculate
AFUDC, averaged approximately $420 million for the year ended September 30,
2009.
Software
Costs
TVA capitalizes certain costs incurred
in connection with developing or obtaining internal-use
software. Capitalized software costs are included in Property, plant, and
equipment on the Balance Sheet and are primarily amortized over five
years. As of September 30, 2009, and 2008, unamortized computer
software costs totaled $189 million and $87 million,
respectively. Depreciation expense related to capitalized computer
software costs was $24 million, $13 million, and $8 million for 2009, 2008, and
2007, respectively. Software costs that do not meet capitalization
criteria are expensed as incurred.
Research
and Development Costs
Research and development costs are
expensed when incurred. TVA’s research programs include those related
to transmission technologies, emerging technologies (clean energy, renewables,
distributed resources, and energy efficiency), technologies related to
generation (fossil, nuclear, and hydro), and environmental
technologies.
Tax
Equivalents
The TVA Act requires TVA to make
payments to states and counties in which TVA conducts its power operations and
in which TVA has acquired power properties previously subject to state and local
taxation. The amount of these payments is 5 percent of gross revenues
from sales of power during the preceding year, excluding sales or deliveries to
other federal agencies and off-system sales with other utilities, with a
provision for minimum payments under certain circumstances.
Impairment
of Assets
TVA evaluates long-lived assets for
impairment when events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable. For long-lived assets,
TVA bases its evaluation on impairment indicators such as the nature of the
assets, the future economic benefit of the assets, any historical or future
profitability measurements, and other external market conditions or factors that
may be present. If such impairment indicators are present or other
factors exist that indicate that the carrying amount of an asset may not be
recoverable, TVA determines whether an impairment has occurred based on an
estimate of undiscounted cash flows attributable to the asset as compared with
the carrying value of the asset. If an impairment has occurred, the
amount of the impairment recognized is measured as the excess of the asset’s
carrying value over its fair value. Additionally, TVA regularly
evaluates construction projects. If the project is cancelled or
deemed to have no future economic benefit, the project is written off as an
asset impairment.
Maintenance
Costs
TVA
records maintenance costs and repairs related to its property, plant, and
equipment on TVA’s Statements of Income as they are incurred except for the
recording of certain regulatory assets. Historically, TVA deferred
nuclear outage costs that were incurred during the operating cycle subsequent to
the refueling outage. These costs are incurred in the process of
performing a nuclear fuel reload outage, and the benefits of these costs are
realized during the subsequent 18 to 24 months when the nuclear fuel is burned
during its operating cycle in producing electricity. The TVA Board
has historically included in rates the amortization of these deferred nuclear
outage costs during the operating cycle subsequent to the refueling
outage.
Beginning in 2010, TVA will implement
a new policy to expense any future outage costs as incurred. However,
TVA will continue to amortize the related existing regulatory asset and include
such amounts in rates. See Note 6.
The
following accounting standards and interpretations became effective for TVA
during 2009.
Accounting Standards
Codification. In June 2009, the Financial Accounting Standards
Board (“FASB”) issued changes to the authoritative hierarchy of GAAP. The
guidance establishes the FASB Accounting Standards Codification (“ASC”) as the
source of authoritative generally accepted accounting principles to be applied
by nongovernmental entities. Filings to the SEC are made in
accordance with GAAP. Accordingly, even though TVA is a government
agency, the changes will apply to TVA’s SEC filings. All guidance
contained in the ASC carries the same level of authority. These
changes became effective for TVA beginning with the financial statements issued
for the year ended September 30, 2009. The adoption of this guidance
changed certain financial statement disclosures but did not materially impact
TVA’s financial condition, results of operations, or cash flows.
Fair Value
Measurements. In September 2006, FASB issued guidance for
measuring assets and liabilities that currently require fair value
measurement. The guidance 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. The guidance 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. The guidance establishes a fair value hierarchy that
prioritizes the information used to develop measurement
assumptions. These changes became effective for TVA on October 1,
2008. See Note 13 for additional information.
In February 2008, FASB issued guidance
that delays the effective date of the fair value accounting changes 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
guidance delays the effective date until fiscal years beginning after November
15, 2008, and interim periods within those fiscal years for items within the
scope of this guidance. TVA has utilized the deferral portion
of this guidance for all nonfinancial assets and liabilities within its scope
and is currently evaluating the future related impact.
In October 2008, FASB issued guidance
for determining the fair value of a financial asset when the market for that
asset is not active. The guidance emphasizes that determining fair
value in an inactive market depends on the facts and circumstances and may
require the use of significant judgment. The guidance was effective
upon issuance, including prior periods for which financial statements have not
been issued, and became effective for TVA on October 1, 2008. The
adoption of this guidance did not materially impact TVA’s financial condition,
results of operations, or cash flows.
In April 2009, FASB issued guidance
regarding determining the fair value when the volume and level of activity for
the asset or liability have significantly decreased and identifying transactions
that are not orderly. The guidance clarifies the application of fair
value measurements in inactive markets and distressed or forced transactions,
issues guidance on identifying circumstances that indicate a transaction is not
orderly, and changes certain disclosure requirements regarding fair value
measurements. These changes became effective for TVA as of April 1,
2009. The adoption of this guidance changed certain financial
statement disclosures but did not materially impact TVA’s financial condition,
results of operations, or cash flows.
In April
2009, FASB issued guidance regarding interim disclosures about fair value of
financial instruments. The guidance requires summarized disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial
statements. The changes are effective for interim and annual
reporting periods ending after June 15, 2009. At initial adoption,
application of these changes is not required for earlier periods that are
presented for comparative purposes. The disclosure provisions of this
guidance became effective for TVA as of April 1, 2009. The adoption
of this guidance changed certain financial statement disclosures but did not
materially impact TVA’s financial condition, results of operations, or cash
flows.
See Note
13 for related fair value disclosures.
Fair Value
Option. In February 2007, FASB issued guidance regarding the
fair value of financial assets and financial liabilities. This guidance permits an
entity to choose to measure many financial instruments and certain other items
at fair value. The fair value option established by the guidance
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
are elective. The guidance became effective for TVA on October 1,
2008. As allowed by the statement, TVA did not elect the fair value
option for the measurement of any eligible assets or liabilities. As
a result, the adoption of these changes did not materially impact TVA’s
financial condition, results of operations, or cash flows.
Offsetting
Amounts. In April 2007, FASB issued guidance addressing
modifications to accounting for the presentation of certain contract
amounts. The guidance 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 became effective
for TVA as of October 1, 2008. The adoption of these changes did not
materially impact TVA’s financial position, results of operations, or cash
flows.
Disclosures about Transfers
of Financial Assets and Interests in Variable Interest
Entities. In December 2008, FASB issued guidance regarding
disclosures about transfers of financial assets and interests in variable
interest entities (“VIEs”). This guidance requires
public entities to provide additional disclosures about transfers of financial
assets. It also expands the required disclosures pertaining to an
enterprise's involvement with VIEs and is intended to provide more transparent
information related to that involvement. The new disclosure
requirements include additional information regarding consolidated VIEs, as well
as a requirement for sponsors of a VIE to disclose certain information even if
they do not hold a significant financial interest in the VIE. These
disclosure provisions became effective for TVA as of October 1,
2008. The adoption of this guidance did not materially impact TVA’s
financial condition, results of operations, or cash flows.
Derivative Instruments and
Hedging Activities. In March 2008, FASB issued guidance
regarding disclosures about derivative instruments and hedging activities, which
amends and expands the disclosure requirements. These changes became
effective for TVA as of January 1, 2009. The adoption of this
guidance changed certain financial statement disclosures but did not materially
impact TVA’s financial condition, results of operations, or cash
flows. See Note 12 for related disclosures.
Subsequent
Events. In May 2009, FASB issued guidance regarding accounting
for subsequent events. The guidance establishes principles and
requirements for the period for which management must evaluate events and
transactions subsequent to the balance sheet date for potential recognition or
disclosure in its financial statements, the circumstances under which an entity
should recognize such events and transactions, and the related
disclosures. These changes became effective for the three month
period ending June 30, 2009. The adoption of this guidance changed
certain financial statement disclosures but did not materially impact TVA’s
financial condition, results of operations, or cash flows. See Note
23 for related disclosures.
The following accounting standards
have been issued, but as of September 30, 2009, were not effective and had not
been adopted by TVA.
Business
Combinations. In December 2007, FASB issued guidance that
changes the accounting for business combinations. The guidance
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including non-controlling interests,
contingent consideration, and certain acquired contingencies. The
guidance also requires acquisition-related transaction expenses and
restructuring costs to be expensed as incurred rather than capitalized as a
component of the business combination. In April 2009, FASB issued
additional guidance to amend and clarify
the initial recognition and measurement, subsequent measurement and accounting,
and related disclosures arising from contingencies in a business
combination. The
provisions of these changes are effective as of the beginning of an entity’s
first fiscal year that begins on or after December 15, 2008. Early
adoption is prohibited. This guidance became effective for TVA as of
October 1, 2009. TVA expects that these changes could impact the
accounting for any businesses acquired after the effective date of these
pronouncements.
Noncontrolling
Interests. In December 2007, FASB issued guidance that
introduces significant changes in the accounting for noncontrolling interests
(formerly minority interests) in a partially-owned consolidated
subsidiary. The guidance also changes the accounting for and
reporting for the deconsolidation of a subsidiary. The guidance
requires that a noncontrolling interest in a consolidated subsidiary be
displayed in the consolidated statement of financial position as a separate
component of equity. The guidance also requires that earnings
attributed to the noncontrolling interests be reported as part of consolidated
earnings, and requires disclosure of the attribution of consolidated earnings to
the controlling and noncontrolling interests on the face of the consolidated
income statement. These changes became effective for TVA as of
October 1, 2009. TVA expects that these changes could impact the
accounting for any noncontrolling interests acquired after the effective date of
this pronouncement.
Employers’ Disclosures about
Post-retirement Benefit Plan
Assets. In
December 2008, FASB issued guidance that changes employers’ disclosures about
post-retirement benefit
plan assets. The guidance requires that an employer disclose the
following information about the plan assets: (1) information regarding how
investment allocation decisions are made; (2) the major categories of plan
assets; (3) information about the inputs and valuation techniques used to
measure fair value of the plan assets; (4) the effect of fair value measurements
using significant unobservable inputs on changes in plan assets for the period;
and (5) significant concentrations of risk within plan assets. These
changes will be effective for fiscal years ending after December 15, 2009, with
early application permitted. At initial adoption, application of
these changes would not be required for earlier periods that are presented for
comparative purposes. TVA is currently evaluating the potential
impact of adopting these changes on its disclosures in the financial
statements. The adoption of this guidance is not expected to
materially impact TVA’s financial position, results of operations, or cash
flows.
Transfers of Financial
Assets. In June 2009, FASB issued guidance regarding
accounting for transfers of financial assets. This guidance
eliminates the concept of a qualifying special-purpose entity (“QSPE”) and
subjects those entities to the same consolidation guidance as other
VIEs. The guidance changes the eligibility criteria for certain
transactions to qualify for sale accounting and the accounting for certain
transfers. The guidance also establishes broad disclosure objectives
and requires extensive specific disclosures related to the
transfers. These changes will become effective for TVA for any
transfers of financial assets occurring on or after October 1,
2010. TVA is currently evaluating the potential impact of the
requirements of this guidance on its financial position, results of operations,
cash flows, and disclosures in its financial statements.
Variable Interest
Entities. In June 2009, FASB issued guidance that changes the
consolidation guidance for VIEs. The guidance eliminates the
consolidation scope exception for QSPEs. The statement amends the
triggering events to determine if an entity is a VIE, establishes a primarily
qualitative model for determining the primary beneficiary of the VIE, and
requires on-going assessment of whether the reporting entity is the primary
beneficiary. These changes will become effective for TVA on October
1, 2010, and will apply to all entities determined to be VIEs as of and
subsequent to the date of adoption. TVA is currently evaluating the
potential impact of the requirements of these changes on its financial position,
results of operations, cash flows, and disclosures in its financial
statements.
Fair Value Measurements of
Liabilities. In August 2009, FASB issued guidance regarding
fair value measurements of liabilities. The
guidance clarifies how the fair value of a liability should be measured when a
quoted price in an active market for the identical liability either is or is not
available. Additionally, the guidance clarifies how to consider a
restriction when estimating the fair value of a liability and the appropriate
level within the fair value disclosure hierarchy in which the various
measurement techniques result. These changes will become effective
for TVA beginning with the financial statements issued for the three months
ending December 31, 2009. TVA is currently evaluating the potential
impact of the requirements of these changes on its financial position, results
of operations, cash flows, and disclosures in its financial
statements.
Fair Value Measurements of
Investments. In September 2009, FASB issued guidance regarding
fair value measurements for certain alternative investments, such as interests
in hedge funds, private equity funds, real estate funds, venture capital funds,
offshore fund vehicles, and funds of funds. The guidance allows
reporting entities to use net asset value per share to estimate the fair value
of these investments as a practical expedient. The guidance also
requires disclosures by major category of investment about the attributes of the
investments, such as the nature of any restrictions on the investor's ability to
redeem its investments at the measurement date, any unfunded commitments, and
the investment strategies of the investees. The new guidance will
become effective for TVA beginning with the financial statements issued for the
three months ending December 31, 2009. TVA is currently evaluating
the potential impact of these changes on its financial position, results of
operations, cash flows, and disclosures in its financial
statements.
Accounts
receivable primarily consist of amounts due from customers for power
sales. The table below summarizes the types and amounts of
receivables:
Accounts
Receivable
As
of September 30
|
||||||||
2009
|
2008
|
|||||||
Power
receivables billed
|
$ | 309 | $ | 357 | ||||
Power
receivables unbilled
|
940 | 1,000 | ||||||
Fuel
cost adjustment – current
|
-
|
24 | ||||||
Total
power receivables
|
1,249 | 1,381 | ||||||
Other
receivables
|
56 | 26 | ||||||
Allowance
for uncollectible accounts
|
$ | (2 | ) | $ | (2 | ) | ||
Net
accounts receivable
|
$ | 1,303 | $ | 1,405 |
Completed plant consisted of the
following at September 30:
TVA
Completed Plant
As
of September 30
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Cost
|
Accumulated
Depreciation
|
Net
|
Cost
|
Accumulated
Depreciation
|
Net
|
|||||||||||||||||||
Coal-Fired
|
$ | 12,171 | $ | 6,286 | $ | 5,885 | $ | 11,371 | $ | 5,950 | $ | 5,421 | ||||||||||||
Combustion
turbine
|
1,653 | 678 | 975 | 1,608 | 614 | 994 | ||||||||||||||||||
Nuclear
|
17,634 | 7,440 | 10,194 | 17,598 | 6,982 | 10,616 | ||||||||||||||||||
Transmission
|
5,201 | 1,899 | 3,302 | 5,074 | 1,745 | 3,329 | ||||||||||||||||||
Hydroelectric
|
2,154 | 791 | 1,363 | 2,098 | 762 | 1,336 | ||||||||||||||||||
Other
electrical plant
|
1,501 | 657 | 844 | 1,358 | 604 | 754 | ||||||||||||||||||
Subtotal
|
40,314 | 17,751 | 22,563 | 39,107 | 16,657 | 22,450 | ||||||||||||||||||
Multipurpose
dams
|
928 | 323 | 605 | 928 | 316 | 612 | ||||||||||||||||||
Other
stewardship
|
44 | 12 | 32 | 44 | 10 | 34 | ||||||||||||||||||
Subtotal
|
972 | 335 | 637 | 972 | 326 | 646 | ||||||||||||||||||
Total
|
$ | 41,286 | $ | 18,086 | $ | 23,200 | $ | 40,079 | $ | 16,983 | $ | 23,096 |
The table below summarizes the types
and amounts of TVA’s Other long-term
assets:
Other
Long-Term Assets
As
of September 30
|
||||||||
2009
|
2008
|
|||||||
Loans
and long-term receivables, net
|
$ | 77 | $ | 81 | ||||
Currency
swap assets
|
7 | 101 | ||||||
Coal
contracts with volume options assets
|
87 | 813 | ||||||
Other
long-term assets
|
3 | — | ||||||
Total
other long-term assets
|
$ | 174 | $ | 995 |
The decrease in value of the coal
contracts with volume options is primarily due to the decline in market prices
for coal and roll-off or settlement of contracted volumes from September 30,
2008, to September 30, 2009. Two of the currency swap assets held at
September 30, 2008, became liabilities during 2009, due primarily to changes in
exchange rates.
Regulatory assets are included in Deferred nuclear generating
units and Other
regulatory assets on the September 30, 2009 and 2008, Balance
Sheets. See Note 1 — Cost-Based
Regulation.
The year-end balances of TVA’s
regulatory assets and liabilities are as follows:
TVA
Regulatory Assets and Liabilities
As
of September 30
|
||||||||
2009
|
2008
|
|||||||
Regulatory
Assets:
|
||||||||
Deferred
other post-retirement benefit costs
|
$ | 298 | $ | 157 | ||||
Deferred
pension costs
|
3,764 | 2,120 | ||||||
Nuclear
decommissioning costs
|
909 | 764 | ||||||
Non-nuclear
decommissioning costs
|
351 | 349 | ||||||
Debt
reacquisition costs
|
195 | 209 | ||||||
Unrealized
losses relating to TVA’s Financial Trading Program
|
85 | 146 | ||||||
Unrealized
losses on coal contracts with volume options
|
70 | — | ||||||
Unrealized
losses on certain swap and swaption contracts
|
498 | 226 | ||||||
Environmental
cleanup costs - Kingston ash spill
|
933 | — | ||||||
Deferred
outage costs
|
144 | 139 | ||||||
Deferred
capital lease asset costs
|
40 | 52 | ||||||
Fuel
cost adjustment: long-term
|
— | 4 | ||||||
Subtotal
|
7,287 | 4,166 | ||||||
Deferred
nuclear generating units
|
2,347 | 2,738 | ||||||
Subtotal
|
9,634 | 6,904 | ||||||
Fuel
cost adjustment receivable: short-term
|
— | 24 | ||||||
Total
|
$ | 9,634 | $ | 6,928 | ||||
Regulatory
Liabilities:
|
||||||||
Unrealized
gains on coal contracts with volume options
|
$ | 87 | $ | 813 | ||||
Capital
lease liabilities
|
26 | 47 | ||||||
Unrealized
gains relating to TVA’s Financial Trading Program
|
17 | — | ||||||
Subtotal
|
130 | 860 | ||||||
Reserve
for future generation
|
67 | 70 | ||||||
Accrued
tax equivalents
|
81 | 40 | ||||||
Fuel
cost adjustment liability short-term
|
822 | — | ||||||
Total
|
$ | 1,100 | $ | 970 |
Deferred Other Post-retirement
Benefit Costs and Deferred Pension Costs. TVA measures its
benefit obligations related to other post-retirement benefit and pension costs
as of the year-end balance sheet date. TVA recognizes the funded
status of the plans on the balance sheet which in an unregulated environment
would result in a corresponding offset to Accumulated Other Comprehensive Income
(“AOCI”). “Incurred cost” is a cost arising from cash paid out or
obligation to pay for an acquired asset or service, a loss from any cause that
has been sustained and has been or must be paid for. In this case,
the unfunded obligation represents a projected liability to the employee for
services rendered, and thus it meets the definition of an incurred
cost. Therefore, amounts otherwise charged to AOCI for these costs
will be recorded as a regulatory asset since TVA has historically recovered
other post-retirement benefit and pension expense in rates. Through
historical and current year expense included in ratemaking, the TVA Board has
demonstrated the ability and intent to include other postemployment benefit
(“OPEB”) and pension costs in allowable costs and in rates for ratemaking
purposes. As a result, it is probable that future revenue, if
necessary, will result from inclusion of the OPEB and pension regulatory assets
in allowable costs for ratemaking purposes.
Nuclear Decommissioning
Costs. Nuclear decommissioning costs include: (1) certain
deferred charges related to the future closure and decommissioning of TVA’s
nuclear generating units under NRC requirements and (2) recognition of changes
in the liability, investment funds, and certain other deferred charges under the
accounting rules for asset retirement obligations. These future costs
will be funded through a combination of investment funds already set aside by
TVA, future earnings on those investment funds, and if necessary, additional TVA
cash contributions to the investment funds. See Note 1 — Investment
Funds.
Non-Nuclear Decommissioning
Costs. In
September 2007, the TVA Board approved the establishment of an asset retirement
trust to more effectively segregate, manage, and invest funds to help meet
future asset retirement obligations. TVA made a $40 million initial
contribution to the asset retirement trust on September 28, 2007. TVA
made additional $40 million contributions to the asset retirement trust in
September 2008 and 2009. At September 30, 2009 and 2008, the assets
of the trust totaled $120 million and $81 million,
respectively. Although the TVA Board approved contributions to the
asset retirement trust in 2007 and 2008, the TVA Board did not approve funding
for the trust as part of its budget and ratemaking process in relation to
providing a potential funding source through rates for non-nuclear
decommissioning costs until August 2008.
The funds from the asset retirement
trust may be used, among other things, to pay the cost of retiring non-nuclear
long-lived assets from the accumulation of assets in the trust. The
costs of retiring non-nuclear long-lived assets represent the net deferred costs
related to the future closure and retirement of TVA's non-nuclear long-lived
assets under various legal requirements. These costs did not
previously meet the asset recognition criteria under the GAAP guidance in effect
at the date the costs were incurred. Because of the establishment of
the asset retirement trust and the approval of the funding in rates as part of
the TVA Board’s budget and ratemaking process, these costs met asset recognition
criteria in the fourth quarter of 2008. Accordingly, all cumulative
ARO costs were recaptured as a regulatory asset as of September 30,
2008. The regulatory asset initially created related to this
adjustment totaled $350 million. The offset to this adjustment was a
one-time decrease to depreciation, amortization, and accretion expense.
These future costs can be funded
through a combination of investment funds already set aside in the asset
retirement trust, future earnings on those investment funds, and future cash
contributions to the investment funds. Through its August 2008
actions, the TVA Board demonstrated its ability and intention to include
non-nuclear retirement costs in allowable costs and in future rates. The
regulatory asset is amortized into expense ratably as amounts are collected in
rates to cover contributions.
Debt Reacquisition
Costs. Reacquisition expenses, call premiums, and other
related costs, such as unamortized debt issue costs associated with redeemed
Bond issues, are deferred under provisions of the FERC’s Uniform System of
Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions
of the Federal Power Act (“Uniform System of Accounts”). These costs
are deferred and amortized (accreted) on a straight-line basis over the weighted
average life of TVA’s debt portfolio (even though TVA is not a public utility
subject generally to FERC jurisdiction).
Deferred Gains and Losses Relating
to TVA’s Financial Trading Program. Deferred gains and losses
relating to TVA’s Financial Trading Program represent net unrealized gains and
losses on swaps, futures, and options. The program is used to reduce
TVA’s economic risk exposure associated with electricity generation, purchases,
and sales. Net unrealized losses as of September 30, 2009, were
approximately $68 million and as of September 30, 2008, were approximately $146
million. This accounting treatment reflects TVA’s ability and intent
to recover the cost of these commodity contracts in future periods through the
FCA.
Swap and Swaption
Contracts. On October 1, 2007, TVA began using regulatory
accounting treatment to defer the mark-to-market unrealized gains and losses on
certain swap and swaption contracts to reflect that the gain or loss is included
in the ratemaking formula when these transactions actually
settle. The value of the swap and swaptions is recorded on TVA’s
Balance Sheet with realized gains or losses, if any, recorded in TVA’s Income
Statement. The deferred unrealized losses on the value of swaps and
swaptions were $498 million at September 30, 2009, and are included as a Regulatory asset on the
September 30, 2009, Balance Sheet.
Environmental Cleanup – Kingston Ash
Spill. In August 2009, TVA began using regulatory accounting
treatment to defer all actual costs incurred and expected future costs related
to the Kingston ash spill. The TVA Board approved a plan of
amortizing these costs over 15 years beginning October 1, 2009. As of
September 30, 2009, TVA’s remediation cost estimate of $933 million was deferred
as a regulatory asset. Any future revisions to the estimate will be
amortized as a change in estimate over the remaining term of the initial 15 year
life. See Note 7.
Deferred Outage
Costs. TVA’s investment in the fuel used in its nuclear units
is being amortized and accounted for as a component of fuel
expense. Nuclear refueling outage and maintenance costs already
incurred have historically been deferred and amortized on a straight-line basis
over the estimated period until the next refueling outage. Beginning
in 2010, outage costs will no longer be deferred as a regulatory
asset. Outage costs will be expensed as
incurred. Previously deferred outage costs will continue to be
amortized as the remaining amounts are collected in rates.
Deferred Capital Lease Asset
Costs. Deferred capital lease asset costs represent the
difference between FERC’s Uniform System of Accounts model balances recovered in
rates and the balances under GAAP guidance. Under the Uniform System
of Accounts, TVA recognizes the initial capital lease asset and liability at
inception of the lease; however, the annual expense under the Uniform System of
Accounts is equal to the annual lease payments, which differs from GAAP
treatment. This practice results in TVA’s capital lease asset
balances being higher than they otherwise would have been under GAAP, with the
difference representing a regulatory asset related to each capital
lease. These costs are being amortized over the respective lease
terms as lease payments are made.
Fuel Cost
Adjustment. The FCA provides a mechanism to regularly alter
rates to reflect changing fuel and purchased power costs. There is
typically a lag between the occurrence of a change in fuel and purchased power
costs and the reflection of the change in rates. As of September 30,
2009, TVA had recognized a short-term regulatory liability of $822 million with
no long-term regulatory liability related to the FCA. These balances
represent excess revenues collected to offset fuel and purchased power
costs. The excess revenue is driven by market commodity prices being
lower than those forecasted. As of September 30, 2008, TVA had
recognized a regulatory asset of $28 million, including $24 million classified
as a receivable representing deferred power costs to be recovered through the
FCA adjustments in future periods. To more closely reflect the cash
flows related to the collection of the FCA, TVA recorded $24 million in accounts
receivable and the remaining balance of $4 million in regulatory
assets. The short-term portion of the FCA liability is included in
Accounts payable and
accrued liabilities on the Balance Sheet at September 30,
2009.
In August
2009, the TVA Board approved a revision to the FCA formula. Starting
with the October 1, 2009 billing period, all adjustments to the FCA will be made
on a monthly basis instead of a quarterly basis. This will allow for
the FCA rate to be more closely aligned with TVA’s costs. Likewise,
the FCA formula also contains a deferred account which is used to reconcile the
difference between actual and forecasted fuel costs in the FCA. The
difference between the amounts is included in the deferred account, and 50 percent of
the account will be disbursed or collected on a monthly basis instead of a
quarterly basis. This change to a monthly FCA is expected to result
in smaller reconciliations and faster liquidation of any balances in the
account. With the move to the monthly FCA formula on October 1, 2009,
the remaining balance in the existing deferred liability account balance from
the quarterly FCA of approximately $822 will be liquidated over a nine-month period from
October 1, 2009 through June 30, 2010.
Deferred Nuclear Generating
Units. In July 2005, the TVA Board approved the amortization,
and inclusion into rates, of TVA’s $3.9 billion investment in the deferred
nuclear generating units at Bellefonte Nuclear Plant over a 10-year period
beginning in 2006. The TVA Board determined that a 10-year recovery
period would not place an undue burden on ratepayers while still ensuring the
probability of cost recovery during that 10-year period.
Unrealized Gains (Losses) on Coal
Contracts with Volume Options. Unrealized gains (losses) on
coal purchase contracts relate to the mark-to-market valuation of coal purchase
contracts that contain options to purchase additional or fewer
quantities. These contracts qualify as derivative contracts but do
not qualify for cash flow hedge accounting treatment. As a result,
TVA recognizes the changes in the market value of these derivative contracts as
a regulatory liability (asset). This treatment reflects TVA’s ability
and intent to recover the cost of these commodity contracts on a settlement
basis for ratemaking purposes through the FCA. TVA has historically
recognized the actual cost of fuel received under these contracts in fuel
expense at the time the fuel is used to generate electricity. These
contracts expire at various times through 2013. See Note
12.
Capital Lease
Liability. As a result of a capital lease payment stream
requiring larger cash payments during the latter years of the lease term than
during the early years of the lease term, TVA levelized the annual lease expense
recognition related to this lease in order to promote the fair and equitable
cost recovery from ratepayers. These levelized costs are being
amortized over the lease term.
Reserve for Future Generation.
See Note 1 — Reserve
for Future Generation.
Accrued Tax
Equivalents. The FCA structure includes a provision related to
the current funding of the future expense TVA will incur for tax equivalent
payments. As TVA records the fuel cost adjustment, the percent of the
calculation that relates to a future liability for tax equivalent payments is
recorded as a regulatory liability. The resulting liability of $81
million at September 30, 2009, and $40 million at September 30, 2008, is
included in Accounts
payable on the respective Balance Sheets.
The
Event. On December 22, 2008, approximately five million cubic
yards of water and coal fly ash flowed out of the Kingston ash pond onto
approximately 300 acres, primarily Watts Bar Reservoir and shoreline property
owned by the United States and managed by TVA, but also structurally damaged
three homes, interrupted utility service, and blocked a local
road. Fly ash is a coal combustion product of a coal-fired
plant. Kingston used wet ash containment impoundments for fly
ash.
TVA is
conducting cleanup and recovery efforts in conjunction with federal and state
agencies. Under the May 11, 2009, Administrative Order and Agreement
of Consent (“Order and Agreement”) entered into by TVA and the EPA under CERCLA,
TVA retains its status as a lead federal agency, but TVA's work is subject to
review and approval by the EPA, in consultation with TDEC. Under the
Order and Agreement, response actions are classified into three categories:
time-critical removal; non-time-critical removal; and remedial
actions. Generally, removal of the ash from the Emory River is
time-critical. TVA estimates that this work will be completed in
2010. Removal
of the remaining ash is considered to be non-time-critical. TVA
estimates that this work will be completed in 2013. Once the removal
actions are completed, TVA will be required to assess the site and determine
whether any additional actions may be needed at Kingston or the surrounding
impacted area. This
assessment and any additional activities found to be necessary are considered
the remedial actions.
Insurance. TVA
has property and excess liability insurance programs in place which may cover
some of the Kingston ash spill costs. The insurers for each of these
programs have been notified of the event. Although three of the
insurers that provide liability insurance have denied coverage, TVA is working
with its insurers to provide information, as it becomes available, on the event
and its cause to determine applicable coverage. As a result, no
estimate for potential insurance recovery has been accrued at this
time.
Claims and
Litigation. Fourteen
lawsuits based on the Kingston ash spill have been filed, all of which are
pending in the United States District Court for the Eastern District of
Tennessee. See Note 20 — Legal Proceedings and
Note 23.
Financial
Impact. TVA has recorded an estimate in the amount of $933
million for the cost of cleanup related to this event. This amount
had been charged to expense during the nine month period ended June 30,
2009. However, due to actions of the TVA Board in August 2009, the
amount was reclassified as a regulatory asset during the fourth quarter and will
be charged to expense as it is collected in future rates over 15
years. Costs incurred through September 30, 2009, totaled $231
million. The $933 million estimate currently includes, among other
things, a reasonable estimate of costs related to ash dredging and processing,
ash disposition, infrastructure repair, dredge cell repair, root cause analysis,
certain legal and settlement costs, environmental impact studies and
remediation, human health assessments, community outreach and support,
regulatory oversight, cenosphere recovery, skimmer wall installation,
construction of temporary ash storage areas, dike reinforcement, project
management, and certain other remediation costs associated with the clean
up. If the actual amount of ash removed is more or less than the
estimate, the expense could change significantly as this affects the largest
cost components of the estimate. The cost of the removal of the ash
is in large part dependent on the final disposal plan, which is still in
development by TVA and regulatory authorities.
TVA has
revised the estimated cost of the cleanup over the course of the year consistent
with receipt of better information as the remediation work has
progressed. As work progresses and more information is available, TVA
will review its estimates and revise as appropriate. TVA currently
estimates the recovery process will be completed in 2013. As such,
TVA has accrued a portion of the estimate in current liabilities, with the
remaining portion shown as a long-term liability on TVA’s September 30, 2009
Balance Sheet.
Due to
the uncertainty at this time of the final methods of remediation, a range of
reasonable estimates has been developed by cost category and either the known
amounts, most likely scenarios, or the low end of the range for each category
has been accumulated and evaluated to determine the total
estimate. The costs related to ash loading, transport, and disposal
of all time critical ash and final disposition of dredge cell closures are the
ones most subject to change. It is not currently known exactly how
much ash will need to be removed. The range of estimated costs varies
from approximately $933 million to approximately $1.2 billion.
TVA has
not included the following categories of costs in the above estimate since it
has determined that these costs are currently either not probable, not
reasonably estimable, or not appropriately accounted for as part of the estimate
accrual: fines or regulatory directive actions, outcome of lawsuits, future
claims, long-term environmental impact costs, final long-term disposition of ash
processing area, associated capital asset purchases, ash handling and
disposition from current plant operations, costs of remediating any discovered
mixed waste during ash removal process, and other costs not meeting the
recognition criteria. As ash removal continues, it is possible that
other environmentally sensitive material potentially in the river sediment
before the ash spill may be uncovered. If other materials are identified,
additional remediation not included in the above estimates may be required.
Other long-term liabilities consist
primarily of estimated amounts due for post-retirement and postemployment
benefits and liabilities related to certain derivative
agreements. The table below summarizes the types and amounts of
liabilities:
Other
Long-Term Liabilities
As
of September 30
|
||||||||
2009
|
2008
|
|||||||
Currency
swap liabilities
|
$ | 51 | $ | — | ||||
Swaption
liability
|
592 | 416 | ||||||
Interest
rate swap liabilities
|
287 | 195 | ||||||
Coal
contracts with volume options liabilities
|
80 | — | ||||||
Post-retirement
and postemployment benefit obligations
|
3,678 | 2,736 | ||||||
Other
long-term liability obligations
|
117 | 167 | ||||||
Total
other long-term liabilities
|
$ | 4,805 | $ | 3,514 |
Two of the currency swaps held as
assets at September 30, 2008, became liabilities during 2009, due primarily to
changes in exchange rates. In addition, the swaption and interest
rate swap liabilities increased during 2009 due primarily to a decrease in
interest rates. See Note 18 for discussion related to changes
affecting benefit plan obligations.
During 2009, TVA’s total asset
retirement obligations (“ARO”) liability increased $365 million. The
increase was comprised of $1 million in new AROs, $224 million of new revisions
in the estimated lives and cost estimates related to the ash storage areas, $11
million in changes to the nuclear future cash flows estimates, and $129 million
in ARO accretion. The nuclear accretion expense of $98 million and
the non-nuclear accretion expense of $31 million were deferred and charged to a
regulatory asset. The related regulatory asset was amortized to
expense as it was collected in rates. Contributions to the ART of $40
million for each of 2009, 2008, and 2007 have been reflected in the Statement of
Income. See Note 6 — Nuclear Decommissioning Costs
and Non-Nuclear
Decommissioning Costs.
Reconciliation
of Asset Retirement Obligation Liability
As
of September 30
|
||||||||
2009
|
2008
|
|||||||
Balance
at beginning of period
|
$ | 2,318 | $ | 2,189 | ||||
Changes
in nuclear estimates to future cash flows
|
11 | — | ||||||
Non-nuclear
additional obligations
|
1 | 8 | ||||||
Non-nuclear
additional obligations (ash storage areas)
|
224 | — | ||||||
236 | 8 | |||||||
Add: ARO
accretion expense
|
||||||||
Nuclear
accretion (recorded as a regulatory asset)
|
98 | 92 | ||||||
Non-nuclear
accretion (recorded as a regulatory asset)
|
31 | 29 | ||||||
129 | 121 | |||||||
Balance
at end of period
|
$ | 2,683 | $ | 2,318 |
General
The TVA Act authorizes TVA to issue
Bonds in an amount not to exceed $30 billion at any time. At
September 30, 2009, TVA had only two types of Bonds outstanding: power bonds and
discount notes. Power bonds have maturities of between one and 50
years, and discount notes have maturities of less than one
year. Power bonds and discount notes are both issued pursuant to
section 15d of the TVA Act and pursuant to the Basic Tennessee Valley Authority
Power Bond Resolution adopted by the TVA Board on October 6, 1960, as amended on
September 28, 1976, October 17, 1989, and March 25, 1992 (the “Basic
Resolution”). TVA Bonds are not obligations of the United States, and
the United States does not guarantee the payments of principal or interest on
Bonds.
Power bonds and discount notes rank on
parity and have first priority of payment out of net power proceeds, which are
defined as:
•
|
the
remainder of TVA’s gross power
revenues
|
o
|
after
deducting
|
–
|
the
costs of operating, maintaining, and administering its power properties,
and
|
–
|
payments
to states and counties in lieu of taxes,
but
|
o
|
before
deducting depreciation accruals or other charges representing the
amortization of capital expenditures,
plus
|
•
|
the
net proceeds from the sale or other disposition of any power facility or
interest therein.
|
Because TVA’s lease payments under its
leaseback transactions are considered costs of operating, maintaining, and
administering its power properties, those payments have priority over TVA’s
payments on the Bonds. Once net power proceeds have been applied to
payments on power bonds and discount notes as well as any other Bonds that TVA
may issue in the future that rank on parity with or subordinate to power bonds
and discount notes, Section 2.3 of the Basic Resolution provides that the
remaining net power proceeds shall be used only for minimum payments into the
U.S. Treasury required by the TVA Act in repayment of and as a return on the
Power Facility Appropriation Investment, investment in power assets, additional
reductions of TVA’s capital obligations, and other lawful purposes related to
TVA’s power program.
The TVA Act and the Basic Resolution
each contain two bond tests: the rate test and the bondholder
protection test. Under the rate test, TVA must charge rates for power
which will produce gross revenues sufficient to provide funds for, among other
things, debt service on outstanding Bonds. See Note 1 — General. Under the
bondholder protection test, TVA must, in successive five-year periods, use an
amount of net power proceeds at least equal to the sum of:
|
•
|
the
depreciation accruals and other charges representing the amortization of
capital expenditures and
|
|
•
|
the net
proceeds from any disposition of power
facilities
|
|
for
either
|
|
•
|
the reduction
of its capital obligations (including Bonds and the Power Facility
Appropriation Investment) or
|
|
•
|
investment
in power assets.
|
TVA must next meet the bondholder
protection test for the five-year period ending September 30, 2010.
Short-Term
Debt
The weighted average rates applicable
to short-term debt outstanding in the public market as of September 30, 2009,
2008, and 2007, were 0.06 percent, 1.26 percent, and 4.74 percent,
respectively. During 2009, 2008, and 2007, the maximum outstanding
balances of TVA short-term borrowings held by the public were $2.7 billion, $1.6
billion, and $2.8 billion, respectively. For these same years, the
average amounts (and weighted average interest rates) of TVA short-term
borrowings were approximately $1.7 billion (0.32 percent), $767 million (3.71
percent), and $2.3 billion (5.17 percent), respectively.
TVA also
has access to a financing arrangement with the U.S. Treasury. TVA
and the U.S. Treasury entered into a memorandum of understanding under which the
U.S. Treasury provides TVA with a $150 million credit facility. This credit facility
matures on September 30, 2010, and is expected to be renewed. This
arrangement is pursuant to the TVA Act. Access to this credit
facility or other similar financing arrangements has been available to TVA since
1959. TVA plans to use the U.S. Treasury credit facility as a
secondary source of liquidity. The interest rate on any borrowing
under this facility is based on the average rate on outstanding marketable
obligations of the United States with maturities from date of issue of one year
or less. During 2009, TVA did not borrow under the credit
facility. In 2008 and 2007, TVA had a $150 million note with the U.S.
Treasury, and the daily average amounts outstanding (and average interest rates)
from the U.S. Treasury were approximately $74 million (3.02 percent) and $132
million (5.07 percent), respectively.
TVA also has short-term funding
available in the form of two short-term revolving credit facilities, one of
which is a $1.0 billion facility that matures on May 12, 2010, and the other of
which is a $1.0 billion facility that matures on November 8,
2010. The credit facilities accommodate the issuance of letters of
credit. The interest rate on any borrowing and the fees on any letter
of credit under these facilities are variable 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 $2.0 billion which TVA has not borrowed or committed under letters of
credit. The fee may fluctuate depending on the non-enhanced credit
ratings on TVA’s senior unsecured long-term debt. At September 30,
2009, there were $103 million of letters of credit outstanding under the
facilities and there were no outstanding borrowings. TVA anticipates
renewing each credit facility as it matures.
Put
and Call Options
Bond issues of $1.6 billion held by the
public are redeemable in whole or in part, at TVA’s option, on call dates
ranging from the present to 2020 and at call prices ranging from 100 percent to
106 percent of the principal amount. Eighteen Bond issues totaling
$451 million, with maturity dates ranging from 2018 to 2029, include a
“survivor’s option,” which allows for right of redemption upon the death of a
beneficial owner in certain specified circumstances. There is no
accounting difference between a “survivor’s option” put and a “regular” put on
any TVA put Bond.
