Amended Quarterly Report
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
Amendment
No. 1
(Mark
One)
x
QUARTERLY
REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2008
OR
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
|
62-0474417
|
|
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(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
|
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400
W. Summit Hill Drive
Knoxville,
Tennessee
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37902
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|
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(Address
of principal executive offices)
|
(Zip
Code)
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(865) 632-2101
(Registrant’s
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
|
Large
accelerated filer
o
|
Accelerated
filer
o
|
|
|
Non-accelerated
filer
x
|
Smaller
reporting company
o
|
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
x
Explanatory
Note
In this Amendment to the Quarterly
Report on Form 10-Q/A for the three and six months ended March 31, 2008 (“Form
10-Q/A”), the Tennessee Valley Authority (“TVA”) is restating the financial
statements for the three and six months ended March 31, 2008, and 2007,
primarily to restate revenue associated with an accounting error in the
financial statements included in the original Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2008 (the “Original 10-Q”). The
error was discovered during TVA’s review of its unbilled revenue estimation
process.
TVA is primarily a wholesale provider
of power to distributor customers (“distributors”) that resell the power to end
users at retail rates. Under TVA’s end-use billing arrangements with
distributors, TVA relies on distributors to report their end-use
sales. Because of the delay between the wholesale delivery of power
to the distributor and the report of end-use sales to TVA, TVA must estimate the
unbilled revenue at the end of each financial reporting period. In
September 2006, TVA implemented a change in methodology for estimating unbilled
revenue for electricity sales which resulted in an increase of $232 million in
unbilled revenue (2.6 percent of operating revenue) for 2006.
The estimation process implemented in
September 2006 utilized the distributors’ average rates and an estimate of the
number of days of revenue outstanding to reflect the delay in reporting the
end-use sales to TVA (“days outstanding”). The number of days
outstanding was derived using a procedure similar to a cross-correlation
calculation that compared the monthly retail load to the monthly wholesale
load. The intent was to reflect in the unbilled estimate the end-use
sales that would be reported that month by distributors plus any remaining sales
that would not be reported until the following month due to the delay between
wholesale delivery and end-use reporting.
TVA has determined that the process
implemented in September 2006 overestimated the days outstanding and that this
overestimation resulted in an error in recording unbilled revenue and unbilled
receivables. The previous unbilled process also failed to consider
the annual true-up of each distributor’s reported distribution losses. The
annual true-up reconciles total end-use kilowatt-hour (“kWh”) sales and revenue
reported by each distributor with the kWh sales recorded for each distributor at
wholesale.
TVA has used a new process for
estimating unbilled revenues for the three and six months ended March 31, 2008
and 2007 in this Form 10-Q/A. This process carries over only the
portion of sales from the distributor’s meter read date to the
month-end. Those sales, along with the current month sales, are then
priced at rates based on each distributor’s customer and product
mix. Additionally, the true-up component has been added to the
unbilled calculation to reflect any timing differences that occur between the
retail and wholesale billing cycles. Due to the new process, an
adjustment was made to increase revenue for the three and six months ended March
31, 2008, by $61 million (approximately 2.4 percent of quarterly operating
revenues) and $69 million (approximately 1.4 percent of year to date operating
revenues), respectively, and to decrease revenue for the three and six months
ended March 31, 2007, by $25 million (approximately 1.1 percent of quarterly
operating revenues) and $4 million (less than one percent of year to date
operating revenues), respectively.
The restatement of unbilled revenue
also affected TVA’s fuel cost adjustment (“FCA”) calculation. The FCA
is a mechanism by which TVA collects the direct cost of fuel used in its
generating facilities and also the energy costs of purchased power used to serve
power demand. Implementation of the FCA occurred in October 2006 as a
joint effort between TVA and its customers. The goal of the FCA is
timely recovery of fuel-related expenses to reduce the volatility driven by fuel
and purchased power markets. Under TVA’s FCA methodology, adjustments
to rates are based primarily on the difference between forecasted and actual
expenses for the upcoming quarter, as well as the difference between forecasted
and actual revenues for the upcoming quarter. Because the FCA
adjustments are forward-looking, there is typically a difference between what is
collected in rates and what actual expense is realized over the course of the
quarter. This difference is added to or subtracted from a deferred
account on TVA’s balance sheet.
The restatement of unbilled revenue
changed TVA’s forecasted revenues, and since forecasted revenues are a major
component of the FCA calculation, the change in forecasted revenues required a
restatement of the amounts in TVA’s deferred FCA account. In the
Original 10-Q, TVA reported a FCA deferred balance of $199 million at March 31,
2008, which was restated to a deferred balance of $166 million. Of
the $166 million, $21 million is a deferred asset and $145 million is a current
receivable.
The unbilled revenue error also
affected the application of distributor prepayments. The balance in
the distributors’ unbilled accounts receivable is offset by a reduction in the
advance collections of those distributors who make prepayments for their
power. As a result of the change in unbilled revenue, the balances in
the unbilled receivable and advance collections accounts were also
adjusted. The adjustment related to distributor prepayments decreased
the balance in the receivable and advance collections accounts by less than $1
million as of March 31, 2008.
In light of the need for this
restatement, TVA has identified a material weakness in its internal control over
financial reporting related to its unbilled revenue calculation, and has
concluded that its disclosure controls and procedures were not effective as of
March 31, 2008, solely because of this material weakness. To rectify
the material weakness, the new method of calculating the unbilled revenue
estimate described above was used for periods presented in this Form
10-Q/A. See Part 1, Item 4, Controls and Procedures, for additional
information regarding controls and procedures related to this material
weakness.
TVA has also included in the
appropriate periods in its restated consolidated financial statements other
miscellaneous adjustments that were deemed to be not material by management,
either individually or in the aggregate, and therefore were corrected in the
period in which they were originally identified. These adjustments
are described in more detail in Note 2.
The effects of these restatements and
miscellaneous adjustments on TVA's consolidated financial statements as of and
for the quarters ended March 31, 2008, and 2007, are described in Note
2. The restatements had no impact on TVA’s cash or cash
equivalents.
For the convenience of the reader, TVA
is refiling its entire Quarterly Report on Form 10-Q/A for the three and six
months ended March 31, 2008, by means of this Form 10-Q/A. However,
except for the information affected by the restatement, TVA has not materially
updated the information contained herein for events or transactions occurring
subsequent to the date the Original 10-Q was filed with the SEC. TVA
recommends that this Form 10-Q/A be read in conjunction with the reports and any
amendments thereto TVA has filed with the SEC subsequent to the filing date of
the Original 10-Q.
The following items have been amended
principally as a result of, and to reflect, the restatement, and no other
information in the Original 10-Q is amended hereby as a result of the
restatement:
Part I – Item 1 – Financial Statements
Part
I – Item 2 – Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part I – Item 4 – Controls and Procedures
Part II – Item 1 – Legal Proceedings
TVA is also filing updated
certifications by the Chief Executive Officer and Chief Financial Officer as
exhibits to this Form 10-Q/A.
This Form 10-Q/A is not superseding or
restating financial statements contained in any current report on Form 8-K filed
subsequent to September 30, 2007.
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Part I - FINANCIAL
INFORMATION
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Part II - OTHER
INFORMATION
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This Quarterly Report contains
forward-looking statements relating to future events and future
performance. All statements other than those that are purely
historical may be forward-looking statements.
In certain cases, forward-looking
statements can be identified by the use of words such as “may,” “will,”
“should,” “expect,” “anticipate,” “believe,” “intend,” “project,” “plan,”
“predict,” “assume,” “forecast,” “estimate,” “objective,” “possible,”
“probably,” “likely,” “potential,” or other similar expressions.
