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TVC > SEC Filings for TVC > Form 10-K on 18-Nov-2011All Recent SEC Filings




Annual Report

(Dollars in millions except where noted)

Business Overview

The Tennessee Valley Authority ("TVA") operates the nation's largest public power system. At September 30, 2011, TVA provided electricity to approximately 50 large industrial customers, six federal agency customers, and 155 distributor customers that serve over nine million people in parts of seven southeastern states. TVA generates virtually all of its revenues from the sale of electricity, and in 2011 revenues from the sale of electricity totaled $11.7 billion. As a wholly-owned agency and instrumentality of the United States, however, TVA differs from other electric utilities in a number of ways:

(1) TVA is a government corporation.

(2) The area in which TVA sells power is limited by the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. 831-831ee (as amended, the "TVA Act") under a provision known as the "fence"; however, another provision of federal law known as the "anti-cherrypicking" provision generally protects TVA from being forced to provide access to its transmission lines to others for the purpose of delivering power to customers within substantially all of TVA's defined service area.

(3) The rates TVA charges for power are not set or reviewed by another entity, such as a public utility commission. TVA's rates are set solely by the TVA Board. In setting rates, however, 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 be sold at rates as low as feasible.

(4) TVA 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 and is authorized by the TVA Act to issue bonds, notes, and other evidences of indebtedness ("Bonds") in an amount not to exceed $30.0 billion outstanding at any given time. Although TVA's operations were originally funded primarily with appropriations from Congress, TVA has not received any appropriations from Congress for any activities since 1999 and, as directed by Congress, has funded essential stewardship activities primarily with power revenues.

Executive Summary

Although the worst recession since the 1930s has technically ended, difficult economic conditions and decreased customer demand continued to persist in 2011. In addition, more stringent environmental regulations have impacted generating resources and production costs, and the timing and magnitude of pending regulations create uncertainty. Customers and stakeholders are also expecting power system operations to be cleaner and have less of an impact on the environment in the future. TVA is taking actions to address these challenges, such as idling or retiring older coal-fired generating units, changing the way coal combustion residuals are stored, continuing to install clean air equipment, and continuing its focus on the safe operation of its nuclear units in light of global events.

TVA Vision

TVA's renewed vision is to be one of the nation's leading providers of low-cost and cleaner energy by 2020. More specifically, TVA intends to be:

The nation's leader in improving air quality;

The nation's leader in increased nuclear production;

The Southeast's leader in increased energy efficiency.

During 2011, the TVA Board accepted an integrated resource plan ("IRP") which recommends a strategic direction focusing on a diverse mix of electricity generation sources, including nuclear power, renewable energy, natural gas and energy efficiency, as well as traditional coal and hydroelectric power. TVA intends to move toward more generation with low or no emissions. TVA considers fuel mix in making decisions about additional generation, and is expected to rely on nuclear, natural gas-fired capacity, and energy efficiency as the primary means to meet future electricity needs. The restart of Browns Ferry Nuclear Plant ("Browns Ferry") Unit 1, the decision to complete Watts Bar Nuclear Plant ("Watts Bar") Unit 2, the reactivation of the construction permits for the existing Bellefonte Nuclear Plant ("Bellefonte") units, the decision to complete Bellefonte Unit 1, the filing of combined construction and operating license applications ("CCOLA") for two new units at Bellefonte, the purchase of the Magnolia Combined Cycle Plant ("Magnolia"), and the construction of the John Sevier Combined Cycle Facility are examples of TVA's pursuit of generation sources with low or no emissions. These projects require capital investment in the current year and over the next several years. Another challenge in this area is that TVA must have sufficient generation capacity to meet peak demands. Consequently, TVA is exploring alternatives to reduce or shift peak energy demands.

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Linking the Vision to Performance

During 2011, TVA set measures and evaluated its operational performance by focusing on two key indicators. The first measure was net cash flow, which is cash flow from operations plus investing cash flow less net cash flow from change in the fuel cost adjustment deferral account. The second measure was equivalent availability factor, which measures the availability of TVA's generation units within the nuclear and fossil-fueled fleets. The 2011 results compared with targets for these key indicators are reflected in the following chart.

Corporate Measure Target Actual Net cash flow $(935) Million $(774) Million Equivalent availability factor 86.0% 85.1%

TVA exceeded its target for net cash flow by $161 million due to higher cash received from power sales and lower spending on construction expenditures than expected. These items were partially offset by the acquisition of the Magnolia facility which was not included in the 2011 target.

