10-K 1 tve-9302011x10k.htm 2011 10-K TVE - 9.30.2011 - 10K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
x
ANNUAL REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2011
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-52313


TENNESSEE VALLEY AUTHORITY
(Exact name of registrant as specified in its charter)
A corporate agency of the United States created by an act of Congress
 (State or other jurisdiction of incorporation or organization)
62-0474417
 (IRS Employer Identification No.)
400 W. Summit Hill Drive
Knoxville, Tennessee
 (Address of principal executive offices)
37902
 (Zip Code)
(865) 632-2101
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o  No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13, Section 15(d), or Section 37 of the Securities Exchange Act.  Yes o  No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer o                                                Accelerated filer o
Non-accelerated filer   x                                               Smaller reporting company  o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).  Yes o  No x 
 

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Table of Contents
GLOSSARY OF COMMON ACRONYMS.......................................................................................................................................................................................................
FORWARD-LOOKING INFORMATION.........................................................................................................................................................................................................
GENERAL INFORMATION............................................................................................................................................................................................................................
 
 
 
 
 
ITEM 1. BUSINESS......................................................................................................................................................................................................................................
The Corporation.................................................................................................................................................................................................................................
Service Area.......................................................................................................................................................................................................................................
Customers..........................................................................................................................................................................................................................................
Rates..................................................................................................................................................................................................................................................
Current Power Supply.........................................................................................................................................................................................................................
Future Power Supply..........................................................................................................................................................................................................................
Fuel Supply.........................................................................................................................................................................................................................................
Transmission......................................................................................................................................................................................................................................
Weather and Seasonality....................................................................................................................................................................................................................
Competition........................................................................................................................................................................................................................................
Research and Development...............................................................................................................................................................................................................
Environmental Stewardship Activities.................................................................................................................................................................................................
Economic Development Activities......................................................................................................................................................................................................
Governance........................................................................................................................................................................................................................................
Regulation..........................................................................................................................................................................................................................................
Taxation and Tax Equivalents.............................................................................................................................................................................................................
Environmental Matters.......................................................................................................................................................................................................................
Employees..........................................................................................................................................................................................................................................
 
 
ITEM 1A. RISK FACTORS............................................................................................................................................................................................................................
 
 
ITEM 1B. UNRESOLVED STAFF COMMENTS............................................................................................................................................................................................
 
 
ITEM 2. PROPERTIES..................................................................................................................................................................................................................................
Generating Properties........................................................................................................................................................................................................................
Transmission Properties.....................................................................................................................................................................................................................
Natural Resource Stewardship Properties.........................................................................................................................................................................................
Buildings.............................................................................................................................................................................................................................................
Disposal of Property...........................................................................................................................................................................................................................
 
 
 
 
ITEM 3. LEGAL PROCEEDINGS..................................................................................................................................................................................................................
 
 
ITEM 4. REMOVED AND RESERVED.........................................................................................................................................................................................................
 
 
 
 
 
 
 
ITEM 6. SELECTED FINANCIAL DATA........................................................................................................................................................................................................
 
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................................
Business Overview.............................................................................................................................................................................................................................
Executive Summary............................................................................................................................................................................................................................
2011 Highlights...................................................................................................................................................................................................................................
2011 Challenges.................................................................................................................................................................................................................................
Future Challenges..............................................................................................................................................................................................................................
Liquidity and Capital Resources.........................................................................................................................................................................................................
Results of Operations.........................................................................................................................................................................................................................
Off-Balance Sheet Arrangements.......................................................................................................................................................................................................
Critical Accounting Policies and Estimates.........................................................................................................................................................................................
Fair Value Measurements...................................................................................................................................................................................................................
New Accounting Standards and Interpretations.................................................................................................................................................................................
Legislative and Regulatory Matters....................................................................................................................................................................................................
Environmental Matters.......................................................................................................................................................................................................................
Legal Proceedings..............................................................................................................................................................................................................................
Risk Management Activities...............................................................................................................................................................................................................
Subsequent Events............................................................................................................................................................................................................................
 
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................................................................................................

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................................................................................................................
Statements of Operations...................................................................................................................................................................................................................
Balance Sheets..................................................................................................................................................................................................................................
Statements of Cash Flows.................................................................................................................................................................................................................
Statements of Changes in Proprietary Capital...................................................................................................................................................................................
Notes to Financial Statements...........................................................................................................................................................................................................
Report of Independent Registered Public Accounting Firm................................................................................................................................................................
 