Additionally, TVA has two issues of
Putable Automatic Rate Reset Securities (“PARRS”) outstanding. After
a fixed-rate period of five years, the coupon rate on the PARRS may
automatically be reset downward under certain market conditions on an annual
basis. The coupon rate reset on the PARRS is based on a
calculation. For both series of PARRS, the coupon rate will reset
downward on the reset date if the rate calculated is below the coupon rate on
the Bond. The calculation dates, potential reset dates, and terms of
the calculation are different for each series. The coupon rate on the
1998 Series D PARRS may be reset on June 1 (annually) if the sum of the five-day
average of the 30-Year Constant Maturity Treasury (“CMT”) rate for the week
ending the last Friday in April, plus 94 basis points, is below the then-current
coupon rate. The coupon rate on the 1999 Series A PARRS may be reset
on May 1 (annually) if the sum of the five-day average of the 30-Year CMT rate
for the week ending the last Friday in March, plus 84 basis points, is below the
then-current coupon rate. The coupon rates may only be reset
downward, but investors may request to redeem their Bonds at par value in
conjunction with a coupon rate reset for a limited period of time prior to the
reset dates and under certain circumstances.
The coupon rate for the 1998 Series D
PARRS, which mature in June 2028, has been reset four times, from an initial
rate of 6.75 percent to the current rate of 4.728 percent. In
connection with these resets, $238 million of the bonds have been redeemed, and
$330 million of the bonds were outstanding at September 30, 2009. The
coupon rate for the 1999
Series A PARRS, which mature in May 2029, has been reset three times, from an
initial rate of 6.50 percent to the current rate of 4.50 percent. In
connection with these resets, $241 million of the bonds have been redeemed, and
$274 million of the bonds were outstanding at September 30,
2009.
Due to
the contingent nature of the put option on the PARRS, TVA determines whether the
PARRS should be classified as long-term debt or current maturities of long-term
debt by calculating the expected reset rate on the bonds. The
expected reset rate is calculated using forward rates and the fixed spread for
each Bond issue as noted above. If the expected reset rate is less
than the coupon on the Bond, the PARRS are included in current
maturities. Otherwise, the PARRS are included in long-term
debt. At September 30, 2009, the expected reset rate was higher than
the current coupon on each issue of PARRS; therefore, the par amount outstanding
for each series of PARRS was classified as long-term debt.
Debt
Securities Activity
The table below summarizes TVA’s Bond
activity for the period from October 1, 2007, to September 30,
2009.
Debt
Securities Activity from October 1, 2007, to September 30,
2009
|
||||||||
Redemptions/Maturities:
|
2009
|
2008
|
||||||
electronotes®
|
||||||||
First
quarter
|
$ | — | $ | — | ||||
Second
quarter
|
558 | 197 | ||||||
Third
quarter
|
3 | 115 | ||||||
Fourth
quarter
|
248 | — | ||||||
1998
Series G
|
2,000 | — | ||||||
1998
Series D
|
— | 7 | ||||||
1999
Series A
|
— | 10 | ||||||
1999
Series A
|
25 | 102 | ||||||
2009
Series A
|
1 | — | ||||||
1998
Series D
|
20 | 108 | ||||||
2009
Series B
|
19 | — | ||||||
1997
Series E
|
— | 100 | ||||||
2003
Series C
|
— | 50 | ||||||
Total
|
$ | 2,874 | $ | 689 | ||||
Issues:
|
||||||||
electronotes®
|
||||||||
First
quarter
|
$ | 39 | $ | 41 | ||||
Second
quarter
|
89 | 61 | ||||||
Third
quarter
|
115 | 3 | ||||||
Fourth
quarter
|
135 | — | ||||||
2008
Series A
|
— | 500 | ||||||
2008
Series B
|
— | 1,000 | ||||||
2008
Series C
|
— | 500 | ||||||
2009
Series A
|
22 | — | ||||||
2009
Series B
|
469 | — | ||||||
2009
Series C
|
1,500 | — | ||||||
Total
|
$ | 2,369 | $ | 2,105 |
Debt
Outstanding
Debt outstanding at September 30, 2009,
consisted of the following:
Short-Term
Debt
As
of September 30
|
||||||||||||||
CUSIP
or Other Identifier
|
Maturity
|
Call/(Put)
Date
|
Coupon
Rate
|
2009
Par
Amount
|
2008
Par
Amount
|
|||||||||
Discount
Notes (net of discount)
|
$ | 844 | $ | 185 | ||||||||||
Current
maturities of long-term debt
|
||||||||||||||
880591DB5
|
11/13/2008
|
5.38 | % | — | 2,000 | |||||||||
88059TCW9
|
03/15/2009
|
03/15/2005
|
3.20 | % | — | 30 | ||||||||
880591EE8
|
11/15/2009
|
2.25 | % | 3 | — | |||||||||
88059TEL1
|
05/15/2010
|
2.65 | % | 3 | — | |||||||||
880591EF5
|
06/15/2010
|
3.77 | % | 2 | — | |||||||||
Current
maturities of long-term debt
|
8 | 2,030 | ||||||||||||
Total
debt due within one year, net
|
$ | 852 | $ | 2,215 |
Long-Term
Debt1
As
of September 30
|
||||||||||||||
CUSIP
or Other Identifier
|
Maturity
|
Call/(Put)
Date
|
Coupon
Rate
|
2009
Par
Amount
|
2008
Par
Amount
|
|||||||||
880591EE8
|
11/15/2010
|
2.250 | % | $ | 2 | $ | — | |||||||
88059TEL1
|
11/15/2010
|
2.650 | % | 1 | — | |||||||||
880591EF5
|
12/15/2010
|
3.770 | % | 1 | — | |||||||||
880591DN9
|
01/18/2011
|
5.625 | % | 1,000 | 1,000 | |||||||||
880591EE8
|
05/15/2011
|
2.250 | % | 2 | — | |||||||||
88059TEL1
|
05/15/2011
|
2.650 | % | 1 | — | |||||||||
880591EF5
|
06/15/2011
|
3.770 | % | 1 | — | |||||||||
Maturing
in 2011
|
1,008 | 1,000 | ||||||||||||
880591EE8
|
11/15/2011
|
2.250 | % | 2 | — | |||||||||
88059TEL1
|
11/15/2011
|
2.650 | % | 1 | — | |||||||||
880591EF5
|
12/15/2011
|
3.770 | % | 1 | — | |||||||||
880591EE8
|
05/15/2012
|
2.250 | % | 2 | — | |||||||||
88059TEL1
|
05/15/2012
|
2.650 | % | 1 | — | |||||||||
880591DL3
|
05/23/2012
|
7.140 | % | 29 | 29 | |||||||||
880591DT6
|
05/23/2012
|
6.790 | % | 1,486 | 1,486 | |||||||||
880591EF5
|
06/15/2012
|
3.770 | % | 1 | — | |||||||||
Maturing
in 2012
|
1,523 | 1,515 | ||||||||||||
880591EE8
|
11/15/2012
|
2.250 | % | 2 | — | |||||||||
88059TEL1
|
11/15/2012
|
2.650 | % | 1 | — | |||||||||
880591EF5
|
12/15/2012
|
3.770 | % | 1 | — | |||||||||
88059TBR1
|
01/15/2013
|
01/15/2005
|
4.375 | % | — | 14 | ||||||||
88059TBW0
|
03/15/2013
|
03/15/2005
|
4.000 | % | — | 22 | ||||||||
88059TBX8
|
03/15/2013
|
03/15/2005
|
4.250 | % | — | 12 | ||||||||
880591CW0
|
03/15/2013
|
6.000 | % | 1,359 | 1,359 | |||||||||
88059TEG2
|
04/15/2013
|
07/15/2009
|
3.500 | % | — | 3 | ||||||||
880591EE8
|
05/15/2013
|
2.250 | % | 2 | — | |||||||||
88059TEL1
|
05/15/2013
|
2.650 | % | 2 | — | |||||||||
88059TCD1
|
06/15/2013
|
06/15/2004
|
3.500 | % | — | 12 | ||||||||
880591EF5
|
06/15/2013
|
3.770 | % | 1 | — | |||||||||
88059TCF6
|
07/15/2013
|
07/15/2005
|
4.350 | % | — | 17 | ||||||||
88059TDS7
|
07/15/2013
|
07/15/2008
|
5.625 | % | — | 9 | ||||||||
880591DW9
|
08/01/2013
|
4.750 | % | 940 | 940 | |||||||||
Maturing
in 2013
|
2,308 | 2,388 | ||||||||||||
88059TCL3
|
10/15/2013
|
10/15/2005
|
4.500 | % | — | 12 | ||||||||
880591EE8
|
11/15/2013
|
2.250 | % | 2 | — | |||||||||
88059TEL1
|
11/15/2013
|
2.650 | % | 1 | — | |||||||||
88059TCQ2
|
12/15/2013
|
12/15/2005
|
4.700 | % | — | 8 | ||||||||
880591EF5
|
12/15/2013
|
3.770 | % | 1 | — | |||||||||
88059TDZ1
|
04/15/2014
|
04/15/2008
|
5.000 | % | — | 4 | ||||||||
880591EE8
|
05/15/2014
|
2.250 | % | 1 | — | |||||||||
88059TEL1
|
05/15/2014
|
2.650 | % | 2 | — | |||||||||
880591EF5
|
06/15/2014
|
3.770 | % | 25 | — | |||||||||
Maturing
in 2014
|
32 | 24 | ||||||||||||
88059TBJ9
|
10/15/2014
|
10/15/2004
|
4.600 | % | — | 21 | ||||||||
88059TED9
|
11/15/2014
|
11/15/2008
|
4.800 | % | — | 17 | ||||||||
880591EE8
|
11/15/2014
|
2.250 | % | 2 | — | |||||||||
88059TEL1
|
11/15/2014
|
2.650 | % | 1 | — | |||||||||
88059TBN0
|
12/15/2014
|
12/15/2004
|
5.000 | % | — | 54 | ||||||||
880591EF5
|
12/15/2014
|
3.770 | % | 1 | — | |||||||||
88059TBY6
|
04/15/2015
|
04/15/2005
|
4.600 | % | — | 20 | ||||||||
88059TDB4
|
04/15/2015
|
04/15/2007
|
5.000 | % | — | 49 | ||||||||
880591EE8
|
05/15/2015
|
2.250 | % | 1 | — | |||||||||
88059TEL1
|
05/15/2015
|
2.650 | % | 1 | — | |||||||||
880591DY5
|
06/15/2015
|
4.375 | % | 1,000 | 1,000 | |||||||||
880591EF5
|
06/15/2015
|
3.770 | % | 26 | — | |||||||||
88059TDE8
|
07/15/2015
|
07/15/2007
|
4.500 | % | — | 6 | ||||||||
88059TCH2
|
08/15/2015
|
08/15/2005
|
5.125 | % | — | 33 | ||||||||
88059TBK6
|
10/15/2015
|
10/15/2005
|
5.050 | % | — | 19 | ||||||||
88059TDH1
|
15/15/2015
|
10/15/2007
|
5.000 | % | — | 27 | ||||||||
CUSIP
or Other Identifier
|
Maturity
|
Call/(Put)
Date
|
Coupon
Rate
|
2009
Par
Amount
|
2008
Par
Amount
|
|||||||||
88059TBL4
|
11/15/2015
|
11/15/2005
|
4.800 | % | — | 26 | ||||||||
880591EE8
|
11/15/2015
|
2.250 | % | 2 | — | |||||||||
88059TEL1
|
11/15/2015
|
2.650 | % | 1 | — | |||||||||
88059TCR0
|
12/15/2015
|
12/15/2005
|
4.875 | % | — | 11 | ||||||||
880591EF5
|
12/15/2015
|
3.770 | % | 1 | — | |||||||||
88059TBU4
|
02/15/2016
|
02/15/2016
|
4.550 | % | — | 8 | ||||||||
88059TCV1
|
02/15/2016
|
02/15/2016
|
4.500 | % | — | 3 | ||||||||
88059TEL1
|
05/15/2016
|
2.650 | % | 1 | — | |||||||||
88059TCC3
|
06/15/2016
|
06/15/2006
|
3.875 | % | — | 3 | ||||||||
880591EF5
|
06/15/2016
|
3.770 | % | 26 | — | |||||||||
88059TCJ8
|
09/15/2016
|
09/15/2006
|
4.950 | % | — | 11 | ||||||||
88059TDU4
|
09/15/2016
|
09/15/2007
|
5.375 | % | — | 14 | ||||||||
88059TEL1
|
11/15/2016
|
2.650 | % | 1 | — | |||||||||
880591DS8
|
12/15/2016
|
4.875 | % | 524 | 524 | |||||||||
880591EF5
|
12/15/2016
|
3.770 | % | 1 | — | |||||||||
88859TCS8
|
01/15/2017
|
01/15/2007
|
5.000 | % | — | 28 | ||||||||
88059TDW8
|
01/15/2017
|
01/15/2008
|
5.250 | % | — | 6 | ||||||||
88059TEL1
|
05/15/2017
|
2.650 | % | 1 | — | |||||||||
88059TEA5
|
06/15/2017
|
06/15/2008
|
5.500 | % | — | 4 | ||||||||
880591EF5
|
06/15/2017
|
3.770 | % | 27 | — | |||||||||
880591EA6
|
07/18/2017
|
5.500 | % | 1,000 | 1,000 | |||||||||
88059TEB3
|
09/15/2017
|
09/15/2009
|
5.000 | % | — | 4 | ||||||||
88059TEL1
|
11/15/2017
|
2.650 | % | 1 | — | |||||||||
880591CU4
|
12/15/2017
|
6.250 | % | 650 | 650 | |||||||||
880591EF5
|
12/15/2017
|
3.770 | % | 1 | — | |||||||||
88059TEF4
|
03/15/2018
|
03/15/2010
|
4.500 | % | 25 | 25 | ||||||||
880591EC2
|
04/01/2018
|
4.500 | % | 1,000 | 1,000 | |||||||||
88059TCA7
|
05/15/2018
|
05/15/2004
|
4.750 | % | — | 24 | ||||||||
88059TEL1
|
05/15/2018
|
2.650 | % | 2 | — | |||||||||
880591EF5
|
06/15/2018
|
3.770 | % | 28 | — | |||||||||
88059TCE9
|
07/15/2018
|
07/15/2004
|
4.700 | % | — | 34 | ||||||||
88059TCN9
|
11/15/2018
|
11/15/2006
|
5.125 | % | — | 18 | ||||||||
88059TEL1
|
11/15/2018
|
2.650 | % | 1 | — | |||||||||
880591EF5
|
12/15/2018
|
3.770 | % | 1 | — | |||||||||
88059TCT6
|
01/15/2019
|
01/15/2005
|
5.000 | % | — | 27 | ||||||||
88059TCX7
|
03/15/2019
|
01/15/2005
|
4.500 | % | 12 | 12 | ||||||||
88059TEL1
|
05/15/2019
|
2.650 | % | 1 | — | |||||||||
880591EF5
|
06/15/2019
|
3.770 | % | 29 | — | |||||||||
88059TEL1
|
11/15/2019
|
2.650 | % | 1 | — | |||||||||
880591EF5
|
12/15/2019
|
3.770 | % | 1 | — | |||||||||
88059TEL1
|
05/15/2020
|
2.650 | % | 1 | — | |||||||||
880591EF5
|
06/15/2020
|
3.770 | % | 27 | — | |||||||||
88059TDF5
|
08/15/2020
|
08/15/2008
|
5.000 | % | — | 10 | ||||||||
88059TDG3
|
09/15/2020
|
09/15/2008
|
4.800 | % | 3 | 3 | ||||||||
88059TDJ7
|
11/15/2020
|
11/15/2008
|
5.500 | % | — | 11 | ||||||||
880591EF5
|
12/15/2020
|
3.770 | % | 1 | — | |||||||||
88059TDL2
|
01/15/2021
|
01/15/2009
|
5.125 | % | — | 5 | ||||||||
880591DC3
|
06/07/2021
|
5.805 | %2 | 320 | 356 | |||||||||
880591EF5
|
06/15/2021
|
3.770 | % | 28 | — | |||||||||
880591EF5
|
12/15/2021
|
3.770 | % | 1 | — | |||||||||
88059TDY4
|
03/15/2022
|
03/15/2008
|
5.375 | % | — | 6 | ||||||||
880591EF5
|
06/15/2022
|
3.770 | % | 28 | — | |||||||||
88059TEC1
|
10/15/2011
|
10/15/2022
|
5.500 | % | — | 25 | ||||||||
88059TBM2
|
11/15/2011
|
11/15/2022
|
5.000 | % | — | 10 | ||||||||
88059TBP5
|
12/15/2022
|
12/15/2006
|
5.000 | % | — | 19 | ||||||||
880591EF5
|
12/15/2022
|
3.770 | % | 1 | — | |||||||||
88059TBT7
|
01/15/2023
|
01/15/2007
|
5.000 | % | — | 10 | ||||||||
88059TBV2
|
02/15/2023
|
02/15/2007
|
5.000 | % | — | 16 | ||||||||
88059TBZ3
|
05/15/2023
|
05/15/2004
|
5.125 | % | — | 14 | ||||||||
880591EF5
|
06/15/2023
|
3.770 | % | 28 | — | |||||||||
88059TEH0
|
10/15/2023
|
10/15/2011
|
5.000 | % | 15 | — | ||||||||
88059TCK5
|
10/15/2023
|
10/15/2007
|
5.200 | % | — | 13 | ||||||||
88059TCP4
|
11/15/2023
|
11/15/2004
|
5.250 | % | — | 11 | ||||||||
880591EF5
|
12/15/2023
|
3.770 | % | 1 | — | |||||||||
88059TCU3
|
02/15/2024
|
02/15/2008
|
5.125 | % | — | 8 | ||||||||
88059TEM9
|
03/15/2024
|
03/15/2012
|
4.500 | % | 59 | — | ||||||||
88059TCY5
|
04/15/2024
|
04/15/2005
|
5.375 | % | — | 14 | ||||||||
880591EF5
|
06/15/2024
|
3.770 | % | 21 | — | |||||||||
88059TES6
|
07/15/2024
|
07/15/2012
|
4.875 | % | 28 | — | ||||||||
880591EF5
|
12/15/2024
|
3.770 | % | 1 | — | |||||||||
88059TCZ2
|
02/15/2025
|
02/15/2006
|
5.000 | % | — | 18 | ||||||||
88059TDA6
|
03/15/2025
|
03/15/2009
|
5.000 | % | — | 6 | ||||||||
88059TDC2
|
05/15/2025
|
05/15/2009
|
5.125 | % | 13 | 13 | ||||||||
880591EF5
|
06/15/2025
|
3.770 | % | 22 | — | |||||||||
880591CJ9
|
11/01/2025
|
6.750 | % | 1,350 | 1,350 |
CUSIP
or Other Identifier
|
Maturity
|
Call/(Put)
Date
|
Coupon
Rate
|
2009
Par
Amount
|
2008
Par
Amount
|
|||||||||
880591EF5
|
12/15/2025
|
3.770 | % | — | — | |||||||||
88059TDM0
|
02/15/2026
|
02/15/2010
|
5.500 | % | 6 | 6 | ||||||||
880591EF5
|
06/15/2026
|
3.770 | % | 20 | — | |||||||||
88059TDV0
|
10/15/2026
|
10/15/2010
|
5.500 | % | 9 | 9 | ||||||||
880591EF5
|
12/15/2026
|
3.770 | % | — | — | |||||||||
880591EF5
|
06/15/2027
|
3.770 | % | 20 | — | |||||||||
880591EF5
|
12/15/2027
|
3.770 | % | — | — | |||||||||
88059TEE7
|
01/15/2028
|
01/15/2012
|
4.750 | % | 36 | 36 | ||||||||
8805913003
|
06/01/2028
|
4.728 | % | 330 | 350 | |||||||||
880591EF5
|
06/15/2028
|
3.770 | % | 16 | — | |||||||||
88059TEJ6
|
11/15/2008
|
11/15/2012
|
5.250 | % | 7 | — | ||||||||
88059TEK3
|
12/15/2028
|
12/15/2012
|
5.000 | % | 18 | — | ||||||||
880591EF5
|
12/15/2028
|
3.770 | % | — | — | |||||||||
88059TEP2
|
04/15/2029
|
04/15/2013
|
4.350 | % | 51 | |||||||||
8805914093
|
05/01/2029
|
4.500 | % | 274 | 298 | |||||||||
88059TEQ0
|
05/15/2029
|
05/15/2013
|
4.500 | % | 50 | — | ||||||||
88059TER8
|
06/15/2029
|
06/15/2013
|
4.750 | % | 13 | — | ||||||||
880591EF5
|
06/15/2029
|
3.770 | % | 12 | — | |||||||||
88059TET4
|
07/15/2029
|
07/15/2013
|
4.750 | % | 37 | — | ||||||||
88059TEV9
|
08/15/2029
|
08/15/2013
|
4.875 | % | 19 | — | ||||||||
88059TEW7
|
09/15/2029
|
09/15/2013
|
4.750 | % | 51 | — | ||||||||
880591EF5
|
12/15/2029
|
3.770 | % | — | — | |||||||||
880591DM1
|
05/01/2030
|
7.125 | % | 1,000 | 1,000 | |||||||||
880591EF5
|
06/15/2030
|
3.770 | % | 12 | — | |||||||||
880591EF5
|
12/15/2030
|
3.770 | % | — | — | |||||||||
880591EF5
|
06/15/2031
|
3.770 | % | 12 | — | |||||||||
880591EF5
|
12/15/2031
|
3.770 | % | — | — | |||||||||
880591DP4
|
06/07/2032
|
6.587 | %2 | 399 | 445 | |||||||||
880591EF5
|
06/15/2032
|
3.770 | % | 12 | — | |||||||||
880591EF5
|
12/15/2032
|
3.770 | % | — | — | |||||||||
880591EF5
|
06/15/2033
|
3.770 | % | 5 | — | |||||||||
880591DV1
|
07/15/2033
|
4.700 | % | 472 | 472 | |||||||||
880591EF5
|
12/15/2033
|
3.770 | % | — | — | |||||||||
880591EF5
|
06/15/2034
|
3.770 | % | 5 | — | |||||||||
880591DX7
|
06/15/2035
|
4.650 | % | 436 | 436 | |||||||||
880591CK6
|
04/01/2036
|
5.980 | % | 121 | 121 | |||||||||
880591CS9
|
04/01/2036
|
5.880 | % | 1,500 | 1,500 | |||||||||
880591CP5
|
01/15/2038
|
6.150 | % | 1,000 | 1,000 | |||||||||
880591ED0
|
06/15/2038
|
5.500 | % | 500 | 500 | |||||||||
880591EH1
|
09/15/2039
|
5.250 | % | 1,500 | — | |||||||||
880591BL5
|
04/15/2042
|
04/15/2012
|
8.250 | % | 1,000 | 1,000 | ||||||||
880591DU3
|
06/07/2043
|
4.962 | %2 | 240 | 267 | |||||||||
880591CF7
|
07/15/2045
|
07/15/2020
|
6.235 | % | 140 | 140 | ||||||||
880591EB4
|
01/15/2048
|
4.875 | % | 500 | 500 | |||||||||
880591DZ2
|
04/01/2056
|
5.375 | % | 1,000 | 1,000 | |||||||||
Maturing
2015-2056
|
17,141 | 15,676 | ||||||||||||
Subtotal
|
22,012 | 20,603 | ||||||||||||
Unamortized
discounts, premiums, and other
|
(224 | ) | (199 | ) | ||||||||||
Total
long-term debt, net
|
$ | 21,788 | $ | 20,404 | ||||||||||
Notes
(1) The
above table includes net exchange losses from currency transactions of $30
million and $138 million at September 30, 2009 and 2008,
respectively.
(2) The
coupon rate represents TVA’s effective interest rate.
(3) TVA
PARRS, CUSIP numbers 880591300 and 880591409, may be redeemed under
certain conditions. See Note 10 — Put and Call
Options.
|
Seven
States Power Corporation (“SSPC”), through its subsidiary, Seven States
Southaven, LLC (“SSSL”), purchased an undivided 90 percent interest from TVA in
a three-unit, 792-MW summer net capability combined cycle combustion turbine
facility in Southaven, Mississippi. SSSL paid TVA approximately $420 million for
its interest in the facility.
As part
of the transaction, SSSL has the right at any time and for any reason to require
TVA to buy back SSSL’s interest in the facility at SSSL’s original purchase
price (plus the cost of SSSL’s share of any capital improvements) minus
amortization costs that TVA pays under the lease. As part of any such
buy-back, TVA would pay off the remaining balance on SSSL’s loan, with that
amount being credited against the buy-back price that TVA would pay to
SSSL. A buy-back may also be triggered under certain circumstances
including, among other things, a default by SSSL. Finally, TVA will
buy back SSSL’s interest in the facility if long-term operational and power
sales arrangements for the facility among TVA, SSSL, and SSPC are not in place
by April 30, 2010. TVA’s buy-back obligation will terminate if such
long-term arrangements are in place by that date. In the event of a
buy-back, TVA would re-acquire SSSL’s
interest in the facility and the related assets. As of November 25,
2009, long-term arrangements are not in place. At this time
management is unable to predict whether such arrangements will be in place by
April, 30, 2010. Because of TVA’s continued ownership interest in the
facility as well as the buy-back provisions, the transaction did not qualify as
a sale and, accordingly, has been recorded as a leaseback
obligation. As of September 30, 2009, the carrying amount of the
obligation was approximately $415 million. TVA has recognized the
buy-back obligation as a Current portion of leaseback
obligations of $415 million on its September 30, 2009 Balance
Sheet.
TVA recognizes certain of its
derivative instruments as either assets or liabilities on its Balance Sheet at
fair value. The accounting for changes in the fair value of these
instruments depends on (1) whether the derivative instrument has been designated
and qualifies for hedge accounting treatment and (2) if so, the type of hedge
relationship (e.g., cash flow hedge).
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. Other than certain derivatives instruments in investment
funds, it is TVA’s policy to enter into these derivative transactions solely for
hedging purposes and not for speculative purposes.
Overview of Accounting
Treatment
The following tables summarize the
accounting treatment that certain of TVA’s financial derivative transactions
receive.
Summary
of Derivative Instruments That Receive Hedge Accounting Treatment (part
1)
|
||||||||
Derivatives
in Cash Flow Hedging Relationship
|
Objective
of Hedge Transaction
|
Accounting
for Derivative Hedging Instrument
|
Amount
of MtM (Loss) Recognized in Other Comprehensive
Loss (“OCL”) Years Ended
September
30
|
|||||
2009
|
2008
|
|||||||
Currency
swaps
|
To
protect against changes in cash flows caused by changes in foreign
currency exchange rates (exchange rate risk)
|
Cumulative
unrealized gains and losses are recorded in OCL and reclassified to
interest expense to the extent they are offset by cumulative gains and
losses on the hedged transaction
|
$
(145)
|
$
(179)
|
Summary
of Derivative Instruments That Receive Hedge Accounting Treatment (part
2)
|
||||||||
Derivatives
in Cash Flow
Hedging
Relationship
|
Amount
of Exchange Gain
Reclassified
from
OCL
to Interest Expense
Years
Ended September
30 (a)
|
|||||||
2009
|
2008
|
|||||||
Currency
swaps
|
$ | 108 | $ | 161 | ||||
Note
(a) There
were no ineffective portions or amounts excluded from effectiveness
testing for any of the periods presented. Also see Note
13.
|
Summary
of Derivative Instruments That Do Not Receive Hedge Accounting
Treatment
|
||||||||
Derivative
Type
|
Objective
of Derivative
|
Accounting
for Derivative Instrument
|
Amount
of Gain
(Loss)
Recognized in
Income
on Derivatives
Years
Ended
September
30 (a)
|
|||||
2009
|
2008
|
|||||||
Swaption
|
To
protect against decreases in value of the embedded call (interest rate
risk)
|
Gains
and losses are recorded as regulatory assets or liabilities until
settlement, at which time the gains/losses (if any) are recognized in
gain/loss on derivative contracts.
|
$ —
|
$ —
|
||||
Interest
rate swaps
|
To
fix short-term debt variable rate to a fixed rate (interest rate
risk)
|
Gains
and losses are recorded as regulatory assets or liabilities until
settlement, at which time the gains/losses (if any) are recognized in
gain/loss on derivative contracts.
|
—
|
—
|
||||
Coal
contracts with volume options
|
To
protect against fluctuations in market prices of purchased coal (price
risk)
|
Gains
and losses are recorded as regulatory assets or liabilities until
settlement, at which time they are recognized in fuel and purchased power
expense. Settlement fees associated with early contract
terminations are recognized in fuel and purchased power expense in the
period incurred.
|
37
|
—
|
||||
Commodity
derivatives
under
Financial Trading Program
|
To
protect against fluctuations in market prices of purchased commodities
(price risk)
|
Realized
gains and losses are recorded in earnings as fuel and purchased power
expense. Unrealized gains and losses are recorded as a
regulatory asset/liability.
|
(408)
|
10
|
||||
Note
(a)
All of TVA’s derivative instruments that do not receive hedge accounting
treatment have unrealized gains (losses) that would otherwise be
recognized in income but instead are deferred as regulatory assets and
liabilities. As such, there was no related gain (loss)
recognized in income for these unrealized gains (losses) for 2008 and
2009. See Note 6 — Deferred Gains and Losses
Relating to TVA’s Financial Trading Program, Swap and Swaption
Contract, and Unrealized Gains (Losses) on
Coal Contacts with Volume Options.
|
TVA has
recorded the following amounts for its derivative financial instruments
described in the tables above:
MARK-TO-MARKET
VALUES OF TVA DERIVATIVES
As
of September 30
|
||||||||||
2009
|
2008
|
|||||||||
Derivatives in Cash Flow Hedging
Relationship:
|
||||||||||
Balance
|
Balance
Sheet Presentation
|
Balance
|
Balance
Sheet Presentation
|
|||||||
Currency
swaps:
|
||||||||||
£200
million Sterling
|
$ | (33 | ) |
Other
long-term liabilities
|
$ | 2 |
Other
long-term assets
|
|||
£250
million Sterling
|
7 |
Other
long-term assets
|
72 |
Other
long-term assets
|
||||||
£150
million Sterling
|
(18 | ) |
Other
long-term liabilities
|
27 |
Other
long-term assets
|
|||||
Derivatives Not Receiving Hedge
Accounting Treatment:
|
||||||||||
Balance
|
Balance
Sheet Presentation
|
Balance
|
Balance
Sheet Presentation
|
|||||||
Swaption:
|
||||||||||
$1.0
billion notional
|
$ | (592 | ) |
Other
long-term liabilities
|
$ | (416 | ) |
Other
long-term liabilities
|
||
Interest
rate swaps:
|
||||||||||
$476
million notional
|
(276 | ) |
Other
long-term liabilities
|
(188 | ) |
Other
long-term liabilities
|
||||
$42
million notional
|
(11 | ) |
Other
long-term liabilities
|
(7 | ) |
Other
long-term liabilities
|
||||
Coal
contracts with volume options
|
7 |
Other
long-term assets
$87,
Other long-term
liabilities
($80)
|
813 |
Other
long-term assets
|
||||||
Commodity
derivatives under Financial Trading Program:
|
||||||||||
Margin
cash account*
|
28 |
Inventories
and other, net
|
25 |
Inventories
and other, net
|
||||||
Unrealized
losses, net
|
(68 | ) |
Other
regulatory assets ($85),
Regulatory
liabilities
$17
|
(146 | ) |
Other
regulatory assets
|
||||
Note
* In
accordance with certain credit terms, TVA used leveraging to trade
financial instruments under the Financial Trading Program. Therefore,
the margin cash account balance does not represent 100 percent of the net
market value of the derivative positions outstanding as shown in the
Commodity Derivatives Under Financial Trading Program table
below.
|
Cash
Flow Hedging Strategy for Currency Swaps
To
protect against the exchange rate risk related to three sterling denominated
Bond transactions, TVA entered into foreign currency hedges at the time the Bond
transactions occurred. TVA has the following currency swaps
outstanding as of September 30, 2009:
Currency
Swaps Outstanding
As
of September 30, 2009
|
|||
Effective
Date of Currency Swap Contract
|
Associated
TVA Bond Issues – Currency Exposure
|
Expiration
Date of Swap
|
Overall
Effective
Cost
to TVA
|
2003
|
£150
million
|
2043
|
4.96%
|
2001
|
£250
million
|
2032
|
6.59%
|
1999
|
£200
million
|
2021
|
5.81%
|
When the
dollar strengthens against the British pound sterling, the exchange gain on the
Bond liability is offset by an exchange loss on the swap
contract. Conversely, when the dollar weakens, the exchange loss on
the Bond liability is offset by an exchange gain on the swap
contract. All such exchange gains or losses are included in Long-term debt,
net. The offsetting exchange losses or gains on the swap
contracts are recognized in Accumulated other
comprehensive loss. If any loss (gain) were to be incurred as
a result of the early termination of the foreign currency swap contract, any
resulting charge (income) would be amortized over the remaining life of the
associated Bond as a component of interest expense.
Derivatives
Not Receiving Hedge Accounting Treatment
Swaption
and Interest Rate Swaps
TVA has entered into four swaption
transactions to monetize the value of call provisions on certain of its Bond
issues. A swaption grants a third party the right to enter into a
swap agreement with TVA under which TVA receives a floating rate of interest and
pays the third party a fixed rate of interest equal to the interest rate on the
Bond issue for which the call provision has been monetized by TVA.
|
•
|
In
2003, TVA monetized the call provisions on a $1.0 billion Bond issue by
entering into a swaption agreement with a third party in exchange for $175
million (the “2003A Swaption”).
|
|
•
|
In
2003, TVA also monetized the call provisions on a $476 million Bond issue
by entering into a swaption agreement with a third party in exchange for
$81 million (the “2003B Swaption”).
|
|
•
|
In
2005, TVA monetized the call provisions on two electronotes®
issues ($42 million total par value) by entering into swaption agreements
with a third party in exchange for $5 million (the “2005
Swaptions”).
|
In February 2004, the counterparty to
the 2003B Swaption exercised its option to enter into an interest rate swap with
TVA, effective April 10, 2004, requiring TVA to make fixed rate payments to the
counterparty of 6.875 percent and the counterparty to make floating payments to
TVA based on LIBOR. These payments are based on the notional
principal amount of $476 million and began on June 15, 2004.
In February 2008, the counterparty to
the 2005 Swaptions exercised its options to enter into interest rate swaps with
TVA, effective March 11, 2008. Under the swaps, TVA is required to
make fixed rate payments to the counterparty at 6.125 percent, and the
counterparty is required to make floating payments to TVA based on
LIBOR. These payments are based on a combined notional amount of $42
million and began on April 15, 2008.
On October 1, 2007, TVA began using
regulatory accounting treatment to defer the mark-to-market gains and losses on
these swap and swaption agreements to reflect that the gain or loss is included
in the ratemaking formula when these transactions settle. The values
of the swap and swaption agreements and related deferred unrealized gains and
losses are recorded on TVA’s balance sheet with realized gains or losses, if
any, recorded on TVA’s income statement.
For the year ended September 30, 2009,
the changes in market value resulted in deferred unrealized losses on the value
of interest rate swaps and swaptions of $272 million. For the year
ended September 30, 2008, the changes in market value resulted in deferred
unrealized losses on the value of interest rate swaps and swaptions of $226
million. All net deferred unrealized losses are reclassified as
regulatory assets on the Balance Sheets.
Coal
Contracts with Volume Options
TVA enters into certain coal supply
contracts that require delivery of fixed quantities of coal (base tons) at fixed
prices. Certain coal contracts also contain options that permit TVA
to either increase or reduce the amounts of coal delivered within specified
guidelines. Essentially, the option to take more or less coal
represents a purchased option that is combined with the forward coal contract in
a single supply contract. TVA marks to market the value of these
contracts on a quarterly basis.
At September 30, 2009, and September
30, 2008, TVA’s coal contracts which contained volume optionality had
approximate net market values of $7 million and $813 million, respectively,
which TVA deferred as regulatory liabilities. TVA will continue to
defer all unrealized gains or losses related to the exercise of these options
and record only realized gains or losses as fossil fuel expense at the time the
coal is consumed. The decrease in the value of coal contracts with
volume options is primarily a result of the decline in the market price for coal
and roll-off or settlement of contracted volumes from September 30, 2008, to
September 30, 2009. The $7 million net market value of TVA’s coal
contracts with volume options at September 30, 2009, also includes a $10 million
expected net settlement expense related to the early termination of a coal
supply contract subsequent to September 30, 2009.
Coal
Contracts with Volume Options
As
of September 30
|
|||||||
2009
|
2008
|
||||||
Number
of
Contracts
|
Notional
Amount
(in
tons)
|
Fair
Value (MtM)
(in
millions)
|
Number
of Contracts
|
Notional
Amount
(in
tons)
|
Fair
Value (MtM)
(in
millions)
|
||
Coal
Contracts with Volume Options
|
7
|
29
million
|
$ 7
|
10
|
37
million
|
$ 813
|
Commodity
Derivatives Under Financial Trading Program
In 2005, the TVA Board approved a
Financial Trading Program (“FTP”) under which TVA can purchase and sell swaps,
options on swaps, futures, and options on futures to hedge TVA’s exposure to
natural gas and fuel oil prices. In 2007, the TVA Board expanded the
FTP, among other things, (1) to permit financial trading for the purpose of
hedging or otherwise limiting the economic risks associated with the price of
electricity, coal, emission allowances, nuclear fuel, and other commodities
included in TVA’s FCA calculation, such as ammonia and limestone, as well as the
price of natural gas and fuel oil, (2) to authorize the use of futures, swaps,
options, and combinations of these instruments as long as these instruments are
standard in the industry, (3) to authorize the use of the
IntercontinentalExchange as well as the NYMEX to trade financial instruments,
and (4) to increase the aggregate transaction limit to $130 million (based on
one-day value at risk). In 2009, the TVA Board further expanded the
FTP to permit financial trading for the purpose of hedging or otherwise limiting
the economic risks associated with the price of construction
materials. The maximum hedge volume for these transactions is 75
percent of the underlying net notional volume of the material that TVA
anticipates using in approved TVA projects, and the market value of all
outstanding hedging transactions involving construction materials is limited to
$100 million at the execution of any new transaction. In 2009, the
TVA Board also expanded the FTP to permit financial trading to manage financial
risks that occur when TVA contracts for goods priced in or indexed to foreign
currencies. The portfolio value at risk limit for these transactions
is $5 million and is separate and distinct from the $130 million transaction
limit discussed above. Under the FTP, TVA is prohibited from trading
financial instruments for speculative purposes.
Commodity
Derivatives Under Financial Trading Program
As
of September 30
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Notional
Amount
|
Fair
Value (MtM)
(in
millions)
|
Notional
Amount
|
Fair
Value (MtM)
(in
millions)
|
|||||||||||||
Natural
gas (in mmBtu)
|
||||||||||||||||
Futures
contracts
|
||||||||||||||||
Fixed
positions
|
— | $ | (5 | ) | — | $ | — | |||||||||
Open
positions at end of period
|
30,020,000 | (25 | ) | 20,900,000 | (12 | ) | ||||||||||
Net
position at end of period
|
30,020,000 | (30 | ) | 20,900,000 | (12 | ) | ||||||||||
Swap
contracts
|
||||||||||||||||
Fixed
positions
|
— | (16 | ) | — | — | |||||||||||
Open
positions at end of period
|
115,307,500 | (36 | ) | 70,510,000 | (126 | ) | ||||||||||
Net
position at end of period
|
115,307,500 | (52 | ) | 70,510,000 | (126 | ) | ||||||||||
Option
contracts open at end of period
|
7,300,000 | 1 | (1,600,000 | ) | (8 | ) | ||||||||||
Natural
gas financial positions
at
end of period, net
|
152,627,500 | $ | (81 | ) | 89,810,000 | $ | (146 | ) | ||||||||
Fuel
oil/crude oil (in barrels)
|
||||||||||||||||
Futures
contracts open at end of period
|
398,000 | $ | 3 | — | $ | — | ||||||||||
Swap
contracts open at end of period
|
1,660,000 | 7 | — | — | ||||||||||||
Option
contracts open at end of period
|
1,236,000 | 3 | — | — | ||||||||||||
Fuel
oil/crude oil financial positions at end of period,
net
|
3,294,000 | $ | 13 | — | $ | — |
TVA defers all FTP unrealized gains
(losses) as regulatory liabilities (assets) and records only realized gains or
losses to match the delivery period of the underlying commodity
product.
Natural Gas
At September 30, 2009, TVA had natural
gas hedges with notional volumes equivalent to 152,627,500 (in mmBtu), the
market value of which was a net loss of $81 million. For the year
ended September 30, 2009, TVA recognized realized losses on natural gas hedges
of $405 million. All realized losses (gains) were recorded as an
increase (decrease) to purchased power expense. The unrealized loss
of $84 million and unrealized gain of $3 million at September 30, 2009, were
deferred as a regulatory asset and a regulatory liability,
respectively.