Examples of forward-looking statements
include, but are not limited to:
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•
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Statements
regarding strategic objectives;
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•
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Projections
regarding potential rate actions;
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•
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Estimates
of costs of certain asset retirement
obligations;
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•
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Estimates
regarding power and energy
forecasts;
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•
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Expectations
about the adequacy of TVA’s funding of its pension plans, nuclear
decommissioning trust, and asset retirement
trust;
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•
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Estimates
regarding the reduction of bonds, notes, and other evidences of
indebtedness, lease/leaseback commitments, and power prepayment
obligations;
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•
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Estimates
of amounts to be reclassified from other comprehensive income to earnings
over the next year;
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•
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TVA’s
plans to continue using short-term debt to meet current obligations;
and
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•
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The
anticipated cost and timetable for placing Watts Bar Unit 2 in
service.
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Although the Tennessee Valley Authority
(“TVA”) believes that the assumptions underlying the forward-looking statements
are reasonable, TVA does not guarantee the accuracy of these
statements. Numerous factors could cause actual results to differ
materially from those in the forward-looking statements. These
factors include, among other things:
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•
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New
laws, regulations, and administrative orders, especially those related
to:
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–
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TVA’s
protected service area,
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–
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The
sole authority of the TVA board of directors to set power
rates,
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–
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Various
environmental and nuclear matters including laws, regulations, and
administrative orders restricting carbon emissions and preferring certain
fuels over others,
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–
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TVA’s
management of the Tennessee River
system,
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–
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TVA’s
credit rating, and
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–
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TVA’s
debt ceiling;
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•
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Loss
of customers;
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•
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Performance
of TVA’s generation and transmission
assets;
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•
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Availability
of fuel supplies;
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•
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Purchased
power price volatility;
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•
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Events
at facilities not owned by TVA that affect the supply of water to TVA’s
generation facilities;
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•
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Compliance
with existing environmental laws and
regulations;
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•
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Significant
delays or cost overruns in construction of generation and transmission
assets;
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•
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Significant
changes in demand for electricity;
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•
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Legal
and administrative proceedings;
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•
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Weather
conditions, including drought;
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•
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Failure
of transmission facilities;
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•
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Events
at any 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, 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
of purchased power providers, fuel suppliers, and other
counterparties;
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•
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Changes
in the market price of commodities such as coal, uranium, natural gas,
fuel oil, electricity, and emission
allowances;
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•
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Changes
in the prices of equity securities, debt securities, and other
investments;
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•
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Changes
in interest rates;
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•
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Creditworthiness
of TVA, its counterparties, or its
customers;
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•
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Rising
pension costs and health care
expenses;
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•
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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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Limitations
on TVA’s ability to borrow money;
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•
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Changes
in the economy;
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•
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Ineffectiveness
of TVA’s disclosure controls and procedures and its internal control over
financial reporting;
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•
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Changes
in accounting standards;
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•
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The
loss of TVA’s ability to use regulatory
accounting;
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•
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Problems
attracting and retaining skilled
workers;
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•
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Changes
in technology;
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•
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Changes
in the market for TVA securities;
and
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•
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Unforeseeable
events.
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Additionally, other risks that may
cause actual results to differ from the predicted results are set forth in Part
I, Item 2, Management’s Discussion and Analysis of Financial Condition and
Results of Operations in this Quarterly Report, in Item 1A, Risk Factors and
Item 7, Management’s Discussion and Analysis of Financial Conditions and Results
of Operations in TVA’s Annual Report on Form 10-K, as amended, for the fiscal
year ended September 30, 2007 (“Annual Report”), and in other filings TVA makes
from time to time with the Securities and Exchange Commission
(“SEC”). New factors emerge from time to time, and it is not possible
for management to predict all such factors or to assess the extent to which any
factor or combination of factors may impact TVA’s business or cause results to
differ materially from those contained in any forward-looking
statement.
TVA undertakes no obligation to update
any forward-looking statement to reflect developments that occur after the
statement is made.
Fiscal
Year
Unless otherwise indicated, years
(2008, 2007, etc.) in this Quarterly Report refer to TVA’s fiscal years ended
September 30.
Notes
References to “Notes” are to the Notes
to Financial Statements contained in Part I, Item 1, Financial Statements in
this Quarterly Report.
Available
Information
TVA's Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments
to those reports are made available on TVA's web site, free of charge, as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC. TVA's web site is
www.tva.gov. Information contained on TVA’s web site shall not be
deemed to be incorporated into, or to be a part of, this Quarterly
Report. In addition, the public may read and copy any reports or
other information that TVA files with the SEC at the SEC’s Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. TVA's SEC reports are also available to the public
without charge from the web site maintained by the SEC at
www.sec.gov.
TENNESSEE
VALLEY AUTHORITY
(in
millions)
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
March
31
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March
31
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
As
Restated
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As
Restated
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As
Restated
|
As
Restated
|
|||||||||||||
|
Operating
revenues
|
||||||||||||||||
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Sales
of electricity
|
||||||||||||||||
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Municipalities
and cooperatives
|
$ | 2,072 | $ | 1,897 | $ | 3,985 | $ | 3,660 | ||||||||
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Industries
directly served
|
382 | 301 | 774 | 603 | ||||||||||||
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Federal
agencies and other
|
33 | 26 | 58 | 51 | ||||||||||||
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Other
revenue
|
31 | 35 | 61 | 71 | ||||||||||||
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Total
operating revenues
|
2,518 | 2,259 | 4,878 | 4,385 | ||||||||||||
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Operating
expenses
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||||||||||||||||
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Fuel
and purchased power
|
973 | 831 | 1,895 | 1,580 | ||||||||||||
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Operating
and maintenance
|
559 | 566 | 1,139 | 1,116 | ||||||||||||
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Depreciation,
amortization, and accretion
|
392 | 369 | 782 | 730 | ||||||||||||
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Tax
equivalents
|
117 | 109 | 237 | 217 | ||||||||||||
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Loss
on asset impairment
|
– | – | – | 17 | ||||||||||||
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Total
operating expenses
|
2,041 | 1,875 | 4,053 | 3,660 | ||||||||||||
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Operating
income
|
477 | 384 | 825 | 725 | ||||||||||||
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Other
(expense) income, net (Note 1)
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(2 | ) | 17 | 1 | 35 | |||||||||||
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Unrealized
gain on derivative contracts, net (Note 1)
|
– | 16 | – | 31 | ||||||||||||
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Interest
expense
|
||||||||||||||||
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Interest
on debt and leaseback obligations
|
340 | 351 | 681 | 699 | ||||||||||||
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Amortization
of debt discount, issue, and reacquisition costs, net
|
5 | 5 | 10 | 10 | ||||||||||||
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Allowance
for funds used during construction and nuclear fuel
expenditures
|
(5 | ) | (50 | ) | (8 | ) | (99 | ) | ||||||||
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Net
interest expense
|
340 | 306 | 683 | 610 | ||||||||||||
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Net
income
|
$ | 135 | $ | 111 | $ | 143 | $ | 181 | ||||||||
The
accompanying Notes are an integral part of these financial
statements.