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................................
 
 
ITEM 9A. CONTROLS AND PROCEDURES...............................................................................................................................................................................................
Disclosure Controls and Procedures..................................................................................................................................................................................................
Internal Control over Financial Reporting...........................................................................................................................................................................................
Report of Independent Registered Public Accounting Firm................................................................................................................................................................
 
 
ITEM 9B. OTHER INFORMATION................................................................................................................................................................................................................
 
 
 
 
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.............................................................................................................................
Directors..............................................................................................................................................................................................................................................
Executive Officers...............................................................................................................................................................................................................................
Disclosure and Financial Code of Ethics.............................................................................................................................................................................................
Committees of the TVA Board.............................................................................................................................................................................................................
 
 
ITEM 11. EXECUTIVE COMPENSATION.....................................................................................................................................................................................................
Compensation Discussion and Analysis..............................................................................................................................................................................................
Executive Compensation Tables and Narrative Disclosures...............................................................................................................................................................
Retirement and Pension Plans............................................................................................................................................................................................................
Other Agreements...............................................................................................................................................................................................................................
Director Compensation........................................................................................................................................................................................................................
Compensation Committee Interlocks and Insider Participation...........................................................................................................................................................
Compensation Committee Report.......................................................................................................................................................................................................
 
 
 
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.........................................................................................
Director Independence........................................................................................................................................................................................................................
Related Party Transactions.................................................................................................................................................................................................................
 
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES......................................................................................................................................................................
 
 
 
 
 
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.....................................................................................................................................................................
 
 
SIGNATURES................................................................................................................................................................................................................................................
EXHIBIT INDEX.............................................................................................................................................................................................................................................


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GLOSSARY OF COMMON ACRONYMS
 
 
 
Following are definitions of terms or acronyms frequently used in this Annual Report on Form 10-K for the fiscal year ended September 30, 2011 (the “Annual Report”):
 
Term or Acronym
 
Definition
AFUDC
 
Allowance for funds used during construction
ARO
 
Asset retirement obligation
ARP
 
Acid Rain Program
ART
 
Asset retirement trust
ASLB
 
Atomic Safety and Licensing Board
BEST
 
Bellefonte Efficiency and Sustainability Team
BREDL
 
Blue Ridge Environmental Defense League
CAA
 
Clean Air Act
CCOLA
 
Combined construction and operating license application
CCP
 
Coal combustion products
CCR
 
Coal combustion residual
CERCLA
 
Comprehensive Environmental Response, Compensation, and Liability Act
CME
 
Chicago Mercantile Exchange
CO2
 
Carbon dioxide
COLA
 
Cost of living adjustment
CVA
 
Credit valuation adjustment
CY
 
Calendar year
EPA
 
Environmental Protection Agency
FASB
 
Financial Accounting Standards Board
FERC
 
Federal Energy Regulatory Commission
FTP
 
Financial Trading Program
GAAP
 
Accounting principles generally accepted in the United States of America
GHG
 
Greenhouse gas
GWh
 
Gigawatt hour(s)
IRP
 
Integrated Resource Plan
KDAQ
 
Kentucky Division for Air Quality
kWh
 
Kilowatt-hour(s)
mmBtu
 
Million British thermal unit(s)
MtM
 
Mark-to-market
MW
 
Megawatt
NAAQS
 
National Ambient Air Quality Standards
NDT
 
Nuclear decommissioning trust
NEPA
 
National Environmental Policy Act
NERC
 
North American Electric Reliability Corporation
NOx
 
Nitrogen oxides
NPDES
 
National Pollutant Discharge Elimination System
NRC
 
Nuclear Regulatory Commission
NRP
 
Natural Resource Plan
NSR
 
New Source Review
PSD
 
Prevention of Significant Deterioration
QSPE
 
Qualifying special-purpose entity
REIT
 
Real estate investment trust
SACE
 
Southern Alliance for Clean Energy
SCRs
 
Selective catalytic reduction systems
SDE
 
Seasonal demand and energy

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SEC
 
Securities and Exchange Commission
SERP
 
Supplemental Executive Retirement Plan
Seven States
 
Seven States Power Corporation
SO2
 
Sulfur dioxide
SSSL
 
Seven States Southaven, LLC
TDEC
 
Tennessee Department of Environment and Conservation
TOU
 
Time-of-use
TVARS
 
Tennessee Valley Authority Retirement System
VIE
 
Variable interest entity


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FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements relating to future events and future performance.  All statements other than those that are purely historical may be forward-looking statements.  In certain cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “project,” “plan,” “predict,” “assume,” “forecast,” “estimate,” “objective,” “possible,” “probably,” “likely,” “potential,” or other similar expressions.