At September 30, 2008, TVA had natural
gas hedges with notional volumes equivalent to 89,810,000 (in mmBtu), the market
value of which was a loss of $146 million. For the year ended
September 30, 2008, TVA recognized realized gains of $10 million, which
were recorded as a decrease to purchased power expense. The
unrealized loss of $146 million at September 30, 2008, was deferred as a
regulatory asset.
Fuel Oil/Crude Oil
At September 30, 2009, TVA had notional
volumes of fuel oil/crude oil hedges equivalent to 3,294,000 (in barrels), the
market value of which was a net gain of $13 million. For the year
ended September 30, 2009, TVA recognized realized losses on fuel oil/crude oil
hedges of $4 million. All realized losses were recorded as an
increase to fossil fuel expense. The unrealized loss of $1 million
and unrealized gain of $14 million at September 30, 2009, were deferred as a
regulatory asset and a regulatory liability, respectively.
TVA did not have any fuel oil/crude oil
hedges as of September 30, 2008.
Other
Derivative Instruments
Other Commodity
Derivatives
TVA enters into forward contracts that
hedge cash flow exposures to market fluctuations in the price and delivery of
certain commodities including coal, natural gas, fuel oil, crude oil,
electricity, uranium, and construction commodities. TVA expects to
take or make delivery, as appropriate, under these forward
contracts. Accordingly, these contracts qualify for normal purchases
and normal sales accounting. As of September 30, 2009, and September
30, 2008, TVA did not have derivative contracts related to the purchase of
electricity, uranium, or construction commodities.
Investment Fund
Derivatives
Investment funds consist primarily of
funds held in trusts designed to fund nuclear decommissioning requirements,
asset retirement obligations, and the SERP. All securities in the
trusts are classified as trading. See Note 13 for a discussion of the
trusts’ objectives and the types of investments included in the various
trusts. Derivative instruments in these trusts include swaps,
futures, options, forwards, and other instruments. As of September
30, 2009, and September 30, 2008, the fair value of derivative instruments in
these trusts was immaterial.
Collateral
TVA’s interest rate swaps, two of its
currency swaps, and its swaption contain contract provisions that require a
party to post collateral (in a form such as cash or a letter of credit) when the
party’s liability balance under the agreement exceeds a certain
threshold. As of September 30, 2009, the aggregate fair value of all
derivative instruments with credit-risk related contingent features that were in
a liability position was $897 million. TVA’s collateral obligation as
of September 30, 2009, under these arrangements was $143 million, for which TVA
had an existing position of $103 million under a letter of
credit. The difference between the obligation and the collateral
amount is due to the timing of the collateral transfer. In October
2009, TVA posted the remainder of its obligation. These letter of
credit postings reduce the available balance in TVA’s two $1.0 billion revolving
credit facilities. TVA’s assessment of the risk of its nonperformance
includes a reduction in its exposure under the contract as a result of this
posted collateral.
For all
of its derivative instruments with credit-risk related contingent
features:
|
•
|
If
TVA remains a majority-owned U.S. government entity but S&P or Moody’s
downgrades TVA’s credit rating to AA+/Aa1, TVA would be required to post
an additional $425 million of collateral in excess of its September 30,
2009 obligation; and
|
|
•
|
If
TVA ceases to be majority-owned by the U.S. government, its credit rating
would likely change and TVA would be required to post additional
collateral.
|
Concentration
of Credit
Credit risk is the exposure to economic
loss that would occur as a result of a counterparty’s nonperformance of its
contractual obligations. Where exposed to credit risk, TVA analyzes
the counterparty’s financial condition prior to entering into an agreement,
establishes credit limits, monitors the appropriateness of those limits, as well
as any changes in the creditworthiness of the counterparty on an ongoing basis,
and employs credit mitigation measures, such as collateral or prepayment
arrangements and master purchase and sale agreements, to mitigate credit
risk. The majority of TVA’s credit risk is limited to trade accounts
receivable from delivered power sales to municipal and cooperative distributor
customers, all located in the Tennessee Valley region. To a lesser
extent, TVA is exposed to credit risk from industries and federal agencies
directly served and from exchange power arrangements with a small number of
investor-owned regional utilities related to either delivered power or the
replacement of open positions of longer-term purchased power or fuel
agreements. Outstanding accounts receivable for the top seven
customers at September 30, 2009, were $528 million, or 41 percent of total
outstanding accounts receivable, and at September 30, 2008, were $554 million,
or 40 percent of total outstanding accounts receivable.
TVA is also exposed to credit risk from
the banking and coal industries because multiple companies in these industries
serve as counterparties to TVA in various derivative transactions. As
of September 30, 2009, the swaption and all of TVA’s currency swaps, interest
rates swaps, and commodity derivatives under the FTP were with counterparties
whose credit rating per Moody’s was “A2” or higher. As of September
30, 2009, all of the total coal tonnage associated with TVA’s coal contracts
with volume options was with counterparties whose Moody’s credit rating, or
TVA’s internal analysis when such information was unavailable, was “B2” or
higher. To
help ensure that reliable supply of
coal, TVA had coal contracts with 32 different suppliers at September 30,
2009. The contracted supply of coal is sourced from multiple
geographic regions of the United States and is to be delivered via various
transportation methods (e.g., barge, rail, and truck).
Fair
value is determined based on the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in TVA’s principal market,
or in the absence of a principal market, the most advantageous market for the
asset or liability in an orderly transaction between market
participants. TVA uses market or observable inputs as the preferred
source of values, followed by assumptions based on hypothetical transactions in
the absence of market inputs.
Valuation
Techniques
There are three main approaches to
measuring the fair value of assets and liabilities: (1) the market approach; (2)
the income approach; and (3) the cost approach. The market approach
uses prices and other relevant information generated from market transactions
involving identical or comparable assets or liabilities. The income
approach uses valuation techniques to convert future amounts to a single present
value amount. The measurement is based on the value indicated by
current market expectations about those future amounts of income. The
cost approach is based on the amount that would currently be required to replace
an asset. TVA utilizes the market approach and the income approach in
its fair value measurements.
The valuation techniques used to
measure fair value are based upon observable and unobservable inputs. Observable
inputs reflect market data obtained from independent sources, while unobservable
inputs reflect TVA’s market assumptions. These two types of inputs
create the following fair value hierarchy:
Level
1
|
—
|
Unadjusted
quoted prices in active markets accessible by the reporting entity for
identical assets or liabilities. Active markets are those in
which transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing.
|
|
Level
2
|
—
|
Pricing
inputs other than quoted market prices included in Level 1 that are based
on observable market data and that are directly or indirectly observable
for substantially the full term of the asset or
liability. These include quoted market prices for similar
assets or liabilities, quoted market prices for identical or similar
assets in markets that are not active, adjusted quoted market prices,
inputs from observable data such as interest rate and yield curves,
volatilities and default rates observable at commonly quoted intervals,
and inputs derived from observable market data by correlation or other
means.
|
|
Level
3
|
—
|
Pricing
inputs that are unobservable, or less observable, from objective
sources. Unobservable inputs are only to be used to the extent
observable inputs are not available. These inputs maintain the
concept of an exit price from the perspective of a market participant and
should reflect assumptions of other market participants. An
entity should consider all market participant assumptions that are
available without unreasonable cost and effort. These are given
the lowest priority and are generally used in internally developed
methodologies to generate management's best estimate of the fair value
when no observable market data is available.
|
A financial instrument's level within
the fair value hierarchy is based on the lowest level of input significant to
the fair value measurement, where Level 1 is the highest and Level 3 is the
lowest.
Nonperformance
Risk
The impact of nonperformance risk,
which includes credit risk, considers changes in current market conditions,
readily available information on nonperformance risk, letters of credit,
collateral, other arrangements available, and the nature of master netting
arrangements. TVA is a counterparty to currency swaps, a swaption,
interest rate swaps, commodity contracts, and other derivatives which subject
TVA to nonperformance risk. Nonperformance risk on the majority of
investments and certain exchange-traded instruments held by TVA is incorporated
into the exit price that is derived from quoted market data that is used to mark
the investment to market.
Nonperformance risk for most of TVA’s
derivative instruments is an adjustment to the initial asset/liability fair
value. TVA adjusts for nonperformance risk, both of TVA (for
liabilities) and the counterparty (for assets), by applying a
CVA. TVA determines an appropriate CVA for each applicable financial
instrument based on the term of the instrument and TVA’s or counterparty’s
credit rating as obtained from Moody’s. For companies that do not
have an observable credit rating, TVA uses internal analysis to assign a
comparable rating to the company. TVA discounts each financial
instrument using the historical default rate (as reported by Moody’s for CY 1983
to CY 2008) for companies with a similar credit rating over a time period
consistent with the remaining term of the contract.
The following sections describe the
valuation methodologies TVA uses to measure different financial instruments at
fair value. All changes in fair value of these assets and liabilities
have been reflected as changes in regulatory assets, regulatory liabilities, or
accumulated other comprehensive loss on TVA’s balance sheets and statements of
changes in proprietary capital as of September 30, 2009. There has
been no impact to the statements of operations or the statements of cash flows
related to these fair value measurements.
Investments
At September 30, 2009, TVA’s investment
funds comprised $981 million of securities classified as trading and measured at
fair value and $2 million of equity investments not required to be measured at
fair value. TVA holds trading securities in its NDT, ART, and
SERP. The NDT holds funds for the ultimate decommissioning of its
nuclear power plants. The ART holds funds for the costs related to
the future closure and retirement of TVA’s long-lived assets. TVA
established a SERP for certain executives in critical positions to provide
supplemental pension benefits tied to compensation that is not creditable under
the qualified pension plan. TVA has historically funded the annual
calculated expense of the SERP. The NDT and SERP are invested in
securities generally designed to achieve a return in line with broad equity
market performance. The ART is presently invested to achieve a return
in line with fixed-income market performance.
The NDT, ART, and SERP are composed of
multiple types of investments. Most U.S. and international equities,
Treasury inflation-protected securities, REITs, cash securities, and certain
derivative instruments are exchange-traded and are classified as Level 1
valuations. Fixed-income investments, high-yield fixed-income
investments, commingled funds, currencies, and most derivative instruments are
classified as Level 2 valuations. These measurements are based on
market and income approaches with observable market inputs. The
application of CVAs did not materially affect the fair value of TVA’s
investments at September 30, 2009.
Gains and losses on trading securities
are recognized in current earnings and are based on average cost. The
gains and losses on the NDT and ART are subsequently reclassified to a
regulatory asset account in accordance with TVA’s regulatory accounting
policy. The NDT had unrealized gains of $85 million in 2009, had
unrealized losses of $184 million in 2008, and had unrealized gains of $80
million in 2007. The ART had unrealized losses of $2 million in
2009. The ART had no unrealized losses or gains in 2008 or
2007. The SERP had unrealized losses of $3 million and $12 million in
2009 and 2008, respectively, and unrealized gains of $3 million in
2007.
Currency
Swaps, Swaption, and Interest Rate Swaps
See Note 13 — Cash Flow Hedging Strategy for
Currency Swaps and Derivatives Not Receiving Hedge
Accounting Treatment for a discussion of the nature, purpose, and
contingent features of TVA’s currency swaps, swaption, and interest rate
swaps.
The currency swaps are classified as
Level 2 valuations and are valued based on income approaches with observable
market inputs. The swaption is classified as a Level 3 valuation and
is valued based on an income approach. The valuation is computed
using a broker-provided pricing model utilizing interest and volatility
rates. While most of the fair value measurement is based on
observable inputs, volatility for TVA’s swaption is generally
unobservable. Therefore, the valuation is derived from an observable
volatility measure with adjustments. The interest rate swaps are
classified as Level 2 valuations and are valued based on income
approaches. The application of CVAs resulted in a decrease of $2
million in the fair value of the swaption and interest rate swap liabilities,
and did not materially affect the fair values of the currency swaps at September
30, 2009.
Coal
Contracts with Volume Options and Commodity Derivatives Under TVA’s Financial
Trading Program
See Note 12 — Derivatives Not Receiving Hedge
Accounting Treatment — Coal Contracts with Volume Options and Commodity Derivatives Under
Financial Trading Program for a discussion of the nature and purpose of
coal contracts with volume options and commodity derivatives under TVA’s
Financial Trading Program.
Coal Contracts with Volume
Options. These contracts are
classified as Level 3 valuations and are valued based on income
approaches. TVA develops an overall coal price forecast using
widely-used short-term market data from an external pricing specialist,
long-term price forecasts developed with the assistance of a third-party
valuation service, and other internal estimates. To value the option
component of the contract, TVA uses a Black-Scholes pricing model which includes
inputs from the overall coal price forecast, contract-specific terms, and other
market inputs. The application of CVAs resulted in a decrease of $5
million in the fair value of applicable coal contracts in an asset position at
September 30, 2009, and did not materially affect the fair value of applicable
coal contracts in a liability position at September 30, 2009.
Commodity Derivatives Under
Financial Trading Program. These contracts are valued based on
market approaches which utilize NYMEX quoted prices. Contracts
settled on the NYMEX (e.g., futures and options) are classified as Level 1
valuations. Contracts where nonperformance risk exists outside of the
exit price (e.g., swaps and over-the-counter options) are measured with the
incorporation of CVAs and are classified as Level 2 valuations. The application of CVAs
did not materially affect the fair value of commodity derivatives under the FTP
at September 30, 2009.
The
following table sets forth by level, within the fair value hierarchy, TVA's
financial assets and liabilities that were measured at fair value on a recurring
basis as of September 30, 2009. Financial assets and liabilities have
been classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. TVA's assessment of the
significance of a particular input to the fair value measurement requires
judgment and may affect the determination of the fair value of the assets and
liabilities and their classification in the fair value hierarchy
levels.
Fair
Value Measurements
As
of September 30, 2009
|
||||||||||||||||||||
Assets
|
Quoted
Prices in Active Markets for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
Netting1
|
Total
|
|||||||||||||||
Description
|
||||||||||||||||||||
Investments:
|
||||||||||||||||||||
Equity
securities
|
$ | 82 | $ | 1 | $ | — | $ | — | $ | 83 | ||||||||||
Debt
securities-U.S. government corporations and agencies
|
83 | 28 | — | — | 111 | |||||||||||||||
Corporate
debt securities
|
— | 203 | — | — | 203 | |||||||||||||||
Residential
mortgage-backed securities
|
— | 18 | — | — | 18 | |||||||||||||||
Commercial
mortgage-backed securities
|
— | 2 | — | — | 2 | |||||||||||||||
Collateralized
debt obligations
|
— | 6 | — | — | 6 | |||||||||||||||
Commingled
funds2:
|
||||||||||||||||||||
Equity
security commingled funds
|
— | 328 | — | — | 328 | |||||||||||||||
Debt
security commingled funds
|
— | 185 | — | — | 185 | |||||||||||||||
Foreign
currency commingled funds
|
— | 11 | — | — | 11 | |||||||||||||||
Other
commingled funds
|
— | 34 | — | — | 34 | |||||||||||||||
Currency
swaps
|
— | 7 | — | — | 7 | |||||||||||||||
Coal
contracts with volume options
|
— | — | 87 | — | 87 | |||||||||||||||
Commodity
derivatives under FTP
|
11 | 29 | — | (23 | ) | 17 | ||||||||||||||
Total
|
$ | 176 | $ | 852 | $ | 87 | $ | (23 | ) | $ | 1,092 | |||||||||
Liabilities
|
Quoted
Prices in Active Markets for Identical Liabilities
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
Netting
|
Total
|
|||||||||||||||
Description
|
||||||||||||||||||||
Currency
swaps
|
$ | — | $ | 51 | $ | — | $ | — | $ | 51 | ||||||||||
Interest
rate swaps
|
— | 287 | — | — | 287 | |||||||||||||||
Swaption
|
— | — | 592 | — | 592 | |||||||||||||||
Coal
contracts with volume options
|
— | — | 80 | — | 80 | |||||||||||||||
Commodity
derivatives under FTP
|
31 | 55 | — | (23 | ) | 63 | ||||||||||||||
Total
|
$ | 31 | $ | 393 | $ | 672 | $ | (23 | ) | $ | 1,073 | |||||||||
Notes
(1) Due
to the right of setoff and method of settlement, TVA elects to record
commodity derivatives under the FTP based on its net commodity position
with the counterparty or broker.
(2)
Commingled funds represent investment funds comprising multiple individual
financial instrumetns and are classified in the table based on their
existing investment portfolio. Commingled funds exclusively composed
of one class of security are classified in that category (e.g., equity,
debt, or foreign currency securities). Commingled funds comprising
multiple classes of securities are classified as "other commingled
funds."
|
The following table presents a
reconciliation of all assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for year ended
September 30, 2009:
Fair
Value Measurements Using Significant Unobservable Inputs
As
of September 30
|
||||||||
Coal
Contracts with Volume Options
|
Swaption
|
|||||||
Balances
at beginning of period
|
$ | 813 | $ | (416 | ) | |||
Unrealized
losses deferred as regulatory assets
|
(796 | ) | (176 | ) | ||||
Unrealized
losses related to expected net settlement fees included in fuel and
purchased power expense
|
(10 | ) | — | |||||
Balances
at end of period
|
$ | 7 | $ | (592 | ) |
There were no realized gains or losses
related to the instruments measured at fair value using significant unobservable
inputs. Other than the expected net settlement expense, all
unrealized gains and losses related to these instruments have been reflected as
increases or decreases in regulatory assets and liabilities. See Note
6.
Other
Financial Instruments Not Carried at Fair Value
TVA uses the methods and assumptions
described below to estimate the fair value of each significant class of
financial instrument. The fair market value of the financial
instruments held at September 30, 2009, and September 30, 2008, may not be
representative of the actual gains or losses that will be recorded when these
instruments mature or are called or presented for early
redemption. The estimated values of TVA’s financial instruments not
recorded at fair value at September 30, 2009, and September 30, 2008, were as
follows:
Estimated
Values of Financial Instruments
As
of September 30
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
Cash
and cash equivalents
|
$ | 201 | $ | 201 | $ | 213 | $ | 213 | ||||||||
Restricted
cash and investments
|
— | — | 106 | 106 | ||||||||||||
Loans
and other long-term receivables
|
77 | 68 | 81 | 81 | ||||||||||||
Short-term
debt, net
|
844 | 844 | 185 | 185 | ||||||||||||
Long-term
debt (including current portion), net
|
21,796 | 23,757 | 22,434 | 23,851 |
Because of the short-term maturity of
cash and cash equivalents, restricted cash and investments, and short-term debt,
net, the carrying amounts of these instruments approximate their fair
values.
Fair value of long-term debt traded in
the public market is determined by multiplying the par value of the debt by the
indicative market price at the balance sheet date.
Fair values for loans and other
long-term receivables are estimated by determining the present value of future
cash flows using a discount rate equal to lending rates for similar loans made
to borrowers with similar credit ratings and for similar remaining maturities,
where applicable.
Appropriation
Investment
TVA’s power program and stewardship
program were originally funded primarily by appropriations from
Congress. In 1959, however, Congress passed legislation that required
TVA’s power program to be self-financing from power revenues and proceeds from
power program financings. While TVA’s power program did not directly
receive appropriated funds after it became self-financing, TVA continued to
receive appropriations for certain multipurpose and other mission-related
activities as well as for its stewardship activities. TVA has not
received any appropriations from Congress for any activities since 1999, and
since that time, TVA has funded stewardship program activities primarily with
power revenues in accordance with a statutory directive from
Congress.
The 1959
legislation also required TVA, beginning in 1961, to make annual payments to the
U.S. Treasury from net power proceeds as a repayment of and as a return on the
Power Facility Appropriation Investment until an additional $1.0 billion of the
Power Facility Appropriation Investment has been repaid. Of this
$1.0 billion
amount, $90 million remained unpaid at September 30, 2009. Once the
Power Facility Appropriation Investment has been repaid, the TVA Act requires
TVA to continue making payments to the U.S. Treasury as a return on the
remaining Power Facility Appropriation Investment. The remaining
Power Facility Appropriation Investment will be $258 million if TVA receives no
additional appropriations from Congress for its power program.
The table
below summarizes TVA's activities related to appropriated funds.
Appropriations
Activity
As
of September 30
|
||||||||||||
Power
Facility
Appropriation
Investment
|
Stewardship
Program Appropriations
|
Total
Appropriation Investment
|
||||||||||
Appropriation
Investment at September 30, 2007
|
$ | 388 | $ | 4,355 | $ | 4,743 | ||||||
Less
repayments to the U.S. Treasury
|
(20 | ) | — | (20 | ) | |||||||
Appropriation
Investment at September 30, 2008
|
368 | 4,355 | 4,723 | |||||||||
Less
repayments to the U.S. Treasury
|
(20 | ) | — | (20 | ) | |||||||
Appropriation
Investment at September 30, 2009
|
$ | 348 | $ | 4,355 | $ | 4,703 |
Payments
to the U.S. Treasury
TVA paid $20 million each year for
2009, 2008,
and 2007 as a repayment of the Power Facility Appropriation
Investment. In addition, TVA paid the U.S. Treasury $13 million in
2009 and $20 million in both 2008 and 2007 as a return on the Power Facility
Appropriation Investment. The amount of the return on the Power
Facility Appropriation Investment is based on the Power Facility Appropriation
Investment balance as of the beginning of that year and the computed average
interest rate payable by the U.S. Treasury on its total marketable public
obligations as of the same date. The interest rates payable by TVA on
the Power Facility Appropriation Investment were 3.67 percent, 4.90 percent, and
4.87 percent for 2009, 2008, and 2007, respectively.
Accumulated
Other Comprehensive Income (Loss)
The items included in Accumulated other
comprehensive income (loss) consist of market valuation adjustments for
certain derivative instruments. See Note 12. The Accumulated other
comprehensive loss as of September 30, 2009, 2008, and 2007, was $75
million, $37 million, and $19 million, respectively.
Total
Other Comprehensive Loss Activity
For
the years ended September 30
|
||||
Accumulated
other comprehensive income, September 30, 2006
|
$ | 43 | ||
Changes
in fair value:
|
||||
Inflation
swap
|
9 | |||
Foreign
currency swaps
|
(71 | ) | ||
Accumulated
other comprehensive loss, September 30, 2007
|
(19 | ) | ||
Changes
in fair value:
|
||||
Inflation
swap
|
— | |||
Foreign
currency swaps
|
(18 | ) | ||
Accumulated
other comprehensive loss, September 30, 2008
|
(37 | ) | ||
Changes
in fair value:
|
||||
Foreign
currency swaps
|
(38 | ) | ||
Accumulated
other comprehensive loss, September 30, 2009
|
$ | (75 | ) | |
Note
Foreign
currency swap changes are shown net of reclassifications from Other comprehensive
income to
earnings.
|
TVA records exchange rate gains and
losses on debt in earnings and marks its currency swap assets and liabilities to
market through other comprehensive income. TVA then reclassifies an
amount out of other comprehensive income into earnings, offsetting the earnings
gain/loss from recording the exchange gain/loss on the debt. The
amounts reclassified from other comprehensive income into earnings were a
decrease to earnings of $108 million in 2009, a decrease to earnings of $161
million in 2008, and an increase to earnings of $104 million in
2007. These reclassifications, coupled with the recording of the
exchange gain/loss on the debt, resulted in a net effect on earnings
of zero
for 2009, 2008, and 2007. Due to the number of variables affecting
the future gains/losses on these instruments, TVA is unable to reasonably
estimate the amount to be reclassified from other comprehensive income to
earnings in future years.
Unrealized
Losses on Swap/Swaption Contracts
In the first quarter of 2008, TVA began
using regulatory accounting treatment to defer the unrealized mark-to-market
gains and losses on certain swap and swaption contracts to reflect that the gain
or loss is included in the ratemaking formula when these transactions actually
settle. The value of the swap and swaptions is still recorded on
TVA’s Balance Sheet with realized gains or losses on these contracts recorded in
TVA's Income Statement. The deferred unrealized losses on the value
of the swaps and swaption were $272 million for 2009 and $226 million for 2008,
and are included as a Regulatory asset on
TVA’s Balance Sheets. See Note 6 — Swap and Swaption
Transactions.
Other income, net is
comprised of the following:
Other
Income, Net
For
the years ended September 30
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Interest
income
|
$ | 9 | $ | 13 | $ | 23 | ||||||
(Losses)
gains on investments
|
(9 | ) | (27 | ) | 7 | |||||||
External
services, net
|
14 | 14 | 22 | |||||||||
Claims
settlement
|
4 | 8 | — | |||||||||
Miscellaneous
|
7 | 1 | 19 | |||||||||
Total
other income, net
|
$ | 25 | $ | 9 | $ | 71 |
Interest paid was $1.4 billion in each
of 2009, 2008, and 2007. These amounts differ from interest expense
due to the timing of payments and interest capitalized of $40 million in 2009,
$17 million in 2008, and $177 million in 2007 as a part of major capital
expenditures.
Cash flows from futures contracts,
forward contracts, option contracts, or swap contracts that are accounted for as
hedges are classified in the same category as the item being hedged or on a
basis consistent with the nature of the instrument.
In February 1997, TVA entered into a
purchase power agreement with Choctaw Generation, Inc. (subsequently assigned to
Choctaw Generation, L.P. (“Choctaw”))
to purchase all the power generated from its facility. Before July 2009, TVA did
not have access to certain financial records of Choctaw and was unable to
determine if Choctaw met the definition of a variable interest
entity. In July 2009, TVA obtained access to certain financial
records of Choctaw. Based on the financial information
received, TVA updated its assessment of its contractual relationship with
Choctaw and determined that Choctaw did not meet the definition of a variable
interest entity. As a result, TVA is not required to consolidate
Choctaw’s balance sheet, results of operations, and cash flows. TVA’s
future contractual cash commitments under this purchase power agreement are
disclosed in Note 20 — Power
Purchase Obligations.
TVA sponsors a qualified defined
benefit pension plan that covers most of its full-time annual employees, a
qualified defined contribution plan that covers most of its full-time annual
employees, two unfunded post-retirement health
care plans that provide for non-vested contributions toward the cost of certain
retirees’ medical coverage, other postemployment benefits such as workers’
compensation, and a supplemental executive retirement plan. Following
are discussions of each of these plans.
Overview
of Plans and Benefits
Defined Benefit Pension
Plan. TVA sponsors a defined benefit plan for most of its
full-time annual employees that provides two benefit structures: the Original
Benefit Structure and the Cash Balance Benefit Structure.
•
|
Original Benefit
Structure. The pension benefit for a member
participating in the Original Benefit Structure is based on the member’s
creditable service, the member’s average monthly salary for the highest
three consecutive years of base pay, and a pension factor based on the
member’s age and years of service, less a Social Security
offset.
|
•
|
Cash Balance Benefit
Structure. The pension benefit for a member
participating in the Cash Balance Benefit Structure is based on credits
accumulated in the member’s account and the member’s age. A
member’s account receives credits each pay period equal to 6.00 percent of
his or her straight-time earnings. The account also receives
monthly interest credits at a rate set at the beginning of each year equal
to the change in the Consumer Price Index (“CPI”) for the period ending on
the previous October 31 plus 3.00 percent, with the provision that the
rate may not be less than 6.00 percent or more than 10.00
percent. The actual changes in the CPI for the years ended
October 31, 2008 and 2007 were 4.45 percent and 2.53 percent, which
resulted in interest rates of 7.45 percent and 6.00 percent for CY 2009
and 2008, respectively.
|
Members of both the Original Benefit
Structure and the Cash Balance Benefit Structure can also become eligible for a
vested supplemental pension benefit based on age and years of service, which is
designed to help retirees offset the cost of medical insurance.
The defined benefit pension plan is
administered by a separate legal entity, the TVA Retirement System (“TVARS”),
which is governed by its own board of directors (“TVARS Board”). Upon
notification by the TVARS Board of a recommended contribution for the next
fiscal year, TVA determines whether to make the recommended contribution or any
contribution that may be required by the rules and regulations of
TVARS.
Defined Contribution Plan.
TVARS also administers a defined contribution 401(k) plan to which TVA
makes matching contributions of 25 cents on the dollar (up to 1.5 percent of
annual pay) for members participating in the Original Benefit Structure and of
75 cents on the dollar (up to 4.5 percent of annual pay) for members
participating in the Cash Balance Benefit Structure. TVA made matching
contributions of about $24 million to the plan during 2009, $21 million during
2008, and $21 million during 2007.
Supplemental Executive Retirement
Plan. In 1995, TVA established its SERP for certain executives in
critical positions to provide supplemental pension benefits tied to compensation
that are not creditable under the qualified pension plan. TVA has
historically funded the annual calculated expense.
Other Post-retirement
Benefits. TVA sponsors two unfunded post-retirement benefit
plans that provide for non-vested contributions toward the cost of certain
eligible retirees’ medical coverage. The first plan covers only
certain retirees and surviving dependents who do not qualify for TVARS benefits,
including the vested supplemental pension benefit. The second plan is
designed to place a limit on the out-of-pocket amount certain eligible retirees
pay for medical coverage and provides a credit based on years of TVA service and
monthly base pension amount reduced by any TVARS supplemental pension benefits
or any TVA contribution from the first plan described above.
Other Postemployment
Benefits. TVA employees injured in work-related incidents are
covered by the workers’ compensation program for federal employees administered
through the Department of Labor by the Office of Workers’ Compensation Programs
in accordance with the provisions of the Federal Employees’ Compensation Act
(“FECA”). FECA provides compensation benefits to federal employees
for permanent and temporary disability due to employment-related injury or
disease.
Accounting
Mechanisms
Regulatory
Accounting. TVA has classified all amounts related to
unrecognized prior service costs, net actuarial gains or losses, and subsequent
changes in the funded status into a regulatory asset. The deferral of
incurred costs is allowed if the costs are probable of future recovery in
customer rates.
TVA uses the projected unit credit cost
method to determine the service cost and the projected benefit obligation for
retirement, termination, and ancillary benefits. Under this method, a
“projected accrued benefit” is calculated as of the beginning of the year and as
of the end of the year for each benefit that may be payable in the
future. The “projected accrued benefit” is based on the plan’s
accrual formula and upon service as of the beginning or end of the year, but
using final
average compensation, social security benefits, and other relevant factors
projected to the age at which the employee is assumed to leave active
service. The projected benefit obligation is the actuarial present
value of the “projected accrued benefits” as of the end of the year for employed
participants and is the actuarial present value of all benefits for other
participants. The service cost is the actuarial present value of the
difference between the “projected accrued benefits” as of the beginning and end
of the year.
TVA utilizes the corridor approach to
gain/loss amortization. Differences between actuarial assumptions and
actual plan results are deferred and amortized into periodic cost only when the
accumulated differences exceed 10 percent of the greater of the projected
benefit obligation or the market-related value of plan assets. If
necessary, the excess is amortized over the average remaining service period of
active employees.
Additionally, TVA recognizes the impact
of asset performance on pension expense over a three-year phase-in period
through a “market-related” value of assets calculation. Since the
“market-related” value of assets recognizes investment gains and losses over a
three year period, the future value of assets will be impacted as previously
deferred gains or losses are recognized. The “market-related” value
is used in calculating expected return on plan assets and net gain or loss for
pension cost determination. The net gain or loss to be amortized is
derived from a comparison of the expected return on “market-related” value of
plan assets with the actual return on plan assets. A portion of any
difference between the two is reflected in the end-of-year “market-related”
asset value and net gain or loss; the remainder is reflected in those balances
in future periods.
Obligations
and Funded Status
The changes in plan obligations,
assets, and funded status for the years ended September 30 were as
follows:
Obligations
and Funded Status
As
of September 30
|
||||||||||||||||
Pension
Benefits
|
Other
Post-retirement Benefits
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Change
in benefit obligation
|
||||||||||||||||
Benefit
obligation at beginning of year
|
$ | 8,080 | $ | 8,642 | $ | 498 | $ | 464 | ||||||||
Service
cost
|
84 | 110 | 7 | 5 | ||||||||||||
Interest
cost
|
582 | 522 | 36 | 28 | ||||||||||||
Plan
participants’ contributions
|
32 | 34 | 81 | 78 | ||||||||||||
Amendments
|
(482 | ) | 3 | 7 | — | |||||||||||
Actuarial
(gain)
|
1,552 | (708 | ) | 146 | 25 | |||||||||||
Net
transfers from variable fund/401(k) plan
|
(3 | ) | 7 | — | — | |||||||||||
Expenses
paid
|
(6 | ) | (5 | ) | — | — | ||||||||||
Benefits
paid
|
(573 | ) | (525 | ) | (110 | ) | (102 | ) | ||||||||
Benefit
obligation at end of year
|
9,266 | 8,080 | 665 | 498 | ||||||||||||
Change
in plan assets
|
||||||||||||||||
Fair
value of plan assets at beginning of year
|
6,188 | 7,977 | — | — | ||||||||||||
Actual
return on plan assets
|
— | (1,465 | ) | — | — | |||||||||||
Plan
participants’ contributions
|
32 | 34 | 81 | 78 | ||||||||||||
Net
transfers from variable fund/401(k) plan
|
(3 | ) | 7 | — | — | |||||||||||
Employer
contributions
|
1,005 | 165 | 29 | 24 | ||||||||||||
Expenses
paid
|
(6 | ) | (5 | ) | — | — | ||||||||||
Benefits
paid
|
(573 | ) | (525 | ) | (110 | ) | (102 | ) | ||||||||
Fair
value of plan assets at end of year
|
6,643 | 6,188 | — | — | ||||||||||||
Funded
status
|
$ | (2,623 | ) | $ | (1,892 | ) | $ | (665 | ) | $ | (498 | ) | ||||
The actuarial loss above for 2009
primarily reflects the impact of the reduction in the discount rate from 7.50
percent to 5.75 percent, which increased the liability by approximately $1.6
billion.
The
effect of plan amendments disclosed in the table above refers primarily to
changes to the TVARS benefit plan since the last actuarial
valuation. The following changes were made to the cost of living
adjustment (“COLA”) provisions for the four years beginning January 1,
2010:
|
•
|
For
CY 2010, the COLA will be zero.
|
|
•
|
For
CY 2011, the COLA will be the change in the CPI, capped at 3
percent.
|
|
•
|
For
CY 2012, the COLA will be zero.
|
|
•
|
For
CY 2013, the COLA will be the change in the CPI, capped at 2.5
percent.
|
At the
end of the four-year period, the COLA benefit of CPI, capped at 5 percent, will
be restored. Further, the eligibility for the COLA will change to age
60 for employees who retire on or after January 1, 2010. Finally, the
interest crediting rate for fixed fund balances and future contributions will be
reduced to 6 percent effective January 1, 2010.
Amounts
recognized in the Balance Sheet at September 30 consist of:
Obligations
and Funded Status
Recognized
Amounts
As
of September 30
|
||||||||||||||||
Pension
Benefits
|
Other
Post-retirement Benefits
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Regulatory
assets
|
$ | 3,764 | $ | 2,120 | $ | 298 | $ | 157 | ||||||||
Accrued
liabilities
|
(5 | ) | (5 | ) | (35 | ) | (29 | ) | ||||||||
Other
long-term liabilities
|
(2,618 | ) | (1,887 | ) | (630 | ) | (469 | ) |
Unrecognized
amounts included in regulatory assets yet to be recognized as components of
accrued benefit cost at September 30 consist of:
Obligations
and Funded Status
Unrecognized
Amounts
As
of September 30
|
||||||||||||||||
Pension
Benefits
|
Other
Post-retirement Benefits
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Unrecognized
prior service cost (credit)
|
$ | (305 | ) | $ | 214 | $ | 31 | $ | 29 | |||||||
Unrecognized
net loss
|
3,987 | 1,906 | 267 | 128 | ||||||||||||
Amount
deferred due to actions of regulator
|
82 | - | - | - | ||||||||||||
Total
regulatory assets
|
$ | 3,764 | $ | 2,120 | $ | 298 | $ | 157 |
The projected benefit obligation,
accumulated benefit obligation, and fair value of plan assets for the pension
plans with accumulated benefit obligations in excess of plan assets at September
30, 2009 and 2008, were as follows:
Projected
Benefit Obligations in Excess of Plan Assets
As
of September 30
|
||||||||
2009
|
2008
|
|||||||
Projected
benefit obligation
|
$ | 9,266 | $ | 8,080 | ||||
Accumulated
benefit obligation
|
9,032 | 7,870 | ||||||
Fair
value of plan assets
|
6,643 | 6,188 |
The components of net periodic benefit
cost and other amounts recognized as changes in regulatory assets for the years
ended September 30 were as follows:
Components
of Net Periodic Benefit Cost
For
the years ended September 30
|
||||||||||||||||||||||||
Pension
Benefits
|
Other
Post-retirement Benefits
|
|||||||||||||||||||||||
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||
Components
of net periodic benefit cost
|
||||||||||||||||||||||||
Service
cost
|
$ | 84 | $ | 110 | $ | 122 | $ | 7 | $ | 5 | $ | 5 | ||||||||||||
Interest
cost
|
581 | 522 | 493 | 36 | 28 | 26 | ||||||||||||||||||
Expected
return on plan assets
|
(543 | ) | (608 | ) | (571 | ) | — | — | — | |||||||||||||||
Amortization
of prior service cost
|
37 | 37 | 37 | 5 | 5 | 5 | ||||||||||||||||||
Recognized
net actuarial loss
|
14 | 41 | 83 | 7 | 5 | 6 | ||||||||||||||||||
Net
periodic benefit cost as actuarially determined
|
173 | 102 | 164 | 55 | 43 | 42 | ||||||||||||||||||
Amount
capitalized due to actions of regulator
|
(82 | ) | — | — | — | — | — | |||||||||||||||||
Total
net periodic benefit cost
|
$ | 91 | $ | 102 | $ | 164 | $ | 55 | $ | 43 | $ | 42 | ||||||||||||
The amounts in the regulatory asset
that are expected to be recognized as components of net periodic benefit cost
during the next fiscal year are as follows:
Expected
Amortization of Regulatory Assets in 2010
As
of September 30, 2009
|
||||||||||||
Pension
Benefits
|
Other
Post-retirement
Benefits
|
Total
|
||||||||||
Prior
service cost (credit)
|
$ | (23 | ) | $ | 6 | $ | (17 | ) | ||||
Net
actuarial loss
|
203 | 17 | 220 | |||||||||
Deferred
amounts
|
28 | — | 28 |
Plan
Assumptions
TVA’s reported costs of providing the
plan benefits are impacted by numerous factors including the provisions of the
plans, changing employee demographics, and various assumptions, the most
significant of which are noted below.
Actuarial
Assumptions
As
of September 30
|
||||||||||||||||
Pension
Benefits
|
Other
Post-retirement Benefits
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Assumptions
utilized to determine benefit obligations at September 30
|
||||||||||||||||
Discount
rate
|
5.75 | % | 7.50 | % | 5.75 | % | 7.50 | % | ||||||||
Expected
return on plan assets
|
7.75 | % | 8.00 | % | N/A | N/A | ||||||||||
Rate
of compensation increase
|
4.40 | % | 4.33 | % | N/A | N/A | ||||||||||
Initial
health care cost trend rate
|
N/A | N/A | 8.00 | % | 8.00 | % | ||||||||||
Ultimate
health care cost trend rate
|
N/A | N/A | 5.00 | % | 5.00 | % | ||||||||||
Ultimate
trend rate is reached in year beginning
|
N/A | N/A | 2015 | 2014 | ||||||||||||
Assumptions
utilized to determine expense for the years ended September
30
|
||||||||||||||||
Discount
rate
|
7.50 | % | 6.25 | % | 7.5 | % | 6.25 | % | ||||||||
Expected
return on plan assets
|
8.00 | % | 8.75 | % | N/A | N/A | ||||||||||
Rate
of compensation increase
|
4.33 | % | 4.30 | % | N/A | N/A | ||||||||||
Initial
health care cost trend rate
|
N/A | N/A | 8.00 | % | 8.00 | % | ||||||||||
Ultimate
health care cost trend rate
|
N/A | N/A | 5.00 | % | 5.00 | % | ||||||||||
Ultimate
trend rate is reached in year beginning
|
N/A | N/A | 2014 | 2013 |
Discount Rate. In
the case of selecting an assumed discount rate, TVA reviews market yields on
high-quality corporate debt and long-term obligations of the U.S. Treasury and
endeavors to match, through the use of a hypothetical bond portfolio, instrument
maturities with the maturities of its pension obligations in accordance with the
prevailing accounting standards. Additionally, TVA looks at published
pension spot yield curves and applies expected cash flows to these curves to
approximate the rate expected to settle the projected benefit
payments. Based on recent market trends in all these data points, TVA
decreased its discount rate used to determine benefit obligations from 7.50
percent at the end of 2008 to 5.75 percent at the end of 2009. TVA
had increased its discount rate from 6.25 percent at the end of 2006 to 7.5
percent at the end of 2008.