TENNESSEE
VALLEY AUTHORITY
(in
millions)
|
|
||||||||
|
March
31
|
September
30
|
|||||||
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ASSETS
|
2008
|
2007
|
||||||
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As
Restated
|
||||||||
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Current
assets
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(Unaudited)
|
|||||||
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Cash
and cash equivalents
|
$ | 760 | $ | 165 | ||||
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Restricted
cash and investments (Note 1)
|
90 | 150 | ||||||
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Accounts
receivable, net (Note 1)
|
1,195 | 1,458 | ||||||
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Inventories
and other
|
771 | 663 | ||||||
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Total
current assets
|
2,816 | 2,436 | ||||||
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Property,
plant, and equipment
|
||||||||
|
Completed
plant
|
39,152 | 38,811 | ||||||
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Less
accumulated depreciation
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(16,441 | ) | (15,937 | ) | ||||
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Net
completed plant
|
22,711 | 22,874 | ||||||
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Construction
in progress
|
1,513 | 1,286 | ||||||
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Nuclear
fuel and capital leases
|
736 | 672 | ||||||
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Total
property, plant, and equipment, net
|
24,960 | 24,832 | ||||||
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Investment
funds
|
1,054 | 1,169 | ||||||
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Regulatory and other long-term
assets
(Note 1)
|
||||||||
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Deferred
nuclear generating units
|
2,934 | 3,130 | ||||||
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Other
regulatory assets
|
2,115 | 1,790 | ||||||
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Subtotal
|
5,049 | 4,920 | ||||||
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Other
long-term assets
|
817 | 375 | ||||||
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Total
regulatory and other long-term assets
|
5,866 | 5,295 | ||||||
|
Total
assets
|
$ | 34,696 | $ | 33,732 | ||||
|
LIABILITIES
AND PROPRIETARY CAPITAL
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 899 | $ | 1,205 | ||||
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Collateral
funds held
|
115 | 157 | ||||||
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Accrued
interest
|
427 | 406 | ||||||
|
Current
portion of leaseback obligations
|
41 | 43 | ||||||
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Current
portion of energy prepayment obligations
|
106 | 106 | ||||||
|
Short-term
debt, net
|
568 | 1,422 | ||||||
|
Current
maturities of long-term debt (Note 4)
|
2,631 | 90 | ||||||
|
Total
current liabilities
|
4,787 | 3,429 | ||||||
|
Other
liabilities
|
||||||||
|
Other
liabilities
|
2,256 | 2,067 | ||||||
|
Regulatory
liabilities (Note 1)
|
648 | 83 | ||||||
|
Asset
retirement obligations
|
2,249 | 2,189 | ||||||
|
Leaseback
obligations
|
1,000 | 1,029 | ||||||
|
Energy
prepayment obligations (Note 1)
|
980 | 1,032 | ||||||
|
Total
other liabilities
|
7,133 | 6,400 | ||||||
|
Long-term debt, net
(Note 4)
|
19,897 | 21,099 | ||||||
|
Total
liabilities
|
31,817 | 30,928 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Proprietary
capital
|
||||||||
|
Appropriation
investment
|
4,733 | 4,743 | ||||||
|
Retained
earnings
|
1,900 | 1,763 | ||||||
|
Accumulated
other comprehensive loss (Note 3)
|
(67 | ) | (19 | ) | ||||
|
Accumulated
net expense of stewardship programs
|
(3,687 | ) | (3,683 | ) | ||||
|
Total
proprietary capital
|
2,879 | 2,804 | ||||||
|
Total
liabilities and proprietary capital
|
$ | 34,696 | $ | 33,732 | ||||
The
accompanying Notes are an integral part of these financial
statements
TENNESSEE
VALLEY AUTHORITY
For the
six months ended March 31
(in
millions)
|
2008
|
2007
|
|||||||
|
As
Restated
|
As
Restated
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
income
|
$ | 143 | $ | 181 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||
|
Depreciation,
amortization, and accretion
|
792 | 740 | ||||||
|
Nuclear
refueling outage amortization
|
50 | 39 | ||||||
|
Loss
on asset impairment
|
– | 18 | ||||||
|
Amortization
of nuclear fuel
|
88 | 59 | ||||||
|
Non-cash
retirement benefit expense
|
71 | 101 | ||||||
|
Net
unrealized gain on derivative contracts
|
– | (31 | ) | |||||
|
Prepayment
credits applied to revenue
|
(53 | ) | (53 | ) | ||||
|
Fuel
cost adjustment deferral
|
(15 | ) | (27 | ) | ||||
|
Other,
net
|
20 | (9 | ) | |||||
|
Changes
in current assets and liabilities
|
||||||||
|
Accounts
receivable, net
|
278 | 213 | ||||||
|
Inventories
and other
|
(55 | ) | (110 | ) | ||||
|
Accounts
payable and accrued liabilities
|
(253 | ) | 11 | |||||
|
Accrued
interest
|
21 | 9 | ||||||
|
Pension
contributions
|
(37 | ) | (37 | ) | ||||
|
Refueling
outage costs
|
(85 | ) | (77 | ) | ||||
|
Other,
net
|
(6 | ) | 26 | |||||
|
Net
cash provided by operating activities
|
959 | 1,053 | ||||||
|
Cash
flows from investing activities
|
||||||||
|
Construction
expenditures
|
(686 | ) | (811 | ) | ||||
|
Combustion
turbine asset acquisitions
|
– | (98 | ) | |||||
|
Nuclear
fuel expenditures
|
(195 | ) | (92 | ) | ||||
|
Change
in restricted cash and investments
|
43 | 4 | ||||||
|
Proceeds
of investments, net
|
2 | 2 | ||||||
|
Loans
and other receivables
|
||||||||
|
Advances
|
(4 | ) | (4 | ) | ||||
|
Repayments
|
6 | 8 | ||||||
|
Proceeds
from sale of receivables/loans
|
– | 2 | ||||||
|
Other,
net
|
– | 1 | ||||||
|
Net
cash used in investing activities
|
(834 | ) | (988 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Long-term
debt
|
||||||||
|
Issues
|
1,602 | 28 | ||||||
|
Redemptions
and repurchases
|
(214 | ) | (464 | ) | ||||
|
Short-term
debt, net
|
(854 | ) | 262 | |||||
|
Payments
on leaseback financing
|
(24 | ) | (18 | ) | ||||
|
Payments
on equipment financing
|
(7 | ) | (7 | ) | ||||
|
Financing
costs, net
|
(13 | ) | – | |||||
|
Payments
to U.S. Treasury
|
(20 | ) | (20 | ) | ||||
|
Net
cash provided by (used in) financing activities
|
470 | (219 | ) | |||||
|
Net
change in cash and cash equivalents
|
595 | (154 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
165 | 536 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 760 | $ | 382 | ||||
The
accompanying Notes are an integral part of these financial
statements.
