The Application of Federal Securities Law Disclosure and Reporting Requirements to the Tennessee Valley Authority
Alan L. Beller
Director, Division of Corporation Finance
U.S. Securities & Exchange Commission
Before the Committee on Banking, Housing and Urban Affairs, United States Senate
September 17, 2002
Chairman Sarbanes, Senator Gramm, Members of the Committee:
I am pleased to have this opportunity to testify before you on behalf of the Securities and Exchange Commission regarding the application of disclosure and reporting requirements of the federal securities laws to the Tennessee Valley Authority ("TVA"). As you know, TVA was statutorily created in 19331 the same year the first of the federal securities laws was enacted. It was formed to provide flood control, navigation and agricultural and industrial development and to promote the use of electric power in the Tennessee valley region. From its creation in 1933, TVA has been wholly owned by the United States government and is considered an agency and instrumentality of the United States. As such, the offer and sale of its securities has been exempt from registration under the terms of the Securities Act of 1933 ("Securities Act") and its securities are exempted securities and government securities under the terms of the Securities Exchange Act of 1934 ("Exchange Act").2
TVA's Borrowing Authority and Types of Debt Issuances
TVA is currently authorized by statute to issue only debt. Until 1959, any indebtedness incurred by TVA was backed by the full faith and credit of the United States. In 1959, Congress eliminated the backing of TVA debt by the full faith and credit of the United States. Under its current statutory authority, TVA may borrow up to $30,000,000,000 to finance its power program and to refund any outstanding bonds and is permitted to repay the bonds only from its net power proceeds (and proceeds of any bond refunding).3 TVA is also obligated to repay the government for its original investment,4also known as appropriation investment, which payment was $55,000,000 in 2001. At its September 30, 2001 fiscal year end, TVA continued to have an obligation to repay the government its remaining appropriation investment of $508,000,000.
TVA has stated that it issues bonds in a variety of structures and sells its bonds to institutional and individual investors on a global basis. According to TVA, as of February 28, 2002, it had 49 long term public bond issues outstanding, including at least one specifically designed for individual investors.5 Based on its 2001 annual report, at September 30, 2001, TVA's long term debt was $22,359,000,000, and its short term debt in the form of discount notes was $3,016,000,000. At least two of TVA's debt securities, the putable automatic rate reset securities and the Valley inflation indexed power securities, are listed and traded on the New York Stock Exchange.
Our area of interest as an agency involves disclosure to investors in TVA debt and not other aspects of federal regulation or incentives in the power market.6 Because TVA is wholly owned by the United States and does not issue any equity securities, the most appropriate way to evaluate its disclosure is from the standpoint of debt investors.
In 1992, the Commission participated with the Department of Treasury and the Board of Governors of the Federal Reserve System in a Joint Report on the Government Securities Market ("1992 Report").7 As a government agency, TVA was excluded from the recommendations regarding government sponsored enterprises ("GSEs") in the 1992 Report. Further, the Commission has not considered the status of TVA since that time.
Application of the Federal Securities Laws
As an agency and instrumentality of the United States, the offer and sale by TVA of its debt is exempt from registration under the Securities Act, and its securities are within the definition of exempted securities and government securities under the Exchange Act. In addition, as part of the 1959 amendments, Congress explicitly exempted the issuance and sale of TVA bonds from the requirements or limitations of any other law, which includes the federal securities laws. Therefore, TVA does not register the offerings of its debt securities under the Securities Act, and its debt, including debt that is listed on the New York Stock Exchange, is not subject to registration under the Exchange Act. Congressional action would be required to eliminate these various statutory exemptions.
The effect of the exemptions from the Securities Act and the Exchange Act is that disclosures by TVA are largely unregulated at the federal level. Financial statements are statutorily mandated under the Tennessee Valley Authority Act of 1933.8 The staff of the Commission does not review these financial statements or any other TVA disclosure documents. However, TVA is subject to general antifraud restrictions prohibiting false or misleading statements of material facts, including the omission of material facts necessary to make the statements made, in light of the circumstances under which they are made, not misleading.
TVA is also not subject to the provisions of the recently enacted Sarbanes-Oxley Act of 2002.9 For example, TVA will not be subject to the independent audit committee requirements, the auditor independence rules, the certification requirements or the code of ethics provisions.