Rate of Return. In
determining its expected long-term rate of return on pension plan assets, TVA
reviews past long-term performance, asset allocations, and long-term inflation
assumptions. The expected rate of return used to develop net pension
cost was 8 percent and 8.75 percent during 2009 and 2008, respectively, and is
determined at the beginning of the period. TVA adjusted the expected
rate for 2010 based on revisions to future expected returns as provided by third
party professional asset managers to reflect a change in the asset allocation
policy of TVARS to shift a portion of target allocations from equities to fixed
income securities. As of October 1, 2009, the expected rate of return
was 7.75 percent. The actual rate of return for the year ended
September 30, 2009, was a loss of 0.71 percent.
Compensation
Increases. This assumption is based on the results obtained
from an actual company experience study performed during the most recent six
years for retirees as well as other plan participants. TVA obtained
an updated study in 2008 and determined that no changes in this assumption were
required.
Mortality. Mortality
assumptions are based on the results obtained from a recent actual company
experience study performed which included retirees as well as other plan
participants. TVA obtained an updated study in 2008 and, accordingly,
adjusted the mortality rates from the 1983 Group Annuity Mortality Tables to the
RP-2000 Mortality Tables.
Health Care Cost Trends. TVA
reviews actual recent cost trends and projected future trends in establishing
health care cost trend rates. The assumed health care trend rate used
for 2009 and 2008 was 8.0 percent. The 2009 health care cost trend
rate of 8.0 percent used to determine benefit obligations is assumed to
gradually decrease each successive
year until it reaches a 5.0 percent annual increase in health care costs in the
year beginning October 1, 2015, and beyond.
Cost of Living
Adjustment. The COLA is generally
indexed against the CPI, subject to a floor and ceiling. The CPI fell
during 2009, and current economic forecasts project slow growth in the CPI
through 2015. Additionally, the COLA had been temporarily reduced for
current retirees and deferred to age 60 for employees retiring on or after
January 1, 2010. As a result of these COLA benefit reductions and low
inflationary expectations, TVA reduced the COLA assumption from 3.0 percent to
2.5 percent at September 30, 2009.
Sensitivity of Costs to Changes in
Assumptions. The following chart reflects the sensitivity of
pension cost to changes in certain actuarial assumptions:
Sensitivity
of Costs to Changes in Pension Benefit Assumptions
|
||||||||||||
Actuarial
Assumption
|
Change
in Assumption
|
Impact
on 2010
Pension
Cost
|
Impact
on 2009 Projected Benefit Obligation
|
|||||||||
(Increase
in millions)
|
||||||||||||
Discount
rate
|
(0.25 | %) | $ | 14 | $ | 243 | ||||||
Rate
of return on plan assets
|
(0.25 | %) | 17 |
NA
|
Each fluctuation above assumes that the
other components of the calculation are held constant and excludes any impact
for unamortized actuarial gains or losses.
The following chart reflects the
sensitivity of post-retirement benefit
cost to changes in the health care trend rate:
Sensitivity
to Components of Other Post-retirement
Benefits Plan
As
of September 30, 2009
|
||||||||
1%
Increase
|
1%
Decrease
|
|||||||
Effect
on total of service and interest cost components
|
$ | 5 | $ | (6 | ) | |||
Effect
on end-of-year accumulated post-retirement benefit
obligation
|
66 | (74 | ) |
Each fluctuation above assumes that the
other components of the calculation are held constant and excludes any impact
for unamortized actuarial gains or losses.
Plan
Investments
The qualified defined benefit pension
plan, which includes the Original Benefit Structure and the Cash Balance Benefit
Structure, is the only plan that includes qualified plan assets. The
plan assets are primarily stocks and bonds. In June 2009, TVARS
adopted a new asset allocation policy. The new policy shifts a
portion of target allocations from equities to fixed income
securities. TVARS currently targets an asset allocation of 45 percent
equity securities, 40 percent fixed income securities, and 15 percent
alternative investments. Of the 45 percent equity securities, 22.5
percent may be non-U.S. equity holdings. Of the 40 percent fixed
income securities, 15 percent may be investment grade credit, 9 percent may be
high yield securities, and 6 percent may be inflation protected
bonds. Of the 15 percent alternative investments, 5 percent may be
private real estate, 4 percent may be private equity, 3 percent may be
distressed debt, and 3 percent may
be timberland. The TVARS asset allocation policy includes a
permissible 3 percent deviation from these target allocations. The
TVARS Board can take action, as appropriate, to rebalance the system’s assets
consistent with the asset allocation policy. For 2009 and 2008, the
asset holdings of the system included the following:
Asset
Holdings of TVARS
As
of September 30
|
||||||||
Plan
Assets at September 30
|
||||||||
2009
|
2008
|
|||||||
Asset
Category
|
||||||||
U.S.
equity securities
|
23 | % | 32 | % | ||||
Non-U.S.
equity securities
|
20 | % | 21 | % | ||||
Private
equity holdings or similar alternative investments
|
6 | % | 6 | % | ||||
Private
real estate holdings
|
1 | % | 2 | % | ||||
Fixed
income securities
|
27 | % | 32 | % | ||||
High
yield securities
|
7 | % | 7 | % | ||||
Cash
and equivalents
|
16 | % | 0 | % | ||||
Total
|
100 | % | 100 | % | ||||
Cash
equivalents at September 30, 2009, consisted primarily of TVA’s contribution to
the defined benefit plan in September 2009.
Cash
Flows
Estimated Future Benefit
Payments. The following table sets forth the estimated future
benefit payments under the benefit plans.
Estimated
Future Benefits Payments
As
of September 30, 2009
|
||||||||
Pension
Benefits
|
Other
Post-retirement Benefits
|
|||||||
2010
|
$ | 694 | $ | 37 | ||||
2011
|
683 | 41 | ||||||
2012
|
678 | 45 | ||||||
2013
|
678 | 46 | ||||||
2014
|
678 | 48 | ||||||
2015
- 2019
|
3,394 | 245 |
Plan
Contributions. TVA expects to contribute $7 million to its
SERP and $37 million to its other post-retirement benefit
plans in 2010. TVA made a contribution to the defined benefit pension
plan on September 24, 2009 of $1.0 billion that constituted the amount that was
expected to be contributed from 2010 to 2013.
Other
Postemployment Benefits
Postemployment benefit cost estimates
are revised to properly reflect changes in actuarial assumptions made at the end
of the year. In accordance with SEC recommendations related to the
selection of discount rates, TVA utilizes a discount rate determined by
reference to the U.S. Treasury Constant Maturities corresponding to calculated
average durations of TVA’s future estimated postemployment claims
payments. The use of a 3.31 percent discount rate resulted in the
recognition of 2009 annual expense of approximately $47 million and an unpaid
benefit obligation of about $484 million at year end. The current
portion of the obligation is $58 million and is recorded in Accounts payable and accrued
liabilities. The long-term portion of $426 million is recorded
in Other
liabilities. TVA
utilized a discount rate of 3.85 percent and 4.59 percent in 2008 and 2007,
respectively. The use of these discount rates resulted in expense and
unpaid benefit obligations of $65 million and $434 million, respectively, for
2008 and expense and unpaid benefit obligations of $49 million and $406 million,
respectively, for 2007.
New
Generation
Despite the current economic conditions
which are leading towards lower energy demand in the short-term, TVA must still
respond to the need for additional generation over the
long-term. Additionally, TVA intends to move toward more generation
with low or no emissions. This requires capital investment in the
current year and over the next few years. Another challenge in this
area is that TVA must have sufficient generation capacity to meet peak
demands. TVA is exploring alternatives to reduce or shift the peak
demands of energy.
Nuclear. On
August 1, 2007, the TVA Board approved the completion of Watts Bar Unit 2
construction,
which was halted in 1985. Preliminary project activities began at
Watts Bar Unit 2 in October 2007. TVA is now engaged in unrestricted
construction activities, and the project is scheduled to be completed in the
fall of CY 2012.
TVA is
developing other options for future nuclear generation at its Bellefonte
site. In October 2007, TVA submitted a Combined Construction and
Operating License Application to the NRC for two new Westinghouse Electric Co.
designed Advanced Passive 1000 reactors to be located at the Bellefonte site and
designated as Bellefonte Units 3 and 4. TVA’s application was being supported,
in part, by NuStart, an industry consortium comprised of 10 utilities and two
reactor vendors whose purpose is to satisfactorily demonstrate the new NRC
licensing process for new nuclear plants. The Bellefonte Combined
Construction and Operating License Application is one of several Advanced
Passive 1000 standardized plant applications, and other applicants have
announced construction schedules that call for their license reviews to be
completed prior to Bellefonte’s. As a result, NuStart, with TVA’s agreement, is
transitioning its reference plant to the Combined Construction and Operating
License Application of another utility. TVA intends to continue to
support the review of the Bellefonte application and does not expect this
transition, by itself, to impact the issuance of a license for Bellefonte Units
3 and 4. See Note 20 — Legal
Proceedings for a discussion of an administrative proceeding regarding
Bellefonte Units 3 and 4.
As
another option, TVA asked the NRC in August 2008 to reinstate the construction
permits for its two unfinished nuclear units at the Bellefonte
site. On March 9, 2009, the NRC issued an order reinstating the
construction permits for Bellefonte Units 1 and 2. Reinstatement of
the construction permits, however, does not mean TVA can re-commence
construction of these units. Further action by the NRC, reviews by
TVA, and approval by the TVA Board are required before construction
activities can resume. See Note 20 — Legal Proceedings for a
discussion of legal proceedings regarding Bellefonte Units 1 and 2.
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.
Combined
Cycle. SSPC,
through its subsidiary SSSL, purchased an undivided 90 percent interest from TVA
in a three-unit, 792-MW summer net capability combined cycle combustion turbine
facility in Southaven, Mississippi. SSSL paid TVA approximately $420
million for its interest in the facility. SSSL and TVA have entered
into a lease under
which TVA leases SSSL’s undivided 90 percent interest in the facility and
operates the entire facility through April 30, 2010. For additional
details, see Note 11.
TVA is
constructing an additional combined cycle facility, the Lagoon Creek Combined
Cycle Facility, which is currently scheduled to be in service in July 2010 and
have a summer net capability of 540 MW. The gas-fired combined cycle
plant will consist of two combustion turbines that supply steam to a single
steam turbine.
On June
4, 2009, the TVA Board approved deferring certain upgrades planned for TVA’s
Gleason combustion turbine plant and the newly planned New Caledonia combustion
turbine plant in order to construct the John Sevier Combined Cycle Facility in
northeast Tennessee, using, in part, funds and certain equipment originally
allocated for the deferred projects. By the end of December 2011, TVA
plans to have operational the three combustion turbines of the John Sevier
Combined Cycle Facility, which are expected to supply over 500 MW of
power. TVA expects to complete the combined cycle portion of the
facility by mid-CY 2012. The completed facility is expected to add
approximately 880 MW of summer capability to the TVA system at a cost of
approximately $820 million. Also, the new combined cycle facility is
expected to provide TVA the flexibility to build the scrubbers and selective
catalytic reduction systems (“SCRs”) for the John Sevier Fossil Plant on a more
reasonable schedule than required by the court in the North Carolina public
nuisance litigation, should TVA elect to do so. See Note 20 — Legal Proceedings — Case Brought by
North Carolina Alleging Public Nuisance.
Buildings
On
February 8, 2008, TVA finalized an agreement to purchase the portion of TVA’s
Chattanooga Office Complex in Chattanooga, Tennessee, leased from Chattanooga
Valley Associates (with the exception of Monteagle Place, which includes
approximately 131,979 square feet) upon the expiration of the existing lease
term on January 1, 2011. The purchase price is $22 million, payable
on January 3, 2011. On May 18, 2009, TVA finalized an agreement to
purchase the Monteagle Place portion of the Chattanooga Office Complex upon the
expiration of the existing lease term on October 1, 2012. The
purchase price is $8 million. TVA paid $2 million on October 1, 2009,
and will pay $2 million on each October 1 for the next three years (2010-2012)
to satisfy its purchase price commitment. As a result of these
transactions, the capital lease liability and the property, plant, and equipment
account for capital leases were adjusted in accordance with the applicable
accounting guidance related to leased assets purchased by a lessee during the
term of a lease.
Commitments
As of
September 30, 2009, the amounts of contractual cash commitments maturing in each
of the next five years and beyond are shown below:
Commitments
and Contingencies
Payments
due in the year ending September 30
|
||||||||||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
Debt
|
$ | 852 | $ | 1,008 | $ | 1,523 | $ | 2,308 | $ | 32 | $ | 17,111 | $ | 22,834 | 1 | |||||||||||||
Lease
obligations
|
||||||||||||||||||||||||||||
Capital
|
488 | 54 | 6 | — | — | 3 | 551 | |||||||||||||||||||||
Non-cancelable
operating
|
52 | 43 | 37 | 31 | 28 | 195 | 386 | |||||||||||||||||||||
Purchase
obligations
|
||||||||||||||||||||||||||||
Power
|
274 | 272 | 258 | 203 | 198 | 6,200 | 7,405 | |||||||||||||||||||||
Fuel
|
2,209 | 1,592 | 1,160 | 938 | 832 | 1,836 | 8,567 | |||||||||||||||||||||
Other
|
50 | 48 | 37 | 30 | 27 | 156 | 348 | |||||||||||||||||||||
Payments
on other financings
|
89 | 94 | 98 | 99 | 100 | 818 | 1,298 | |||||||||||||||||||||
Total
|
$ | 4,014 | $ | 3,111 | $ | 3,119 | $ | 3,609 | $ | 1,217 | $ | 26,319 | $ | 41,389 | ||||||||||||||
Note
(1) Does
not include noncash items of foreign currency valuation loss of $30
million and net discount on sale of Bonds of $224 million.
|
In addition to the cash requirements
above, TVA has contractual obligations in the form of revenue discounts related
to energy prepayments. See Note 1 — Energy Prepayment
Obligations.
Energy
Prepayment Obligations
Payments
Due in the Year Ending September 30
|
||||||||||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
Energy
prepayment obligations
|
$ | 105 | $ | 105 | $ | 105 | $ | 102 | $ | 100 | $ | 410 | $ | 927 |
Debt. At September
30, 2009, TVA had outstanding discount notes of $844 million and long-term debt
(including current maturities) at varying maturities and interest rates of $21.8
billion for total outstanding indebtedness of $22.6 billion. See Note
10.
Leases. TVA leases
certain property, plant, and equipment under agreements with terms ranging from
one to 30 years. Of the total obligations for TVA’s capital leases,
$58 million represents the cost of financing. TVA’s rental expense
for operating leases was $62 million in 2009, $63 million in 2008, and $65
million in 2007.
Power Purchase
Obligations. TVA has contracted with various independent power
producers and power distributor customers for additional capability to be made
available to TVA. In total, these agreements provide 2,774 MW of
summer net capability and 29 MW of capability from renewable resources that are
not included in the determination of summer net capability. These
qualify as normal purchases and normal sales contracts under GAAP and are thus
not accounted for as derivatives. The total financial commitment for
these non-renewable power supply contracts is approximately $7.0 billion, and the
total financial commitment for these renewable power supply contracts is
approximately $87
million. Costs under TVA’s power purchase agreements are included in
the Statements of Income for 2009, 2008, and 2007 as Fuel and purchased
power expense and are expensed as incurred.
Certain contracts with independent
power producers qualify as operating leases. Certain costs associated
with these contracts meet the definition of contingent
rentals. Amounts under these contracts qualifying as contingent
rentals during 2009 amounted to approximately $425 million. TVA
accrues contingent rentals when the achievement of the event that triggers the
contingent rental expense is probable. Because of the uncertainty
associated with future power demand, TVA accrues contingent rentals under these
arrangements as power is purchased; accordingly, these rentals are not included
in the Commitments and Contingencies table.
Under federal law, TVA is obligated to
purchase power from qualifying facilities. At September 30, 2009,
there was a combined qualifying capacity of 914 MW, from seven different
suppliers, from which TVA purchased power under this law. TVA’s
obligations to purchase power from these qualifying facilities are not included
in the Commitments and Contingencies table.
TVA,
along with others, contracted with the Southeastern Power Administration
(“SEPA”) to obtain power from eight U.S. Army Corps of Engineers hydroelectric
facilities on the Cumberland River system. The agreement with SEPA
can be terminated upon three years’ notice, but this notice of termination may
not become effective prior to June 30, 2017. The contract originally
required SEPA to provide TVA an annual minimum of 1,500 hours of power for each
megawatt of TVA’s 405 MW allocation, and all surplus power from the Cumberland
River system. Because hydroelectric production has been reduced at
two of the hydroelectric facilities on the Cumberland River system and because
of reductions in the summer stream flow on the Cumberland River, SEPA declared
“force majeure” on February 25, 2007. SEPA then instituted an
emergency operating plan that, among other things, eliminates SEPA’s obligation
to provide TVA and other affected customers with a minimum amount of
power. It is unclear how long the emergency operating plan will
remain in effect. TVA’s obligations under its contract with SEPA are
not included in the Commitments and Contingencies table.
Fuel Purchase
Obligations. TVA has approximately $5.6 billion in long-term
fuel purchase commitments ranging in terms of up to 11 years primarily for the
purchase and transportation of coal and approximately an additional $3.0 billion
of long-term commitments ranging in terms of up to 10 years for the purchase of
enriched uranium and fabrication of nuclear fuel assemblies.
Other
Obligations. Other obligations of $348 million consist of
contracts as of September 30, 2009, for goods and services primarily related to
capital projects as well as other major recurring operating costs.
Contingencies
Nuclear
Insurance. The Price-Anderson Act provides a layered framework
of protection to compensate for losses arising from a nuclear
event. For the first layer, all NRC nuclear plant licensees,
including TVA, purchase $300 million of nuclear liability insurance from
American Nuclear Insurers for each plant with an operating
license. Funds for the second layer, the Secondary Financial Program,
would come from an assessment of up to $112 million from the licensees of each
of the 104 NRC licensed reactors in the United States. The assessment
for any nuclear accident would be limited to $18 million per year per
unit. American Nuclear Insurers, under a contract with the NRC,
administers the Secondary Financial Program. With its six licensed
units, TVA could be required to pay a maximum of $671 million per nuclear
incident, but it would have to pay no more than $105 million per incident in any
one year. When the contributions of the nuclear plant licensees are
added to the insurance proceeds of $300 million, over $12 billion, including a 5
percent surcharge for legal expenses, would be available. Under the
Price-Anderson Act, if the first two layers are exhausted, the U.S. Congress is
required to take action to provide additional funds to cover the additional
losses.
TVA carries property, decommissioning,
and decontamination insurance of $4.6 billion for its licensed nuclear plants,
with up to $2.1 billion available for a loss at any one site, to cover the cost
of stabilizing or shutting down a reactor after an accident. Some of
this insurance, which is purchased from Nuclear Electric Insurance Limited
(“NEIL”), may require the payment of retrospective premiums up to a maximum of
approximately $76 million.
TVA purchases accidental outage
(business interruption) insurance for TVA’s nuclear sites from
NEIL. In the event that an accident covered by this policy takes a
nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA, after a
waiting period, an indemnity (a set dollar amount per week) up to a maximum
indemnity of $490 million per unit. This insurance policy may require
the payment of retrospective premiums up to a maximum of approximately $31
million.
Decommissioning
Costs. TVA recognizes legal obligations associated with the
future retirement of certain tangible long-lived assets related primarily to
fossil-fired generating plants and nuclear generating plants, hydroelectric
generating plants/dams, transmission structures, and other property-related
assets.
Nuclear. Provision
for decommissioning costs of nuclear generating units is based on options
prescribed by NRC procedures to dismantle and decontaminate the facilities to
meet NRC criteria for license termination. At September 30, 2009, the
present value under GAAP of the estimated future decommissioning cost of $1.8
billion was included in Asset retirement
obligations. The actual decommissioning costs may vary from
the derived estimates because of, among other things, changes in current
assumptions, such as the assumed dates of decommissioning, changes in regulatory
requirements, changes in technology, and changes in the cost of labor,
materials, and equipment. Utilities that own and operate nuclear
plants are required to use different procedures in calculating nuclear
decommissioning costs under GAAP than those that are used in calculating nuclear
decommissioning costs when reporting to the NRC. The two sets of
procedures produce different estimates for the costs of decommissioning
primarily because of the difference in the discount rates used to calculate the
present value of decommissioning costs.
TVA
maintains a nuclear decommissioning trust (“NDT”) to provide funding for the
ultimate decommissioning of its nuclear power plants. The balance as
of September 30, 2009, was less than the present value of the estimated future
nuclear decommissioning costs under the NRC methodology and under
GAAP. TVA monitors the monetary value of its nuclear decommissioning
trust and believes that, over the long term and before cessation of nuclear
plant operations and commencement of decommissioning activities, adequate funds
from investments will be available to support decommissioning. TVA’s
nuclear power units are currently authorized to operate until 2020-2036,
depending on the unit. It may be possible to extend the operating
life of some of the units with approval from the NRC. See Note 6 —
Nuclear Decommissioning
Costs and Note 9.
Non-Nuclear
Decommissioning. The present value of the estimated future
non-nuclear decommissioning cost was $846 million at September 30,
2009. This decommissioning cost estimate involves estimating the
amount and timing of future expenditures and making judgments concerning whether
or not such costs are considered a legal obligation. Estimating the
amount and timing of future expenditures includes, among other things, making
projections of the timing and duration of the asset retirement process and how
costs will escalate with inflation. The actual decommissioning costs
may vary from the derived estimates because of changes in current assumptions,
such as the assumed dates of decommissioning, changes in regulatory
requirements, changes in technology, and changes in the cost of labor,
materials, and equipment.
TVA
maintains an ART to provide funding for the ultimate decommissioning of its
non-nuclear power plants. Estimates involved in determining if
additional funding will be made to the ART include inflation rate and rate of
return projections on the fund investments. See Note 6—Non-Nuclear Decommissioning
Costs and Note 9.
Environmental
Matters. TVA’s power generation activities, like those across
the utility industry and in other industrial sectors, are subject to federal,
state, and local environmental laws and regulations. Major areas of
regulation affecting TVA’s activities include air quality control, water quality
control, and management and disposal of solid and hazardous
wastes. Looking to the future, regulations in all of these areas are
expected to become more stringent and apply to new emissions and sources with
the increased emphasis on dealing with climate change, expanding renewable
generation alternatives, and encouraging efficient use of
electricity.
TVA has
incurred, and expects to continue to incur, substantial capital and operating
and maintenance costs to comply with evolving environmental requirements
primarily associated with, but not limited to, the operation of TVA’s 59
coal-fired generating units. It is virtually certain that
environmental requirements placed on the operation of TVA’s coal-fired and other
generating units will continue to become more restrictive and potentially apply
to new emissions and sources. Litigation over emissions from
coal-fired generating units is also occurring, including litigation against
TVA. Failure to comply with environmental and safety laws can result
in being subject to enforcement actions which can lead to the imposition of
significant civil liability, including fines and penalties, criminal sanctions,
and/or the shutting down of non-compliant facilities.
The total
cost of compliance with future clean air regulations cannot reasonably be
determined at this time because of the unknowns and uncertainties surrounding
emerging EPA regulations, resultant compliance strategies, and the potential for
the development of new emission control technologies, litigation, and future
amendments to the Clean Air Act (“CAA”). However, TVA does estimate
that spending on emission controls for SO2, NOx, and
mercury in the decade beginning in 2011 will cost approximately $4.2
billion. There could be additional costs for complying with
particulate collection requirements associated with a utility maximum achievable
control technology (“MACT”) rule. There could be other substantial
costs if reductions of carbon dioxide (“CO2”) are
mandated. Predicting how and when CO2 may be
regulated
is very difficult, even more so than the future regulation of other
substances. TVA will continue to monitor this issue and will assess
and respond to potential financial impacts as they become more
certain.
TVA’s
total cost related to emission reduction regulatory programs for SO2, NOx, and
particulates from 1977 through CY 2010 is expected to reach $5.5 billion, $5.3
billion of which had already been spent as of September 30, 2009.
Liability
for releases and cleanup of hazardous substances is primarily regulated by the
federal Comprehensive Environmental Response, Compensation, and Liability Act
(“CERCLA”), and other federal and parallel state statutes. In a
manner similar to many other industries and power systems, TVA has generated or
used hazardous substances over the years. TVA is aware of alleged
hazardous-substance releases at 11 non-TVA areas for which it may have some
liability. TVA has reached agreements with the EPA to settle its
liability at two of these non-TVA areas for a total of less than
$23,000. There is little or no known evidence that TVA contributed
any significant quantity of hazardous substances to six of these non-TVA areas,
and there has been no recent assertion of potential TVA liability for five of
these six areas. There
is evidence that TVA sent some materials to the remaining three non-TVA sites:
the Ward Transformer site in Raleigh, North Carolina, the David Witherspoon site
in Knoxville, Tennessee, and the General Waste Products site in Evansville,
Indiana. TVA is not able at this time to estimate its liability
related to these sites.
The David
Witherspoon site was contaminated with radionuclides, polychlorinated biphenyls
(“PCBs”), and
metals. DOE admitted to being the main contributor of materials to
the site and cleaned the site up at a reported cost of about $35
million. While DOE asked TVA to “cooperate” in completing the
cleanup; TVA believes it sent only a relatively small amount of equipment and
that none of it was radioactive. See Note 20 — Legal Proceedings for a
discussion of the Ward Transformer site and the General Waste Production
site.
Operations
at some of TVA’s facilities have resulted in oil spills and other contamination
that TVA is addressing. As of September 30, 2009, TVA’s
estimated liability for cleanup and similar environmental work for those sites
for which sufficient information is available to develop a cost estimate
(primarily the TVA sites) is approximately $20 million on a non-discounted
basis, and is included in Other liabilities on
the Balance Sheet. The estimate includes Watts Bar Fossil Plant
decommissioning work of $17 million. It is at least reasonably
possible that a change in estimate will occur in the near term.
Legal
Proceedings
From time to time, TVA is a party to or
otherwise involved in lawsuits, claims, proceedings, investigations, and other
legal matters (“Legal Proceedings”) that have arisen in the ordinary course of
conducting TVA’s activities, as a result of a catastrophic event or
otherwise. These Legal Proceedings include the matters discussed
below as well as in Note 23. TVA had accrued approximately $16
million and $46 million with respect to the Legal Proceedings described
below as well as in Note 23 as of September 30,
2009, and September 30, 2008, respectively, as well as less than $1 million at
September 30, 2009 and $5 million at September 30, 2008, respectively, with
respect to other Legal Proceedings that have arisen in the ordinary course of
TVA’s business. TVA recognized $1 million, $20 million, and $4
million of expense in 2009, 2008, and 2007, respectively, by increasing accruals
related to Legal Proceedings. No assurance can be given that TVA will
not be subject to significant additional claims and liabilities. If
actual liabilities significantly exceed the estimates made, TVA’s results of
operations, liquidity, and financial condition could be materially adversely
affected.
Legal Proceedings Related to
Kingston Ash Pond Spill. Fourteen
lawsuits based on the Kingston ash spill have been filed, all of which are
pending in the United States District Court for the Eastern District of
Tennessee (“Eastern District”).
|
•
|
Mays v. TVA (proposed
class action), filed January 2, 2009. The Mays plaintiff filed
suit on behalf of himself and others similarly situated. The
plaintiff seeks to represent a class of persons claimed to be riparian
owners downstream from Kingston on the Clinch River and Emory River
portions of Watts Bar Reservoir. The complaint asserts private
nuisance and seeks compensatory
damages.
|
|
•
|
Blanchard v. TVA
(proposed class action), filed January 9, 2009. The Blanchard plaintiffs
are eight individuals who filed suit on behalf of themselves and others
similarly situated. The plaintiffs seek to represent a class of
persons who own property or reside in a defined area near
Kingston. The plaintiffs allege a cause of action based on
inverse condemnation and various causes of action based in tort and seek
compensatory and punitive damages and injunctive relief relating to spill
remediation, including an order directing TVA to fund medical
monitoring.
|
|
•
|
Giltnane v. TVA
(proposed class action), filed January 9, 2009. The Giltnane plaintiffs are
six individuals and a business who filed suit on behalf of themselves and
others similarly situated. The plaintiffs seek to represent a
class of persons who own property, reside, or conduct business within a
25-mile radius of Kingston. The plaintiffs allege
various causes of action based in tort and seek compensatory and punitive
damages and injunctive relief relating to spill remediation, including an
order directing TVA to fund medical
monitoring.
|
|
•
|
Raymond v. TVA, filed
December 30, 2008. The Raymond plaintiffs are
26 owners of property in the area of Kingston. The plaintiffs
filed suit alleging a cause of action based on inverse condemnation and
various causes of action based in tort and seek compensatory and punitive
damages and injunctive relief relating to spill
remediation.
|
|
•
|
Auchard v. TVA, filed
February 18, 2009. The Auchard plaintiffs are
277 adults and minors who allegedly own property and/or reside in the
vicinity of the Kingston ash spill. The plaintiffs allege
various causes of action based in tort and seek compensatory damages and
injunctive relief relating to spill remediation, including an order
directing TVA to fund medical
monitoring.
|
|
•
|
Scofield v. TVA, filed
February 20, 2009. The Scofield plaintiffs are
18 individuals and a farm business. The plaintiffs assert a
cause of action based on inverse condemnation and various causes of action
based in tort and seek compensatory and punitive damages and injunctive
relief relating to spill
remediation.
|
|
•
|
Long v. TVA (proposed
class action), filed March 17, 2009. The Long plaintiffs are 43
individuals who own property and/or reside in the vicinity of Kingston or
do business in the area. The plaintiffs seek to represent a
class of all similarly situated persons within a 10-mile radius of
Kingston who have been injured in some way by the ash spill. As
to TVA, the plaintiffs assert various causes of action based in tort law
and also assert NEPA claims under the Administrative Procedure
Act. Plaintiffs seek compensatory and punitive damages and
injunctive relief relating to spill remediation, including an order
directing TVA to fund medical monitoring. The plaintiffs also
named four TVA employees as defendants, alleging both state law torts and
constitutional tort claims.
|
|
•
|
Dickson v. TVA, filed
August 18, 2009. The Dickson plaintiffs are
an individual and a corporation involved in a planned waterfront
residential development on Watts Bar Lake in Rhea County,
Tennessee. The plaintiffs allege a private nuisance based on
the ash spill and are seeking damages of $17
million.
|
|
In
response to the lawsuits, TVA has filed the following pending
motions:
|
|
•
|
To
dismiss all the tort claims on federal discretionary function
grounds.
|
|
•
|
To
dismiss all the inverse condemnation claims on the ground that the factual
allegations are insufficient to state an inverse condemnation
claim.
|
|
•
|
To
dismiss all the punitive damages claims on the ground that such damages
may not be recovered against TVA, a federal executive branch agency,
because Congress has not expressly authorized such damages against
TVA.
|
|
•
|
To
dismiss all the jury demands against TVA because Congress has not provided
a right to a jury trial against TVA in actions such as
these.
|
|
•
|
To
dismiss the NEPA claims in the Long case on the ground
that the court is without jurisdiction to review TVA’s ongoing spill
response activities because those activities are being conducted under
CERCLA.
|
|
•
|
To
dismiss the individual TVA employee defendants in the Long case because the
state law claims are precluded by the Federal Employees Liability Reform
and Tort Compensation Act of 1988, and the constitutional allegations are
insufficient.
|
|
See
Note 23 for a description of the other lawsuits.
|
TVA has received several notices of
intent to sue under various environmental statutes from both individuals and
environmental groups.
To settle other claims arising from the
ash spill, TVA had paid approximately $69 million as of September 30, 2009, $42
million of which was spent to acquire 145 tracts of land consisting of
approximately 600 acres. A portion of the $69 million has been
recorded as Property,
plant, and equipment, and a portion has been included in the Environmental cleanup costs -
Kingston ash spill estimate. In addition, TVA has received
substantial other claims from private individuals and companies allegedly
affected by the ash spill, and may receive additional claims.
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 constitutes a public
nuisance. North Carolina sought caps on emissions of certain
pollutants from TVA’s coal-fired plants that were equivalent to caps on
emissions imposed by North Carolina law on North Carolina’s two largest electric
utilities. On January 13, 2009, the court held that emissions from
Bull Run, Kingston, and John Sevier, all located in Tennessee, and Widows Creek,
located in Alabama, constitute a public nuisance. The court declined
to order any relief as to the remainder of TVA’s coal-fired plants, holding that
their emissions did not significantly impact North Carolina.
The court ordered that:
|
•
|
The
flue gas scrubbers and SCRs currently operating at Bull Run be properly
maintained and operated year round.
|
|
•
|
The
scrubbers under construction at Kingston be completed by December 31,
2010, and that Kingston’s scrubbers and SCRs be properly maintained and
operated year-round.
|
|
•
|
Scrubbers
and SCRs be installed and in operation for all four units at John Sevier
by December 31, 2011.
|
|
•
|
TVA
complete its plan to modernize the two existing scrubbers at Widows Creek,
and install scrubbers and SCRs at Widows Creek Units 1-6 by December 31,
2013.
|
|
•
|
The
plants meet specified emission rates and annual tonnage caps for NOx and
SO2
after the applicable operation dates for the
scrubbers.
|
|
•
|
TVA’s
Chief Executive Officer (“CEO”) make semi-annual reports to the court of
TVA’s progress in complying with the
order.
|
TVA was already in the process of
performing or planning to perform some of the actions ordered by the
court. For example, the court’s requirements with respect to Bull Run
and Kingston are consistent with TVA’s current operating procedures and
construction schedule, and the modernization of the two existing Widows Creek
scrubbers has been completed. The court’s order will require TVA to
accelerate its schedule in some cases, such as by adding scrubbers and SCRs at
John Sevier by December 31, 2011, when the previous schedule called for
completing the scrubbers in mid-2012 and completing the SCRs by
2015. The court-ordered scrubbers and SCRs at Widows Creek Unit 1-6
were not in TVA’s previous clean air plan. Advancing the construction
schedule or taking additional actions will likely increase TVA’s expenses or
cause TVA to change the way it operates these facilities.
TVA currently estimates that the total
cost of taking all of the actions required by the court would be approximately
$1.7 billion in fiscal years 2009 through 2014. Of this amount, TVA
was planning to spend approximately $0.6 billion before the court issued its
order. The $1.1 billion that TVA was not planning to spend before the
court issued its order represents the clean air capital costs for Widows Creek
Units 1-6 and for accelerating the installation of controls at John
Sevier. While Bull Run, Kingston, and Widows Creek Units 7-8 were
named in the court order, the clean air controls required by the order for these
units are already complete or near completion; accordingly, the order did not
affect the capital costs for these units. There could be other cost
impacts, including fuel, variable operation and maintenance expense, and fixed
operation and maintenance expense, and those costs are under
evaluation.
On May 29, 2009, TVA appealed the
district court’s decision to the United States Court of Appeals for the Fourth
Circuit (“Fourth Circuit”). TVA also filed a motion requesting the
district court to stay its injunction during the appeal process, which the
district court denied.
Case Involving Alleged
Violations of the New Source Review Regulations at Bull Run Fossil
Plant. The National Parks Conservation Association and the
Sierra Club filed suit against TVA on February 13, 2001, in the Eastern
District, alleging that TVA did not comply with the New Source Review (“NSR”)
requirements of the CAA when TVA repaired Bull Run. The trial was
completed the week of July 7, 2009. TVA has installed the control
equipment that the plaintiffs seek to require TVA to install in this case, and
it is unlikely that an adverse decision will result in substantial additional
costs to TVA at Bull Run. An adverse decision, however, could lead to
additional litigation and could cause TVA to install additional emission
control systems such as scrubbers and SCRs on units where they are not currently
installed, under construction, or planned to be
installed.
Case Involving the General
Waste Products Sites. In July 2008, a third-party complaint
under CERCLA was filed against TVA in the District Court for the Southern
District of Indiana, alleging that TVA and several other defendants (General
Waste Products, General Electric Company, Indianapolis Power and Light, National
Tire and Battery, Old Ben Coal Co., Solar Sources Inc., Whirlpool, White County
Coal, PSI, Tell City Electric Department, Frontier Kemper, Speed Queen, Allan
Trockman (the former operator of the site), and the City of Evansville) disposed
of hazardous materials at two General Waste Products sites in Evansville,
Indiana. TVA was named in the complaint based on allegations that TVA
arranged for the disposal of contaminated materials at the sites. The
complaint also includes a claim under state law for the release of hazardous
materials. This action was brought by a group of potentially
responsible parties in order to require the third-party defendants to contribute
to, or pay for, the remediation of the sites. As of February 2009,
the total remediation cost for both sites was expected to exceed $10
million. A subpoena sent to TVA in 2003 by the owner of the sites
reflects that the primary issues involve lead from batteries and PCBs from
transformers, but TVA has found no records indicating that it arranged for
disposal of these types of hazardous substances at the sites. Trial
is scheduled to begin on July 12, 2010.
Case Involving the Ward
Transformer Site. The Ward Transformer site in Raleigh, North
Carolina, is contaminated by PCBs from electrical equipment. A
working group of potentially responsible parties (the “PRP Work Group”) is
cleaning up on-site contamination in accordance with an agreement with the
EPA. The cleanup effort has been divided into four phases: two phases
of soil cleanup; one phase of cleanup of off-site contamination in the
downstream drainage basin; and one phase of supplemental groundwater
remediation. The cost estimates for the first two phases of soil
cleanup are $55 million and $10 million, respectively. Estimates for
cleanup of off-site contamination in the downstream drainage basin range from $6
million to $25 million. There are no reliable estimates for the
supplemental groundwater remediation phase. On April 30, 2009, the
PRP Work Group sued TVA and other potentially responsible parties in the
District Court for the Eastern District of North Carolina regarding the two
phases of soil cleanup. TVA has settled this lawsuit and its
potential liability for the two phases of soil cleanup for $300,000, and has
been dismissed as a party. The settlement with respect to the first
two phases does not resolve any potential liability in connection with the other
two phases or any natural resource damages.
Proceedings Regarding
Bellefonte Nuclear Plant Units 1 and 2. On March 9, 2009, in
response to a request by TVA, NRC issued an order reinstating the construction
permits for Bellefonte Units 1 and 2 and returning Bellefonte to a terminated
status. On March 30, 2009, the Blue Ridge Environmental Defense
League (“BREDL”) filed a petition in the United States Court of Appeals for the
District of Columbia Circuit (“D.C. Circuit”) asking the court to review the
NRC’s decision to reinstate the construction permits. On May 8, 2009,
BREDL, the Bellefonte Efficiency and Sustainability Team (“BEST”), and the
Southern Alliance of Clean Energy (“SACE”) filed a petition to intervene in the
NRC license proceeding, requested a hearing, and raised several contentions
regarding reinstatement of the construction permits. Holding their
other contentions in abeyance, the NRC directed the petitioners, TVA, and NRC
staff to submit briefs addressing the threshold question of the NRC’s statutory
authority to reinstate the construction permits. Briefs were filed in
June 2009. On June 11, 2009, the D.C. Circuit issued an order holding
the case in abeyance pending further order of the court. In August
2009, TVA notified the NRC that TVA had put the necessary programs, policies,
and procedures in place to warrant transitioning Units 1 and 2 from terminated
to deferred status, and asked the NRC to authorize placement of the units in
deferred status.
Administrative Proceeding
Regarding Bellefonte Nuclear Plant Units 3 and 4. TVA
submitted its Combined Construction and
Operating License Application for two Advanced Passive1000 reactors at
Bellefonte Units 3 and 4 to the NRC in October 2007. On June 6, 2008,
BEST, BREDL, and SACE submitted a joint petition to the NRC for intervention and
a request for a hearing. The petition raised 19 potential contentions
with respect to TVA’s Combined Construction and
Operating License Application. The Atomic Safety and Licensing
Board presiding over the proceeding subsequently denied standing to BEST and
accepted four of the 19 contentions submitted by BREDL and
SACE. Although the NRC later dismissed one of these contentions, a
hearing on the remaining three contentions will be conducted in the
future. The three remaining contentions involve questions about the
estimated costs of the new nuclear plant and the impact of the facility’s
operations, in particular the plant intake, on aquatic species.
Administrative Proceeding
Regarding Watts Bar Nuclear Plant Unit 2. On
July 15, 2009, SACE, the Tennessee Environmental Council, the Sierra Club, We
the People, and BREDL filed a request for a hearing and petition to intervene in
the NRC administrative process reviewing TVA’s application for an operating
license for Watts Bar Unit 2. The petitioners raised seven
contentions related to TVA’s environmental review of the project and the NRC’s
basis for confidence in the availability of safe storage options for spent
nuclear fuel. TVA and the NRC Staff responded to these contentions in
August 2009, arguing that none met the standards for admissibility under the
NRC’s regulations. On November
19, 2009, the Atomic Safety and Licensing Board granted SACE’s request for
hearing, admitted two of SACE’s seven contentions for hearing, and denied the
request for hearing submitted on behalf of the other four
petitioners.