TENNESSEE
VALLEY AUTHORITY
(in
millions)
For the
three months ended March 31, 2008 and 2007
|
Appropriation
Investment
|
Retained
Earnings(Restated)
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated
Net Expense of Stewardship Programs
|
Total(Restated)
|
Comprehensive
Income (Loss)
|
|||||||||||||||||||
|
Balance at December 31, 2006
(as restated)
(unaudited)
|
$ | 4,758 | $ | 1,416 | $ | 28 | $ | (3,674 | ) | $ | 2,528 | |||||||||||||
|
Net
income (loss) (as restated)
|
– | 113 | – | (2 | ) | 111 | $ | 111 | ||||||||||||||||
|
Return
on Power Facility Appropriation Investment
|
– | (5 | ) | – | – | (5 | ) | – | ||||||||||||||||
|
Accumulated
other comprehensive loss (Note 3)
|
– | – | (22 | ) | – | (22 | ) | (22 | ) | |||||||||||||||
|
Return
of Power Facility Appropriation Investment
|
(5 | ) | – | – | – | (5 | ) | – | ||||||||||||||||
|
Balance at March 31, 2007 (as
restated)
(unaudited)
|
$ | 4,753 | $ | 1,524 | $ | 6 | $ | (3,676 | ) | $ | 2,607 | $ | 89 | |||||||||||
|
Balance at December 31, 2007
(as restated)
(unaudited)
|
$ | 4,738 | $ | 1,768 | $ | (23 | ) | $ | (3,685 | ) | $ | 2,798 | ||||||||||||
|
Net
income (loss) (as restated)
|
– | 137 | – | (2 | ) | 135 | $ | 135 | ||||||||||||||||
|
Return
on Power Facility Appropriation Investment
|
– | (5 | ) | – | – | (5 | ) | – | ||||||||||||||||
|
Accumulated
other comprehensive loss (Note 3)
|
– | – | (44 | ) | – | (44 | ) | (44 | ) | |||||||||||||||
|
Return
of Power Facility Appropriation Investment
|
(5 | ) | – | – | – | (5 | ) | – | ||||||||||||||||
|
Balance at March 31, 2008 (as
restated)
(unaudited)
|
$ | 4,733 | $ | 1,900 | $ | (67 | ) | $ | (3,687 | ) | $ | 2,879 | $ | 91 | ||||||||||
For the
six months ended March 31, 2008 and 2007
|
Appropriation
Investment
|
Retained
Earnings(Restated)
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated
Net Expenseof Stewardship Programs
|
Total(Restated)
|
Comprehensive
Income (Loss)
|
|||||||||||||||||||
|
Balance
at September 30, 2006 (as restated)
|
$ | 4,763 | $ | 1,349 | $ | 43 | $ | (3,672 | ) | $ | 2,483 | |||||||||||||
|
Net
income (loss) (as restated)
|
– | 185 | – | (4 | ) | 181 | $ | 181 | ||||||||||||||||
|
Return
on Power Facility Appropriation Investment
|
– | (10 | ) | – | – | (10 | ) | – | ||||||||||||||||
|
Accumulated
other comprehensive loss (Note 3)
|
– | – | (37 | ) | – | (37 | ) | (37 | ) | |||||||||||||||
|
Return
of Power Facility Appropriation Investment
|
(10 | ) | – | – | – | (10 | ) | – | ||||||||||||||||
|
Balance at March 31, 2007 (as
restated)
(unaudited)
|
$ | 4,753 | $ | 1,524 | $ | 6 | $ | (3,676 | ) | $ | 2,607 | $ | 144 | |||||||||||
|
Balance
at September 30, 2007 (as restated)
|
$ | 4,743 | $ | 1,763 | $ | (19 | ) | $ | (3,683 | ) | $ | 2,804 | ||||||||||||
|
Net
income (loss) (as restated)
|
– | 147 | – | (4 | ) | 143 | $ | 143 | ||||||||||||||||
|
Return
on Power Facility Appropriation Investment
|
– | (10 | ) | – | – | (10 | ) | – | ||||||||||||||||
|
Accumulated
other comprehensive loss (Note 3)
|
– | – | (48 | ) | – | (48 | ) | (48 | ) | |||||||||||||||
|
Return
of Power Facility Appropriation Investment
|
(10 | ) | – | – | – | (10 | ) | – | ||||||||||||||||
|
Balance at March 31, 2008 (as
restated)
(unaudited)
|
$ | 4,733 | $ | 1,900 | $ | (67 | ) | $ | (3,687 | ) | $ | 2,879 | $ | 95 | ||||||||||
The
accompanying Notes are an integral part of these financial
statements
(Dollars
in millions except where noted)
1.
Summary of Significant Accounting Policies
General
The Tennessee Valley Authority (“TVA”)
is a wholly-owned corporate agency and instrumentality of the United
States. TVA was created by the U.S. Congress in 1933 by virtue of the
Tennessee Valley Authority Act of 1933,
as amended
, 16 U.S.C.
§§ 831-831ee (as amended, the “TVA Act”). TVA was created to
improve navigation on the Tennessee River, reduce flood damage, provide
agricultural and industrial development, and provide electric power to the
Tennessee Valley region. TVA manages the Tennessee River and its
tributaries for multiple river-system purposes, such as navigation; flood damage
reduction; power generation; environmental stewardship; shoreline use; and water
supply for power plant operations, consumer use, recreation, and
industry.
Substantially all TVA revenues and
assets are attributable to the power program. TVA provides power in
most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern
Kentucky, and in portions of northern Georgia, western North Carolina, and
southwestern Virginia to a population of approximately 8.8 million
people. The power program has historically been separate and distinct
from the stewardship programs. The power program is required to be
self-supporting from power revenues and proceeds from power financings, such as
proceeds from the issuance of bonds, notes, and other evidences of indebtedness
(“Bonds”). Although TVA does not currently receive congressional
appropriations, it is required to make annual payments to the U.S. Treasury in
repayment of, and as a return on, the government’s appropriation investment in
TVA power facilities (the “Power Facility Appropriation
Investment”). Before 2000, most of the funding for TVA’s stewardship
programs was provided by congressional appropriations. These programs
are now funded with power revenues except for certain stewardship activities
that generate various revenues and user fees. These activities
related to stewardship properties do not meet the criteria of an operating
segment pursuant to Statement of Financial Accounting Standard (“SFAS”) No. 131,
“Disclosures About Segments of
an Enterprise and Related Information.”
Accordingly,
stewardship assets and properties are included as part of the power program,
TVA’s only operating segment.
Power
rates are established by the TVA board of directors (“TVA Board”) as authorized
by the TVA Act. The TVA Act requires TVA to charge rates for power
that will produce gross revenues sufficient to provide funds for operation,
maintenance, and administration of its power system; payments to states and
counties in lieu of taxes (“tax equivalent payments”); debt service on
outstanding indebtedness; payments to the U.S. Treasury in repayment of and as a
return on the Power Facility Appropriation Investment; and such additional
margin as the TVA Board may consider desirable for investment in power system
assets, retirement of outstanding Bonds in advance of maturity, additional
reduction of the Power Facility Appropriation Investment, and other purposes
connected with TVA’s power business. In setting TVA’s rates, the TVA
Board is charged by the TVA Act to have due regard for the primary objectives of
the TVA Act, including the objective that power shall be sold at rates as low as
are feasible. Rates set by the TVA Board are not subject to the prior
approval of or subsequent review by any state or federal regulatory
body.
Basis
of Presentation
TVA prepares its interim financial
statements in conformity with generally accepted accounting principles (“GAAP”)
accepted in the United States for interim financial
information. Accordingly, TVA’s interim financial statements do not
include all of the information and notes required by GAAP for complete financial
statements. Because the accompanying interim financial statements do not include
all of the information and footnotes required by GAAP for complete financial
statements, they should be read in conjunction with the audited financial
statements for the year ended September 30, 2007, and the notes thereto, which
are contained in TVA’s Annual Report on Form 10-K/A No. 2, as amended, for the
fiscal year ended September 30, 2007 (“Annual Report”).
The amounts included in the
accompanying interim financial statements are unaudited but, in the opinion of
TVA management, reflect all adjustments, which consist solely of normal
recurring adjustments, necessary to fairly present TVA’s financial position and
results of operations for the interim periods. Due to seasonal
weather variations and the timing of planned maintenance and refueling outages
of electric generating units, the results of operations for interim periods are
not necessarily indicative of amounts expected for the entire
year.
Use
of Estimates
In preparing financial statements that
conform to GAAP, management must make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the amounts of
revenues and expenses reflected during the reporting period. Actual results
could differ from those estimates.
Fiscal
Year
TVA’s fiscal year ends September
30. Unless otherwise indicated, years (2008, 2007, etc.) refer to
TVA’s fiscal years.
Restricted
Cash and Investments
As of March 31, 2008, and September 30,
2007, TVA had $90 million and $150 million, respectively, in Restricted cash and
investments on its Balance Sheets primarily related to collateral posted with
TVA by a swap counterparty in accordance with certain credit terms included in
the swap agreement. This resulted in the funds being reported in
Restricted cash and investments.