TVA did not meet its equivalent availability factor target for 2011 because of extended outages at two of its larger coal-fired plants as well as an extended outage at one of its combined cycle plants.

Beginning in 2012, TVA plans to measure success using a vision scorecard. Processes will be established to monitor progress in meeting the vision's objectives.

Net cash flow is not a measure of financial performance under accounting principles generally accepted in the United States ("GAAP"). Accordingly, it should not be considered as a substitute for cash flow data prepared in accordance with GAAP. However, TVA uses net cash flow as an indicator of TVA's ability to meet its debt service and availability of funds for capacity expansion and other business requirements.

TVA calculates net cash flow as Net cash provided by operating activities plus Net cash used from investing activities less net cash flow from change in fuel cost adjustment deferral. The following reconciles the net cash flow to Net cash provided by operating activities.

                          Non-GAAP Reconciliation
                   For the year ended September 30, 2011

Net cash provided by operating activities                          $ 2,437
Plus: Net cash used from investing activities                       (3,142 )
Less: Net cash flow from change in fuel cost adjustment deferral       (69 )
Net cash flow                                                      $  (774 )

2011 Highlights


Power sales were three percent lower during 2011 than 2010. The lower demand for electricity was primarily weather-driven but was also affected by lower demand for electricity by TVA's largest industrial customer, which has been curtailing operations. See 2011 Challenges - Weather Extremes below.

TVA had net income for 2011 of $162 million as compared to $972 million for 2010. Revenues from the sale of electricity totaled $11.7 billion for 2011, and despite the decrease in sales, revenues were nine percent higher in 2011 as compared to 2010. The $1.0 billion increase in revenue was related to the recovery of fuel and purchased power costs in rates and substantially offset the $1.1 billion increase in fuel and purchased power costs. Expenses related to repair of damage caused by storms, higher operating and maintenance expenses related to nuclear refueling outages at generating facilities, the Environmental Agreements, and increases in the cost of employee benefit programs all contributed to the decrease in net income for 2011 as compared to 2010.

Rate Changes and Adjustments

In April 2011, TVA implemented a new wholesale rate structure, which includes seasonal demand and energy ("SDE") and time-of-use ("TOU") rates. The revised rate structures provide price signals intended to incentivize distributor and end-use customers to shift energy usage from high-cost periods to less expensive periods. The rates are not intended to provide additional revenue for TVA (although individual customers may see some effect on their bills), but are intended to more closely align TVA's revenues with its costs.

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The new rate structure removed most fuel costs from the base rate. In conjunction with that change, the rate structure was also revised to establish a separate fuel rate that includes the costs of natural gas, fuel oil, purchased power, coal, emission allowances, nuclear fuel and other fuel-related commodities; realized gains and losses on derivatives purchased to hedge the costs of such commodities; and tax equivalents associated with the fuel cost adjustments. Instead of adjusting the energy rates as was the case with the previous rate structure where fuel costs were a component of the base rate, the fuel cost adjustment now establishes the separate fuel rate that is applicable for each month. The following table summarizes the impact that the fuel cost adjustment had on TVA's average wholesale firm rate during 2011.

                                                                    Impact on
                                          Fuel Cost                   Total
                              Base Fuel   Adjustment   Total Fuel    Average
                                Rate         Rate         Rate      Wholesale
           Month               (/kWh)     (/kWh)      (/kWh)     Firm Rate
October 2010                    1.851       1.127        2.978        6.4%
November 2010                   1.851       0.735        2.586       (5.0)%
December 2010                   1.851       0.476        2.327       (3.5)%
January 2011                    1.851       0.548        2.399        1.0%
February 2011                   1.851       0.436        2.287       (1.5)%
March 2011                      1.851       0.613        2.464        2.5%
April 2011                       n/a         n/a         2.376       (1.2)%
May 2011                         n/a         n/a         2.347       (0.4)%
June 2011                        n/a         n/a         2.366        0.3%
July 2011                        n/a         n/a         2.689        4.5%
August 2011                      n/a         n/a         2.741        0.7%
September 2011                   n/a         n/a         2.664       (1.0)%

At its August 18, 2011 meeting, the TVA Board approved an adjustment addendum that increased existing base wholesale rate charges beginning in October 2011, and that is expected to result in an increase of approximately two percent in total existing wholesale rate charges. The adjustment to base rates was designed to generate an additional $234 million in revenue in 2012. This increase in revenue will help fund projects tied to TVA's vision, including increasing efficiency of operating assets, increasing energy efficiency/demand response initiatives and funding compliance with emerging regulatory requirements resulting from events like Fukushima.