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 Mississippi residents 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. The plaintiffs allege that the defendants’ GHG
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 on the grounds that the plaintiffs lacked
standing. The plaintiffs appealed the dismissal to the United States
Court of Appeals for the Fifth Circuit (“Fifth Circuit”). In October
2009, the Fifth Circuit decided that the plaintiffs have standing to assert
their public and private nuisance, trespass, and negligence claims, and that
none of these claims present political questions, but also concluded that their
unjust enrichment, fraudulent misrepresentation, and civil conspiracy claims
must be dismissed for standing reasons. Accordingly, the Fifth
Circuit reversed the district court’s judgment, dismissed the plaintiffs’ suit
in part, and remanded the case to the district court for further
proceedings.
Global Warming Cases,
Southern District of New York. On July 21, 2004, two lawsuits
were filed against TVA and other companies that generate power from fossil-fuel
electric generating facilities 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 suppliers. The second case, which also alleges 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 seek a court order requiring each defendant
to cap its CO2 emissions
and then reduce these emissions by an unspecified percentage each year for at
least a decade. In September 2005, the district court dismissed both
lawsuits because they raised political questions that should not be decided by
the courts. The plaintiffs appealed to the United States Court of
Appeals for the Second Circuit (“Second Circuit”). On September 21, 2009, the
Second Circuit reversed the district court’s decision, holding, among other
things, that the claims can be heard by the courts and do not raise political
questions. The Second Circuit remanded the cases to the district
court for further proceedings. On November 5, 2009, TVA and the other
defendants filed a petition seeking a rehearing by the entire Second
Circuit.
Paradise Fossil Plant Clean
Air Act Permit. On December 21, 2007, the Sierra Club, the
Center for Biological Diversity, Kentucky Heartwood, Preston Forsythe, and
Hilary Lambert filed a petition with the EPA raising objections to the
conditions of TVA’s current CAA permit at 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. In an order issued in July 2009, the EPA agreed that the
permit failed to include a proper analysis of NOx for the
plant’s three main boilers, that the permit failed to require adequate
monitoring systems for opacity and NOx, and that
the monitoring of soot emissions from the coal washing and handling plant was
inadequate. TVA’s permit at Paradise is issued by the Kentucky
Division for Air Quality (“KDAQ”), and if it is changed, it must be changed by
KDAQ. In November 2009, KDAQ determined that the actions at Paradise
had not triggered NSR requirements and reissued the operating permit without
including NSR compliance milestones. KDAQ has submitted to operating
permits to the EPA for review. 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. Judicial review of KDAQ’s
decision about the permit is a possibility.
Information Request from
EPA. On April 25, 2008, TVA received a request from the EPA
under section 114 of the CAA requesting extensive information about projects at
and the operations of 14 of TVA’s 59 coal-fired units. These 14 units
are located in Alabama, Kentucky, and Tennessee. TVA has responded to
this request. This request for information is similar to but broader
than section 114 requests that other companies have received during the EPA’s
NSR enforcement initiative. TVA cannot predict whether the EPA will
consider the maintenance, capital improvement, or other activities at these 14
units to have violated NSR requirements because of the uncertain interpretation
of this program and recent court decisions. If violations are
confirmed, TVA could be required to install new pollution control equipment in
addition to the modifications that have already been completed or planned, and
TVA could become liable for other payments or penalties. The EPA’s
request could be the first step in an administrative proceeding against TVA that
could then result in litigation in the courts.
Notice of Violation at
Widows Creek Unit 7. On July 16, 2007, TVA received a Notice
of Violation (“NOV”) from the EPA alleging, among other violations, that TVA
failed to properly maintain ductwork at Widows Creek Unit 7. TVA
repaired
the ductwork in 2005. While the NOV does not set out an
administrative penalty, it is likely that the EPA may seek a monetary sanction
through giving up emission allowances, paying an administrative penalty, or
both. On March 5, 2008, TVA and
Alabama entered into an agreed order in which TVA agreed to pay the state
$100,000. TVA is unable to estimate the amount of potential monetary
sanctions from the EPA for which TVA may be liable in connection with the
NOV.
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.
Litigation
with Potential Impact on TVA
Case Involving NSR
Regulations. 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 the EPA in the EPA’s NSR enforcement case against
Duke Energy. The NSR regulations apply primarily to the construction
of new plants but can apply to existing plants if a maintenance project (1) is
“non-routine” and (2) increases emissions. The Supreme Court held
that under the EPA’s Prevention of Significant Deterioration regulations,
increases in annual emissions, rather than increases in hourly emissions, should
be used to test whether emissions increase. TVA and other power
suppliers had supported the hourly standard. Annual emissions can
increase when a project improves the reliability of plant operations and,
depending on the time period over which emission changes are calculated, it is
possible to argue that almost all reliability projects increase annual
emissions. Neither the Supreme Court nor the Fourth Circuit addressed
what the “routine” project test should be. The United States District
Court for the Middle District of North Carolina had ruled for Duke Energy on
this issue, holding that “routine” must take into account what is routine in the
industry and not just what is routine at a particular plant or unit as the EPA
has argued. On October 5, 2007, the EPA filed a motion with the
United States District Court for the Middle District of North Carolina asking
that court to vacate its entire prior ruling, including the portion relating to
the test for “routine” projects.
TVA is
currently involved in an NSR case involving Bull Run, which is discussed in more
detail above. The Supreme Court’s rejection of the hourly standard
for emissions testing could undermine one of TVA’s defenses in the Bull Run
case. Environmental groups and North Carolina have given TVA notice
in the past that they may sue TVA for alleged NSR violations at a number of TVA
units. The Supreme Court’s decision could encourage such suits, which
are likely to involve units where emission control systems such as scrubbers and
SCRs are not installed, under construction, or planned to be installed in the
relatively near term.
Case Involving North
Carolina’s Petition to EPA. In 2005, North Carolina petitioned
the EPA under section 126 of the CAA to impose additional emission reduction
requirements for SO2 and
NOx on
coal-fired power plants in 13 states, including the states where TVA’s
coal-fired power plants are located. In March 2006, the EPA denied
the North Carolina petition primarily on the basis that the Clean Air Interstate
Rule (“CAIR”) remedies the problem. In June 2006, North Carolina
filed a petition for review of the EPA’s decision with the D.C.
Circuit. On October 1, 2007, TVA filed a friend of the court brief in
support of the EPA’s decision to deny North Carolina’s section 126
petition. In Sierra
Club v. EPA, the D.C. Circuit remanded the petition back to the EPA in
March 2009 for reconsideration in light of the EPA’s new CAIR rule, which is
discussed below.
Case Involving Clean Air
Interstate Rule. On July 11, 2008, the D.C. Circuit issued a
decision in State of North
Carolina vs. EPA that vacated CAIR in its entirety and directed the EPA
to promulgate a new rule that is consistent with the D.C. Circuit’s
opinion. The EPA promulgated CAIR in 2005, and the rule
required significant additional utility SO2 and
NOx
emission reductions to address ozone and fine particulate matter attainment
issues in 28 eastern states, including all of TVA’s service area, and the
District of Columbia. The EPA requested a rehearing of the case or,
in the alternative, that the case be remanded without CAIR being
vacated. On December 23, 2008, the D.C. Circuit granted the motion
and ordered the EPA to develop a new rule but allowed CAIR to remain in effect
during this process.
Case Involving the Clean Air
Mercury Rule. On February 8, 2008, the D.C. Circuit issued an
opinion in the case of State
of New Jersey vs. EPA that vacated the EPA’s decision to remove coal and
oil-fired electric generating units from the list of stationary sources whose
hazardous air pollutant (“HAP”) emissions are subject to MACT standards under
section 112 of the CAA. The D.C. Circuit also vacated and remanded
the Clean Air Mercury Rule (“CAMR”), which set mercury
limits via a cap-and-trade program. The EPA now plans to regulate
mercury emissions from utilities under section 112(d) of the CAA, setting MACT
standards for emissions based on command and control type
requirements. The cost to comply with the MACT standards is not
known, but is expected to be higher than the cost would have been to comply with
CAMR. Regardless of the status of the EPA's regulatory program for
mercury, TVA
intends to continue reducing mercury emissions. Over
the next five years, mercury emissions from its coal-fired plants are expected
to continue to decline, primarily as a result of the co-benefits received from
the controls TVA is installing to reduce SO2 and
NOx
emissions.
Case Involving Cooling Water
Intake Structures. On January 25, 2007, the Second Circuit
issued an opinion in the case of Riverkeeper, Inc. vs. EPA
that remanded the second phase of the EPA’s three-part rulemaking to minimize
the adverse impacts from cooling water intake structures on fish and shellfish,
as required under section 316(b) of the Clean Water Act (“CWA”). The
Second Circuit held, 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 Supreme Court. TVA and the attorneys
general of several states, including Alabama, Kentucky, and Tennessee, supported
this petition. On April 1, 2009, the Supreme Court in Entergy Corp. v. Riverkeeper,
Inc., agreed with the industry
petitioners and ruled that the EPA can compare costs with benefits in
determining the technology that must be used at cooling water intake
structures. This decision overturns the Second Circuit ruling that
federal clean water law does not permit the EPA to consider the cost-benefit
relationship in deciding the best technology available to minimize adverse
environmental impact.
TVA is a
wholly-owned corporate agency of the federal government, and because of this
relationship, TVA’s revenues and expenses are included as part of the federal
budget. TVA’s purpose and responsibilities as an agency are described
under the “Other Agencies” section of the federal budget.
TVA currently receives no
appropriations from Congress and funds its business using generated power system
revenues, power financings, and other revenues. TVA is a source of
cash to the federal government. Until TVA meets its remaining
obligation to repay $90 million of the Power Facility Appropriation Investment
under the TVA Act, TVA will continue to repay a portion of the Power Facility
Appropriation Investment. Under the TVA Act, TVA will also continue
to pay a return on the outstanding balance of this investment
indefinitely. See Note 14 — Appropriation
Investment.
TVA also
has access to a financing arrangement with the U.S. Treasury. TVA and
the U.S. Treasury have a memorandum of understanding under which the U.S.
Treasury provides TVA with a $150 million credit facility. This
credit facility matures on September 30, 2010, and is expected to be
renewed. This arrangement is pursuant to the TVA
Act. Access to this credit facility or other similar financing
arrangements has been available to TVA since 1959. See Note 10 —
Short-Term
Debt.
In the
normal course of business, TVA contracts with other federal agencies for sales
of electricity and other services. Transactions with agencies of the
federal government were as follows:
Related
Party Transactions
For
the years ended, or as of September 30
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Sales
of electricity services
|
$ | 260 | $ | 229 | $ | 235 | ||||||
Other
revenues
|
1 | — | — | |||||||||
Other
expenses
|
250 | 231 | 237 | |||||||||
Receivables
at September 30
|
19 | 19 | 19 | |||||||||
Investments
|
25 | — | — | |||||||||
Payables
at September 30
|
133 | 60 | 126 | |||||||||
Return
on Power Facility Appropriation Investment
|
13 | 20 | 20 | |||||||||
Repayment
of Power Facility Appropriation
Investment
|
20 | 20 | 20 |
A summary of the unaudited quarterly
results of operations for the years 2009 and 2008 follows. This
summary should be read in conjunction with the audited financial statements
appearing herein. Results for interim periods may fluctuate as a
result of seasonal weather conditions, changes in rates, and other factors.
138
Unaudited
Quarterly Financial Information
|
||||||||||||||||||||
2009
|
||||||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
Total
|
||||||||||||||||
Operating
revenues
|
$ | 3,077 | $ | 2,933 | $ | 2,566 | $ | 2,679 | $ | 11,255 | ||||||||||
Operating
expenses
|
3,042 | 2,503 | 2,425 | 1,312 | 9,282 | |||||||||||||||
Operating
income
|
35 | 430 | 141 | 1,367 | 1,973 | |||||||||||||||
Net
income
|
(305 | ) | 133 | (167 | ) | 1,065 | 726 |
2008
|
||||||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
Total
|
||||||||||||||||
Operating
revenues
|
$ | 2,360 | $ | 2,518 | $ | 2,552 | $ | 2,952 | $ | 10,382 | ||||||||||
Operating
expenses
|
2,012 | 2,041 | 2,111 | 2,034 | 8,198 | |||||||||||||||
Operating
income
|
348 | 477 | 441 | 918 | 2,184 | |||||||||||||||
Net
income
|
8 | 135 | 100 | 574 | 817 |
The
significant change in quarterly net income during 2009 is due to accounting for
the Kingston Ash Spill. During the first three quarters of 2009,
charges for the estimate to cleanup the site were recorded as
expense. During August 2009, the TVA Board approved that the amount
previously expensed is recoverable in future rates, and, thus, the expense was
reclassified as a regulatory asset. See Note 7. The
increased net income in the fourth quarter of 2008 was primarily due to a
one-time decrease to Depreciation, amortization, and
accretion expense for a change in accounting for non-nuclear asset
retirement obligations of $350 million. See Note 6 — Non-Nuclear Decommissioning
Costs.
TVA evaluated events subsequent to
September 30, 2009 through November 25, 2009, which represents the date the
financial statements were filed with the Securities and Exchange
Commission.
In October 2009, TVA issued $82 million
of electronotes® with
an interest rate of 4.375 percent which mature in 2030 and are callable
beginning in 2014.
In November 2009, TVA and a national
bank amended the credit agreement that matured in November 2009 and extended its
maturity date to November 8, 2010.
On
November 16, 2009, Armes v.
TVA was filed in the United States District Court for the Eastern
District of Tennessee.
The Armes
plaintiffs are two owners of property in the area of Kingston and allege causes
of action based in tort – negligence, negligence per se, gross negligence,
trespass, nuisance, and strict liability – and inverse condemnation. The
plaintiffs seek compensatory damages in an amount not to exceed $10 million,
punitive damages in an amount not to exceed $20 million, unspecified damages for
emotional distress, a court order requiring TVA to clean up plaintiffs’ property
and the surrounding areas, and other relief.
On
November 18, 2009, three cases arising out of the Kingston spill were filed
against TVA in the United States District Court for the Eastern District of
Tennessee: Donathan
v. TVA; Bostedor v.
TVA; and Turner v.
TVA. In each case, the plaintiffs are owners of property in
the area of Kingston and allege causes of action based in tort – negligence,
negligence per se, gross negligence, trespass, nuisance, strict liability – and
inverse condemnation. The plaintiffs seek unspecified compensatory and
punitive damages, damages for emotional distress, punitive damages, a court
order requiring TVA to clean up plaintiffs’ property and the surrounding areas,
and other relief.
On
November 19, 2009, Wallace v. TVA was filed in the
United States District Court for the Eastern District of Tennessee. The Wallace plaintiffs are two
owners of property in the area of Kingston and allege causes of action based in
tort – negligence, negligence per se, gross negligence, trespass, nuisance, and
strict liability – and inverse condemnation. The plaintiffs seek
compensatory damages in an amount not to exceed $600 thousand, punitive damages
in an amount not to exceed $1 million, unspecified damages for emotional
distress, a court order requiring TVA to clean up plaintiffs’ property and the
surrounding areas, and other relief.
On
November 23, 2009, Thew v.
TVA was filed in the United States District Court for the Eastern
District of Tennessee.
The Thew
plaintiffs are four individuals who reside in the area of Kingston and allege
negligence, gross negligence, negligence per se, strict liability, and negligent
infliction of emotional distress. The plaintiffs seek unspecified
compensatory and punitive damages and other
relief.
The Board
of Directors of Tennessee Valley Authority
We have
audited the accompanying balance sheets of Tennessee Valley Authority as of
September 30, 2009 and 2008, and the related statements of income, changes in
proprietary capital, and cash flows for each of the two years ended September
30, 2009. Our audit also included the financial statement schedule
listed in the Index at Item 15(a) for the years ended September 30, 2009 and
2008. These financial statements and schedules are the responsibility
of Tennessee Valley Authority's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Tennessee Valley Authority at
September 30, 2009 and 2008 and the consolidated results of its operations and
its cash flows for each of the two years ended September 30, 2009, in conformity
with U.S. generally accepted accounting principles. Also, in our
opinion the related financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein for the years ended September 30,
2009 and 2008.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Tennessee Valley Authority's internal control
over financial reporting as of September 30, 2009, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated November 25, 2009
expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Chattanooga,
Tennessee
November
25, 2009
To the
Board of Directors of Tennessee Valley Authority:
In our
opinion, the accompanying statements of income, of changes in proprietary
capital and of cash flows present fairly, in all material respects, the results
of its operations and its cash flows of Tennessee Valley Authority for the year
ended September 30, 2007 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements. These financial statements and
financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits. We conducted our audit of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
/s/
PricewaterhouseCoopers LLP
Atlanta,
Georgia
|
December
10, 2007, except with respect to the matter disclosed in Note 2 of the
Tennessee Valley Authority Form 10-K/A Amendment No. 2 as to which the
date is November 21, 2008
|
Not Applicable.
Disclosure
Controls and Procedures
TVA’s management, including the
President and Chief Executive Officer and members of the disclosure control
committee (including the Chief Financial Officer and Vice President and
Controller), evaluated the effectiveness of TVA’s disclosure and controls
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September
30, 2009. Based on this evaluation, TVA’s 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), concluded that TVA’s disclosure controls and procedures were
effective as of September 30, 2009, to ensure that information required to be
disclosed by TVA in reports that it files or submits under the Exchange Act, is
recorded, processed, summarized, and reported, within the time periods specified
in the SEC’s rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by TVA in such reports is
accumulated and communicated to TVA’s 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),
as appropriate, to allow timely decisions regarding required
disclosure.
Internal
Control Over Financial Reporting
(a)
Management’s Annual Report on Internal Control Over Financial
Reporting
TVA’s management is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Exchange Act Rule 13a-15(f) and required by Section 404 of the
Sarbanes-Oxley Act. TVA’s internal control over financial reporting
is designed to provide reasonable, but not absolute, assurance regarding the
reliability of financial reporting and the preparation of financial statements
in accordance with generally accepted accounting principles. Because
of the inherent limitations in all control systems, internal controls over
financial reporting and systems may not prevent or detect
misstatements.
TVA’s
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), evaluated the design and effectiveness of TVA’s
internal control over financial reporting as of September 30, 2009 based on the
framework in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, referred to as
“COSO.” Based on this evaluation, TVA’s management concluded that
TVA’s internal control over financial reporting was effective as of September
30, 2009.
Although management’s
report on the effectiveness of internal control over financial reporting was not
subject to attestation by TVA’s registered public accounting firm,
pursuant to temporary rules of the SEC, TVA has chosen to obtain such a
report. Ernst & Young LLP, the registered public accounting firm
that audited the financial statements included in this Annual Report, has issued
an attestation report on TVA’s internal control over financial
reporting. The attestation report appears below.
(b) Changes in Internal Control over
Financial Reporting
During the quarter ended September 30,
2009, 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.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors of Tennessee Valley Authority
We have
audited Tennessee Valley Authority’s internal control over financial reporting
as of September 30, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Tennessee Valley
Authority’s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Tennessee Valley Authority maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2009,
based on the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of Tennessee Valley
Authority as of September 30, 2009 and 2008, and the related statements of
income, changes in proprietary capital, and cash flows for each of the two years
ended September 30, 2009 and our report dated and our report dated November 25,
2009 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Chattanooga,
Tennessee
November
25, 2009
At the
November 19, 2009 public meeting of the TVA Board, TVA’s President and Chief
Executive Officer Tom Kilgore gave a presentation that, among other things,
included the estimates of TVA’s financial results for fiscal year
2009. Copies of the materials used in Mr. Kilgore’s presentation are
furnished as Exhibit 99.1 to this Annual Report.
In addition, on November 19, 2009, the
TVA Board approved a new long-term deferred compensation agreement for Mr.
Kilgore. The agreement extends his deferred compensation credits of
$300,000 per year for an additional four years, with annual vesting of those
credits.
TVA is administered by a board of nine
part-time members appointed by the President of the United States with the
advice and consent of the Senate. The Chairman of the TVA Board is
selected by the members of the TVA Board.
The TVA Board at November 25, 2009,
consisted of the following individuals with their ages and terms of office
provided:
Directors
|
Age
|
Year
Appointed
|
Year
Term Expires
|
Robert
M. Duncan, Chairman
|
58
|
2006
|
2011
|
William
B. Sansom
|
68
|
2006
|
2009*
|
Thomas
C. Gilliland
|
61
|
2008
|
2011
|
Howard
A. Thrailkill
|
70
|
2006
|
2010
|
Dennis
C. Bottorff
|
65
|
2006
|
2011
|
Bishop
William Graves
|
73
|
2008
|
2012
|
Note
* Although
the term of Director Sansom expired in May 2009, he is entitled to remain
in office until the end of the current session of
Congress.
|
There are currently three vacant
positions on the TVA Board.
Mr. Duncan of Inez, Kentucky, joined
the TVA Board in March 2006 and became Chairman of the TVA Board in May
2009. He is the Chairman, Chief Executive Officer, and Director of
Inez Deposit Bank, FSB, in Louisa, Kentucky (since April 1984, with a one-year
leave of absence from 1989 to 1990 to serve as Assistant Director of Public
Liaison in the White House); Chairman, Chief Executive Officer, and Director of
Inez Deposit Bank in Inez, Kentucky (since September 1974 with a one-year leave
of absence); Chairman, Chief Executive Officer, and Director of Community
Holding Company, a single bank holding company (since 1984 with a one-year leave
of absence); Chairman, Chief Executive Officer, and Director of Community Thrift
Holding Company, a unitary thrift holding company (since 1999). From
1998 to 2007, Mr. Duncan was the Chairman of the Big Sandy Regional Industrial
Development Authority, which manages industrial parks in five eastern Kentucky
counties, and he is also the Secretary for the Highlands Regional Medical Center
in Prestonburg, Kentucky, which manages a regional hospital. From January 2007
to January 2009, he was the Chairman of the Republican National
Committee.
Mr. Sansom of Knoxville, Tennessee,
joined the TVA Board in March 2006 and was elected Chairman by the TVA Board in
March 2006. He served as Chairman of the TVA Board until May
2009. He is Chairman and Chief Executive Officer of the H.T. Hackney
Co., a diversified company involved in wholesale grocery, gas and oil, and
furniture manufacturing, and has held that position since 1983. Since
1995, Mr. Sansom has also been a director of Astec Industries, Inc., a
corporation based in Chattanooga, Tennessee, that manufactures equipment and
components used in road construction, and since 1984, he has been a director at
First Horizon National Corporation, a Memphis, Tennessee, bank holding
company. In 2006, he was named director of Mid-Atlantic Apartment
Communities, Inc., a real estate investment trust with ownership interests in
apartment homes. From 1994 to 2006, he was a director of Martin
Marietta Materials, Inc., a company based in Raleigh, North Carolina, that
supplies minerals, chemicals, and composites for various
industries. Mr. Sansom may continue to serve on the TVA Board until
this session of Congress adjourns.
Mr. Gilliland of Blairsville, Georgia,
joined the Board in March 2008. He retired in January 2008 as
Executive Vice President, Secretary, General Counsel, and Director of United
Community Banks, Inc., a bank holding company. He joined United
Community Banks, Inc., in January 1992.
Mr. Thrailkill of Huntsville, Alabama,
joined the TVA Board in March 2006. He retired in September 2005 as
President and Chief Operating Officer of Adtran, Inc., in Huntsville, which
supplies equipment for telecommunications service providers and corporate end
users. He joined Adtran, Inc., in 1992.
Mr. Bottorff of Nashville, Tennessee,
joined the TVA Board in March 2006. Since January 2001, he has served
as Partner of Council Ventures, a venture capital firm. He was
Chairman of AmSouth Bancorporation until his retirement in 2001 and from 1991 to
1999 was Chief Executive Officer of First American Bank. He served as
a director of Dollar General, a variety store company, from 1998 until its sale
in 2007. In addition, he is a director of Ingram Industries, a
privately held provider of wholesale distribution, inland marine transportation,
and insurance services; a director of Benefit Informatics,
a company which provides information used to improve the quality and reduce the
cost of health care; and a member of the Board of Trustees of Vanderbilt
University.
Bishop Graves of Memphis, Tennessee,
served on the TVA Board from October 2006 to December 2007 and was reappointed
to the TVA Board in June 2008. He has been presiding Bishop of the
Christian Methodist Episcopal Church in Memphis, Tennessee, since being elected
at the 2006 General Conference held in June to July 2006. Previously
he was pastor of the Phillips Temple CME Church of Los Angeles,
California. He is the immediate Past President of the Board of the
Congress of National Black Churches, and from
September 1993 to July 2004, he was a member of the Board of Memphis Light, Gas
and Water, a TVA distributor customer.
TVA’s executive officers as of November
25, 2009, their titles, their ages, and the date their employment with TVA
commenced are as follows:
Executive
Officers
|
Title
|
Age
|
Employment
Commenced
|
Tom
D. Kilgore
|
President
and Chief Executive Officer
|
61
|
2005
|
Kimberly
S. Greene
|
Chief
Financial Officer and Executive Vice President, Financial
Services
|
43
|
2007
|
William
R. McCollum, Jr.
|
Chief
Operating Officer
|
58
|
2007
|
Maureen
H. Dunn
|
Executive
Vice President and General Counsel
|
60
|
1978
|
Preston
D. Swafford
|
Chief
Nuclear Officer and Executive Vice President, TVA Nuclear
|
49
|
2006
|
John
E. Long, Jr.
|
Chief
Administrative Officer and Executive Vice President, Administrative
Services
|
57
|
1980
|
Kenneth
R. Breeden
|
Executive
Vice President, Customer Resources
|
61
|
2004
|
Robin
E. Manning
|
Executive
Vice President, Power System Operations
|
53
|
2008
|
Van
M. Wardlaw
|
Executive
Vice President, Power Supply and Fuels
|
49
|
1982
|
Ashok
S. Bhatnagar
|
Senior
Vice President, Nuclear Generation Development and
Construction
|
53
|
1999
|
William
R. Campbell
|
Senior
Vice President, Fleet Engineering
|
58
|
2007
|
Robert
M. Deacy, Sr.
|
Senior
Vice President, Clean Strategies and Project Development
|
57
|
2007
|
Peyton
T. Hairston, Jr.
|
Senior
Vice President, Corporate Responsibility and
Diversity
|
54
|
1993
|
Janet
C. Herrin
|
Senior
Vice President, River Operations
|
55
|
1978
|
John
M. Hoskins
|
Senior
Vice President and Treasurer
|
54
|
1978
|
Donald
E. Jernigan
|
Senior
Vice President, Nuclear Operations
|
53
|
2008
|
Anda
A. Ray
|
Senior
Vice President, Office of Environment and Research
|
53
|
1983
|
Emily
J. Reynolds
|
Senior
Vice President, Government and Valley Relations
|
53
|
2007
|
David
R. Mould
|
Senior
Vice President, Communications
|
52
|
2009
|
John
J. McCormick, Jr.
|
Senior
Vice President, Fossil Operations
|
47
|
2007
|
John
M. Thomas, III
|
Senior
Vice President, Corporate Governance and Compliance
|
46
|
2005
|
Steve
Byone
|
Vice
President and Controller
|
50
|
2009
|
Mr. Kilgore was named President and
Chief Executive Officer in October 2006 after having served as President and
Chief Operating Officer since joining TVA in March 2005. He
previously served as President and Chief Executive Officer of Progress Energy
Ventures, a subsidiary of Progress Energy Company created to manage various
operations of Progress Energy Company, including fuel extraction and energy
marketing, from April 2000 to February 2005. Prior to taking that
position, Mr. Kilgore had been Senior Vice President of Power Operations for
Carolina Power & Light Company (which became Progress Energy) since August
1998. From 1991 to 1998, Mr. Kilgore was President and Chief
Executive Officer of Oglethorpe Power Corporation in Atlanta,
Georgia.
Ms. Greene was named Chief Financial
Officer and Executive Vice President, Financial Services in September
2007. Ms. Greene previously served as Senior Vice President, Finance,
and Treasurer at Southern Company Services, an energy company, from July 2003 to
September 2007, where she was responsible for financial planning and analysis,
capital markets and leasing, treasury, and investor relations. From
July 2002 to July 2003, Ms. Greene was director of portfolio management for
Southern Company Generation and Energy Marketing.
Mr. McCollum joined TVA in May 2007 as
Chief Operating Officer. Prior to joining TVA, Mr. McCollum was
Executive Vice President and Chief Regulated Generation Officer at Duke Energy
Corporation, an energy company, from October 2006 to May 2007. Mr.
McCollum had been with Duke Energy Corporation (and its predecessor) since 1974
and held a variety of leadership positions there, including Group Vice
President, Regulated Fossil-Hydro Generation (from April 2006 to October 2006),
Vice President, Strategic Planning and Business Development (from January 2005
to April 2006), and Vice President, Nuclear Support (from November 2002 to
December 2004).
Ms. Dunn joined TVA as an attorney in
May 1978, assumed the position of Assistant General Counsel in September 1986,
and assumed the position of Executive Vice President and General Counsel in
January 2001.
Mr. Swafford was named Chief Nuclear
Officer and Executive Vice President, TVA Nuclear in February
2009. From June 2007 to February 2009, he was Executive Vice
President, Fossil Power Group, and from May 2006 to May 2007,
he was
Senior Vice President, Nuclear Support. From December 1995 to April
2006, Mr. Swafford held various positions at Exelon Corporation, an energy
company based in Illinois, and its subsidiaries. From 2002 to 2006,
he served as Senior
Vice President, Exelon Energy Delivery, and was responsible for transmission and
distribution of electricity. From 2002 to 2003, he was Vice
President, Exelon Power, and was responsible for its fleet of gas, coal-fired,
and hydroelectric generating facilities. From 2000 to 2002, he was
Vice President, Dresden Nuclear Station.
Mr. Long was named Executive Vice
President, Administrative Services as well as Chief Administrative Officer in
September 2005. From October 2000 to September 2005, he was Executive
Vice President, Human Resources. Mr. Long joined TVA in 1980 as a
Personnel Officer in the Engineering Design Organization and has held various
Human Resources positions within TVA. From 1992 to 2005, he served on
the TVA Retirement System Board.
Mr.
Breeden was named Executive Vice President, Customer Resources in September 2006
after having served as Executive Vice President, Customer Service and Marketing
since joining TVA in August 2004. From March 2002 to August 2004, he
was the Program Executive for Executive Conversation, Inc., where he was
responsible for executive training programs. From September 1997 to
March 2002, he was President of TXU Energy Services, Enterprise Division, in
Dallas, Texas, where he was responsible for a new venture created to address
customers’ changing energy needs. Mr. Breeden had joined TXU
Corporation in May 1995 as Senior Vice President of TXU Electric & Gas,
where he was responsible for marketing and sales.
Mr. Manning joined TVA in August 2008
as Executive Vice President, Power System Operations. From April 2006
to August 2008, Mr. Manning served as Vice President of Field Operations for
Duke Energy Corporation, an energy company, where he was responsible for the
operation of all transmission and distribution system activity in Duke Energy
Corporation’s Carolinas Region. Mr. Manning joined Duke Energy
Corporation in 1978 and held a variety of leadership positions there, including
Vice President, Central Region for Duke Energy Power Delivery (from January 2004
to April 2006), Vice President of Engineering Standards and Process Management
for Duke Energy Electric Transmission (from May 2003 to January 2004), and Vice
President of Engineering for Duke Energy Gas Transmission (now Spectra
Corporation) (from September 2000 to June 2003).
Mr. Wardlaw was named Executive Vice
President of Power Supply and Fuels in July 2008. Prior to this
appointment, Mr. Wardlaw served as Senior Vice President, Commercial
Operations and Fuels from January 2007 to June 2008, and Vice President, Bulk
Power Trading from September 2006 to December 2006. From December
2000 to September 2006, he served as Vice President of Transmission and
Reliability where he was responsible for real time control of TVA’s generation
fleet and transmission system. Mr. Wardlaw began his career with TVA
in January 1982 as an electrical engineer, and has also worked in customer
service, marketing, and field services.
Mr. Bhatnagar is the Senior Vice
President of Nuclear Generation Development and Construction, a position he has
held since April 2007. He joined TVA in August 1999 as Site Support
Manager at Browns Ferry and was subsequently appointed Browns Ferry Plant
Manager in July 2000, Browns Ferry Site Vice President in July 2001, and Senior
Vice President, Nuclear Operations, in June 2004.
Mr.
Campbell is the Senior Vice President of Fleet Engineering, a position he
assumed in February 2009. From May 2007 to February 2009, Mr.
Campbell served as TVA’s Chief Nuclear Officer and Executive Vice President, TVA
Nuclear. Mr. Campbell served as Executive Vice President, Engineering
and Projects for Entergy Operations, Inc. (“Entergy”), an energy company, from
February 2007 to May 2007. In that capacity, he was responsible for
engineering, technical support, and project management functions for all
regulated and non-regulated Entergy nuclear units. Mr. Campbell
served as Senior Vice President and Chief Operating Officer of Entergy from
February 2003 to February 2007, and was responsible for the operation of all
Entergy regulated nuclear units. He also served as Vice President,
Engineering, of Entergy from June 2000 to February 2003.
Mr. Deacy
is the Senior Vice President, Clean Strategies and Project Development, a
position he assumed in February 2009. Mr. Deacy served as TVA’s
Senior Vice President of Fossil Operations Support from October 2007 to January
2009. Before joining TVA, he served as President of EXCO Partners
from December 2006 to September 2007, where he was responsible for EXCO
exploration, production, and pipeline companies in East Texas and
Louisiana. Mr. Deacy served as Senior Vice President of Oil, Gas and
Merchant Power Generation, Progress Ventures from 2003 to 2006; Senior Vice
President and General Manager, Winchester Energy Company from 2002 to 2003;
Director of New Plant Construction and Start-up Operations, Progress Energy from
1999 to 2002; Outage Planning and Scheduling Manager-Nuclear, Carolina Power
& Light Company from 1995 to 1998; and Maintenance Superintendent-Nuclear,
Carolina Power & Light from 1993 to 1995.
Mr. Hairston was named Senior Vice
President, Corporate Responsibility and Diversity, in April 2007, and was
additionally named TVA’s External Ombudsman and its Chief Ethics and Compliance
Officer in July 2007. He previously served as Senior Vice President,
Communications, a position he assumed in March 2006. From October
2002 to March 2006, he held the position of Senior Vice President, Employee
Relations and Diversity. Mr. Hairston served as Senior
Vice President, Labor Relations, from October 2000 to October 2002, and had held
that position previously from June 1994 to June
1998. From August 1998 to October 2000, he was Senior Vice President,
Strategic Initiatives. Mr. Hairston also served as Senior Manager,
Strategic Planning and Support, from May 1993 to June 1994.
Ms. Herrin is the Senior Vice
President, River Operations, a position she has held since February
1999. Ms. Herrin is responsible for establishing river operations
policies, procedures, and standards for TVA and serves as TVA’s Dam Safety
Officer. She began her career at TVA in 1978 as a Civil
Engineer. She has served on the TVA Retirement System Board since
2005.
Mr. Hoskins, Senior Vice President and
Treasurer, joined TVA in 1978 and worked in several areas of TVA business
including accounting, audit, and revenue before joining the Treasurer’s office
in 1987. He was named Vice President and Treasurer in 1994 and Senior
Vice President and Treasurer in 2000. He has served on the TVA
Retirement System Board of Directors since 2003. Mr. Hoskins also
served as Interim Chief Financial Officer of TVA from November 2006 to September
2007.
Mr. Jernigan was named Senior Vice
President, Nuclear Operations, in September 2008. From November 2004
until August 2008, he served as Site Vice President of Surry Nuclear Power
Station and from November 2003 to November 2004, he served as Director of
Operations and Maintenance at North Anna Nuclear Power Station for Dominion
Resources, Inc., an energy company. Before joining Dominion
Resources, Inc., Mr. Jernigan worked for Florida Power & Light Company,
serving as Site Vice President at St. Lucie Nuclear Station from June 2001 to
April 2004 and as General Manager at Turkey Point Nuclear Station from 1994 to
2001.
Ms. Ray was named the Senior Vice
President of the Office of Environment and Research in August
2008. She served as the Vice President of Environmental Stewardship
and Policy from August 2007 to July 2008. Prior to this, Ms. Ray
served as the Vice President of Enterprise Performance and Analysis, and was the
Director of TVA’s Public Power Institute where she focused on new energy
technologies. Ms. Ray began her career with TVA in 1983 with the
nuclear power organization, and worked in several other TVA functions including
fossil generation, customer groups, and strategic planning.
Ms.
Reynolds joined TVA in April 2007 and was named Senior Vice President,
Government & Valley Relations in July 2009. Prior to this
appointment Ms. Reynolds served as Senior Vice President of Communications,
Government and Valley Relations. Ms. Reynolds served as the 31st
secretary of the U.S. Senate (from January 2003 to January 2007), where she
managed the legislative, financial, and administrative operations of the
Senate. She also served as a consultant to the subsequent secretary
of the U.S. Senate from January 2007 to April 2007. She previously
served as chief of staff for Senator Frist (from January 2001 to January 2003),
where she had overall responsibility for the management and coordination of
staffing, legislative activity, communications, constituent relations, and
scheduling.
Mr. Mould
was named Senior Vice President, Communications in July 2009. From
2005 to 2009, Mr. Mould served as Assistant Administrator for Public Affairs
with the National Aeronautics and Space Administration, directing
communications, outreach, and public affairs efforts for the U.S. space program,
and from 2003 to 2005, he served as special assistant to the U.S. Secretary of
Energy, focusing on strategic communications policies in the Office of the
Secretary. Prior to entering government service, Mr. Mould worked as
vice president of communications for PG&E National Energy Group, a wholesale
electricity and natural gas supplier (from 2000 to 2003), as director of public
relations for Mirant Corp., an electricity and natural gas supplier (from 1997
to 2000), and as media relations manager for Southern Company, an electric
utility holding company (from 1991 to 1997).
Mr. McCormick joined TVA as Vice
President, Fossil Operations, in December 2007 and was later named Senior Vice
President, Fossil Operations, in October 2008. Prior to that, Mr.
McCormick served in various roles at Exelon Corporation, an energy company,
including General Manager of Eddystone Generation Station, General Manager of
Conowingo and Muddy Run Hydro Facilities, and Director of Operations responsible
for supervising power plant general managers of more than 10,000 MW of fossil
and hydro generation. Mr. McCormick began his career with Exelon
Corporation in 1982.
Mr. Thomas was named Senior Vice
President, Corporate Governance and Compliance in July 2009. He
served as Controller and Chief Accounting Officer from January 2008 to September
2009. Prior to being named Controller, he was the General Manager,
Operations Business Services, where he was responsible for financial and
performance support to TVA’s operating organizations from November 2005 to
January 2008. Prior to joining TVA, Mr. Thomas was Chief Financial
Officer for Benson Security Systems during 2005. He was also the
Controller of Progress Fuels Corporation (from
2003 to 2005) and Controller of Progress Ventures, Inc. (from 2001 to 2002),
both subsidiaries of Progress Energy, where he was responsible for accounting
operations, financial reporting, forecasting, and risk
management.
Mr. Byone
was named Vice President and Controller in September 2009. He served
as the Vice President and Chief Financial Officer of the Electric Reliability
Council of Texas (“ERCOT”), an independent system operator located in Austin,
Texas, from September 2005 to September 2009. Mr. Byone first came to
ERCOT in May 2005 in a consulting role to launch ERCOT’s internal control
management and enterprise risk management programs. Previously, Mr.
Byone served as the Vice President and Chief Risk Officer for Progress Energy
(from May 2002 to May 2005). In that position, Mr. Byone designed an
enterprise-wide risk management framework to support review and alignment of
corporate strategy, capital investments, and risk appetite.
TVA has a Disclosure and Financial
Ethics Code (“Financial Ethics Code”) that applies to all executive officers
(including the Chief Executive Officer, Chief Financial Officer, and Controller)
and directors of TVA as well as to all employees who certify information
contained in quarterly reports, annual reports, or information statements or who
have responsibility for internal control self-assessments. The
Financial Ethics Code includes provisions covering conflicts of interest,
ethical conduct, compliance with applicable laws, rules, and regulations,
responsibility for full, fair, accurate, timely, and understandable disclosures,
and accountability for adherence to the Financial Ethics Code. TVA
will provide a current copy of the Financial Ethics Code to any person, without
charge, upon request. Requests may be made by calling 888-882-4975 or
by sending an e-mail to: investor@tva.com. Any waivers of or changes
to provisions of the Financial Ethics Code will be promptly disclosed to the
public, subject to limitations imposed by law, on TVA’s website at:
www.tva.gov. Information contained on TVA’s website shall not be
deemed incorporated into, or to be a part of, this Annual Report.
TVA does not have a Nominating
Committee. Each member of the TVA Board is appointed by the President
of the United States with the advice and consent of the U.S.