Accounts
Receivable
Accounts receivable primarily consist
of amounts due from customers for power sales. The table below
summarizes the types and amounts of receivables.
|
Accounts
Receivable
|
||||||||
|
At
March 31
2008
|
At
September 30
2007
|
|||||||
|
As
Restated
|
||||||||
|
Power
receivables billed
|
$ | 246 | $ | 316 | ||||
|
Power
receivables unbilled
|
781 | 986 | ||||||
|
Fuel
cost adjustment-current
|
145 | 132 | ||||||
|
Total
power receivables
|
1,172 | 1,434 | ||||||
|
Other
receivables
|
25 | 26 | ||||||
|
Allowance
for uncollectible accounts
|
(2 | ) | (2 | ) | ||||
|
Net
accounts receivable
|
$ | 1,195 | $ | 1,458 | ||||
Cost-Based
Regulation
Regulatory assets and regulatory
liabilities are classified under the provisions of SFAS No. 71
, “Accounting for the Effects of
Certain Types of Regulation”
(“SFAS No. 71”), and are included in
Accounts receivable, net, Deferred nuclear generating units, Other regulatory
assets, and Regulatory liabilities and as an offset to Property, plant, and
equipment on the March 31, 2008, and September 30, 2007, Balance
Sheets.
TVA’s regulatory assets and liabilities
are summarized in the table below.
In the first quarter of 2008, TVA began
using regulatory accounting treatment to defer the unrealized mark-to-market
gains and losses on certain swap and swaption contracts to reflect that the gain
or loss is included in the ratemaking formula when these transactions actually
settle. The value of the swap and swaptions is still recorded on
TVA’s balance sheet with realized gains or losses on these contracts recorded in
TVA's income statement. The deferred unrealized loss on the value of
the swaps and swaptions was $199 million for the first two quarters of 2008 and
is included as a Regulatory asset on the March 31, 2008, Balance
Sheet. See
Swaps
and Swaptions
in this Note 1.
On February 8, 2008, TVA finalized an
agreement to purchase the Office of Power Complex (the major portion of TVA’s
Chattanooga Office Complex in Chattanooga, Tennessee) upon the expiration of the
existing lease term on January 1, 2011. The purchase price is $22
million, payable on January 3, 2011. In accordance with Financial
Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 26,
“Accounting for Purchase of a Leased
Asset by the Lessee during the Term of the Lease—an interpretation of FASB
Statement No. 13,”
TVA increased the basis of the capital lease asset by
$14 million, increased the capital lease regulatory asset by $1 million, and
increased the capital lease obligation by $15 million.
TVA
established a reserve for future generation funded by power customers which is
also classified as a regulatory liability. Because of the nature of
the reserve, it is considered as an offset to Property, plant, and equipment on
the March 31, 2008, and September 30, 2007, Balance Sheets.
Reserve
for Future Generation
During the first quarter of 2007, TVA
began collecting in rates amounts intended to fund future generation based on
the need for additional generating capacity in TVA’s service
area. Because these amounts were intended to fund future costs, they
were originally deferred as a regulatory liability. The funds were
based on a predetermined rate applied to electricity sales approved as part of
TVA’s 2007 budget. Collections for the three months and six months
ended March 31, 2007, amounted to $13 million and $21 million,
respectively. Total collections for the year ended September 30,
2007, amounted to $76 million. These amounts were recorded as a
regulatory liability on the March 31, 2007, and September 30, 2007, Balance
Sheets, respectively, as a component of Completed plant.
Following
the purchase of two combustion turbine facilities, these funds were applied as
credits to Completed plant and are reflected on the September 30, 2007, Balance
Sheet. The funds collected for future generation are being amortized
to revenue in order to match revenue with the corresponding depreciation expense
of the facilities on the Statement of Income. This revenue
recognition process began when the facilities were placed into
service. The reserve for future generation was not extended beyond
2007. The balance of the reserve for future generation was $72
million at March 31, 2008, and $74 million at September 30, 2007. TVA
recognized revenue of $1 million during both the first and second quarters of
2008 consistent with the manner in which the related assets are being
depreciated.
Energy
Prepayment Obligations
Prior to
2005, TVA entered into sales agreements with 36 customers for 54.5 discounted
energy units totaling $54.5 million. Total credits applied to power
billings on a cumulative basis from these arrangements through March 31, 2008,
exceeded $28.6 million. Of this amount, over $1 million was
recognized as revenue for each of the six month periods ended March 31, 2008,
and 2007.
In November 2003, TVA, Memphis Light,
Gas, and Water Division (“MLGW”), and the City of Memphis entered into
agreements whereby MLGW prepaid a portion of its power requirements for 15
years. The amount of the prepayment was $1.5 billion. The
prepayment credits are being applied to reduce MLGW’s monthly power bill on a
straight-line basis over the same 15-year period. Total credits
applied to power billings on a cumulative basis through March 31, 2008, exceeded
$440 million. Of this amount, $25 million was recognized as
revenue for each of the six month periods ended March 31, 2008, and
2007. These amounts were based on the ratio of kilowatt-hours of
electricity delivered to the total kilowatt-hours under contract.
At March 31, 2008, and September 30,
2007, obligations for these energy prepayments were $1,086 million and $1,138
million, respectively. These amounts are included in Energy
prepayment obligations and Current portion of energy prepayment obligations on
the March 31, 2008, and September 30, 2007, Balance Sheets.
Asset
Retirement Obligations
In
accordance with the provisions of SFAS No. 143,
“Accounting for Asset Retirement
Obligations,”
TVA recognizes the fair value of legal obligations
associated with the retirement of certain tangible long-lived
assets. The fair value of the liability is added to the book value of
the associated asset. The liability increases due to the passage of
time (accretion expense), based on the time value of money, until the
obligations settle. Subsequent to the initial recognition, the future
liability is adjusted for any periodic revisions to the expected cost of the
retirement obligation (changes in estimates to future cash flows) and for
accretion of the liability due to the passage of time.
During
the second quarter of 2008, TVA’s total asset retirement obligation (“ARO”)
increased $30 million due to accretion expense. The nuclear accretion
expense of $23 million was deferred and charged to a regulatory asset in
accordance with SFAS No. 71
.
The remaining
accretion expense of $7 million, related to coal-fired and gas/oil combustion
turbine plants, asbestos, and polychlorinated biphenyls (“PCBs”), was expensed
during the second quarter of 2008. During the second quarter of 2007,
TVA’s total ARO increased $105 million. The increase was comprised of $83
million in new AROs plus $22 million in ARO expense (accretion of the
liability).
During
the first six months of 2008, TVA’s total ARO increased $60 million due to
accretion expense, $46 million related to nuclear ARO accretion and $14 million
related to non-nuclear ARO accretion. For the first six months of
2007, TVA’s total ARO increased $127 million. The increase was comprised of $83
million in new AROs plus $44 million in ARO expense (accretion of the
liability).