Comparability of Disclosure
TVA, while a unique federally owned corporation, has many of the same disclosure issues as publicly held utilities. TVA bonds are sold to the public in underwritten offerings. We believe investors in those debt securities are entitled to the same type of information as that provided by other issuers of public debt. We further believe that the Commission's detailed disclosure rules and filing requirements and the staff review and comment process provide the best framework for disclosing information to which investors are entitled. Currently, TVA's annual, periodic and offering disclosures have been governed by the demands of market participants and antifraud strictures, not by our disclosure rules.
The effect of the lack of the full faith and credit backing of the United States for TVA bonds of course makes TVA disclosure more relevant. Because investors in TVA bonds may look only to TVA's net power proceeds (and refunding proceeds) for repayment of the bonds, disclosures by TVA should give the holders of its debt a materially complete and accurate picture of TVA's financial and operational situation to evaluate whether there may be sufficient net power proceeds to repay their bonds.
In preparation for this testimony, the staff of the Commission has considered certain recent disclosures by TVA available on their website. This overview does not represent a full review, has not involved a typical comment process with TVA, and does not attempt to cover all the comments the staff might issue in a full review. While TVA disclosures in its most recent information statement and annual report, quarterly reports, offering circulars and other materials generally include most of the same disclosures as companies that file reports with the Commission, there are certain areas where we believe TVA's disclosures would be enhanced if the Commission's line item disclosure requirements and staff review applied.
Financial Statements. TVA provides audited annual financial statements, prepared in accordance with U.S. GAAP. TVA includes in its information statements and annual reports three years of Statements of Income, Cash Flows, Changes in Proprietary Capital and Comprehensive Income (Loss). TVA's presentation of the types and number of years of financial statements appear to be generally consistent with Commission rules and the financial statements that other public companies provide.10 The staff did not conduct a complete accounting review, so we are unable to state whether the financial statements meet all the line item requirements.
Management's Discussion and Analysis. It would appear that TVA provides more summary analysis and less trend information than the Commission would seek, although all of the required categories of information appear to be included.
Market Risk Disclosure. TVA provides more abbreviated disclosure regarding market risk, and in particular less quantitative disclosure, than a public reporting company would be required to provide.11 TVA presents a market risk section that briefly discusses risk policies, interest rate and foreign currency risk, commodity and equity price risk and forward contracts. The discussion does not quantify the effects of price risk for commodity-based derivative instruments. In addition, there is very limited quantitative disclosure on interest-rate risk or foreign-currency risk. TVA presents no detailed quantified information surrounding its use of derivatives, other than identification of the use of interest-rate and currency swap contracts to hedge inflation-indexed and foreign currency denominated debt issues, respectively.
Business and Property. TVA's discussion of its business is somewhat less comprehensive than that which the staff would typically see in disclosure provided by publicly owned utilities. Some of the differences in the level of disclosure provided may be attributed to the different statutory provisions applicable to the TVA and to regulated publicly owned utilities that are subject to the strictures of the PUHCA12and other state and federal laws utility, energy and environmental laws. Notwithstanding the different regulatory requirements that TVA is subject to, the staff might expect to see somewhat more disclosure in a few areas, such as types and sources of fuel and supply contracts, regulation and licensing requirements.
TVA's description of its properties is also somewhat less detailed than public reporting utilities typically provide. For example, most owners of power generation facilities include more comprehensive disclosure regarding location of, nameplate capacity in Megawatts (MW) and number of generating units in, each plant. TVA has included most of this information as it relates to its nuclear plants. However, TVA includes only aggregate summary information about its other plants.
Executive Compensation and Related Party Transactions. The staff did not find any disclosure regarding executive compensation and related party transactions. TVA is not organized in the same manner as a private corporation - for example, the directors are appointed by the President of the United States rather than elected by shareholders. TVA's information statement and annual report do not include executive compensation information that would be required by our rules. TVA's information statement and annual report also do not describe any related party relationships or transactions.13As a government entity, at least part of the information regarding compensation of directors and executive officers is likely publicly available from sources other than TVA's website.
Material Contracts. TVA does not publicly provide copies of the types of contracts that are typically filed by reporting companies.14These might include power purchase contracts and long term supply contracts with 5 key customers.
There is a tension between TVA's status as a government agency and instrumentality and the resulting statutory exemptions on the one hand, and the need for disclosure that meets Commission standards on the other hand. As previously indicated, the 1992 Report did not address TVA because it was a government agency and instrumentality. Unlike GSEs addressed in that report, including Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), TVA is not a profit-making corporation with private shareholders. As such, a different statutory regime may be appropriate.