Senate. The TVA Act provides that to be eligible to be appointed as a
member of the TVA Board, an individual must (1) be a citizen of the United
States, (2) have management expertise relative to a large for-profit or
nonprofit corporate, government, or academic structure, (3) not be an employee
of TVA, (4) make full disclosure to Congress of any investment or other
financial interest that the individual holds in the energy industry, and (5)
affirm support for the objectives and missions of TVA, including being a
national leader in technological innovation, low-cost power, and environmental
stewardship. No more than two of the TVA Board members may be legal
residents outside of TVA’s service area.
The TVA Board has an Audit, Governance,
and Ethics Committee established in accordance with the TVA
Act. TVA’s Audit, Governance, and Ethics Committee consists of Thomas
C. Gilliland (chair), Robert M. Duncan, and Dennis C.
Bottorff. Director Gilliland and Director Bottorff are each an “audit
committee financial expert” as defined in Item 407(d)(5) of Regulation S-K under
the Exchange Act.
TVA is exempted by section 37 of the
Exchange Act from complying with section 10A(m)(3) of the Exchange Act, which
requires each member of a listed issuer’s audit committee to be an independent
member of the board of directors of the issuer. The TVA Act contains
certain provisions that are similar to the considerations for independence under
section 10A(m)(3) of the Exchange Act, including that to be eligible for
appointment to the TVA Board, an individual shall not be an employee of TVA and
shall make full disclosure to Congress of any investment or other financial
interest that the individual holds in the energy industry. These
provisions became applicable to TVA Board members on March 31,
2006.
Under section 10A(m)(2) of the Exchange
Act, which applies to TVA, the audit committee is directly responsible for the
appointment, compensation, and oversight of the external auditor; however, the
TVA Act assigns the responsibility for engaging the services of the external
auditor to the TVA Board.
The TVA Board has also established the
following committees in addition to the Audit, Governance, and Ethics,
Committee:
|
•
|
Finance,
Strategy, Rates, and Administration
Committee
|
|
•
|
Operations,
Environment and Safety Committee
|
|
•
|
Community
Relations and Energy Efficiency
Committee
|
This
Compensation Discussion and Analysis provides information about TVA’s
compensation philosophy and strategy, as well as the policies and decisions that
guided TVA in 2009 in establishing the level and nature of the compensation
provided to the President and CEO, the Chief Financial Officer and Executive
Vice President, Financial Services (“CFO”), and the three most highly
compensated executive officers other than the CEO and CFO. References
to the “Named Executive Officers” or “NEOs” throughout this section refer to the
executive officers listed in the Summary Compensation Table.
Executive
Summary
The TVA
Board has established a compensation plan for all TVA employees (the
“Compensation Plan”) based on the requirements of the TVA Act. The
Compensation Plan is designed to support TVA’s mission and Strategic Plan and to
fulfill the following purposes:
|
•
|
Provide a competitive level of
compensation that enables TVA to attract, retain, and motivate highly
competent employees. Total target compensation for each
position in TVA is determined by market pricing based on a level needed to
attract, retain, and motivate employees critical to TVA’s success in
achieving its mission. Accordingly, total compensation levels
are targeted at the median (50th
percentile) of the relevant labor market for most
positions. However, for positions affected by market scarcity,
recruitment and retention issues, and other business reasons, total
compensation levels are targeted above the median (typically between the
50th
and 75th
percentile).
|
|
•
|
Encourage and reward
executives for their performance and contributions to the successful
achievement of financial and operational goals. A key
component of the Compensation Plan is “pay for performance,” which rewards
executives for improvement in TVA’s overall performance, as well as that
of individual business units and individual employees. The TVA
Board believes that the portion of total direct compensation placed
at-risk should increase as an employee’s position and level of
responsibility within TVA increases. Accordingly, a significant
percentage of
total target direct compensation for the Named Executive Officers (40
percent to 65 percent) is performance-based
compensation.
|
|
•
|
Provide executives with the
focus to achieve short-term and long-term business goals that are
important to TVA, TVA’s customers, and the people TVA
serves. TVA seeks to hire and retain executives who are
focused on both the short-term and long-term success of
TVA. The Compensation Plan is designed to achieve this goal by
providing a mix of salary and at-risk annual and long-term incentive
compensation.
|
|
•
|
Improve overall company
performance through productivity enhancement. An
executive cannot help meet TVA’s goals and improve performance without the
work of others. For this reason, the performance goals set at
the TVA level and business unit level are the same for both executives and
all non-executive employees. This generally translates into all
TVA employees receiving compensation in a manner that aligns their work
with the same goals and encourages and rewards them for the successful
achievement of TVA’s goals.
|
Under the
Compensation Plan, the compensation programs for the Named Executive Officers
consist of the components identified in the following table:
Compensation
Program Components for Named Executive Officers
|
||||
Compensation
Component
|
Objective
|
Key
Features
|
||
Annual
Salary
|
Fixed
and paid biweekly to executives
|
Total
direct compensation (salary plus annual and long-term incentive
compensation plus long-term deferred compensation) is targeted at the
median (50th
percentile) for similar positions at other companies in TVA’s peer group,
or above the median (50th
to 75th
percentile) for positions affected by market scarcity, recruitment and
retention issues, and other business reasons with annual salary targeted
to the same ranges
Reviewed
annually to consider changes in peer group benchmark salaries and/or
exceptional individual merit performances in past years
|
||
Annual
Incentive Compensation
|
At-risk
and based on the attainment of certain pre-established performance goals
for the year
|
Target
annual incentive opportunities increase with position and responsibility
and are based on the opportunities other companies in TVA’s peer group
provide to those in similar positions
Annual
incentive payouts are based on the results of performance goals at the TVA
level and business unit level, and also may be based on goals at the
individual level, and may be adjusted
Annual
incentive opportunities are reviewed annually to consider changes in peer
group benchmark short-term incentives
|
||
Long-Term
Incentive Compensation
|
At-risk
and based on the attainment of certain pre-established performance goals
for a performance cycle, typically three years
|
Target
long-term incentive opportunities are limited to executives in critical
positions who make decisions that significantly influence the development
and execution of TVA’s long-term strategic objectives
Target
long-term incentive payouts are based on the results of performance goals
established for a specific performance cycle and may be
adjusted
Long-term
incentive opportunities are reviewed annually to consider changes in peer
group benchmark long-term incentives
|
||
Long-Term
Deferred Compensation
|
Awarded
in the form of annual credits that vest after a specified period of time,
typically three to five years
|
Awarded
to provide a benefit similar to restricted stock and to provide retention
incentives to executives
Executives
generally must remain at TVA for the entire length of the agreement in
order to receive compensation credits
Target
annual credit amounts such that long-term deferred compensation targeted
to comprise 20 percent of total long-term compensation (in conjunction
with long-term incentive compensation described above)
|
||
Pension
Plans
|
Both
qualified and supplemental, which provide compensation beginning with
retirement or termination of employment
|
Broad-based
plans available to full-time employees of TVA that are qualified under IRS
rules and that are similar to the qualified plans provided by other
companies in TVA’s peer group
Certain
executives in critical positions also participate in a non-qualified
pension plan that provides supplemental pension benefits tied to
compensation levels that exceed limits imposed by IRS regulations
applicable to TVA’s qualified plans, which is comparable to similar plans
provided by other companies in TVA’s peer
group
|
Authority
for the Executive Compensation Program
The TVA
Act is the authority for establishing the compensation of all TVA employees,
including the Named Executive Officers, and places responsibility for doing so
with the TVA Board. Under section 2 of the TVA Act, the TVA Board is
directed to establish a compensation plan for all TVA employees
which:
|
•
|
Specifies
all compensation (including salary or any other pay, bonuses, benefits,
incentives, and any other form of remuneration) for the CEO and TVA
employees;
|
|
•
|
Is
based on an annual survey of the prevailing compensation for similar
positions in private industry, including engineering and electric utility
companies, publicly owned electric utilities, and federal, state, and
local governments; and
|
|
•
|
Provides
that education, experience, level of responsibility, geographic
differences, and retention and recruitment needs will be taken into
account in determining compensation of
employees.
|
The TVA
Act also provides that:
|
•
|
The
TVA Board will annually approve all compensation (including salary or any
other pay, bonuses, benefits, incentives, and any other form of
remuneration) of all managers and technical personnel who report directly
to the CEO (including any adjustment to
compensation);
|
|
•
|
On
the recommendation of the CEO, the TVA Board will approve the salaries of
employees whose salaries would be in excess of Level IV of the Executive
Schedule ($153,200 in 2009); and
|
|
•
|
The
CEO will determine the salary and benefits of employees whose annual
salary is not greater than Level IV of the Executive Schedule ($153,200 in
2009).
|
The
philosophy of the Compensation Plan approved by the TVA Board for all TVA
employees, including the Named Executive Officers, is based on the TVA
Act. The philosophy recognizes that many employees, including
executives, are called on to accomplish specialized aspects of TVA’s mission
safely, reliably, and efficiently, and must have the requisite education,
experience, and professional qualifications. These requirements make
it necessary for TVA to offer compensation to its specialized employees that
makes it possible for TVA to attract highly qualified candidates for positions
similar to those in relevant industries and motivates them to stay with
TVA.
At the
same time, the Compensation Plan provides the TVA Board the discretion to adjust
all forms of compensation to respond to unexpected and significant changes to
TVA’s mission and business that may occur during the year. The TVA
Board decided to use this discretion in light of the economic conditions and
financial challenges the country and TVA faced in late 2008 and 2009, many of
which are described in Item 7, Mangement’s Discussion and Analysis of Financial
Condition and Results of Operations. While
the TVA Board set the compensation of the Named Executive Officers at the
beginning of 2009 based on the philosophy, principles, and targets set
forth above, during 2009 in direct response to these changing economic
conditions and significant financial challenges, the TVA Board exercised the
discretion available to it under the Compensation Plan to adjust certain payouts
for the Named Executive Officers for 2009 and to freeze the salaries of the
Named Executive Officers for 2010. These changes are set forth in
more detail under the heading “Executive Compensation Program
Components.”
Board
Committee Oversight
For 2009,
the Finance, Strategy, Rates, and Administration (“FSRA”) Committee of the TVA
Board was responsible for oversight of executive compensation pursuant to the
Compensation Plan, review of this Compensation Discussion and Analysis, and, to
the extent applicable, review of performance goal achievement for
2009. To assist the FSRA Committee in evaluating competitive levels
of compensation for executives, the FSRA Committee selected and used Watson
Wyatt as its independent compensation consultant.
Use
of Market Data and Benchmarking
TVA seeks
to target total compensation for executives at a competitive level with respect
to the relevant labor market. Market information for total
compensation, as well as each element of compensation, for the Named Executive
Officers in 2009 was obtained from:
|
•
|
Published
and customized compensation surveys reflecting the relevant labor markets
identified for designated positions,
and
|
|
•
|
Publicly
disclosed information from the proxy statements and annual reports on Form
10-K of energy services companies with revenues of $3.0 billion
and greater.
|
After the
competitive market compensation was compiled for the positions, the Human
Resources department, with the assistance of its compensation consultant, Towers
Perrin, analyzed the data, and provided its analysis to the FSRA
Committee. The FSRA Committee, with the assistance of its
compensation consultant, Watson Wyatt, used this information to:
|
•
|
Test
target compensation level and incentive opportunity
competitiveness,
|
|
•
|
Serve
as a point of reference for establishing pay packages for recruiting
executives, and
|
|
•
|
Determine
appropriate adjustments to target compensation levels and incentive
opportunities to maintain the desired degree of market
competitiveness.
|
TVA’s
relevant labor market for most executives, including the Named Executive
Officers, was comprised of both private and publicly owned companies in the
energy services industry of similar revenue and scope to TVA. For the
survey-based analysis, TVA looked at the following energy services companies
with annual revenues of $3.0 billion and
greater from the 2008 Towers Perrin Energy Services Executive Compensation
Database:
Allegheny
Energy, Inc.
|
Energy
Future Holdings Corp.
|
Pepco
Holdings, Inc.*
|
Alliant
Energy Corp.
|
Entergy
Corp.*
|
Pinnacle
West Capital Corp.
|
Ameren
Corp.*
|
Exelon
Corp.*
|
PPL
Corp.*
|
American
Electric Power Co., Inc.*
|
FirstEnergy
Corp.*
|
Progress
Energy, Inc.*
|
Calpine
Corp.
|
FPL
Group, Inc.*
|
Public
Service Enterprise Group, Inc.*
|
CenterPoint
Energy, Inc.
|
Integrys
Energy Group, Inc. *
|
Puget
Energy, Inc.
|
CMS
Energy Corp.*
|
MDU
Resources Group, Inc.
|
Reliant
Energy, Inc.*
|
Consolidated
Edison, Inc.*
|
National
Grid USA
|
SCANA
Corp.
|
Constellation
Energy Group, Inc.*
|
Northeast
Utilities System *
|
Sempra
Energy *
|
Dominion
Resources, Inc.*
|
NRG
Energy, Inc.
|
The
Southern Company *
|
Duke
Energy Corp.*
|
NSTAR
Electric Co.
|
SUEZ
Energy North America
|
Dynegy,
Inc.
|
OGE
Energy Corp.
|
Wisconsin
Energy Corp.
|
Edison
International*
|
Pacific
Gas and Electric Co.*
|
Xcel
Energy, Inc.*
|
El
Paso Corp.
|
PacifiCorp
|
For the
analysis of proxy statements and annual reports on Form 10-K, TVA looked at a
subset of the peer group above, identified with asterisks, as well as three
additional companies in the energy services industry (AES Corp., DTE Energy Co.,
and NiSource Inc.), as recommended by Watson Wyatt.
Executive
Compensation Program Components
Total
target compensation (salaries, annual and long-term incentive compensation, and
long-term deferred compensation) for Mr. Kilgore, Ms. Greene, and Mr. McCollum
for 2009 was reviewed by the FSRA Committee, and the recommended compensation
packages were submitted by the FSRA Committee to the TVA Board for approval
early in 2009. Total target compensation for Mr. Bhatnagar and Mr.
Swafford for 2009 was reviewed and approved by Mr. Kilgore as CEO early in
2009.
As the
year progressed, however, TVA faced a number of challenges, specifically
financial challenges. See Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations for a discussion of
these challenges. At its February 12, 2009, meeting, the TVA Board
heard and reviewed a report on these challenges. As a corporate
agency and instrumentality of the United States, TVA has no equity securities,
and therefore its goals do not encompass making profits for the benefit of
shareholders. However, as acknowledged by the TVA Board at this
meeting, TVA has a commitment to its customers and stakeholders, and part of
TVA’s mission is to sell power at the lowest rate possible to its
customers. In response to these challenges and mission, as detailed
more specifically below, at the recommendation of the FSRA Committee, the TVA
Board at that meeting froze the salaries of and made significant reductions to
the target incentive compensation earlier approved for the Named Executive
Officers. The reductions reflected the various levels of
responsibility and reflected the belief that compensation at risk should be a
function of an employee’s position and level of responsibility.
Salary. The
salaries received by the Named Executive Officers were based on their levels of
responsibility, their individual merit performances in past years, and the
competitive levels of salary for executives in similar positions in the energy
services industry.
For 2009,
the TVA Board approved a salary of $525,000 for Ms. Greene, a 5 percent increase
over 2008, and a salary of $745,514 for Mr. McCollum, a 3.4 percent increase
over 2008. For 2009, Mr. Kilgore as CEO approved a salary of $456,246
for Mr. Bhatnagar, a 5 percent increase over 2008. In February 2009,
Mr. Kilgore as CEO approved the appointment of Mr. Swafford as Chief Nuclear
Officer and Executive Vice President, TVA Nuclear. Following this
appointment, Mr. Kilgore approved a salary of $525,000 for Mr.
Swafford.
The
salaries approved for Ms. Greene and Mr. McCollum for 2009 moved Ms. Greene to
the 50th
percentile and Mr. McCollum to slightly above the 50th
percentile of the benchmark salaries for similar positions in TVA’s peer
group. The salaries approved for Mr. Bhatnagar and Mr. Swafford for
2009 placed both of them near the 75th
percentile of the benchmark salaries for similar positions in TVA’s peer
group. The salaries for Mr. Bhatnagar and Mr. Swafford were targeted
at a higher percentile because their positions as Senior Vice President, Nuclear
Generation Development and Construction, and Chief Nuclear Officer and Executive
Vice President, TVA Nuclear, are subject to high demand and scarcity and because
of recruitment and retention issues within the nuclear
industry. Information about the approval of Mr. Kilgore’s salary for
2009 is provided below under the heading “Considerations Specific to Mr.
Kilgore.”
As part of its February 12, 2009,
compensation actions, the TVA Board decided to eliminate all 2010 merit based
salary adjustments for 2009 performance for the Named Executive Officers and all
other TVA employees on the management and specialist schedule, so the 2010
salaries for the Named Executive Officers will be the same as 2009
salaries.
Annual Incentive
Compensation. All executives, including the Named Executive
Officers, typically participate in the Executive Annual Incentive Plan
(“EAIP”). The EAIP is designed to encourage and reward executives for
their contributions to successfully achieving short-term financial and
operational goals of TVA and applicable business units, and may also include
individual goals. Under the EAIP, an executive’s annual incentive
payment is calculated as follows:
EAIP
Payout
|
=
|
Salary
|
X
|
Annual
Incentive
Opportunity
|
X
|
Percent
of Opportunity
Achieved
|
Annual
incentive opportunities increase with position and responsibility. At
the start of 2009, the annual incentive opportunity was established for each of
the Named Executive Officers based on the opportunities other companies provide
to those in comparable positions in the energy services industry. For
2009, the TVA Board approved a 70 percent annual incentive opportunity for Ms.
Greene, up from 65 percent in 2008, and a 70 percent annual incentive
opportunity for Mr. McCollum, unchanged from 2008. For 2009, Mr.
Kilgore as CEO approved a 60 percent annual incentive opportunity for Mr.
Bhatnagar, unchanged from 2008. Following the appointment of Mr.
Swafford as Chief Nuclear Officer and Executive Vice President, TVA Nuclear, Mr,
Kilgore approved an 80 percent annual incentive opportunity for Mr. Swafford in
2009.
The
annual incentive opportunities were approved for Ms. Greene and Mr. McCollum for
2009 at a level such that 100 percent target payout (together with salary, 100
percent target payout of long-term incentive opportunities, and long-term
compensation credits) would place their total compensation near but below the
50th
percentile of the benchmark total compensation for similar positions in TVA’s
peer group. The annual incentive opportunities were approved for Mr.
Bhatnagar and Mr. Swafford for 2009 at a level such that 100 percent target
payout (together with salary, 100 percent target payout of long-term incentive
opportunities, and long-term compensation credits) would place their total
compensation near but below the 75th
percentile of the benchmark total compensation for similar positions in TVA’s
peer group. The total compensation for Mr. Bhatnagar and Mr. Swafford
was targeted at a higher percentile because their positions as Senior Vice
President, Nuclear Generation Development and Construction, and Chief Nuclear
Officer and Executive Vice President, TVA Nuclear, are subject to high demand
and scarcity and because of recruitment and retention issues within the nuclear
industry. Information about the approval of Mr. Kilgore’s EAIP
incentive opportunity for 2009 and its later elimination is provided below under
the heading “Considerations Specific to Mr. Kilgore.”
The
percent of opportunity achieved by the Named Executive Officers in 2009 was
originally to be determined based upon a weighted average of the results of a
combination of performance goals at the TVA level and the business unit
level. Performance goals at the TVA level and their weights were
identified in TVA’s Winning Performance Balanced Scorecard (the “TVA
Scorecard”). Four of the performance goals identified in the TVA
Scorecard (connection point interruptions, net cash flow from operations less
investing, demand reduction, and equivalent availability factor) were approved
to be used in determining annual incentive payouts for all other participants in
the EAIP, as well as
all other non-executive TVA employees who participate in TVA’s Winning
Performance Team Incentive Plan. These four performance measures,
their weights, and the goals approved by the TVA Board for the 2009 TVA
Scorecard, as well as the results for 2009, are set forth below:
2009
TVA Scorecard
|
|||||||||
Goals1
|
|||||||||
Performance Metric
|
Weight
|
Results
Achieved
|
Threshold
(75%)
|
Target
(100%)
|
Maximum
(125%)
|
||||
Customers
|
|||||||||
Connection
Point Interruptions (Interruptions / Connection Point)
|
20%
|
0.75
|
—
|
1.12
|
0.78
|
||||
Financial
|
|||||||||
Net
Cash Flow from Operations Less Investing ($ Millions)
|
35%
|
(975)
|
(292)
|
(163)
|
(113)
|
||||
Assets/Operations
|
|||||||||
Demand
Reduction ($ / kW Reduced)
|
10%
|
217
|
643
|
611
|
582
|
||||
Equivalent
Availability Factor (%)
2
|
35%
|
85.6
|
85.8
|
87.1
|
88.0
|
||||
Notes
(1) Performance
levels between threshold and target achievement levels, and between target
and maximum achievement levels, were calculated using
straight-line interpolation.
(2) The
equivalent availability factor for 2009 includes only nuclear, coal, and
combined cycle combustion turbine generation assets. The
availability for simple cycle combustion cycle
combustion turbines and hydroelectric generation has been excluded
beginning in 2009. This adjustment will focus TVA’s performance
on the equivalent availability
of base load facilities which are needed nearly all times of the
year. Simple cycle combustion turbine and hydroelectric
generation performance will be measured
during critical periods of the year, and separate metrics will be utilized
to monitor this performance.
|
Achievement
of the TVA level goals was to represent 30 percent of each Named Executive
Officer’s potential payout under the EAIP. However, EAIP awards may
be adjusted and, as part of the compensation actions taken at the February 12,
2009, meeting, the TVA Board decided that for 2009 no EAIP payments would be
made to Mr. Kilgore as CEO or to his direct reports, including Ms. Greene and
Mr. McCollum. It was also decided that no TVA employee would receive
an EAIP payment based on TVA level goals, thereby eliminating 30 percent of Mr.
Bhatnagar’s and Mr. Swafford’s potential EAIP payouts. At the end of
2009, the results achieved were as set forth in the above table. In
making the determination to reduce or eliminate EAIP payments, the TVA Board did
not take into account any impact on the ratio that the actual compensation would
then bear to benchmark total compensation.
The
remaining 70 percent of the potential payout for Mr. Bhatnagar and Mr. Swafford
was tied to business unit performance. Mr. Bhatnagar’s business unit
performance was measured by the results of the Nuclear Generation Development
& Construction (“NGD&C”) scorecard. The performance measures
for this scorecard, and weight tied to overall EAIP performance, are: NGD&C
Safe Workplace – Recordable Injury Rate (15 percent), Watts Bar Nuclear Unit 2
Cost Performance Index (15 percent), NGD&C Major Milestones Met (25
percent), and NGD&C Nuclear Regulatory Commission Severity Level IV
Violations (15 percent), and resulted in a 74.71 percent of target opportunity
achieved for an EAIP payout of $204,517. Had the 30 percent not been
eliminated, Mr. Bhatnagar would have received an additional
$30,796.
Mr.
Swafford’s business unit performance was measured by composite average of the
results of the following three Nuclear Power Group scorecards calculated with
the indicated weighting: Browns Ferry Nuclear Plant scorecard (49.37 percent),
Sequoyah Nuclear Plant scorecard (30.65 percent), and Watts Bar Nuclear Plant
scorecard (19.98 percent), and resulted in a 39.20 percent of target opportunity
achieved for an EAIP payout of $164,640. Had the 30 percent not been
eliminated, Mr. Swafford would have received an additional $47,250.
The
remaining 70 percent of the potential payouts to Ms. Greene and Mr. McCollum
were to have been based on the composite average of all TVA business unit
scorecards. Had their EAIP payments not been eliminated, Ms. Greene
and Mr. McCollum would have received $248,467 and $352,829, respectively, based
on the achievement of the TVA level and business unit goals.
Awards to
the Named Executive Officers under the EAIP for 2009 are reported in the
“Non-Equity Incentive Plan Compensation” column in the Summary Compensation
Table. Other than the discretion not to make payouts, no discretion
was exercised in the determination of EAIP awards.
Long-Term Incentive
Compensation. In addition to the EAIP, certain executives in
critical positions, including the Named Executive Officers, participate in the
Executive Long-Term Incentive Plan (“ELTIP”). Executives in critical
positions are those who make decisions that significantly influence the
development and execution of TVA’s long-term strategic
objectives. The ELTIP has been purposefully designed to properly and
competitively reward executives for helping TVA improve in important areas
directly related to TVA’s long-term success by:
|
•
|
Using
performance criteria that are directly aligned with TVA’s Strategic
Plan;
|
|
•
|
Using
a “cumulative” performance approach to measure performance achieved for
three-year performance cycles;
|
|
•
|
Targeting
award opportunities at levels that approximate median levels of
competitiveness with TVA’s peer group and incorporating the FSRA
Committee’s policy of targeting that (i) approximately 80 percent of each
executive’s total long-term incentive opportunity be performance based
(under the ELTIP) and (ii) approximately 20 percent of each executive’s
total long-term incentive opportunity be retention and security-oriented
(under the Long-Term Deferred Compensation Plan (“LTDCP”) as described
below under the heading “Long-Term Deferred Compensation”);
and
|
|
•
|
Utilizing
a broad award opportunity range of 50 percent to 150 percent of salary to
enable payment of awards that are commensurate with performance
achievements.
|
For the
two-year cycle ended September 30, 2009, and the three-year cycle ending
September 30, 2010, the TVA Board has approved two overall measures of TVA
performance to be applied to all participants in the ELTIP: connection point
interruptions (the number of interruptions of power at connection points caused
by TVA’s transmission system) and retail rates (distributor reported retail
power revenue and directly served power revenue divided by distributor reported
retail sales and directly served power sales). The TVA performance
criteria may be adapted for future performance cycles, and the number of
criteria used may vary from cycle to cycle.
The goals
associated with the two performance measures are generally based on a comparison
of TVA’s performance to the performance of surveyed transmission providers and
regional utilities, and rolling three-year target comparisons for the surveyed
group are utilized. The goals approved for the connection point
interruptions performance measure for each of the two- and three-year
performance cycles described above are as follows:
|
•
|
The
target goal (which will also serve as the threshold goal that must be met
before there is any incentive payment under this measure) is established
based on the 75th
percentile of the performance of the surveyed transmission providers (the
“ELTIP CPI Comparison Group”), and
|
|
•
|
The
maximum goal is established at the 90th
percentile of the ELTIP CPI Comparison Group’s
performance.
|
The goals
approved for the retail rates performance measure for each of the two- and
three-year performance cycles described above are as follows:
|
•
|
The
threshold goal is based on improvement over the last performance
cycle,
|
|
•
|
The
target goal is TVA ranking at or above the 75th
percentile of the performance of a comparison group of regional utilities
composed of 22 utilities, which are subsidiaries of holding companies with
annual revenues greater than $3.0 billion,
in the regional proximity of the TVA service territory (the “ELTIP Retail
Rates Comparison Group”), and
|
|
•
|
The
maximum goal is TVA ranking at or above the 90th
percentile of the ELTIP Retail Rates Comparison Group’s
performance.
|
For 2009,
connection point interruptions performance data came from data provided by SGS
Statistical Services based on an analysis of voluntary survey responses
solicited from 30 electric utilities (not all of which provided
data). Retail rate data (retail sales and retail revenue) for the
ELTIP Retail Rates Comparison Group was obtained from the EIA-826 Monthly
Electric Utility Database.
Under the
ELTIP, an executive’s incentive payment is calculated as follows:
ELTIP
Payout
|
=
|
Salary
|
X
|
ELTIP
Incentive
Opportunity
|
X
|
Percent
of Opportunity
Achieved
|
To meet
the ELTIP objective of establishing incentive opportunities for each of the
Named Executive Officers approximating 80 percent of each Named Executive
Officer’s total long-term compensation based on a percentage of his or her base
salary rate at the end of the performance cycle, for the performance cycle ended
September 30, 2009, the TVA Board approved a 100 percent long-term incentive
opportunity for Ms. Greene, up from 65 percent in 2008, and a 100 percent
long-term incentive opportunity for Mr. McCollum, up from 70 percent in 2008,
and Mr. Kilgore as CEO approved a 50 percent long-term incentive opportunity for
Mr. Bhatnagar, up from 45 percent in 2008.
As a part
of Mr. Kilgore’s approval of the appointment of Mr. Swafford as Chief Nuclear
Officer and Executive Vice President, TVA Nuclear, Mr. Kilgore approved a 100
percent long-term incentive opportunity for Mr. Swafford for
2009. Information about the approval of Mr. Kilgore’s ELTIP incentive
opportunity for the performance cycle ended September 30, 2009 (which was
eliminated as part of the February 12, 2009, TVA Board action), is provided
below under the heading “Considerations Specific to Mr.
Kilgore.”
The
following table shows the performance goals and weighting and percent of
opportunity achieved for the ELTIP for the two-year cycle ended September 30,
2009:
ELTIP Performance Goals, Weighting,
and Percent of Opportunity
|
|||||||||
Goals
|
Performance
Achievement
|
||||||||
Performance
Measure
|
Threshold
(50%)
|
Target
(100%)
|
Maximum
(150%)
|
Performance
Results
|
Actual
(%)
|
X
|
Weight
(%)
|
=
|
Result
(%)
|
Retail
Rate
|
Improvement
Over Last Performance Cycle
|
Top
25% of Comparison
Companies
|
Top
10% of Comparison Companies
|
Below
Threshold
|
0.00%
|
50%
|
0.00%
|
||
Connection
Point Interrruption
|
Top
25% of Comparison Companies
|
Top
10% of Comparison Companies
|
Maximum
|
150%
|
50%
|
75%
|
|||
Overall
Percent of Opportunity Achieved
|
75%
|
As a part of the ELTIP, the TVA Board
reserves discretion to review results and peer group comparisons and to approve
adjustments in payouts, if appropriate, given the circumstances. In
2009, no discretion other than the elimination of the ELTIP payout to Mr.
Kilgore was exercised to adjust the amount of the payout for the Named Executive
Officers.
As a result, the Named Executive
Officers were awarded the following ELTIP payouts for 2009 in comparison to the
2009 target payouts:
2009
ELTIP Payouts
|
|||||
NEO
|
Salary
|
ELTIP
Incentive Opportunity
|
Target
ELTIP Payout
|
Percent
of Opportunity Achieved
|
ELTIP
Payout
|
Tom
D. Kilgore
|
$850,000
|
150%
|
$1,275,000
|
NA
|
$0
|
Kimberly
S. Greene
|
$525,000
|
100%
|
$525,000
|
75.00%
|
$393,750
|
William
R. McCollum, Jr.
|
$745,514
|
100%
|
$745,514
|
75.00%
|
$559,136
|
Preston
D. Swafford
|
$525,000
|
100%
|
$525,000
|
75.00%
|
$393,750
|
Ashok
S. Bhatnagar
|
$456,246
|
50%
|
$228,123
|
75.00%
|
$171,092
|
Awards to
the Named Executive Officers under the ELTIP for the performance cycle that
ended on September 30, 2009, are reported in the “Non-Equity Incentive Plan
Compensation” column in the Summary Compensation Table.
Long-Term Deferred
Compensation. Unlike private sector companies in the energy
services industry, TVA is a corporate agency and instrumentality of the United
States and thus does not have equity securities to provide stock awards or
options as a form of compensation for its employees. Although TVA
cannot and does not seek to replicate the type of equity-based compensation
available at companies in TVA’s peer group, TVA does enter into agreements with
certain executives, including the Named Executive Officers, that are
administered under TVA’s LTDCP, which provides a retention incentive similar to
restricted stock. The LTDCP agreements are designed to provide
retention incentives to executives to encourage them to remain with TVA and to
provide, in combination with salary and EAIP and ELTIP incentive awards, a
competitive level of total compensation. Under the LTDCP, credits
(which may be vested or
unvested) are made to an account in an executive’s name (typically on an annual
basis) for a predetermined period. If the executive remains employed
at TVA until the end of this period (typically three to five years), the
executive becomes vested in the balance of the account, including any return on
investment on the credits in the account, and receives a distribution in
accordance with a deferral election made at the time the LTDCP agreement was
entered into. Annual LTDCP credits are awarded to the Named Executive
Officers in amounts targeted to constitute approximately 20 percent of each
Named Executive Officer’s total long-term compensation in conjunction with
targeted ELTIP compensation described above. Annual credits provided
to the Named Executive Officers under LTDCP agreements in 2009 are reported in
the “All Other Compensation” column in the Summary Compensation
Table. These credits are also reported in the “Registrant
Contributions in Last FY” column in the Nonqualified Deferred Compensation Table
since the credits were placed in deferred compensation accounts in the Named
Executives Officers’ names.
Descriptions
of all the LTDCP agreements with the Named Executive Officers are found
following the Grants of Plan-Based Awards Table and in Item 9B, Other
Information.
Considerations Specific to Mr.
Swafford. In October 2009, Mr. Kilgore approved a $100,000
lump sum performance award for Mr. Swafford for improvement in the overall
performance of Watts Bar Nuclear Plant based on a nuclear power industry peer
evaluation in 2009. In addition, Mr. Kilgore approved an arrangement
for Mr. Swafford that provides for similar awards in future years that is
described in more detail under “Termination Compensation and Other
Arrangements.”
Considerations Specific to Mr.
Kilgore. At the beginning of 2009, the FSRA Committee, in
consultation with its independent executive compensation consultant, Watson
Wyatt, evaluated Mr. Kilgore’s overall performance and then-current compensation
relative to TVA’s Compensation Plan and peer group to determine whether to
recommend adjustments to Mr. Kilgore’s compensation to the TVA Board for
2009.
In 2008,
Mr. Kilgore received an annual salary of $650,000, an EAIP incentive opportunity
of 125 percent of salary, and an ELTIP incentive opportunity of 150 percent of
salary, plus a $300,000 credit under an LTDCP agreement. After
considering information on chief executive officer compensation at the median of
the relevant marketplace (TVA’s peer group) provided by Watson Wyatt, the FSRA
Committee recommended that the TVA Board increase Mr. Kilgore’s potential total
compensation by 8.7 percent for 2009 by increasing his salary by $200,000, but
reducing his EAIP incentive opportunity from 125 percent to 100 percent, while
keeping his ELTIP incentive opportunity and LTDCP credit the
same. His EAIP goals were the same as the goals for Ms. Greene and
Mr. McCollum, based 30 percent on TVA level goals and 70 percent on business
unit goals, and he shared the same ELTIP performance goals, weighting, and
percent of opportunity. As for 2008, the FSRA Committee’s
recommendation was lower than that recommended by Watson Wyatt. The
FSRA Committee made its recommendation taking into account Mr. Kilgore’s overall
responsibility for TVA as President and CEO, his good overall performance in
2008, and the need to keep his total compensation increases competitive with
total compensation increases for other CEOs in TVA’s peer group, while
acknowledging the special place and mission of TVA and the belief that Mr.
Kilgore’s total compensation should be placed at greater risk than any other TVA
executive (65 percent of overall target compensation) given the continuing
special challenges facing TVA in 2009. At its October 30, 2008,
meeting, the TVA Board reviewed and approved the recommendation of the FSRA
Committee.
Below is
a chart comparing the chief executive officer median compensation data provided
by Watson Wyatt based on TVA’s peer group with the compensation approved by the
TVA Board for Mr. Kilgore at the October 30, 2008, TVA Board
meeting:
CEO
Peer Group Compensation Comparison
|
||
Watson
Wyatt Chief Executive Officer Median
Market
Data Range (TVA Peer Group)
|
TVA
Board Approved Target
Compensation
for 2009
|
|
Base
Salary
|
$1,046,000
- $1,150,000
|
$850,000
|
Annual
Incentive %
|
100%
|
100%
|
Total
Cash Compensation
|
$2,091,000
- $2,303,000
|
$1,700,000
|
Long-Term
Incentive %
|
335%
- 385%
|
150%
|
Total
Direct Compensation
|
$5,594,000
- $6,732,000
|
$3,275,000*
|
Note
* Includes an annual credit of
$300,000 provided under a LTDCP agreement. See information
regarding the details of the LTDCP agreement under “Long-Term
Deferred Compensation Plan.”
|
At its
February 12, 2009, meeting, the TVA Board, upon the recommendation of the FSRA
Committee and with Mr. Kilgore’s support, determined to eliminate all of Mr.
Kilgore’s payouts under the EAIP and ELTIP for 2009 and to freeze his 2010
salary at the 2009 level. The TVA Board understood that this decision
would place Mr. Kilgore’s total compensation well below chief executive officer
compensation of TVA’s peer group but felt these adjustments were necessary given
Mr. Kilgore’s position as President and CEO in response to the new, significant
financial challenges facing TVA after the beginning of 2009 and reflected the
TVA Board’s belief that, as the CEO, his total compensation should be placed in
high risk. Had his EAIP and ELTIP payments not been eliminated, Mr.
Kilgore would have received $574,685 and $956,250, respectively, based on
achievement of the various goals under these plans.
Pension
Benefits. All of the Named Executive Officers are eligible to
participate in the following qualified plans available to, and on the same terms
and conditions applicable to, all annual TVA employees:
• Defined
benefit plan
|
–
|
Cash
Balance Benefit Structure (“CBBS”) for employees first hired on or after
January 1, 1996, with a pension based on an account that receives pay
credits equal to six percent of compensation plus
interest
|
• 401(k)
plan
|
–
|
For
CBBS members, TVA provides matching contributions of 75 cents on every
dollar up to 4.5 percent of annual
salary.
|
The
availability of, and level of benefits provided by, these qualified plans is
comparable to similar qualified plans provided by other companies in TVA’s peer
group.
In
addition, certain executives in critical positions, including each of the Named
Executive Officers, as determined by TVA on an individual basis, are eligible to
participate in TVA’s SERP. If the executive is the CEO or a direct
report to the CEO, then the TVA Board must approve the executive’s participation
in SERP. If the executive is not a direct report to the CEO, then the
CEO may approve the executive’s participation in SERP. The SERP is a
non-qualified pension plan that provides supplemental pension benefits tied to
compensation levels that exceed limits imposed by IRS regulations applicable to
TVA’s qualified plans. TVA provides the SERP to certain executives in
critical positions, including the Named Executive Officers, under the belief
that these executives should receive an appropriate total retirement benefit
based on a similar level of compensation credited under TVA’s qualified plans
regardless of IRS qualified plan limits. The availability of, and
level of benefit provided by, this supplemental pension plan is comparable to
similar non-qualified pension plans provided by other companies in TVA’s peer
group and helps TVA to remain competitive in attracting and retaining top-level
executives. Because “compensation” for purposes of SERP includes
EAIP, the actions by the TVA Board to eliminate or reduce EAIP payouts to the
Named Executive Officers could reduce SERP benefits to the Named Executive
Officers in certain circumstances.
More
information regarding these retirement and pension plans is found following the
Pension Benefits Table.
Perquisites. In
2009, TVA provided certain executives, including Ms. Greene, Mr. McCollum, Mr.
Bhatnagar, and Mr. Swafford, a flat-dollar biweekly vehicle allowance that may
be applied toward the purchase or lease of a vehicle, operating fees, excess
mileage, maintenance, repairs, and insurance. Vehicle allowances are
granted on a “business need” basis to a very limited number of
executives. The amount of the vehicle allowances granted to the Named
Executive Officers is reported in the “All Other Compensation” column in the
Summary Compensation Table.
In 2009,
TVA began offering a Financial Counseling Services Program for a limited number
of executives approved by the CEO. Under the program, participants
are eligible to receive personal financial counseling services, such as estate
planning, investment planning, income tax planning, income tax preparation, and
retirement planning. TVA pays the cost of the program for each
participant and also pays each participant a gross-up amount that reasonably
approximates the additional income and employment taxes estimated to be payable
as a result of TVA’s payments pursuant to the program. Mr. Swafford
is the only Named Executive Officer eligible to participate in the Financial
Counseling Services Program. In 2009, TVA made no payments on behalf
of Mr. Swafford pursuant to this program.
TVA did
not provide any other perquisites to the Named Executive Officers in
2009.
Health and Other
Benefits. TVA offers a group of health and other benefits
(medical, dental, vision, life and accidental death and disability insurance,
and long-term disability insurance) that are available to a broad group of
employees. The Named Executive Officers and directors are eligible to
participate in TVA’s health benefit plans and other non-retirement benefit plans
on the same terms and at the same contribution rates as other TVA
employees.
Summary
Compensation and Grants of Plan-Based Awards
The
following table sets forth information regarding compensation earned by each of
the Named Executive Officers in 2009 (and 2008 and 2007 as
applicable).