Environmental Matters

In December 2010, the Environmental Protection Agency ("EPA") issued a report that evaluated progress under its Acid Rain Program ("ARP"). The ARP, established under Title IV of the 1990 Clean Air Act ("CAA") Amendments, requires major emission reductions of sulfur dioxide ("SO2") and nitrogen oxides ("NOx") by the electric power industry. The December 2010 report contains information examining emission reductions, reviewing compliance results and market activity, and comparing changes in emissions to changes in pollutant concentrations. Data contained in this report indicates TVA has reduced SO2 emissions from its coal-fired generating plants at a faster rate than the national average for the industry during the past three decades and that TVA has significantly reduced SO2 emissions during the past three decades. Furthermore, the report indicates that TVA's NOx emissions have been significantly reduced since CY 1990 and that the reduction in these emissions has been at a rate faster than the national average during the past two decades.

New Generation

Natural Gas-Fired Generation. Despite the impacts of the recession of 2008-2009, which reduced TVA sales by approximately seven percent at its peak, and the current relatively sluggish economy, TVA believes new generation sources will be needed to meet anticipated load growth. Load growth is a key planning assumption that was examined and approved by both the TVA Board and TVA external stakeholders through the IRP process in 2011. In keeping with its generation strategy to move toward more generation with low or no emissions, TVA continues to evaluate natural gas-fired resource options. Existing combined cycle plants located within or closely adjacent to the TVA service territory generally meet these criteria and provide suitable opportunities for acquisition or long-term purchased power contracts.

On August 31, 2011, TVA acquired Magnolia for $436 million. The Magnolia facility is a three-unit natural gas-fired combined cycle plant with approximately 900 MW of summer net capability located in Benton County, Mississippi, and has been a source of purchased power for TVA since the plant began operation in 2003. See Note 19 - New Generation.

Additionally, TVA is in the process of completing the John Sevier Combined Cycle Facility in northeast Tennessee. TVA expects to complete the combined cycle facility by mid-CY 2012. The completed facility is expected to add approximately 880 MW of summer net capability to the TVA system at a cost of approximately $820 million.

Nuclear Generation. On August 18, 2011, the TVA Board approved a plan to finish construction of Bellefonte Unit 1,

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located in Hollywood, Alabama. TVA began construction of Bellefonte Unit 1 in 1974 but placed the site in deferred status in 1988. Bellefonte Unit 1 is scheduled to be completed by 2020, at an estimated additional cost of $4.9 billion exclusive of Allowance for Funds Used During Construction ("AFUDC") and the cost of the initial fuel load. Construction of Bellefonte Unit 1 is planned to begin after initial fuel loading at Watts Bar Unit 2.

Stewardship Activities

On August 18, 2011, the TVA Board accepted the Natural Resource Plan ("NRP"). The NRP is designed to enhance stewardship of public recreation facilities, water resources, wildlife and plants, and historic and cultural sites on TVA-managed reservoir lands by helping to guide TVA management to better meet public stewardship objectives while responding to the needs of the TVA region's communities and residents. Implementation of the NRP is expected to be staged over a 20-year period. It is expected to be reviewed and updated at least every five years.

Economic Development

TVA's economic development efforts helped recruit or expand over 140 companies into the TVA service area during 2011. These companies announced capital investments of over $4.9 billion and the expected creation and/or retention of over 43,000 jobs.

2011 Challenges

TVA faced several challenges during 2011 which impacted its operations and financial condition, including those discussed below.

Construction Projects

TVA had two major projects that experienced construction delays in 2011.

Watts Bar Unit 2. The project's schedule has experienced some delays as a result of lower than expected construction productivity and there will likely be a delay from licensing-related activities, including a delay resulting from a hearing scheduled to take place before an Atomic Safety and Licensing Board to resolve a pending aquatic contention.