Reconciliation
of Asset Retirement Obligation Liability
|
Three
Months Ended
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Balance
at beginning of period
|
$ | 2,219 | $ | 2,007 | $ | 2,189 | $ | 1,985 | ||||||||
|
Changes
in nuclear estimates to future cash flows
|
– | 82 | – | 82 | ||||||||||||
|
Non-nuclear
additional obligations
|
– | 1 | – | 1 | ||||||||||||
| – | 83 | – | 83 | |||||||||||||
|
Add: ARO
(accretion) expense
|
||||||||||||||||
|
Nuclear
accretion (recorded as a regulatory asset)
|
23 | 15 | 46 | 30 | ||||||||||||
|
Non-nuclear
accretion (charged to expense)
|
7 | 7 | 14 | 14 | ||||||||||||
| 30 | 22 | 60 | 44 | |||||||||||||
|
Balance
at end of period
|
$ | 2,249 | $ | 2,112 | $ | 2,249 | $ | 2,112 | ||||||||
Other
(Expense) Income, Net
Other (expense) income, net is
comprised of the following:
Other
(Expense) Income, Net
|
Three
Months Ended
March
31
|
Six
Months Ended
March
31
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
As
Restated
|
As
Restated
|
As
Restated
|
As
Restated
|
|||||||||||||
|
Interest
income
|
$ | 5 | $ | 9 | $ | 10 | $ | 20 | ||||||||
|
External
services
|
4 | 2 | 5 | 7 | ||||||||||||
|
Unrealized
(losses) gains on investments
|
(11 | ) | – | (23 | ) | 1 | ||||||||||
|
Claims
settlement
|
– | – | 8 | – | ||||||||||||
|
Miscellaneous
|
– | 6 | 1 | 7 | ||||||||||||
|
Total
other (expense) income, net
|
$ | (2 | ) | $ | 17 | $ | 1 | $ | 35 | |||||||
Allowance
for Funds Used During Construction
TVA
capitalizes interest as an allowance for funds used during construction
("AFUDC"), based on the average interest rate of TVA’s outstanding
debt. The allowance is applicable to construction in progress related
to certain projects and certain nuclear fuel inventories. TVA will
continue to capitalize a portion of current interest costs associated with funds
invested in most nuclear fuel inventories, but interest on funds invested in
construction projects will be capitalized beginning in 2008 only if (1) the
expected total cost of a project is $1 billion or more and (2) the
estimated construction period is at least three years in duration. The adoption
of this new criteria has greatly reduced the number of qualifying projects,
which was approximately 800 at September 30, 2007. During the first six
months of 2008, only one project — Watts Bar Nuclear Plant Unit 2 — met the new
AFUDC criteria. The project base for the year ending September 30,
2007, averaged approximately $2.7 billion. By contrast, the project
base for the six months ending March 31, 2008, averaged approximately $26
million.
Swaps
and Swaptions
From time to time TVA has entered into
call monetization transactions using swaptions to hedge the value of call
provisions on certain of its Bond issues. A swaption essentially
grants a third party an option to enter into a swap agreement with TVA under
which TVA receives a floating rate of interest and pays the third party a fixed
rate of interest equal to the interest rate on the Bond issue whose call
provision TVA monetized.
These call monetization transactions
result in long-term liabilities until such time as TVA repurchases the option or
until the option matures. These liabilities are marked to market each
quarter. In accordance with the accounting policy that was in effect
on September 30, 2007, the changes in the value of these liabilities were
reported as unrealized gains or losses through TVA’s income statement in
accordance with SFAS No. 133,
“Accounting for Derivative
Instruments and Hedging Activities”
(“SFAS No. 133”).
The volatility of the
valuations resulted in the recognition of sizable amounts of non-cash expense or
income, which affected net income.
The TVA Board approved, beginning in
2008, the utilization of regulatory accounting treatment for swaps and swaptions
related to call monetization transactions in order to better match the income
statement recognition of gain and loss with the economic reality of when these
transactions actually settle. This treatment removes the non-cash impacts to
TVA’s earnings that result from marking the value of these instruments to market
each quarter. The value of the swaps and swaptions will still be
recorded on TVA’s balance sheet, and any interest expense impacts will continue
to be reflected in TVA’s income statement. The deferred unrealized
loss on the value of the swaps and swaptions was $100 million and $199 million
for the second quarter and first six months of 2008,
respectively. The deferred loss of $199 million is included as a
Regulatory asset on the March 31, 2008, Balance Sheet.
Impact
of New Accounting Standards and Interpretations
Accounting for Defined
Benefit Pension and Other Postretirement Plans
. On September
30, 2007, TVA adopted the provisions contained within SFAS No. 158,
“Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements
No. 87, 88, 106, and 132(R)”
(“SFAS No. 158”)
.
SFAS No. 158
requires employers to fully recognize within their financial statements the
obligations associated with single-employer defined benefit pension, retiree
healthcare, and other postretirement plans. Specifically, SFAS No.
158 requires an employer to recognize in its statement of financial position an
asset for a plan’s overfunded status or a liability for a plan’s underfunded
status; measure a plan’s assets and its obligations that determine its funded
status as of the end of the employer’s fiscal year (with limited exceptions);
and recognize changes in the funded status of a defined benefit postretirement
plan in the year in which the changes occur. Such changes are to be
reported within comprehensive income of a business entity (except that regulated
entities may report such changes as regulatory assets and/or liabilities in
accordance with the provisions of SFAS No. 71), and within changes in net assets
of a not-for-profit organization.
TVA’s 2007 adoption of SFAS No. 158
resulted in the recognition of the following amounts on its Balance Sheet at
September 30, 2007: additional regulatory assets of $475 million (including the
reclassification of $246 million in unamortized prior service cost previously
classified as intangible assets) resulting in post-SFAS No. 158 benefit
regulatory assets of $973 million; and additional pension and postretirement
obligations of $330 million and $143 million, and $2 million classified as
accumulated other comprehensive gain, resulting in post-SFAS No. 158 benefit
obligations of $1,128 million. The recognition of such amounts
increased total assets and liabilities by $475 million at September 30,
2007.
Fair Value
Measurements
. In September 2006, the Financial Accounting
Standards Board (“FASB”) issued SFAS No. 157,
“Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 provides guidance for using
fair value to measure assets and liabilities that currently require fair value
measurement. The standard also responds to investors’ requests for
expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. SFAS No. 157 applies
whenever other standards require (or permit) assets or liabilities to be
measured at fair value but does not expand the use of fair value in any new
circumstances. SFAS No. 157 establishes a fair value hierarchy that
prioritizes the information used to develop measurement
assumptions. Provisions of SFAS No. 157 were to be effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. However, in February
2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2,
"Effective Date of FASB Statement
No. 157”
which delays the effective date of SFAS No. 157
for nonfinancial assets
and nonfinancial liabilities except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. This
FSP defers the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items
within the scope of this FSP. TVA is currently evaluating the
requirements of SFAS No. 157 and has not yet determined the impact of its
implementation, which may or may not be material to TVA’s results of operations
or financial position.
Fair Value
Option
. In February 2007, FASB issued SFAS No. 159,
“The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement No.
115”
(“SFAS No. 159”). SFAS No. 159 permits an entity to
choose to measure many financial instruments and certain other items at fair
value. The fair value option established by SFAS No.159 permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity will report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date. Most of the provisions in SFAS No. 159 are
elective. The provisions of SFAS No. 159 are effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007. Early adoption is permitted as of the beginning of the previous
fiscal year provided that the entity makes that choice in the first 120 days of
that fiscal year and elects to apply the provisions of SFAS No. 157
.
At this time, TVA is
evaluating the requirements of SFAS No. 159 and has not yet determined the
potential impact of its implementation, which may or may not be material to
TVA’s results of operations or financial position.
Offsetting
Amounts
. On April 30, 2007, FASB issued FSP FIN No. 39-1,
“Amendment of FASB Interpretation
No. 39”
(“FIN No. 39-1”),
which addresses certain
modifications to FASB Interpretation No. 39,
“Offsetting of Amounts Related to
Certain Contracts.”