Summary
Compensation Table
|
|||||||||
Name
and Principal Position
(a)
|
Year
(b)
|
Salary
($)
(c)
|
Bonus
($)
(d)
|
Stock
Awards
($)
(e)
|
Option
Awards
($)
(f)
|
Non-Equity
Incentive Plan Compensation
($)
(g)
|
Change
in Pension Value and
Nonqualified
Deferred Compensation Earnings
($)
(h)
|
All
Other Compensation
($)
(i)
|
Total
($)
(j)
|
Tom
D. Kilgore
President
and Chief Executive Officer
|
2009
2008
2007
|
$853,270
$655,000
$308,693
|
—
—
$341,293
5
|
—
—
—
|
—
—
—
|
$0
$1,099,426
3
$890,507
6
|
$0
1
$406,152
4
$138,274
7
|
$310,350
2
$310,125
$309,900
|
$1,163,620
$2,470,703
$1,988,667
|
Kimberly
S. Greene
Chief
Financial Officer and Executive Vice President, Financial
Services
|
2009
2008
2007
|
$527,020
$503,847
$38,462
|
—
—
—
|
—
—
—
|
—
—
—
|
$393,750
8
$493,838
11
$36,159
13
|
$135,091
9
$223,707
12
$242,752
14
|
$172,082
10
$78,797
$370,900
|
$1,227,943
$1,300,189
$688,273
|
William
R. McCollum, Jr.
Chief
Operating Officer
|
2009
2008
2007
|
$748,381
$726,547
$293,461
|
—
—
—
|
—
—
—
|
—
—
—
|
$559,136
15
$751,751
18
$1,042,132
20
|
$265,870
16
$126,440
19
$2,026,417
21
|
$222,082
17
$223,237
$468,727
|
$1,795,469
$1,827,975
$3,830,737
|
Preston
D. Swafford
Chief
Nuclear Officer and
Executive
Vice President, TVA Nuclear
|
2009
2008
2007
|
$499,877
—
—
|
$100,000
22
—
—
|
—
—
—
|
—
—
—
|
$558,390
23
—
—
|
$201,516
24
—
—
|
$147,08225
—
—
|
$1,506,865
—
—
|
Ashok
S. Bhatnagar
Senior
Vice President, Nuclear Generation Development and
Construction
|
2009
2008
2007
|
$458,001
$437,863
$236,608
|
—
—
$189,384
5
|
—
—
—
|
—
—
—
|
$375,609
26
$403,661
29
$470,668
31
|
$245,892
27
$29,226
30
$154,937
32
|
$165,437
28
$165,612
$165,405
|
$1,244,939
$1,036,362
$1,217,002
|
Notes
(1)
Reflects an increase of $16,929 under the CBBS and a decrease of $133,752
under the SERP.
(2)
Represents a credit in the amount of $300,000 that vested on September 30,
2009, which was provided under a LTDCP agreement with Mr. Kilgore, and
$10,350 in 401(k) employer matching contributions. See
information regarding the details of the LTDCP agreement under “Long-Term
Deferred Compensation Plan.”
(3)
Represents $374,806 awarded under the EAIP and $724,620 awarded under the
ELTIP.
(4)
Represents increases of $12,232 under the CBBS and $393,920 under the
SERP.
(5)
Represents additional annual compensation paid in quarterly installments
through May 31, 2007. Prior to March 31, 2006, the TVA Act
provided that salaries for TVA employees, including the Named Executive
Officers, could match but not exceed the salary of a TVA Board
member. Although the TVA Act, as amended by the Consolidated
Appropriations Act, removed this limitation, salaries were limited to
$145,400 for a portion of 2007. Accordingly, additional annual
compensation, which was paid in quarterly installments, was used in
conjunction with salaries to provide a competitive level of base
compensation.
(6)
Represents $427,382 awarded under the EAIP and $463,125 awarded under the
ELTIP.
(7)
Represents increases of $11,088 under the CBBS and $127,186 under the
SERP.
(8)
Represents $393,750 awarded under the ELTIP.
(9)
Represents increases of $20,754 under the CBBS and $114,337 under the
SERP.
(10)
Represents unvested annual credits totaling $150,000 provided under two
separate LTDCP agreements with Ms. Greene, $11,732 in vehicle allowance
payments, and $10,350 in 401(k) employer matching
contributions. See information regarding the details of the
LTDCP agreements under “Long-Term Deferred Compensation
Plan.”
(11)
Represents $252,298 awarded under the EAIP and $241,540 awarded under the
ELTIP.
(12)
Represents increases of $9,529 under the CBBS and $214,178 under the
SERP.
(13)
Represents $25,439 awarded under the EAIP and $10,720 awarded under the
ELTIP.
(14)
Represents increases of $5,598 under the CBBS and $237,154 under the
SERP.
(15)
Represents $559,136 awarded under the ELTIP.
(16)
Represents increases of $15,789 under the CBBS and $250,081 under the
SERP.
(17)
Represents an unvested annual credit in the amount of $200,000 provided
under a LTDCP agreement with Mr. McCollum, $11,732 in vehicle allowance
payments, and $10,350 in 401(k) employer matching
contributions. See information regarding the details of the
LTDCP agreement under “Long-Term Deferred Compensation Plan.”
|
(18)
Represents $376,658 awarded under the EAIP and $375,093 awarded under the
ELTIP.
(19)
Represents increases of $10,821 under the CBBS and $115,619 under the
SERP.
(20)
Represents $460,257 awarded under the EAIP and $581,875 awarded under the
ELTIP.
(21)
Represents increases of $5,385 under the CBBS and $2,021,032 under the
SERP.
(22)
Represents a lump sum performance payment awarded for an improved nuclear
power industry peer evaluation of Watts Bar Nuclear Plant in
2009.
(23)
Represents $164,640 awarded under the EAIP and $393,750 awarded under the
ELTIP.
(24)
Represents increases of $27,674 under the CBBS and $173,842 under the
SERP.
(25)
Represents an unvested annual credit in the amount of $125,000 provided
under a LTDCP agreement with Mr. Swafford, $11,732 in vehicle allowance
payments, and $10,350 in 401(k) employer matching
contributions. See information regarding the details of the
LTDCP agreement under “Long-Term Deferred Compensation Plan.”
(26)
Represents $204,517 awarded
under the EAIP and $171,092 awarded under the ELTIP.
(27)
Represents increases of $36,696 under the CBBS and $209,196 under the
SERP.
(28)
Represents a credit in the amount of $150,000 that vested on September 30,
2009, which was provided under a LTDCP agreement with Mr. Bhatnagar,
$11,732 in vehicle allowance payments, and $3,705 in 401(k) employer
matching contributions. See information regarding the
details of the LTDCP agreement under “Long-Term Deferred Compensation
Plan.”
(29)
Represents $258,340 awarded under the EAIP and $145,321 awarded under the
ELTIP.
(30)
Represents increases of $14,284 under the CBBS and $14,942 under the
SERP.
(31)
Represents $199,572 awarded under the EAIP, $227,644 awarded under the
ELTIP, and a credit in the amount of $43,452 made to Mr. Bhatnagar’s
deferred compensation account provided under a LTDCP agreement with Mr.
Bhatnagar for achievement of major milestones in 2007 associated with the
Browns Ferry Unit 1 Recovery Project.
(32)
Represents increases of $16,030 under the CBBS and $138,907 under the
SERP.
|
The
following table provides information regarding non-equity incentive plan awards
and the possible range of payouts associated with incentives the Named Executive
Officers were eligible to receive for performance in the performance cycles
ending in 2009.
Grants
of Plan-Based Awards Table
|
||||
Estimated
Possible Payouts Under
Non-Equity
Incentive Plan Awards 1
|
||||
Name
(a)
|
Plan
(b)
|
Threshold
2
($)
(c)
|
Target
2
($)
(d)
|
Maximum
2
($)
(e)
|
Tom
D. Kilgore
|
EAIP
3
ELTIP
4
|
$637,500
/ $0
$637,500
/ $0
|
$850,000
/ $0
$1,275,000
/ $0
|
$1,062,500
/ $0
$1,912,500
/ $0
|
Kimberly
S. Greene
|
EAIP
3
ELTIP
4
|
$275,625
/ $0
$262,500
/ $262,500
|
$367,500
/ $0
$525,000
/ $525,000
|
$459,375
/ $0
$787,500
/ $787,500
|
William
R. McCollum, Jr.
|
EAIP
3
ELTIP
4
|
$391,395
/ $0
$372,757
/ $372,757
|
$521,860
/ $0
$745,514
/ $745,514
|
$652,325
/ $0
$1,118,271
/ $1,118,271
|
Preston
D. Swafford
|
EAIP
3
ELTIP
4
|
$315,000
/ $220,500
$262,500
/ $262,500
|
$420,000
/ $294,000
$525,000
/ $525,000
|
$525,000
/ $367,500
$787,500
/ $787,500
|
Ashok
S. Bhatnagar
|
EAIP
3
ELTIP
4
|
$205,311
/ $143,718
$114,062
/ $114,062
|
$273,748
/ $191,624
$228,123
/ $228,123
|
$342,185
/ $239,530
$342,185
/ $342,185
|
Notes
(1) TVA
does not have any equity securities and therefore has no equity-based
awards.
(2) Threshold,
Target, and Maximum represent amounts that could be earned by an NEO
before/after the February 12, 2009 action of the TVA
Board. Actual EAIP awards earned for performance in 2009 are
reported for each of the Named Executive Officers who receive them under
“Non-Equity Incentive Plan Compensation” in the Summary Compensation
Table.
(3) Target
incentive opportunities as a percentage of salaries were as
follows: Mr. Kilgore, 100%; Ms. Greene, 70%; Mr. McCollum, 70%;
Mr. Swafford, 80%; Mr. Bhatnagar, 60%. Actual EAIP awards
earned for performance in 2009 are reported for each of the Named
Executive Officers who receive them under “Non-Equity Incentive Plan
Compensation” in the Summary Compensation Table.
(4) Target
incentive opportunities for the two-year performance cycle ended September
30, 2009 as a percentage of salaries were as follows: Mr. Kilgore, 150%;
Ms. Greene, 100%; Mr. McCollum, 100%; Mr. Swafford, 100%; Mr. Bhatnagar,
50%. Actual ELTIP awards earned for the performance cycle ended
on September 30, 2009, are reported for each of the Named Executive
Officers who receive them under “Non-Equity Incentive Plan Compensation”
in the Summary Compensation Table.
|
Based on
the action of the TVA Board at its February 12, 2009, meeting to reduce or
eliminate EAIP and ELTIP payments, as discussed above, Mr. Kilgore did not
receive either an EAIP payout or an ELTIP payout for 2009, and neither Ms.
Greene nor Mr. McCollum received an EAIP payout for 2009. In
addition, Mr. Bhatnagar and Mr. Swafford, like all other TVA employees, did not
receive any EAIP payout based on TVA level goals. For Mr. Bhatnagar
and Mr. Swafford, the
remaining payout under the EAIP for 2009 was calculated as the product of salary
multiplied by the annual incentive opportunity multiplied by the percent of
opportunity achieved. Based on this calculation, the EAIP payouts
were $204,517 (44.83 percent of salary) for Mr. Bhatnagar and $164,640 (31.36
percent of salary) for Mr. Swafford.
For Ms.
Greene, Mr. McCollum, Mr. Bhatnagar, and Mr. Swafford, awards earned under the
ELTIP for the two-year performance cycle ended on September 30, 2009, were
calculated as the product of salary multiplied by the ELTIP incentive
opportunity multiplied by the percent of opportunity achieved. Based
on this calculation, and a 75.00 percent of opportunity achieved, the ELTIP
payouts were $393,750 (75.00 percent of salary) for Ms. Greene; $559,136 (75.00
percent of salary) for Mr. McCollum; $171,092 (37.50 percent of salary) for Mr.
Bhatnagar; and $393,750 (75.00 percent of salary) for Mr.
Swafford. Awards under the EAIP and ELTIP will be paid in cash during
the first quarter of 2010 with a deferral option. Mr. McCollum and
Mr. Swafford elected to defer 100 percent and 25 percent, respectively, of their
ELTIP awards earned for the performance cycle ended on September 30,
2009.
Long-Term
Deferred Compensation Plan
The TVA
Long-Term Deferred Compensation Plan is designed to provide long-term incentives
to executives to encourage them to stay with TVA and to provide competitive
levels of total compensation to such executives. Participating
executives enter into deferral agreements with TVA under which deferred
compensation credits are made to an account in the participant’s
name. Credits are made on an annual basis for an established period
of time after which the account balance, with interest or return, is paid to the
participant. Interest is credited daily to the balance reflected in
the participant’s deferral account. Interest is calculated based on
the composite rate of all marketable U.S. Treasury issues. In the
alternative, participants may choose to have their balance adjusted based on the
return on certain mutual funds.
In March
2005, TVA entered into a LTDCP agreement with Mr. Kilgore. Under the
terms of the agreement, Mr. Kilgore received deferred compensation credits of
$300,000 on March 31, 2005, October 1, 2005, October 1, 2006, October 1, 2007,
and October 1, 2008. Pursuant to the agreement, Mr. Kilgore was
vested in the first credit of $300,000 at the time the credit was made and in
any earnings on this amount. Mr. Kilgore was vested in the remaining
balance of his account on September 30, 2009, since he remained employed by TVA
through that date. The entire balance of his account, which includes
the credits and earnings on such credits, will be distributed to Mr. Kilgore in
a lump sum following the termination of his employment with TVA.
In
September 2007, TVA entered into a LTDCP agreement with Ms.
Greene. Under the terms of the agreement, Ms. Greene received a
deferred compensation credit of $280,000 on September 4, 2007, and deferred
compensation credits of $100,000 on October 1, 2008, and October 1,
2009. Ms. Greene will also receive a deferred compensation credit in
the amount of $100,000 on October 1, 2010, if she remains employed by TVA on
that date. Pursuant to the agreement, Ms. Greene was vested in the
first credit of $280,000 at the time the credit was made and will be vested in
any earnings on this amount. Ms. Greene will vest in the remaining
balance of her account only if she remains employed by TVA until the expiration
of the agreement on September 30, 2011. All vested credits, and
earnings on such credits, in her account will be distributed to her in five
annual installments following the termination of her employment with
TVA. In the event TVA terminates Ms. Greene’s employment during the
term of the LTDCP agreement through no act or delinquency of her own, any
credits and earnings on those credits in Ms. Greene’s account at the time of
termination will become vested and distributed to her in five annual
installments. If Ms. Greene voluntarily terminates her employment or
TVA terminates Ms. Greene’s employment for cause prior to the expiration of the
agreement, all credits, and earnings on such credits, in Ms. Greene’s account,
except the initial $280,000 credit and any earnings on this amount, will be
forfeited.
In
December 2008, TVA entered into a second LTDCP agreement with Ms. Greene. Under
the terms of the agreement, Ms. Greene received deferred compensation credits of
$50,000 on December 1, 2008, and October 1, 2009. Ms. Greene will
also receive deferred compensation credits in the amount of $150,000 each on
October 1, 2010, and October 1, 2011, if she remains employed by TVA on these
dates. Ms. Greene will vest in her account only if she remains
employed by TVA until the expiration of the agreement on September 30,
2012. All vested credits, and earnings on such credits, in her
account will be distributed to her in a lump sum following the termination of
her employment with TVA. In the event TVA terminates Ms. Greene’s
employment during the term of the LTDCP agreement through no act or delinquency
of her own, any credits and earnings on those credits in Ms. Greene’s account at
the time of termination will become vested and distributed to her in a lump
sum. If Ms. Greene voluntarily terminates her employment or TVA
terminates Ms. Greene’s employment for cause prior to the expiration of the
agreement, all credits, and earnings on such credits, in Ms. Greene’s account
will be forfeited.
In May
2007, TVA entered into a LTDCP agreement with Mr. McCollum. Under the
terms of the agreement, Mr. McCollum received a deferred compensation credit of
$350,000 on May 1, 2007, and deferred compensation credits of $200,000 on
October 1, 2007, October 1, 2008, and October 1, 2009. Mr. McCollum
will also receive a deferred compensation credit in the amount of $200,000 on
October 1, 2010, if he remains employed by TVA on this date. Pursuant
to the agreement, Mr. McCollum was vested in the first credit of $350,000 at the
time the credit was made and will be vested in any earnings on this
amount. Mr. McCollum will vest in the remaining balance on his
account only if he
remains employed by TVA until the expiration of the agreement on September 30,
2011. All vested credits, and earnings on such credits, in his
account will be distributed to him in five annual installments following the
termination of his employment with TVA. In the event TVA terminates
Mr. McCollum’s employment during the term of the LTDCP agreement through no act
or delinquency of his own, any credits and earnings on those credits in Mr.
McCollum’s account at the time of termination will become vested and distributed
to him in five annual installments. If Mr. McCollum voluntarily
terminates his employment or TVA terminates Mr. McCollum’s employment for cause
prior to the expiration of the agreement, all credits, and earnings on such
credits, in Mr. McCollum’s account, except the initial $350,000 credit and any
earnings on this amount, will be forfeited.
In June
2006, TVA entered into a LTDCP agreement with Mr. Swafford. Under the
terms of the agreement, Mr. Swafford received deferred compensation credits of
$125,000 on June 1, 2006, October 1, 2006, October 1, 2007, October 1, 2008, and
October 1, 2009. Mr. Swafford will vest in his account only if he
remains employed by TVA until the expiration of the agreement on September 30,
2010. All vested credits, and earnings on such credits, in his
account will be distributed to him in a lump sum following the termination of
his employment with TVA. In the event TVA terminates Mr. Swafford’s
employment during the term of the LTDCP agreement through no act or delinquency
of his own, any credits and earnings on those credits in Mr. Swafford’s account
at the time of termination will become vested and distributed to him in a lump
sum. If Mr. Swafford voluntarily terminates his employment or TVA
terminates Mr. Swafford’s employment for cause prior to the expiration of the
agreement, all credits, and earnings on such credits, in Mr. Swafford’s account
will be forfeited.
In
September 2004, TVA entered into a LTDCP agreement with Mr.
Bhatnagar. Under the terms of the agreement, Mr. Bhatnagar received
deferred compensation credits of $150,000 on October 1, 2004, October 1, 2005,
October 1, 2006, October 1, 2007, and October 1, 2008. Mr. Bhatnagar
was vested in his account on September 30, 2009, and the entire balance of his
account, which includes the credits and earnings on such credits, was
distributed to Mr. Bhatnagar in a lump sum in October 2009.
Retirement
and Pension Plans
The
following table provides the actuarial present value of the Named Executive
Officers’ accumulated benefits, including the number of years of credited
service, under TVA’s retirement and pension plans as of September 30, 2009,
determined using a methodology and interest rate and mortality rate assumptions
that are consistent with those used in the financial statements contained in
this Annual Report as set forth in Note 18.
Pension
Benefits Table
|
||||||
Name
(a)
|
Plan
Name
(b)
|
Number
of
Years
of Credited Service 1
(#)
(c)
|
Present
Value of Accumulated Benefit
($)
(d)
|
Payments
During Last Year
($)
(e)
|
||
Tom
D. Kilgore
|
(1)
Qualified Plan – CBBS
(2)
Non-Qualified – SERP Tier 1
|
4.58
8.00
2
|
$53,738
$1,845,052
|
$0
$0
|
||
Kimberly
S. Greene
|
(1)
Qualified Plan – CBBS
(2)
Non-Qualified – SERP Tier 1
|
2.08
17.08
3
|
$35,881
$565,669
|
$0
$0
|
||
William
R. McCollum, Jr.
|
(1)
Qualified Plan – CBBS
(2)
Non-Qualified – SERP Tier 1
|
2.42
12.42
4
|
$31,995
$2,386,732
|
$0
$0
|
||
Preston
D. Swafford
|
(1)
Qualified Plan – CBBS
(2)
Non-Qualified – SERP Tier 1
|
3.42
8.42
5
|
$56,889
$542,851
|
$0
$0
|
||
Ashok
S. Bhatnagar
|
(1)
Qualified Plan – CBBS
(2)
Non-Qualified – SERP Tier 1
|
10.08
10.08
|
$149,257
$779,125
|
$0
$0
|
||
Notes
(1)
Limited to 24 years when determining supplemental benefits available under
SERP Tier 1, described below.
(2)
Mr. Kilgore has been granted three additional years of credited service
for pre-TVA employment following five years of actual TVA
service. In the event his employment is
terminated during the first five years (other than for cause), the
five-year vesting requirement will be waived and he will receive credit
for eight years of service. In
addition, the offset for prior employer pension benefits will be waived,
and the offset for benefits provided under TVA’s defined benefit plan will
be calculated based
on the actual pension benefit he will receive as a participant in the
CBBS. Without waiving the vesting requirement and the
additional years of credited service, the
present value of Mr. Kilgore’s accumulated benefit would be
$0.
(3)
Ms. Greene has been granted 15 additional years of credited service for
pre-TVA employment and the offset for prior employer pension benefits has
been waived. The offset
for benefits provided under TVA’s defined benefit plan will be calculated
based on the benefit she will be eligible to receive as a participant in
the CBBS taking into
account the additional years of credited service being used for SERP
benefit calculation purposes. In the event that Ms. Greene
voluntarily terminates her employment with TVA
or is terminated for cause prior to satisfying the minimum five-year
vesting requirement, no benefits will be provided under the
SERP. In the event of termination
for any other reason, prior to five years of employment, the five-year
vesting requirement will be waived and the benefit Ms. Greene will be
eligible to receive
will be payable no earlier than age 55. As of September 30,
2009, the present value of this benefit is $565,669. Without
the additional years of credited service,
the present
value of Ms. Greene’s accumulated benefit would be
$0.
|
(4)
Mr. McCollum has been granted 10 additional years of credited service for
pre-TVA employment and the offset for prior employer pension benefits has
been waived. The
additional years of credited service will be used for SERP benefit
calculation purposes only and will not count toward the minimum five-year
vesting requirement. In
the event Mr. McCollum voluntarily terminates his employment with TVA or
is terminated for cause prior to satisfying the minimum five-year vesting
requirement,
no benefits will be provided under the SERP. In the event of
termination for any other reason, prior to five years of employment, the
five-year vesting requirement will
be waived as long as the termination is considered acceptable to TVA, and
Mr. McCollum would be eligible to receive benefits payable in five annual
installments
following termination. The present value of this benefit as of
September 30, 2009, is $2,386,732. Without waiving the vesting
requirement and the additional years
of credited service, the present value of Mr. McCollum’s accumulated
benefit would be $0.
(5)
Mr. Swafford has been granted five additional years of credited service
for pre-TVA employment and the offset for prior employer pension benefits
has been waived. The additional
years of credited service will be used for SERP benefit calculation
purposes only and will not count toward the minimum five-year vesting
requirement. In addition,
the offset for benefits provided under TVA’s defined benefit plan will be
calculated based on the benefit he would be eligible to receive as a
participant
in the CBBS taking into account the additional years of credited service
being used for SERP benefit calculation purposes. In the event
Mr. Swafford voluntarily
terminates his employment with TVA or is terminated for cause prior to
satisfying the minimum five-year vesting requirement, no benefits will be
provided under
the SERP. The present value of this benefit as of September 30,
2009, is $542,851. Without the additional years of credited
service, the present value of Mr. Swafford’s
accumulated benefit would be $0.
|
Qualified Defined Benefit
Plan. TVA sponsors a qualified defined benefit plan with two
structures for employees, including the Named Executive Officers, which is
administered by the TVA Retirement System. The structures are the
Original Benefit Structure (“OBS”) and the CBBS. Participation in the
OBS is limited to employees who were covered under the plan prior to January 1,
1996. All employees first hired by TVA on or after January 1, 1996,
participate in the CBBS. As with any other qualified retirement plan,
there are limits on employee and employer contributions and compensation that
can be counted for benefit calculations set by the TVA Retirement System rules
and IRS regulations.
All of
the Named Executive Officers are members of the CBBS. Under the CBBS,
each member has a cash balance account that receives pay credits equal to 6
percent of his/her compensation each pay period (every two
weeks). For executives who are members of the CBBS, compensation is
defined as annual salary only for benefit calculation purposes and is shown
under the column titled “Salary” in the Summary Compensation Table, although
compensation could not exceed $230,000 in 2009 pursuant to the IRS annual
compensation limit applicable to qualified plans. The account is
credited with interest each month, and interest is compounded on an annual
basis. The annual interest rate used for interest credits is
determined each January 1. The interest rate is 3 percent greater
than the percentage increase in the 12-month average of the Consumer Price Index
for the period ending on the previous October 31. The minimum
interest rate is 6 percent and the maximum interest rate is 10 percent unless
the TVARS Board, with TVA’s approval, selects a higher interest
rate. When a member elects to begin receiving retirement benefits,
the cash balance account is converted to a monthly pension payment by dividing
the ending value of the cash balance account by a conversion factor set forth in
the plan based on the member’s actual age in years and months.
Members
with at least five years of CBBS service are eligible to receive an immediate
benefit. CBBS service is the length of time spent as a member of the
TVA Retirement System and does not include credit for unused sick leave,
forfeited annual leave, or pre-TVA employment military service. The
CBBS does not provide for early retirement benefits to any Named Executive
Officer or any other member in the CBBS.
Supplemental Executive Retirement
Plan. The SERP is a non-qualified defined benefit pension plan
similar to those typically found in other companies in TVA’s peer group and is
provided to a limited number of executives, including the Named Executive
Officers. TVA’s SERP was created to recruit and retain key
executives. The plan is designed to provide a competitive level of
retirement benefits in excess of the limitations on contributions and benefits
imposed by TVA’s qualified defined benefit plan and IRS code section 415 limits
on qualified retirement plans.
The SERP
provides two distinct levels of participation, Tier 1 and Tier
2. Each employee is assigned to one of the two tiers at the time he
or she is approved to participate in the SERP. The level of
participation (“Tier”) defines the level of retirement benefits provided under
the SERP at the time of retirement.
Under the
SERP, normal retirement eligibility is age 62 with five years of vesting
service. No vested and accrued benefits are payable prior to age 55,
and benefits are reduced for retirements prior to age 62. The level
of reduction in benefits for retirements prior to age 62 depends on whether a
participant’s termination is “approved” or “unapproved.” In the event
of an approved termination of TVA employment, any vested and accrued benefits
are reduced by 5/12 percent for each month that the date of benefit commencement
precedes the participant’s 62nd birthday up to a maximum reduction of 35
percent. In the event of an unapproved termination of TVA employment,
the participant’s accrued benefits are first subject to a reduced percentage of
vesting if the participant’s years of service are between five and
ten. At five years of vesting service, the vested percentage of
retirement benefits is 50 percent and increases thereafter by 10 percent for
each full additional year of service, reaching 100 percent vesting for ten or
more years of vesting service. Thereafter, any vested and accrued
benefits are reduced by 10/12 percent for each month that the date of benefit
commencement precedes the participant’s 62nd birthday up to a maximum reduction
of 70 percent.
For
purposes of the SERP, an “approved” termination means termination of employment
with TVA due to (i) retirement on or after the participant’s 62nd birthday, (ii)
retirement on or after attainment of actual age 55, if such retirement has the
approval of the TVA Board or its delegate, (iii) death in service as an
employee, (iv) disability (as such term is defined under TVA’s long-term
disability plan), or (v) any other circumstances approved by the TVA Board or
its delegate. For purposes of the SERP, an “unapproved” termination
means a termination of employment with TVA when such termination does not
constitute an “approved” termination as defined in the preceding
sentence.
SERP Tier
1. All of the Named Executive Officers are participants in
Tier 1. The Tier 1 structure is designed to replace 60 percent of the
amount of a participant’s compensation at the time the participant reaches age
62 and has accrued 24 years of service at TVA.
Tier 1
benefits are based on a participant’s highest average compensation during three
consecutive SERP years and a pension multiple of 2.5 percent for each year of
credited service up to a maximum of 24 years. Compensation is defined
as salary, additional annual compensation, and EAIP for benefit calculation
purposes. Tier 1 benefits are offset by Social Security benefits,
benefits provided under TVA’s defined benefit plan, and prior employer pension
benefits when applicable.
SERP Tier
2. None of the Named Executive Officers participates in Tier
2.
The TVA Sponsored 401(k)
Plan. Members of the TVA Retirement System, including the
Named Executive Officers, may elect to participate in the TVA Retirement
System’s 401(k) plan on a before- and/or after-tax basis. For CBBS
members, TVA provides a matching contribution of 75 cents on every dollar
contributed on a before- and/or after-tax basis up to 4.5 percent of the
participant’s annual salary.
Nonqualified
Deferred Compensation
The
following table provides information regarding deferred contributions, earnings,
and balances for each of the Named Executive Officers. The amounts
reported under this table do not represent compensation in addition to the
compensation that was earned in 2009 and already reported in the Summary
Compensation Table but rather the amounts of compensation earned by the Named
Executive Officers in 2009 or prior years that was or has been
deferred.
Nonqualified
Deferred Compensation Table
|
|||||
Name
(a)
|
Executive
Contributions
in
Last
FY
($)
(b)
|
Registrant
Contributions
in
Last
FY
($)
(c)
|
Aggregate
Earnings
in
Last
FY 1
($)
(d)
|
Aggregate
Withdrawals/
Distributions
($)
(e)
|
Aggregate
Balance
at
Last
FYE 2
($)
(f)
|
Tom
D. Kilgore
|
$0
|
$300,000
3
|
$109,883
|
$0
|
$3,441,513
4
|
Kimberly
S. Greene
|
$0
|
$150,000
5
|
$16,353
|
$0
|
$461,422
6
|
William
R. McCollum, Jr.
|
$559,136
7
|
$200,000
8
|
$106,764
|
$0
|
$2,251,606
9
|
Preston
D. Swafford
|
$98,438
10
|
$125,000
11
|
$29,586
|
$0
|
$837,884
12
|
Ashok
S. Bhatnagar
|
$0
|
$150,000
13
|
$2,845
|
$0
|
$2,298,372
14
|
Notes
(1) Includes
vested and unvested earnings. Because none of the amounts is
above market earnings under SEC rules, none of these amounts is included
in the Summary Compensation Table.
(2) Includes
vested and unvested contributions and earnings.
(3) Represents
an unvested annual credit in the amount of $300,000 provided under a LTDCP
agreement with Mr. Kilgore (reported in the “All
Other Compensation”
column in the Summary Compensation Table).
(4) A
total of $2,311,522 was reported as compensation to Mr. Kilgore in the
Summary Compensation Tables in previous years.
(5) Represents
an unvested annual credit in the amount of $150,000 provided under two
separate LTDCP agreements with Ms. Greene (reported in the
“All Other Compensation” column in the Summary Compensation
Table).
(6) Includes
a total of $155,290 of contributions and earnings that were not vested as
of September 30, 2009. A total of $280,000 was reported as
compensation
to Ms. Greene in the Summary Compensation Tables in previous
years.
(7) Mr.
McCollum elected to defer 100 percent of the $559,136 to be awarded under
the ELTIP for the performance cycle that ended on
September 30,
2009 (reported in the “Non-Equity Incentive Plan Compensation” column in
the Summary Compensation Table).
(8) Represents
an unvested annual credit in the amount of $200,000 provided under a LTDCP
agreement with Mr. McCollum (reported in the "All
Other Compensation” column in the Summary Compensation
Table).
(9) Includes
a total of $398,147 of contributions and earnings that were not vested as
of September 30, 2009. The amount reported in “Executive
Contributions
in Last FY” column will be credited to his account in the first quarter of
2010 and is not included in the balance. A total of
$2,083,350
was reported as compensation to Mr. McCollum in the Summary Compensation
Tables in previous years.
(10) Mr.
Swafford elected to defer 25 percent of the $393,750 to be awarded under
the ELTIP for the performance cycle that ended on September 30,
2009 (reported in the “Non-Equity Incentive Plan Compensation” column in
the Summary Compensation Table).
(11) Represents
an unvested annual credit in the amount of $125,000 provided under a LTDCP
agreement with Mr. Swafford (reported in the “All Other
Compensation” column in the Summary Compensation Table).
(12) Includes
a total of $553,815 of contributions and earnings that were not vested as
of September 30, 2009. The amount reported in
"Executive
Contributions in Last FY” column will be credited to his account in the
first quarter of 2010 and is not included in the balance.
(13)
Represents an unvested annual credit in the amount of $150,000 provided
under a LTDCP agreement with Mr. Bhatnagar (reported in
the "All
Other Compensation” column in the Summary Compensation
Table).
(14)
A total of $533,452 was reported as compensation to Mr. Bhatnagar in the
Summary Compensation Tables in previous
years.
|
TVA
normally allows participants in the EAIP, ELTIP, and LTDCP to elect to defer all
or a portion of the compensation earned under those plans that is eligible for
deferral under the terms of each plan and applicable IRS
regulations. All deferrals are credited to each participant in a
deferred compensation account, and the deferral amounts are then funded into a
rabbi trust. Each participant may elect one or more of several
notional investment options made available by TVA or allow some or all funds to
accrue interest at the rate established by the beginning of each fiscal year
equal to the composite rate of all Treasury issues. Participants may
elect to change from either one notional investment option or the TVA interest
bearing option to another at any time. Upon termination, funds are
distributed pursuant to elections made in accordance with applicable IRS
regulations.
No
executives, including the Named Executive Officers, were permitted to defer any
portion of their annual salary or EAIP payout in 2009. Participants
in the ELTIP, including the Named Executive Officers, were permitted to elect to
defer all or a portion of their awards (25, 50, 75, or 100 percent) received
under the plans.
In
January 2005, TVA entered into an agreement with Mr. Kilgore that provides a
lump-sum payment equal to one year’s annual compensation if (1) his duties,
responsibilities, or compensation is substantially reduced, and he terminates
his employment with TVA, or (2) his employment is terminated for any reason
other than “for cause.” For purposes of this agreement, “annual
compensation” is defined as annual salary plus additional annual compensation
plus the amount of the annual and long-term incentive awards he would have been
eligible to receive based on 100 percent achievement of target performance
goals. As of September 30, 2009, this lump-sum payment would have
been equal to $2,975,000. The TVA Board action at its February 12,
2009, meeting to eliminate Mr. Kilgore’s EAIP and ELTIP payouts for 2009 had no
effect on this amount, because “annual compensation” includes annual and
long-term incentive awards based on 100 percent target achievement and not
actual awards. In addition, if his employment had been terminated on
September 30, 2009, Mr. Kilgore would have received $1,338,918 under his LTDCP
agreement payable in a lump sum following termination, and SERP benefits payable
in five annual installments, which as of September 30, 2009, had a present value
of $1,845,052. Upon termination of employment for any reason, Mr.
Kilgore would be eligible to receive any amounts that he earned in past years
but elected to defer.
In August
2007, TVA entered into an agreement with Ms. Greene that provides a lump-sum
payment in an amount equal to two years’ annual compensation in the event that
TVA’s current Chief Executive Officer no longer occupies that position and Ms.
Greene is asked to leave TVA employment for any reason other than for cause or
she terminates her employment because she is asked to take a position with TVA
other than her then current position as Chief Financial Officer and Executive
Vice President, Financial Services. For purposes of this agreement,
“annual compensation” is defined as annual salary plus the amount of the annual
incentive award based on 100 percent achievement of target performance
goals. As of September 30, 2009, this lump-sum payment would have
been equal to $1,785,000. The TVA Board action at its February 12,
2009, meeting to eliminate Ms. Greene’s EAIP payout for 2009 had no effect on
this amount, because “annual compensation” includes the annual incentive award
based on 100 percent target achievement and not the actual award. In
addition, if her employment had been terminated on September 30, 2009, other
than for cause or as a result of a voluntary resignation, Ms. Greene would have
received $155,290 under her LTDCP agreements payable to her partially in annual
installments and partially in a lump sum, and SERP benefits payable in five
annual installments beginning no earlier than age 55. As of September
30, 2009, the present value of these SERP benefits was $565,669. Upon
termination of employment for any reason, Ms. Greene would be eligible to
receive any amounts that she earned in past years but elected to
defer.
In
September 2009, Mr. Kilgore approved a performance arrangement that will provide
Mr. Swafford, as long as he remains responsible for managing and directing TVA’s
Nuclear Power Group, the opportunity to receive annual performance awards for
improvements in the overall performance of any of TVA’s nuclear plants based on
nuclear power industry peer evaluations. Under the arrangement, Mr.
Swafford will receive a lump-sum performance award of $100,000 following each
fiscal year that at least one nuclear plant in TVA’s generation portfolio
achieves an improved performance evaluation. In the event the
performance of any plant drops below that achieved in the most recent evaluation
of the plant, no award will be made. Mr. Swafford is eligible to
receive these annual performance awards based on evaluations completed in 2010
and beyond. All awards will be recommended by the Chief Operating
Officer and approved by the CEO at the end of each fiscal year.
Neither
Mr. McCollum, Mr. Swafford, nor Mr. Bhatnagar has a severance agreement with
TVA. However, had Mr. McCollum’s employment been terminated on
September 30, 2009, other than for cause or as a result of a voluntary
resignation, Mr. McCollum would have received $398,147 under his LTDCP agreement
payable in five annual installments following termination, and SERP benefits
payable in five annual installments, which as of September 30, 2009, had a
present value of $2,386,732, assuming the termination was deemed an approved
termination under the SERP. In addition, upon termination of
employment for any reason, Mr. McCollum would be eligible to receive any amounts
that he earned in past years but elected to defer. Had Mr. Swafford’s
employment been terminated on September 30, 2009, other than for cause or as a
result of a voluntary resignation, Mr. Swafford would have received $553,815
under his LTDCP agreement payable in a lump sum following
termination. In addition, upon termination of employment for any
reason, Mr. Swafford would be eligible to receive any amounts that he earned in
past years but elected to defer. Had Mr. Bhatnagar’s employment been
terminated on September 30, 2009, he would have received $830,396 under his
LTDCP agreement payable in a lump sum following termination, and SERP benefits
payable in five annual installments beginning no earlier than age 55, which as
of September 30, 2009, had a present value of $779,125, assuming the termination
was deemed an approved termination under the SERP. In addition, upon
termination of
employment for any reason, Mr. Bhatnagar would be eligible to receive $149,257
under TVA’s qualified defined benefit plan payable in the form of an actuarial
equivalent lifetime annuity and any amounts that he earned in past years but
elected to defer.
All of the Named Executive Officers
would also be entitled to payments from plans generally available to TVA
employees under the specific circumstances of termination of employment,
including the health and welfare and pension plans and amounts in the 401(k)
plan.
Except as
described above and in Item 9B, Other Information, there are no other agreements
between TVA and any of the Named Executive Officers.
The TVA
Act provides for nine directors on the TVA Board. The TVA Board is
currently composed of six directors with three vacant positions to be filled
upon nomination by the President of the United States and confirmation by the
U.S. Senate. Under the TVA Act, each of TVA’s directors receives
certain stipends that are increased annually by the same percentage increase
applicable to adjustments under 5 U.S.C. § 5318, which provides for adjustments
in the annual rates of pay of employees on the Executive Schedule of the United
States Government. As of September 30, 2009, the base stipend
amounted to $48,200 per year unless (1) the director is the chair of a TVA Board
committee, in which case the stipend is $49,300 per year, or (2) the director is
the chairman of the TVA Board, in which case the stipend is $53,700 per
year. Directors are also reimbursed under federal law for travel,
lodging, and related expenses that they incur in attending meetings and for
other official TVA business in the same manner as other persons employed
intermittently in federal government service.
The
annual stipends provided by the TVA Act for each director and to the chairman of
the TVA Board as of September 30, 2009, were as follows:
TVA
Board Annual Stipends
|
||
Name
|
Annual
Stipend
($)
|
|
Dennis
C. Bottorff
|
$49,300
|
|
Robert
M. Duncan
|
$53,700
|
|
Thomas
C. Gilliland
|
$49,300
|
|
Bishop
William H. Graves
|
$49,300
|
|
William
B. Sansom
|
$48,200
|
|
Howard
A. Thrailkill
|
$49,300
|
The
following table set outs the compensation received by TVA’s directors during
2009.
Director
Compensation
|
||||||||
Name
(a)
|
Fees
Earned or Paid in Cash
($)
(b)
|
Stock
Awards
($)
(c)
|
Option
Awards
($)
(d)
|
Non-Equity
Incentive
Plan
Compensation
($)
(e)
|
Change
in
Pension
Value
andNonqualified
Deferred
Compensation
Earnings 1
($)
(f)
|
All
Other Compensation
($)
(g)
|
Total
($)
(h)
|
|
Dennis
C. Bottorff
|
$49,093
|
|
|
|
|
$495
|
$49,588
|
|
Donald
R. DePriest 2
|
$25,827
|
|
|
|
|
$258
|
$26,085
|
|
Robert
M. Duncan 3
|
$49,629
|
|
|
|
|
$501
|
$50,130
|
|
Thomas
C. Gilliland
|
$49,093
|
|
|
|
|
$495
|
$49,588
|
|
Bishop
William H. Graves
|
$48,348
|
|
|
|
|
$488
|
$48,836
|
|
William
B. Sansom
|
$51,406
|
|
|
|
|
$519
|
$51,925
|
|
Howard
A. Thrailkill
|
$49,093
|
|
|
|
|
$2,476
|
$51,569
|
|
Notes
(1) TVA
directors do not participate in the TVA Retirement System, TVA’s SERP, or
any non-qualified deferred compensation plan available to TVA
employees. However, as appointed officers
of the United States government, the directors are members of the Federal
Employees Retirement System (“FERS”). FERS is administered by
the federal Office of Personnel Management,
and information regarding the value of FERS pension benefits is not
available to TVA.
(2) Mr.