On July 13, 2011, the Nuclear Regulatory Commission's ("NRC") Near-Term Task Force on the Fukushima Event released its review of insights following the Japanese nuclear events recommending that the NRC propose safety improvements in areas ranging from loss of power to earthquakes, flooding, spent fuel pools, containment venting, and preparedness. Actions taken upon the review could result in TVA being required to make changes to its operating nuclear units and Watts Bar Unit 2. Such changes are expected to possibly impact the cost and schedule of the project. See Item 1, Business - Current Power Supply - Nuclear - Response to Recent Events.

As a result of one or more of these developments, TVA believes that the Watts Bar Unit 2 completion date will extend into CY 2013, rather than the last quarter of CY 2012 as had been scheduled. The construction project and schedule for Watts Bar Unit 2 is currently being reviewed by TVA. Project costs are expected to significantly exceed the previous estimate of $2.5 billion. Updates to the schedule and cost estimates are expected to be completed by the second quarter of FY 2012.

TVA has received a license from the NRC to allow TVA to receive, inspect, and store new nuclear fuel at the Unit 2 site. The new fuel began arriving at the Watts Bar site during the summer of 2011. TVA plans to load the new nuclear fuel into the Unit 2 reactor following receipt of the operating license.

In November 2011, the NRC provided notice of its draft environmental report issued in connection with the licensing of Watts Bar Unit 2. In the draft report, the NRC staff concludes that the environmental impacts from the operation of Watts Bar Unit 2 are generally consistent with previous environmental reviews of the unit's operation and are in some cases less than previously identified.

For legal proceedings related to Watts Bar Unit 2, see Note 20 - Legal Proceedings - Administrative Proceedings Regarding Watts Bar Nuclear Plant Unit 2.

Browns Ferry Cooling Tower. A new cooling tower for Browns Ferry had been scheduled to go into operation in the summer of 2011. Completion of the project has been delayed, and TVA now expects the new cooling tower to be completed in the spring of 2012. As a result of not having the additional cooling capacity the new cooling tower would have provided, TVA was required to reduce generation at Browns Ferry during parts of the summer of 2011 to comply with permit requirements related to discharge water temperature.

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Regulatory Compliance

Environmental Agreements. On April 14, 2011, TVA entered into two agreements (collectively, the "Environmental Agreements") that generally absolve TVA until 2019 from any liability, subject to certain limitations and exceptions, under the New Source Review ("NSR") requirements of the CAA for maintenance, repair, and component replacement projects that were commenced at TVA's coal-fired units prior to the execution of the Environmental Agreements. Possible claims for NSR violations involving increases in greenhouse gases ("GHG") and sulfuric acid mist from projects can still be pursued in the future. Claims for increases in particulates also can be pursued except at TVA's Allen Fossil Plant, Bull Run Fossil Plant, Kingston Fossil Plant ("Kingston"), and Gallatin Fossil Plant and Unit 5 at TVA's Colbert Fossil Plant.

The Environmental Agreements provide for a civil penalty of $10 million which was paid in July 2011 and require TVA to provide $60 million to be divided by Alabama, Kentucky, North Carolina, and Tennessee to fund environmental projects with a preference for projects in the Tennessee River watershed, of which $4 million was paid in 2011. In addition, TVA will invest $290 million in energy efficiency projects, demand response projects, renewable energy projects, and other projects.

Certain legal and administrative proceedings have been terminated or will be narrowed in scope as a result of the Environmental Agreements. See Note 20 - Legal Proceedings - Environmental Agreements for more information regarding these proceedings.

In conjunction with the Environmental Agreements and TVA's movement towards more generation with low or no emissions, TVA announced plans to retire 2,700 MW of coal-fired capacity through the end of 2017.

Browns Ferry. TVA discovered a problem involving Browns Ferry Unit 1 low pressure coolant injection valve, which had failed because of a manufacturing deficiency, when the reactor was shut down for refueling in October 2010. TVA repaired the valve, and reported the problem to the NRC. Other similar valves were also inspected and improvements made to prevent future problems of this type. On May 9, 2011, the NRC notified TVA that it issued a red finding related to the valve's performance. The red finding denotes an issue of "high safety significance" and places Browns Ferry in the multiple/repetitive degraded cornerstone category of the NRC's Reactor Oversight Program. TVA appealed the red finding determination. A decision to uphold the finding was made following an NRC internal review. This red finding also means that all of the Browns Ferry units will be subject to increased oversight and inspection, including a maintenance inspection, and inspections focusing on reactor safety and safety culture. The inspections will continue through 2012. TVA is taking actions to address the performance deficiency, which could include mid-cycle outages to perform corrective work, as well as safety-related issues. TVA anticipates spending between $75 million and $120 million during 2012 related to the acceleration of material improvements at Browns Ferry. Estimates of costs related to additional corrective actions over the next several years are in the process of being developed, including improvements at Watts Bar and TVA's Sequoyah Nuclear Plant.