FIN No. 39-1 replaces the terms “conditional
contracts” and “exchange contracts” with the term “derivative instruments” as
defined in SFAS No. 133. FIN No. 39-1 also permits a reporting entity
to offset fair value amounts recognized for the right to reclaim cash collateral
(a receivable) or the obligation to return cash collateral (a payable) against
fair value amounts recognized for derivative instruments executed with the same
counterparty under the same master netting arrangement. The guidance
in FIN No. 39-1 is effective for fiscal years beginning after November 15, 2007,
with early application permitted. At this time, TVA is evaluating the
requirements of FIN No. 39-1 and has not yet determined the potential impact of
its implementation, which may or may not be material to TVA’s financial
position.
Derivative Instruments and
Hedging Activities
. In March 2008, FASB issued SFAS 161,
“
Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No. 133”
(“SFAS No. 161”), which establishes, among other things, the disclosure
requirements for derivative instruments and hedging activities. SFAS
No. 161 amends and expands the disclosure requirements of SFAS No. 133
.
TVA currently
includes many of the disclosures now required by SFAS No. 161 but does not plan
to early adopt the requirements of the new standard. The effective
date of adoption for TVA is the second quarter of 2009.
2. Restatement
The
accompanying financial statements as of March 31, 2008 and 2007, and September
30, 2007, have been restated. TVA determined that the method
implemented to estimate unbilled revenues in September 2006 had resulted in
errors in unbilled revenue presented in TVA’s financial statements for the
fiscal years ended September 30, 2006, and 2007, and the quarterly periods ended
December 31, 2006, March 31, 2007, June 30, 2007, December 31, 2007, and March
31, 2008. There was no effect on periods prior to the three months
ended September 30, 2006.
Under
TVA’s end-use billing arrangements with its distributors, TVA relies on the
distributors to report their end-use sales. Because of the delay between
the wholesale delivery of power to the customer and the report of end-use sales
to TVA, TVA must estimate the unbilled revenue at the end of each financial
reporting period. In September 2006, TVA implemented a change in
methodology for estimating unbilled revenue for electricity sales which resulted
in an increase of $232 million in unbilled revenue (or 2.6 percent of operating
revenues) for 2006.
The
estimation process implemented in September 2006 utilized the distributors’
average rates and an estimate of the number of days of revenue outstanding to
reflect the delay in reporting the end-use sales to TVA (“days
outstanding”). The number of days outstanding was derived using a
procedure similar to a cross-correlation calculation that compared the monthly
retail load to the monthly wholesale load. The intent was to reflect
in the unbilled estimate the end-use sales that would be reported that month by
distributors plus any remaining sales that would not be reported until the
following month due to the delay between wholesale delivery and end-use
reporting.
TVA has
determined that the process implemented in September 2006 overestimated the days
outstanding and that this overestimation of days outstanding resulted in an
error in recording unbilled revenue and unbilled receivables. The
previous unbilled method also failed to consider the annual true-up of each
distributor’s reported distribution losses. The annual true-up
reconciles total end-use kilowatt-hour (“kWh”) sales and revenue reported by
each distributor with the kWh sales recorded for each distributor at
wholesale.
TVA has used a new process for
estimating unbilled revenues for the three and six months ended March 31, 2008,
and 2007. This process carries over only the portion of sales from
the distributor’s meter read date to the month-end. Those sales,
along with the current month sales, are then priced at rates based on each
distributor’s customer and product mix. Additionally, a true-up
component has been added to the unbilled calculation to reflect any timing
differences that occur between the retail and wholesale billing
cycles. Due to the new process, an adjustment was made to increase
revenue for the three months and six months ended March 31, 2008 by $61
million and $69 million, respectively, and decrease revenue for the three
and six months ended March 31, 2007, by $25 million and $4 million,
respectively.
The restatement of unbilled revenue
also affected TVA’s fuel cost adjustment (“FCA”) calculation. The FCA is a
mechanism by which TVA collects the direct cost of fuel used in its generating
facilities and also the energy costs of purchased power used to serve power
demand. Implementation of the FCA occurred in October 2006 as a joint
effort between TVA and its customers. The goal of the FCA is timely
recovery of fuel-related expenses to reduce the volatility driven by fuel and
purchased power markets. Under TVA’s FCA methodology, adjustments to
rates are based primarily on the difference between forecasted and actual
expenses for the upcoming quarter, as well as the difference between forecasted
and actual revenues for the upcoming quarter. Because the FCA
adjustments are forward-looking, there is typically a difference between what is
collected in rates and what actual expense is realized over the course of the
quarter. This difference is added to or subtracted from a deferred
account on TVA’s balance sheet.
The restatement of unbilled revenue
changed TVA’s forecasted revenues, and since forecasted revenues are a major
component of the FCA calculation, the change in forecasted revenues required a
restatement of the amounts in TVA’s deferred FCA account. In the
Original 10-Q, TVA reported a FCA deferred balance of $199 million at March 31,
2008, which was restated to a deferred balance of $166 million. Of the $166
million, $21 million is a deferred asset and $145 million is a current
receivable.
The unbilled revenue error also
affected the application of distributor prepayments. The balance in the
distributors’ unbilled accounts receivable is offset by a reduction in the
advance collections of those customers who make prepayments for their power. As
a result of the change in unbilled revenue, the balances in the unbilled
receivable and advance collections accounts were decreased by less than $1
million as of March 31, 2008.
TVA has evaluated these errors and
determined that the impact was an overstatement of net income for the fiscal
year ended September 30, 2006, and understatements of net income for the fiscal
year ended September 30, 2007, and the three and six months ended March 31,
2008. The changes to the financial statements for the respective
periods primarily involve accounts receivable and retained earnings on the
balance sheets, and operating revenues and net income on the statements of
income. The errors and restatements have no impact on cash and cash
equivalents.