There are a number of ways that a disclosure regime could be applied to TVA. One way would be to change the statutory scheme to eliminate the Securities Act and/or the Exchange Act exemptions. Removing the Securities Act exemption would result in registration of public offers and sales of TVA debt and Exchange Act periodic reporting at least for so long as TVA had more than 300 holders of any class of its debt.15 Because at least two classes of TVA's debt securities are listed on a national securities exchange, without an Exchange Act exemption TVA would have to register these classes under the Exchange Act.16 Once TVA became subject to the reporting requirements of the Exchange Act, it would have to file periodic and current reports with the Commission under Exchange Act Section 13(a), including an annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.17 If TVA registered its securities and became a reporting company, its disclosures would have to comply with the Commission's detailed line item disclosure requirements.18 Given the Commission's integrated disclosure system, the information available to investors would be virtually identical even without registration under the Securities Act. In addition, TVA would become subject to the provisions of the Sarbanes-Oxley Act applicable to reporting companies. Further, TVA would have to qualify its borrowing resolution as an indenture under the Trust Indenture Act of 193919and would have to engage an independent trustee. Since TVA does not issue any equity, however, it is important to note that it would not become subject to the proxy or ownership reporting requirements of the Exchange Act.20
Because TVA is a government agency and instrumentality and because the Commission has not considered TVA's status since the 1992 Report (from which it was excluded), we are not advocating such a change in the statutory arrangements under which TVA operates. In particular, we believe that the Commission's objective - disclosure that meets Commission requirements and standards-can be achieved by alternative means. As one example, exemptions could be conditioned on TVA's providing the same periodic disclosure as required for reporting companies under the Exchange Act. Another possibility would be voluntary compliance or registration under the Exchange Act, a course of action recently taken by Fannie Mae and Freddie Mac and which achieves effectively the same results in respect of disclosure as eliminating the exemptions.
The individual and institutional investors who hold TVA's debt securities depend for repayment on TVA's net power proceeds and refundings, and not a government guarantee. We believe that applying the Commission's disclosure requirements and processes is the preferred method of ensuring that these investors receive the materially accurate and complete disclosure they deserve. TVA's status and exemptions from the registration and reporting requirements of the federal securities laws are not necessarily an obstacle to that result. As previously indicated, there are a number of courses of action, including voluntary action by TVA, to achieve the desired standard of disclosure that is consistent with the Commission's standards and requirements.
1 16 U.S.C. §831 et. seq.
2 See Securities Act §3(a)(2), 15 U.S.C. §77c(a)(2); Exchange Act §§3(a)(12) and 3(a)(42), 15 U.S.C. §78c(a)(12) and (42).
3 See 16 U.S.C. §831n-4.
4 See 16 U.S.C. §831y.
5 See TVA, Financing Program Highlights, undated.
6 TVA, as an agency and instrumentality of the United States, is not subject to the Public Utility Holding Company Act of 1935, 15 U.S.C. §79b(c)("PUHCA"). Even without this exemption, we understand that TVA would not be subject to PUHCA since it is not permitted to have subsidiaries and all the utility assets and businesses therefore are held at the TVA level.
7 Department of the Treasury, Securities and Exchange Commission, Board of Governors of the Federal Reserve System, Joint Report on the Government Securities Market, January 1992.
8 See 16 U.S.C. §831h.
9 Pub. L. 107-204, 116 Stat. 745 (2002).
10 See generally Regulation S-X, 17 CFR 210.
11 See Item 305 of Regulation S-K, 17 CFR 229.305.
12 15 U.S.C. §79a.
13 See Items 402 and 404 of Regulation S-K, 17 CFR 229.402 and 404.
14 See Item 601 of Regulation S-K, 17 CFR 229.601.
15 See Securities Act §5, 15 U.S.C. §77e; Exchange Act §15(d), 15 U.S.C. §78o(d).
16 See Exchange Act §12(a), 15 U.S.C. §78l(a).
17 Exchange Act §13(a), 15 U.S.C. §78m.
18 See Regulation S-K (17 CFR 229) and Regulation S-X (17 CFR 210).
19 15 U.S.C. §77aaa et. seq.
20 See 17 CFR 240.3a12-11 and Exchange Act §16(a), 15 U.S.C. §78p(a).