Kingston Ash Spill. Cleanup and recovery efforts related to the Kingston ash spill in conjunction with federal and state agencies continued during 2011. TVA currently estimates the recovery process will be substantially completed in 2014 although monitoring may continue beyond that date. TVA has accrued a portion of the estimated cost in current liabilities, with the remaining portion accrued as a long-term liability on TVA's balance sheets. Costs incurred since the event through September 30, 2011, totaled $749 million with a remaining estimated liability of $376 million. As work continues to progress and more information is available, TVA will review its estimates and revise them as appropriate. See Note 8.

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 or not reasonably estimable: penalties (other than the penalties set out in the Tennessee Department of Environment and Conservation ("TDEC") order), regulatory directives, natural resources damages (other than payments required under a memorandum of agreement with TDEC and the Fish and Wildlife Service establishing a process and a method for resolving the natural resource damages claim), future lawsuits, future claims, long-term environmental impact costs, final long-term disposition of ash processing area, costs associated with new laws and regulations, or costs of remediating any mixed waste discovered during ash removal process. There are certain other costs that will be incurred that have not been included in the estimate as they are appropriately accounted for in other areas of the financial statements. Associated capital asset purchases are recorded in property, plant, and equipment. Ash handling and disposition costs from current plant operations are recorded in operating expenses. A portion of the pond and dredge cell closure costs are also not included in the estimate as those costs are included in the non-nuclear asset retirement obligation liability.

TDEC issued a civil penalty order of approximately $12 million to TVA for the Kingston ash spill, citing violations of the Tennessee Solid Waste Disposal Act and the Tennessee Water Quality Control Act. Of the $12 million, TVA has already satisfied $8 million of the obligation and may also be credited up to $2 million for performing environmental projects approved by TDEC. The remaining obligation will be paid in installments through July 2012.

Coal Combustion Residuals ("CCRs"). On December 15, 2010, a leak was identified in the clay liner of the gypsum pond at Kingston. TVA submitted to the TDEC a two-phase Corrective Action Plan ("CAP") to install a synthetic liner on the gypsum pond. The synthetic liner is being designed and installed to meet the requirements of the CAP, current TDEC regulations, and anticipated RCRA Subtitle D requirements for CCR storage. The gypsum pond was expected to be back in service by September 2011; however, due to weather and other unforeseeable conditions, implementation of the CAP was

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delayed. Under the Environmental Agreements, TVA is generally not allowed to operate Kingston after September 20, 2011, without the scrubbers in operation, and the scrubbers cannot be operated unless TVA has the ability to store the gypsum the scrubbers produce. Accordingly, TVA stopped operating Kingston on September 19, 2011, and began the fall maintenance outage to tie in the new dry fly ash handling system. Work on the first phase of the new gypsum storage facility was completed on October 21, 2011 and TDEC approval to place the facility back in operation was received on November 16, 2011. As the Kingston fall outage work is completed, and as power is needed, Kingston's units will be brought back on line. The approximate cost of the first phase of work for the gypsum facility is $24 million. The estimate and schedule for the second phase of work has not been established at this time.

TVA is studying the adequacy of storage capacity at other fossil-fuel plants. If it is found that remaining capacity is not adequate, interruptions in the capability of these plants to operate may also result.

Weather Extremes

TVA's service area experienced an unprecedented series of storms on April 27, 2011, and April 28, 2011, causing significant damage to the TVA power system. The hardest hit areas were central and northern Mississippi, northern Alabama, and the eastern portion of Tennessee.

Browns Ferry, located in northern Alabama, and the switchyard at Browns Ferry sustained only minimal damage from the storms, but damage to the TVA transmission system at offsite locations resulted in the plant being without sufficient external electricity supply. Emergency backup power systems, including on-site diesel generators, provided power to safely cool down the reactors during the ensuing shutdown. All Browns Ferry units returned to full availability status by early June 2011. Additionally, transmission lines at Widows Creek Fossil Plant ("Widows Creek"), also located in north Alabama, were . . .

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