In addition to the unbilled revenue and
FCA adjustments, there were certain miscellaneous items that were previously
deemed to be immaterial by management which have been corrected in the period in
which they were originally identified. Summary restatements tables
are presented below. References in the “Note” column correspond to lines on the
Statements of Income and Balance Sheets following these
tables. Accordingly, previously reported amounts are being restated
to properly reflect the accounting for these items as follows:
Statements
of Income
Summary
of Restatements
For
the Three and Six Months Ended March 31
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||||||||||||
|
Line
Item
|
Description
of Adjustment
|
2008
|
Note
|
2007
|
Note
|
2008
|
Note
|
2007
|
Note
|
|||||||||||||||||
|
Operating
revenues
|
Unbilled
revenue adjustments
|
$ | 61 | $ | (25 | ) | $ | 69 | $ | (4 | ) | |||||||||||||||
|
Reclassification
of expenses previously netted with revenue
|
3 | 4 | 5 | 5 | ||||||||||||||||||||||
| 64 |
I08-1
|
(21 | ) | I07-1 | 74 | I08-5 | 1 | I07-5 | ||||||||||||||||||
|
Operating
expenses
|
Fuel
cost adjustment
|
(1 | ) | 3 | (15 | ) | 9 | |||||||||||||||||||
|
Loss
on asset impairment
|
– | – | – | (5 | ) | |||||||||||||||||||||
|
Change
in period for depreciation expense
|
– | (13 | ) | – | (8 | ) | ||||||||||||||||||||
|
Additional
legal expense
|
– | – | (3 | ) | – | |||||||||||||||||||||
|
Intercompany
charges reclassification
|
– | 2 | – | 2 | ||||||||||||||||||||||
|
Financing
cost interest reclassification
|
(12 | ) | (12 | ) | (24 | ) | (24 | ) | ||||||||||||||||||
|
Reclassification
of expenses previously netted with revenue
|
4 | 4 | 7 | 7 | ||||||||||||||||||||||
| (9 | ) | I08-2 | (16 | ) | I07-2 | (35 | ) | I08-6 | (19 | ) | I07-6 | |||||||||||||||
|
Operating
income
|
73 | (5 | ) | 109 | 20 | |||||||||||||||||||||
|
Other
income/expense
|
Additional
legal reserve
|
– | – | – | 4 | |||||||||||||||||||||
|
Intercompany
charges reclassification
|
– | 2 | – | 2 | ||||||||||||||||||||||
|
Reclassification
of other income previously reported as revenue
|
1 | – | 2 | 2 | ||||||||||||||||||||||
| 1 | I08-3 | 2 | I07-3 | 2 | I08-7 | 8 | I07-7 | |||||||||||||||||||
|
Interest
expense
|
Financing
cost interest reclassification
|
12 | I08-4 | 12 | I07-4 | 24 | I08-8 | 24 | I07-8 | |||||||||||||||||
|
Net
income
|
$ | 62 | $ | (15 | ) | $ | 87 | $ | 4 | |||||||||||||||||
Balance
Sheet
Summary
of Restatements
March
31, 2008
|
Description
of Adjustment
|
Amount
|
Note
|
||||||
|
Current
assets
|
||||||||
|
Accounts
receivable
|
Unbilled
revenue adjustments
|
$ | (59 | ) | ||||
|
Fuel
cost adjustments
|
(39 | ) | ||||||
| (98 | ) |
B08-1
|
||||||
|
Property,
Plant, and Equipment
|
||||||||
|
Nuclear
fuel and capital leases
|
Revaluation
of leased asset for purchase
|
14 |
B08-2
|
|
||||
|
Regulatory
and other long-term assets
|
||||||||
|
Fuel
cost adjustments
|
6 | |||||||
|
Regulatory
assets
|
Revaluation
of leased asset for purchase
|
1 | ||||||
| 7 |
B08-3
|
|||||||
|
Total
restatement of assets
|
$ | (77 | ) | |||||
|
Current
liabilities
|
||||||||
|
Accrued
liabilities
|
Fuel
cost adjustments
|
(3 | ) |
B08-4
|
||||
|
Other
liabilities
|
||||||||
|
Other
liabilities
|
Revaluation
of leased asset obligation for purchase
|
15 |
B08-5
|
|||||
|
Proprietary
capital
|
||||||||
|
Retained
earnings
|
Unbilled
revenue adjustments
|
61 | ||||||
|
Retained
earnings
|
Fuel
cost adjustments
|
1 | ||||||
|
Retained
earnings
|
Beginning
retained earnings adjustment
|
(151 | ) | |||||
| (89 | ) |
B08-6
|
||||||
|
Total
restatement of liabilities and proprietary capital
|
$ | (77 | ) | |||||
Accordingly,
previously reported amounts are being restated to properly reflect the
accounting for these items as follows:
Statements of
Income
The
following table summarizes the statements of income for the periods indicated,
giving effect to the restatement adjustments described above and showing
previously reported amounts and restated amounts for the three months ended
March 31, 2008, and 2007.
Statements
of Income
For
the Three Months Ended
|
March
31, 2008
|
March
31, 2007
|
|||||||||||||||||||||||||||||
|
As
Previously Reported
|
Increase
(Decrease)
|
Note
|
As
Restated
|
As
Previously Reported
|
Increase
(Decrease)
|
Note
|
As
Restated
|
|||||||||||||||||||||||
|
Operating
revenues
|
||||||||||||||||||||||||||||||
|
Sales
of electricity
|
||||||||||||||||||||||||||||||
|
Municipalities
and cooperatives
|
$ | 2,011 | $ | 61 | $ | 2,072 | $ | 1,922 | $ | (25 | ) | $ | 1,897 | |||||||||||||||||
|
Industries
directly served
|
382 | – | 382 | 301 | – | 301 | ||||||||||||||||||||||||
|
Federal
agencies and other
|
33 | – | 33 | 26 | – | 26 | ||||||||||||||||||||||||
|
Other
revenue
|
28 | 3 | 31 | 31 | 4 | 35 | ||||||||||||||||||||||||
|
Operating
revenues
|
2,454 | 64 |
I08-1
|
2,518 | 2,280 | (21 | ) | I07-1 | 2,259 | |||||||||||||||||||||
|
Operating
expenses
|
||||||||||||||||||||||||||||||
|
Fuel
and purchased power
|
971 | 2 | 973 | 824 | 7 | 831 | ||||||||||||||||||||||||
|
Operating
and maintenance
|
570 | (11 | ) | 559 | 576 | (10 | ) | 566 | ||||||||||||||||||||||
|
Depreciation,
amortization, and accretion
|
392 | – | 392 | 382 | (13 | ) | 369 | |||||||||||||||||||||||
|
Tax
equivalents
|
117 | – | 117 | 109 | – | 109 | ||||||||||||||||||||||||
|
Loss
on asset impairment
|
– | – | – | – | – | – | ||||||||||||||||||||||||
|
Total
operating expenses
|
2,050 | (9 | ) | I08-2 | 2,041 | 1,891 | (16 | ) | I07-2 | 1,875 | ||||||||||||||||||||
|
Operating
income
|
404 | 73 | 477 | 389 | (5 | ) | 384 | |||||||||||||||||||||||
|
Other
(expense) income, net
|
(3 | ) | 1 | I08-3 | (2 | ) | 15 | 2 | I07-3 | 17 | ||||||||||||||||||||
|
Unrealized
gain on derivative contracts, net
|
– | – | – | 16 | – | 16 | ||||||||||||||||||||||||
|
Interest
expense
|
||||||||||||||||||||||||||||||
|
Interest
on debt and leaseback obligations
|
328 | 12 | 340 | 339 | 12 | 351 | ||||||||||||||||||||||||
|
Amortization
of debt discount, issue, and reacquisition costs, net
|
5 | – | 5 | 5 | – | 5 | ||||||||||||||||||||||||
|
Allowance
for funds used during construction and nuclear fuel
expenditures
|
(5 | ) | – | (5 | ) | (50 | ) | – | (50 | ) | ||||||||||||||||||||
|
Net
interest expense
|
328 | 12 | I08-4 | 340 | 294 | 12 | I07-4 | 306 | ||||||||||||||||||||||
|
Net
income
|
$ | 73 | $ | 62 | $ | 135 | $ | 126 | $ | (15 | ) | $ | 111 | |||||||||||||||||
The
following table summarizes the statements of income for the periods indicated,
giving effect to the restatement adjustments described above and showing
previously reported amounts and restated amounts for the six months ended
March 31, 2008, and 2007.
Statements
of Income
For
the Six Months Ended
|
March
31, 2008
|
March
31, 2007
|
|||||||||||||||||||||||||||
|
As
Previously Reported
|
Increase
(Decrease)
|
Note
|
As
Restated
|
As
Previously Reported
|
Increase
(Decrease)
|
Note
|
As
Restated
|
|||||||||||||||||||||
|
Operating
revenues
|
||||||||||||||||||||||||||||
|
Sales
of electricity
|
||||||||||||||||||||||||||||
|
Municipalities
and cooperatives
|
$ | 3,916 | $ | 69 | $ | 3,985 | $ | 3,664 | $ | (4 | ) | $ | 3,660 | |||||||||||||||
|
Industries
directly served
|
774 | – | 774 | 603 | – | 603 | ||||||||||||||||||||||
|
Federal
agencies and other
|
58 | – | 58 | 51 | – | 51 | ||||||||||||||||||||||
|
Other
revenue
|
56 | 5 | 61 | 66 | 5 | 71 | ||||||||||||||||||||||
|
Operating
revenues
|
4,804 | 74 |
I08-5
|
4,878 | 4,384 | 1 |
I07-5
|
4,385 | ||||||||||||||||||||
| </ | ||||||||||||||||||||||||||||