DePriest resigned as director on April 8, 2009.
(3) Mr.
Duncan became Chairman on May 19, 2009.
(4) Mr. Sansom’s
term as Chairman expired on May 19, 2009, but he has continued to serve as
director since that time, as he is entitled to remain in office until the
end of the current session of
Congress.
|
The
directors are not eligible to participate in any incentive programs available to
TVA employees. The directors do not participate in the TVA Retirement
System and do not participate in TVA’s SERP. However, as appointed
officers of the United States government, the directors are members of the
Federal Employees Retirement System (“FERS”). FERS is a tiered
retirement plan that includes three components: (1) Social Security benefits,
(2) the Basic Benefit Plan, and (3) the Thrift Savings Plan. Each
director pays full Social Security taxes and makes a small contribution (0.8
percent of salary or stipend) to the Basic Benefit Plan.
The FERS
Basic Benefit Plan is a qualified defined benefit plan that provides a
retirement benefit based on a final average pay formula that includes age,
highest average salary during any three consecutive years of service, and years
of creditable service. A director must have at least five years of
creditable service in order to be eligible to receive retirement
benefits. Directors are eligible for immediate, unreduced retirement
benefits once (1) they reach age 62 and have five years of creditable service,
(2) they reach age 60 and have 20 years of creditable service, or (3) they
attain the minimum retirement age and accumulate the specified years of service
as set forth in the FERS regulations. Generally, benefits are
calculated by multiplying 1.0 percent of the highest average salary during any
three consecutive years of service by the number of years of creditable
service. Directors who retire at age 62 or later with at least 20
years of service receive an enhanced benefit (a factor of 1.1 percent is used
rather than 1.0 percent).
Directors
may also retire with an immediate benefit under FERS if they reach their minimum
retirement age based on type of retirement and years of service and have
accumulated at least 10 years of creditable service. For directors
who reach the minimum retirement age and have at least 10 years of creditable
service, the annuity will be reduced by 5 percent for each year the director is
under age 62.
Each
director is also eligible to participate in the Thrift Savings
Plan. The Thrift Savings Plan is a tax-deferred retirement savings
and investment plan that offers the same type of savings and tax benefits
offered under 401(k) plans. Once a director becomes eligible, TVA
contributes an amount equal to 1 percent of the director’s stipend into a Thrift
Savings Plan account for the director. These contributions are made
automatically every two weeks regardless of whether the director makes a
contribution of his or her own money. Directors are eligible to
contribute up to the Internal Revenue Service (“IRS”) elective deferral
limit. Directors receive matching contributions of 100 percent of
each dollar for the first 3 percent of the director’s stipend and 50 percent of
each dollar for the next 2 percent of the director’s stipend.
The FSRA
Committee consists of the following three directors: Dennis C. Bottorff, Chair,
Thomas C. Gilliland, and Bishop William H. Graves. Pursuant to the
Compensation Plan, the FSRA Committee will review the compensation of the CEO
and his direct reports, monitor the process for approving compensation for TVA
employees compensated in excess of the federal government’s Executive Schedule
Level IV ($153,200 as of September 30, 2009), monitor TVA executive compensation
programs, and periodically review the compensation and benefits programs for all
TVA employees.
Under the
TVA Act, the TVA Board has the authority to approve the compensation of the CEO
and his direct reports, as well as the salaries of employees whose salaries
exceed Executive Schedule Level IV. While the FSRA Committee can
recommend that the TVA Board approve the compensation of the CEO and his direct
reports and the salaries of employees whose salaries exceed Executive Schedule
Level IV, the FSRA Committee has no approval authority.
No
executive officer of TVA serves on the board of an entity which in turn has an
executive officer of the entity serving as a director of TVA.
The FSRA
Committee has reviewed and discussed the Compensation Discussion and Analysis
with management, and based on the review and discussions, the FSRA Committee
recommended to the TVA Board that the Compensation Discussion and Analysis be
included in this Annual Report.
THE
FINANCE, STRATEGY, RATES, AND ADMINISTRATION COMMITTEE
Dennis C.
Bottorff, Chair
Thomas C.
Gilliland
Bishop
William H. Graves
Not
applicable.
The composition of the TVA Board is
governed by the TVA Act. The TVA Act contains certain provisions that
are similar to the considerations for independence under section 10A(m)(3) of
the Exchange Act, including that to be eligible for appointment to the TVA
Board, an individual shall not be an employee of TVA and shall make full
disclosure to Congress of any investment or other financial interest that the
individual holds in the energy industry. These provisions became
applicable to TVA Board members on March 31, 2006.
Conflict
of Interest Provisions
All TVA employees, including
directors and executive officers, are subject to the conflict of interest laws
and regulations applicable to employees of the federal
government. Accordingly, the general federal conflict of interest
statute (18 U.S.C. § 208) and the Standards of Ethical Conduct for Employees of
the Executive Branch (5 C.F.R. part 2635) (“Standards of Ethical Conduct”)
form the basis of TVA’s policies and procedures for the review, approval, or
ratification of related party transactions. The general federal
conflict of interest statute, subject to certain exceptions, prohibits each
government employee, including TVA’s directors and executive officers, from
participating personally and substantially (by advice, decision, or otherwise)
as a government employee in any contract, controversy, proceeding, request for
determination, or other official particular matter in which, to his or her
knowledge, he or she (or his or her spouse, minor child, general partner,
organization with which he or she serves as officer, director, employee,
trustee, or general partner, or any person or organization with which he or she
is negotiating, or has an arrangement, for future employment) has a financial
interest. Exceptions to the statutory prohibition relevant to TVA
employees are (1) financial interests which have been deemed by the Office of
Government Ethics, in published regulations, to be too remote or inconsequential
to affect the integrity of the employee’s services, or (2) interests which are
determined in writing, after full disclosure and on a case by case basis, to be not
so substantial as to be deemed likely to affect the integrity of the employee’s
services for TVA. In accordance with the statute, individual waiver
determinations are made by the official responsible for the employee’s
appointment. In the case of TVA directors, the determination may be
made by the Chairman of the TVA Board, and in the case of the Chairman of the
TVA Board, the determination may be made by the Counsel to the President of the
United States.
More broadly, Subpart E of the
Standards of Ethical Conduct provides that where an employee (1) knows that a
particular matter involving specific parties is likely to have a direct and
predictable effect on the financial interests of a member of his or her
household, or that a person with whom the employee has a “covered relationship”
(which includes, but is not limited to, persons with whom the employee has a
close family relationship and organizations in which the employee is an active
participant) is or represents a party to the matter, and (2) determines that the
circumstances would cause a reasonable person with knowledge of relevant facts
to question his or her impartiality in the matter, the employee should not
participate in the matter absent agency authorization. This
authorization may be given by the employee’s supervising officer, as agency
designee, in consultation with the TVA Designated Agency Ethics Official, upon
the determination that TVA’s interest in the employee’s participation in the
matter outweighs the concern that a reasonable person may question the integrity
of TVA’s programs and operations.
The previously described restrictions
are reflected in TVA’s Employment Practice 1, Business Ethics, which
requires employees, including TVA’s directors and executive officers, to comply
with the guidelines outlined in the Standards of Ethical Conduct and which
restates the standard of the conflict of interest statute.
Additionally, on November 30, 2006,
the TVA Board approved a written conflict of interest policy that applies to all
TVA employees, including TVA’s directors and executive officers. The
conflict of interest policy reaffirms the requirement that all TVA employees
must comply with applicable federal conflict of interest laws, regulations, and
policies. It also establishes an additional policy that is applicable
to TVA’s directors and Chief Executive Officer, which provides as
follows:
In
addition to the law and policy applicable to all TVA employees, TVA Directors
and the Chief Executive Officer shall comply with the following additional
policy restricting the holding of certain financial interests:
1.
|
For
purposes of this policy, “financial interest” means an interest of a
person, or of a person’s spouse or minor child, arising by virtue of
investment or credit relationship, ownership, employment, consultancy, or
fiduciary relationship such as director, trustee, or
partner. However, financial interest does not include an
interest in TVA or any interest:
|
•
|
comprised
solely of a right to payment of retirement benefits resulting from former
employment or fiduciary
relationship,
|
•
|
arising
solely by virtue of cooperative membership or similar interest as a
consumer in a distributor of TVA power,
or
|
•
|
arising
by virtue of ownership of publicly traded securities in any single entity
with a value of $25,000 or less, or within a diversified mutual fund
investment in any amount.
|
2.
|
Directors
and the Chief Executive Officer shall not hold a financial interest in any
distributor of TVA power.
|
3.
|
Directors
and the Chief Executive Officer shall not hold a financial interest in any
entity engaged in the wholesale or retail generation, transmission, or
sale of electricity.
|
4.
|
Directors
and the Chief Executive Officer shall not hold a financial interest in any
entity that may reasonably be perceived as likely to be adversely affected
by the success of TVA as a producer or transmitter of electric
power.
|
5.
|
Any
action taken or interest held that creates, or may reasonably be perceived
as creating, a conflict of interest restricted by this additional policy
applicable to TVA Directors and the Chief Executive Officer should
immediately be disclosed to the Chairman of Board of Directors and the
Chairman of the Audit, Governance,
and Ethics Committee. The Audit, Governance, and Ethics
Committee shall be responsible for initially reviewing all such
disclosures and making recommendations to the entire Board on what action,
if any, should be taken. The entire Board, without the vote of
any Director(s) involved, shall determine the appropriate action to be
taken.
|
6.
|
Any
waiver of this additional policy applicable to TVA Directors and the Chief
Executive Officer may be made only by the Board, and will be disclosed
promptly to the public, subject to the limitations on disclosure imposed
by law.
|
TVA relies on the policies,
practices, laws, and regulations discussed above to regulate conflicts of
interest involving employees, including directors and executive
officers. TVA has no other written or unwritten policy for the
approval or ratification of any transactions in which TVA was or is to be a
participant and in which any director or executive officer of TVA (or any child,
stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law of any director or
executive officer of TVA) had or will have a direct or indirect material
interest.
U.S.
Treasury Interim Obligations
TVA has
access to a financing arrangement with the U.S. Treasury. TVA and the
U.S. Treasury have a memorandum of understanding under which the U.S. Treasury
provides TVA with a $150 million credit facility. TVA did not borrow
under the facility during 2009. This credit facility matures on September 30,
2010 and is expected to be renewed. This arrangement is pursuant to
the TVA Act. Access to this credit facility or other similar
financing arrangements has been available to TVA since 1959. See Note
10 — Short-Term
Debt.
Power
Facility Appropriation Investment
In addition, TVA makes payments to the
U.S. Treasury as a repayment of and a return on the Power Facility Appropriation
Investment. Under the TVA Act, TVA is required to repay $1.0 billion of the
Power Facility Appropriation Investment, and $90 million of this amount remained
unpaid as of September 30, 2009. Once TVA repays this $90 million,
there will still be an outstanding balance on the Power Facility Appropriation
Investment, and TVA is obligated under the TVA Act to pay the U.S. Treasury a
return on this remaining balance indefinitely. See Note
14.
The following table shows the fees of
Ernst and Young LLP for the audit and audit-related services for the years ended
September 30, 2009 and 2008.
Principal
Accountant Fees and Services
(in
actual dollars)
|
|||||||||||||||||
Year
|
Principal
Accountant
|
Audit
Fees1
|
Audit-Related
Fees2
|
All
Other Fees
|
Total
|
||||||||||||
2009
|
Ernst
and Young LLP
|
$ | 2,125,603 | $ | — | — | $ | 2,125,603 | |||||||||
2008
|
Ernst
and Young LLP
|
1,603,016 | 517,090 | — | 2,120,106 | ||||||||||||
Notes
(1) Audit
fees consist of fees for professional services rendered for the audit of
internal control over financial reporting (2009), and of TVA's
annual
financial statements, fees for review of the interim financial statements
included in TVA's quarterly reports, and fees for Bond offering
comfort
letters.
(2) Audit-related
fees include professional
services rendered in connection with Sarbanes-Oxley Act of 2002 Section
404 readiness assistance.
|
The TVA Board has an Audit, Governance,
and Ethics Committee. Under the TVA Act, the Audit, Governance, and
Ethics Committee, in consultation with the Inspector General, recommends to the
TVA Board the selection of an external auditor. TVA’s Audit,
Governance, and Ethics Committee in consultation with the Inspector General
recommended that the TVA Board select Ernst and Young LLP as TVA’s external
auditor for the 2008 and 2009 audits and other related services, and the TVA
Board approved these recommendations.
The
Audit, Governance, and Ethics Committee adopted on August 6, 2007, and amended
on January 16, 2009, a policy on audit and permissible non-audit services (the
“Policy”). The Policy provides that
all auditing services and permissible non-audit services shall be pre-approved
by the Audit, Governance, and Ethics Committee unless:
•
|
The
aggregate amount of all such non-audit services provided to TVA does not
exceed 5 percent of the total amount TVA pays the external auditor during
the fiscal year in which the non-audit services are
provided;
|
•
|
Such
services were not recognized by TVA at the time of the engagement to be
non-audit services or non-audit related services;
and
|
•
|
Such
services are promptly brought to the attention of the Audit, Governance,
and Ethics Committee and approved at the next scheduled Audit, Governance,
and Ethics Committee meeting or by one or more members of the Audit,
Governance, and Ethics Committee to whom the authority to grant such
approvals has been delegated.
|
The Policy also lists the following
services as ones the external auditor is not permitted to
perform. The prohibited non-audit services are:
•
|
Bookkeeping
or other services related to the accounting records or financial
statements of TVA;
|
•
|
Financial
information system design and
implementation;
|
•
|
Appraisal
or valuation services, fairness opinions, and contribution-in-kind
reports;
|
•
|
Actuarial
services;
|
•
|
Internal
audit outsourcing services;
|
•
|
Management
functions or human resources;
|
•
|
Broker
or dealer, investment adviser, or investment banking
services;
|
•
|
Legal
services and expert services unrelated to the audit;
and
|
•
|
Any
other services that the Public Company Accounting Oversight Board
determines, by regulation, is
impermissible.
|
The Policy also delegates to the
Chairman of the Audit, Governance, and Ethics Committee the authority to
pre-approve a permissible service so long as the amount of the service does not
exceed $100,000 and the Chairman reports for informational purposes the services
pre-approved at the Audit, Governance, and Ethics Committee’s next
meeting.
The Audit, Governance, and Ethics
Committee pre-approved all of the audit and audit-related services for 2008 and
2009.
(a) The
following documents have been filed as part of this Annual Report:
(1) Financial
Statements. The following documents are provided in Item 8, Financial
Statements and Supplementary Data herein.
Statements of Income
Balance Sheets
Statements of Cash Flow
Statements of Changes in Proprietary
Capital
Notes to Financial
Statements
Report of Independent Registered
Public Accounting Firm (Ernst and Young LLP)
Report of Independent Registered
Public Accounting Firm (Pricewaterhouse Coopers LLP)
(2) Financial
Statement Schedules.
|
Schedules
not included are omitted because they are not required or because the
required information is provided in the financial statements, including
the notes thereto.
|
Schedule
II — Valuation and Qualifying Accounts
(in
millions)
|
||||||||||||||||
Description
|
Balance
at beginning of year
|
Additions
charged to expense
|
Deductions
|
Balance
at
end of
year
|
||||||||||||
For
the year ended September 30, 2009
|
||||||||||||||||
Allowance
for doubtful accounts
|
||||||||||||||||
Receivables
|
$ | 2 | $ | — | $ | — | $ | 2 | ||||||||
Loans
|
13 | 1 | (1 | ) | 13 | |||||||||||
Total
allowances deducted from assets
|
$ | 15 | $ | 1 | $ | (1 | ) | $ | 15 | |||||||
For
the year ended September 30, 2008
|
||||||||||||||||
Allowance
for doubtful accounts
|
||||||||||||||||
Receivables
|
$ | 2 | $ | 1 | $ | (1 | ) | $ | 2 | |||||||
Loans
|
15 | 4 | (6 | ) | 13 | |||||||||||
Total
allowances deducted from assets
|
$ | 17 | $ | 5 | $ | (7 | ) | $ | 15 | |||||||
For
the year ended September 30, 2007
|
||||||||||||||||
Allowance
for doubtful accounts
|
||||||||||||||||
Receivables
|
$ | 10 | $ | — | $ | (8 | ) | $ | 2 | |||||||
Loans
|
15 | — | — | 15 | ||||||||||||
Total
allowances deducted from assets
|
$ | 25 | $ | — | $ | (8 | ) | $ | 17 |
(3) List
of Exhibits.
Exhibit No.
|
Description
|
3.1
|
Tennessee
Valley Authority Act of 1933, as amended, 16 U.S.C.
§§ 831-831ee (Incorporated by reference to Exhibit 3.1 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended December 31, 2007,
File No. 000-52313)
|
3.2
|
Bylaws
of Tennessee Valley Authority Adopted by the TVA Board of Directors on May
18, 2006, as Amended on April 3, 2008, and May 19, 2008 (Incorporated by
reference to Exhibit 3.1 to TVA’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008, File No. 000-52313)
|
4.1
|
Basic
Tennessee Valley Authority Power Bond Resolution Adopted by the TVA Board
of Directors on October 6, 1960, as Amended on September 28, 1976, October
17, 1989, and March 25, 1992 (Incorporated by reference to Exhibit 4.1 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
10.1*
|
Fall
Maturity Credit Agreement Dated as of March 26, 2009, Among TVA, Bank of
America, N.A., as Administrative Agent, Bank of America, N.A., as a
Lender, and the Other Lenders Party Thereto (Incorporated by reference to
Exhibit 10.1 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2009, File No. 000-52313)
|
10.2*
|
Spring
Maturity Credit Agreement Dated as of March 26, 2009, Among TVA, Bank of
America, N.A., as Administrative Agent, Bank of America, N.A., as a
Lender, and the Other Lenders Party Thereto (Incorporated by reference to
Exhibit 10.2 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2009, File No. 000-52313)
|
10.3*
|
Amendment
Dated as of May 13, 2009, to Spring Maturity Credit Agreement Dated as of
March 26, 2009, Among TVA, Bank of America, N.A., as Administrative Agent,
Bank of America, N.A., as a Lender, and the Other Lenders Party Thereto
(Incorporated by reference to Exhibit 99.1 to TVA’s Current Report on Form
8-K filed on May 15, 2009, File No. 000-52313)
|
10.4*
|
Amendment
Dated as of November 9, 2009, to Fall Maturity Credit Agreement Dated as
of March 26, 2009, Among TVA, Bank of America, N.A., as Administrative
Agent, Bank of America, N.A., as a Lender, and the Other Lenders Party
Thereto (Incorporated by reference to Exhibit 99.1 to TVA’s Current Report
on Form 8-K filed on November 13, 2009, File No.
000-52313)
|
10.5
|
TVA
Discount Notes Selling Group Agreement (Incorporated by reference to
Exhibit 10.2 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2008, File No. 000-52313)
|
10.6
|
Electronotes®
Selling Agent Agreement Dated as of June 1, 2006, Among TVA, LaSalle
Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global
Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank
National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, and Wachovia Securities, LLC (Incorporated by reference to
Exhibit 10.4 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.7
|
Assumption
Agreement Between TVA and Incapital LLC Dated as of February 29, 2008,
Relating to the electronotes®
Selling Agent Agreement Dated as of June 1, 2006, Among TVA, LaSalle
Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global
Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank
National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, and Wachovia Securities, LLC (Incorporated by reference to
Exhibit 10.1 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008, File No. 000-52313)
|
10.8
|
Commitment
Agreement Among Memphis Light, Gas and Water Division, the City of
Memphis, Tennessee, and TVA Dated as of November 19, 2003 (Incorporated by
reference to Exhibit 10.5 to TVA’s Annual Report on Form 10-K for the year
ended September 30, 2006, File No. 000-52313)
|
10.9
|
Power
Contract Supplement No. 95 Among Memphis Light, Gas and Water Division,
the City of Memphis, Tennessee, and TVA Dated as of November 19, 2003
(Incorporated by reference to Exhibit 10.6 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.10
|
Void
Walk Away Agreement Among Memphis Light, Gas and Water Division, the City
of Memphis, Tennessee, and TVA Dated as of November 20, 2003 (Incorporated
by reference to Exhibit 10.7 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.11
|
Power
Contract Supplement No. 96 Among Memphis Light, Gas and Water Division,
the City of Memphis, Tennessee, and TVA Dated as of November 20, 2003
(Incorporated by reference to Exhibit 10.8 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.12*
|
Joint
Ownership Agreement Dated as of April 30, 2008, Between Seven States Power
Corporation and TVA (Incorporated by reference to Exhibit 10.3 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, File
No. 000-52313)
|
10.13
|
Supplement
No. 1 Dated as of September 2, 2008, to the Joint Ownership Agreement
Dated as of April 30, 2008, Between Seven States Power Corporation and TVA
(Incorporated by reference to Exhibit 10.16 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2008, File No.
000-52313)
|
10.14
|
Supplement
No. 2 Dated as of September 30, 2008, to the Joint Ownership Agreement
Dated as of April 30, 2008, Between Seven States Power Corporation and TVA
(Incorporated by reference to Exhibit 10.17 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2008, File No.
000-52313)
|
10.15
|
Supplement
No. 3 Dated as of April 17, 2009, to the Joint Ownership Agreement Dated
as of April 30, 2008, Between Seven States Power Corporation and
TVA
|
10.16
|
Lease
Agreement Dated as of September 30, 2008, Between TVA and Seven States
Southaven, LLC (Incorporated by reference to Exhibit 10.18 to TVA’s Annual
Report on Form 10-K for the year ended September 30, 2008, File No.
000-52313)
|
10.17
|
First
Amendment Dated as of April 17, 2009, to Lease Agreement Dated September
30, 2008, Between TVA and Seven States Southaven, LLC
|
10.18*
|
Buy-Back
Arrangements Dated as of September 30, 2008, Among TVA, JPMorgan Chase
Bank, National Association, as Administrative Agent, Lead Arranger, and a
Lender, and the Other Lenders Referred to Therein (Incorporated by
reference to Exhibit 10.19 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2008, File No. 000-52313)
|
10.19
|
Overview
of TVA’s September 26, 2003, Lease and Leaseback of Control, Monitoring,
and Data Analysis Network with Respect to TVA’s Transmission System in
Tennessee, Kentucky, Georgia, and Mississippi (Incorporated by reference
to Exhibit 10.9 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.20*
|
Participation
Agreement Dated as of September 22, 2003, Among (1) TVA, (2) NVG Network I
Statutory Trust, (3) Wells Fargo Delaware Trust Company, Not in Its
Individual Capacity, Except to the Extent Expressly Provided in the
Participation Agreement, But as Owner Trustee, (4) Wachovia Mortgage
Corporation, (5) Wilmington Trust Company, Not in Its Individual Capacity,
Except to the Extent Expressly Provided in the Participation Agreement,
But as Lease Indenture Trustee, and (6) Wilmington Trust Company, Not in
Its Individual Capacity, Except to the Extent Expressly Provided in the
Participation Agreement, But as Pass Through Trustee (Incorporated by
reference to Exhibit 10.10 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.21*
|
Network
Lease Agreement Dated as of September 26, 2003, Between NVG Network I
Statutory Trust, as Owner Lessor, and TVA, as Lessee (Incorporated by
reference to Exhibit 10.11 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.22*
|
Head
Lease Agreement Dated as of September 26, 2003, Between TVA, as Head
Lessor, and NVG Network I Statutory Trust, as Head Lessee (Incorporated by
reference to Exhibit 10.12 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.23*
|
Leasehold
Security Agreement Dated as of September 26, 2003, Made by NVG Network I
Statutory Trust to TVA (Incorporated by reference to Exhibit 10.13 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
10.24†
|
TVA
Compensation Plan Approved by the TVA Board on May 31, 2007 (Incorporated
by reference to Exhibit 99.3 to TVA’s Current Report on Form 8-K filed on
December 11, 2007, File No. 000-52313)
|
10.25†
|
TVA
Vehicle Allowance Guidelines, Effective April 1, 2006 (Incorporated by
reference to Exhibit 10.18 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2007, File No. 000-52313)
|
10.26†
|
Supplemental
Executive Retirement Plan (Incorporated by reference to Exhibit 10.1 to
TVA’s Current Report on Form 8-K filed on January 6, 2009, File No.
000-52313)
|
10.27†
|
Executive
Annual Incentive Plan (Incorporated by reference to Exhibit 10.3 to TVA’s
Current Report on Form 8-K filed on January 6, 2009, File No.
000-52313)
|
10.28†
|
Executive
Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 to
TVA’s Current Report on Form 8-K filed on January 6, 2009, File No.
000-52313)
|
10.29†
|
Long-Term
Deferred Compensation Plan (Incorporated by reference to Exhibit 10.5 to
TVA’s Current Report on Form 8-K filed on January 6, 2009, File No.
000-52313)
|
10.30†
|
Deferred
Compensation Plan (Incorporated by reference to Exhibit 10.2 to TVA’s
Current Report on Form 8-K filed on January 6, 2009, File No.
000-52313)
|
10.31†
|
Overview
of Financial Counseling Services Program
|
10.32†
|
Offer
Letter to Tom D. Kilgore Accepted as of January 19, 2005 (Incorporated by
reference to Exhibit 10.19 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.33†
|
Offer
Letter to William R. McCollum, Jr., Accepted as of March 9, 2007
(Incorporated by reference to Exhibit 10.26 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.34†
|
Offer
Letter to Kimberly S. Greene Accepted as of August 3, 2007 (Incorporated
by reference to Exhibit 10.27 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2007, File No. 000-52313)
|
10.35†
|
Compensation
Arrangements for Preston D. Swafford Effective as of February 5,
2009
|
10.36†
|
Overview
of Compensation Arrangements for Preston D. Swafford Effective as of July
1, 2009
|
10.37†
|
Overview
of Compensation Arrangements for Preston D. Swafford Effective as of
October 27, 2009
|
10.38†
|
First
Deferral Agreement Between TVA and Tom D. Kilgore Dated as of March 29,
2005 (Incorporated by reference to Exhibit 10.24 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.39†
|
Second
Deferral Agreement Between TVA and Tom Kilgore Dated as of November 24,
2009
|
10.40†
|
Deferral
Agreement Between TVA and Ashok S. Bhatnagar Dated as of September 28,
2004 (Incorporated by reference to Exhibit 10.21 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.41†
|
Deferral
Agreement Between TVA and William R. McCollum, Jr., Dated as of May 3,
2007 (Incorporated by reference to Exhibit 10.33 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.42†
|
First
Deferral Agreement Between TVA and Kimberly S. Greene Dated as of
September 4, 2007 (Incorporated by reference to Exhibit 10.34 to TVA’s
Annual Report on Form 10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.43†
|
Second
Deferral Agreement Between TVA and Kimberly S. Greene Dated as of December
20, 2008
|
10.44†
|
Deferral
Agreement Between TVA and Preston D. Swafford Dated as of May 10,
2006
|
14
|
Disclosure
and Financial Ethics Code (Incorporated by reference to Exhibit 14 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification Executed by the Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification Executed by the Chief Financial
Officer
|
32.1
|
Section
1350 Certification Executed by the Chief Executive
Officer
|
32.2
|
Section
1350 Certification Executed by the Chief Financial
Officer
|
99.1
|
Materials
Used in Mr. Kilgore’s November 19, 2009 Presentation to the TVA
Board
|
†
Management contract or compensatory arrangement.
*
Certain schedule(s) and/or exhibit(s) have been omitted. The
Tennessee Valley Authority hereby undertakes to furnish supplementally
copies of any of the omitted schedules and/or exhibits upon request by the
Securities and Exchange Commission.
|
Pursuant to the requirements of Section
13, 15(d), or 37 of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November
25, 2009
|
TENNESSEE
VALLEY AUTHORITY
|
|
(Registrant)
|
||
By:
|
/s/ Tom D. Kilgore | |
Tom
D. Kilgore
|
||
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
/s/ Tom D. Kilgore |
President
and Chief Executive Officer
|
November
25, 2009
|
Tom
D. Kilgore
|
(Principal
Executive Officer)
|
|
/s/ Kimberly S. Greene |
Chief
Financial Officer and Executive Vice
|
November
25, 2009
|
Kimberly
S. Greene
|
President,
Financial Services
|
|
(Principal
Financial Officer)
|
||
/s/ Steve Byone |
Vice
President and Controller
|
November
25, 2009
|
Steve
Byone
|
(Principal
Accounting Officer)
|
|
/s/
Robert M. Duncan
|
Chairman
and Director
|
November
25, 2009
|
Robert
M. Duncan
|
||
/s/
Dennis C. Bottorff
|
Director
|
November
25, 2009
|
Dennis
C. Bottorff
|
||
/s/
Thomas C. Gilliland
|
Director
|
November
25, 2009
|
Thomas
C. Gilliland
|
||
/s/
Bishop William H. Graves
|
Director
|
November
25, 2009
|
Bishop
William H. Graves
|
||
/s/
Howard A. Thrailkill
|
Director
|
November
25, 2009
|
Howard
A. Thrailkill
|
||
/s/
William B. Sansom
|
Director
|
November
25, 2009
|
William
B. Sansom
|
||
Exhibit No.
|
Description
|
3.1
|
Tennessee
Valley Authority Act of 1933, as amended, 16 U.S.C.
§§ 831-831ee (Incorporated by reference to Exhibit 3.1 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended December 31, 2007,
File No. 000-52313)
|
3.2
|
Bylaws
of Tennessee Valley Authority Adopted by the TVA Board of Directors on May
18, 2006, as Amended on April 3, 2008, and May 19, 2008 (Incorporated by
reference to Exhibit 3.1 to TVA’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008, File No. 000-52313)
|
4.1
|
Basic
Tennessee Valley Authority Power Bond Resolution Adopted by the TVA Board
of Directors on October 6, 1960, as Amended on September 28, 1976, October
17, 1989, and March 25, 1992 (Incorporated by reference to Exhibit 4.1 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
10.1*
|
Fall
Maturity Credit Agreement Dated as of March 26, 2009, Among TVA, Bank of
America, N.A., as Administrative Agent, Bank of America, N.A., as a
Lender, and the Other Lenders Party Thereto (Incorporated by reference to
Exhibit 10.1 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2009, File No. 000-52313)
|
10.2*
|
Spring
Maturity Credit Agreement Dated as of March 26, 2009, Among TVA, Bank of
America, N.A., as Administrative Agent, Bank of America, N.A., as a
Lender, and the Other Lenders Party Thereto (Incorporated by reference to
Exhibit 10.2 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2009, File No. 000-52313)
|
10.3*
|
Amendment
Dated as of May 13, 2009, to Spring Maturity Credit Agreement Dated as of
March 26, 2009, Among TVA, Bank of America, N.A., as Administrative Agent,
Bank of America, N.A., as a Lender, and the Other Lenders Party Thereto
(Incorporated by reference to Exhibit 99.1 to TVA’s Current Report on Form
8-K filed on May 15, 2009, File No. 000-52313)
|
10.4*
|
Amendment
Dated as of November 9, 2009, to Fall Maturity Credit Agreement Dated as
of March 26, 2009, Among TVA, Bank of America, N.A., as Administrative
Agent, Bank of America, N.A., as a Lender, and the Other Lenders Party
Thereto (Incorporated by reference to Exhibit 99.1 to TVA’s Current Report
on Form 8-K filed on November 13, 2009, File No.
000-52313)
|
10.5
|
TVA
Discount Notes Selling Group Agreement (Incorporated by reference to
Exhibit 10.2 to TVA’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2008, File No. 000-52313)
|
10.6
|
Electronotes®
Selling Agent Agreement Dated as of June 1, 2006, Among TVA, LaSalle
Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global
Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank
National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, and Wachovia Securities, LLC (Incorporated by reference to
Exhibit 10.4 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.7
|
Assumption
Agreement Between TVA and Incapital LLC Dated as of February 29, 2008,
Relating to the electronotes® Selling Agent Agreement Dated as of
June 1, 2006, Among TVA, LaSalle Financial Services, Inc., A.G.
Edwards & Sons, Inc., Citigroup Global Markets Inc., Edward D. Jones
& Co., L.P., First Tennessee Bank National Association, J.J.B.
Hilliard, W.L. Lyons, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated, and Wachovia
Securities, LLC (Incorporated by reference to Exhibit 10.1 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, File
No. 000-52313)
|
10.8
|
Commitment
Agreement Among Memphis Light, Gas and Water Division, the City of
Memphis, Tennessee, and TVA Dated as of November 19, 2003 (Incorporated by
reference to Exhibit 10.5 to TVA’s Annual Report on Form 10-K for the year
ended September 30, 2006, File No. 000-52313)
|
10.9
|
Power
Contract Supplement No. 95 Among Memphis Light, Gas and Water Division,
the City of Memphis, Tennessee, and TVA Dated as of November 19, 2003
(Incorporated by reference to Exhibit 10.6 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.10
|
Void
Walk Away Agreement Among Memphis Light, Gas and Water Division, the City
of Memphis, Tennessee, and TVA Dated as of November 20, 2003 (Incorporated
by reference to Exhibit 10.7 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.11
|
Power
Contract Supplement No. 96 Among Memphis Light, Gas and Water Division,
the City of Memphis, Tennessee, and TVA Dated as of November 20, 2003
(Incorporated by reference to Exhibit 10.8 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.12*
|
Joint
Ownership Agreement Dated as of April 30, 2008, Between Seven States Power
Corporation and TVA (Incorporated by reference to Exhibit 10.3 to TVA’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, File
No. 000-52313)
|
10.13
|
Supplement
No. 1 Dated as of September 2, 2008, to the Joint Ownership Agreement
Dated as of April 30, 2008, Between Seven States Power Corporation and TVA
(Incorporated by reference to Exhibit 10.16 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2008, File No.
000-52313)
|
10.14
|
Supplement
No. 2 Dated as of September 30, 2008, to the Joint Ownership Agreement
Dated as of April 30, 2008, Between Seven States Power Corporation and TVA
(Incorporated by reference to Exhibit 10.17 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2008, File No.
000-52313)
|
10.15
|
Supplement
No. 3 Dated as of April 17, 2009, to the Joint Ownership Agreement Dated
as of April 30, 2008, Between Seven States Power Corporation and
TVA
|
10.16
|
Lease
Agreement Dated as of September 30, 2008, Between TVA and Seven States
Southaven, LLC (Incorporated by reference to Exhibit 10.18 to TVA’s Annual
Report on Form 10-K for the year ended September 30, 2008, File No.
000-52313)
|
10.17
|
First
Amendment Dated as of April 17, 2009, to Lease Agreement Dated September
30, 2008, Between TVA and Seven States Southaven, LLC
|
10.18*
|
Buy-Back
Arrangements Dated as of September 30, 2008, Among TVA, JPMorgan Chase
Bank, National Association, as Administrative Agent, Lead Arranger, and a
Lender, and the Other Lenders Referred to Therein (Incorporated by
reference to Exhibit 10.19 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2008, File No. 000-52313)
|
10.19
|
Overview
of TVA’s September 26, 2003, Lease and Leaseback of Control, Monitoring,
and Data Analysis Network with Respect to TVA’s Transmission System in
Tennessee, Kentucky, Georgia, and Mississippi (Incorporated by reference
to Exhibit 10.9 to TVA’s Annual Report on Form 10-K for the year ended
September 30, 2006, File No. 000-52313)
|
10.20*
|
Participation
Agreement Dated as of September 22, 2003, Among (1) TVA, (2) NVG Network I
Statutory Trust, (3) Wells Fargo Delaware Trust Company, Not in Its
Individual Capacity, Except to the Extent Expressly Provided in the
Participation Agreement, But as Owner Trustee, (4) Wachovia Mortgage
Corporation, (5) Wilmington Trust Company, Not in Its Individual Capacity,
Except to the Extent Expressly Provided in the Participation Agreement,
But as Lease Indenture Trustee, and (6) Wilmington Trust Company, Not in
Its Individual Capacity, Except to the Extent Expressly Provided in the
Participation Agreement, But as Pass Through Trustee (Incorporated by
reference to Exhibit 10.10 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.21*
|
Network
Lease Agreement Dated as of September 26, 2003, Between NVG Network I
Statutory Trust, as Owner Lessor, and TVA, as Lessee (Incorporated by
reference to Exhibit 10.11 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.22*
|
Head
Lease Agreement Dated as of September 26, 2003, Between TVA, as Head
Lessor, and NVG Network I Statutory Trust, as Head Lessee (Incorporated by
reference to Exhibit 10.12 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No. 000-52313)
|
10.23*
|
Leasehold
Security Agreement Dated as of September 26, 2003, Made by NVG Network I
Statutory Trust to TVA (Incorporated by reference to Exhibit 10.13 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
10.24†
|
TVA
Compensation Plan Approved by the TVA Board on May 31, 2007 (Incorporated
by reference to Exhibit 99.3 to TVA’s Current Report on Form 8-K filed on
December 11, 2007, File No. 000-52313)
|
10.25†
|
TVA
Vehicle Allowance Guidelines, Effective April 1, 2006 (Incorporated by
reference to Exhibit 10.18 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2007, File No. 000-52313)
|
10.26†
|
Supplemental
Executive Retirement Plan (Incorporated by reference to Exhibit 10.1 to
TVA’s Current Report on Form 8-K filed on January 6, 2009, File No.
000-52313)
|
10.27†
|
Executive
Annual Incentive Plan (Incorporated by reference to Exhibit 10.3 to TVA’s
Current Report on Form 8-K filed on January 6, 2009, File No.
000-52313)
|
10.28†
|
Executive
Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 to
TVA’s Current Report on Form 8-K filed on January 6, 2009, File No.
000-52313)
|
10.29†
|
Long-Term
Deferred Compensation Plan (Incorporated by reference to Exhibit 10.5 to
TVA’s Current Report on Form 8-K filed on January 6, 2009, File No.
000-52313)
|
10.30†
|
Deferred
Compensation Plan (Incorporated by reference to Exhibit 10.2 to TVA’s
Current Report on Form 8-K filed on January 6, 2009, File No.
000-52313)
|
10.31†
|
Overview
of Financial Counseling Services Program
|
10.32†
|
Offer
Letter to Tom D. Kilgore Accepted as of January 19, 2005 (Incorporated by
reference to Exhibit 10.19 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2006, File No.
000-52313)
|
10.33†
|
Offer
Letter to William R. McCollum, Jr., Accepted as of March 9, 2007
(Incorporated by reference to Exhibit 10.26 to TVA’s Annual Report on Form
10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.34†
|
Offer
Letter to Kimberly S. Greene Accepted as of August 3, 2007 (Incorporated
by reference to Exhibit 10.27 to TVA’s Annual Report on Form 10-K for the
year ended September 30, 2007, File No. 000-52313)
|
10.35†
|
Compensation
Arrangements for Preston D. Swafford Effective as of February 5,
2009
|
10.36†
|
Overview
of Compensation Arrangements for Preston D. Swafford Effective as of July
1, 2009
|
10.37†
|
Overview
of Compensation Arrangements for Preston D. Swafford Effective as of
October 27, 2009
|
10.38†
|
First
Deferral Agreement Between TVA and Tom D. Kilgore Dated as of March 29,
2005 (Incorporated by reference to Exhibit 10.24 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.39†
|
Second
Deferral Agreement Between TVA and Tom Kilgore Dated as of
November 24, 2009
|
10.40†
|
Deferral
Agreement Between TVA and Ashok S. Bhatnagar Dated as of September 28,
2004 (Incorporated by reference to Exhibit 10.21 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2006, File No.
000-52313)
|
10.41†
|
Deferral
Agreement Between TVA and William R. McCollum, Jr., Dated as of May 3,
2007 (Incorporated by reference to Exhibit 10.33 to TVA’s Annual Report on
Form 10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.42†
|
First
Deferral Agreement Between TVA and Kimberly S. Greene Dated as of
September 4, 2007 (Incorporated by reference to Exhibit 10.34 to TVA’s
Annual Report on Form 10-K for the year ended September 30, 2007, File No.
000-52313)
|
10.43†
|
Second
Deferral Agreement Between TVA and Kimberly S. Greene Dated as of December
20, 2008
|
10.44†
|
Deferral
Agreement Between TVA and Preston D. Swafford Dated as of May 10,
2006
|
14
|
Disclosure
and Financial Ethics Code (Incorporated by reference to Exhibit 14 to
TVA’s Annual Report on Form 10-K for the year ended September 30, 2006,
File No. 000-52313)
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification Executed by the Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification Executed by the Chief Financial
Officer
|
32.1
|
Section
1350 Certification Executed by the Chief Executive
Officer
|
32.2
|
Section
1350 Certification Executed by the Chief Financial
Officer
|
99.1
|
Materials
Used in Mr. Kilgore’s November 19, 2009 Presentation to the TVA
Board
|
†
Management contract or compensatory arrangement.
*
Certain schedule(s) and/or exhibit(s) have been omitted. The
Tennessee Valley Authority hereby undertakes to furnish supplementally
copies of any of the omitted schedules and/or exhibits upon request by the
Securities and Exchange Commission.
|
181