Although the Tennessee Valley Authority (“TVA”) believes that the assumptions underlying the forward-looking statements are reasonable, TVA does not guarantee the accuracy of these statements.  Numerous factors could cause actual results to differ materially from those in the forward-looking statements.  These factors include, among other things:

New or changed laws, regulations, and administrative orders, including those related to environmental matters, and the costs of complying with these new or changed laws, regulations, and administrative orders, as well as complying with existing laws, regulations, and administrative orders;
The requirement or decision to make additional contributions to TVA’s pension or other post-retirement benefit plans or to TVA’s nuclear decommissioning trust (“NDT”);
Events at a TVA nuclear facility, which, among other things, could result in loss of life, damage to the environment, damage to or loss of the facility, and damage to the property of others;
Events at a nuclear facility, whether or not operated by or licensed to TVA, which, among other things, could lead to increased regulation or restriction on the construction, operation, and decommissioning of nuclear facilities or on the storage of spent fuel, obligate TVA to pay retrospective insurance premiums, reduce the availability and affordability of insurance, increase the costs of operating TVA’s existing nuclear units, negatively affect the cost and schedule for completing Watts Bar Nuclear Plant (“Watts Bar”) Unit 2 and Bellefonte Nuclear Plant (“Bellefonte”) Unit 1, and cause TVA to forego future construction at these or other facilities;
Significant delays, cost increases, or cost overruns associated with the construction of generation or transmission assets;
Fines, penalties, natural resource damages, and settlements associated with the Kingston Fossil Plant ("Kingston") ash spill;
The outcome of legal and administrative proceedings;
Significant changes in demand for electricity;
Addition or loss of customers;
The continued operation, performance, or failure of TVA’s generation, transmission, and related assets, including coal combustion residual (“CCR”) facilities;
The economics of modernizing aging coal-fired generating units and installing emission control equipment to meet anticipated emission reduction requirements, which could make continued operation of certain coal-fired units uneconomical and lead to more than anticipated removals of such units from service, perhaps permanently;
Disruption of fuel supplies, which may result from, among other things, weather conditions, production or transportation difficulties, labor challenges, or environmental laws or regulations affecting TVA’s fuel suppliers or transporters;
Purchased power price volatility and disruption of purchased power supplies;
Events involving transmission lines, dams, and other facilities not operated by TVA, including those that affect the reliability of the interstate transmission grid of which TVA’s transmission system is a part, as well as inadequacies in the supply of water to TVA’s generation facilities;
Inability to obtain regulatory approval for the construction or operation of assets;
Weather conditions;
Catastrophic events such as fires, earthquakes, solar events, floods, hurricanes, tornadoes, pandemics, wars, national emergencies, terrorist activities, and other similar events, especially if these events occur in or near TVA’s service area;
Restrictions on TVA's ability to manage real property currently under its control;
Reliability and creditworthiness of counterparties;
Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, crude oil, construction materials, reagents, electricity, and emission allowances;
Changes in the market price of equity securities, debt securities, and other investments;
Changes in interest rates, currency exchange rates, and inflation rates;
Rising pension and health care costs;
Increases in TVA’s financial liability for decommissioning its nuclear facilities and retiring other assets;
Limitations on TVA’s ability to borrow money which may result from, among other things, TVA’s approaching or reaching its debt ceiling and changes in TVA’s borrowing authority;
An increase in TVA’s cost of capital which may result from, among other things, changes in the market for TVA’s debt securities, changes in the credit rating of TVA or the U.S. government, and an increased reliance by TVA on alternative financing arrangements as TVA approaches its debt ceiling;
Changes in the economy and volatility in financial markets;

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Inability to eliminate identified deficiencies in TVA’s systems, standards, controls, and corporate culture;
Ineffectiveness of TVA’s disclosure controls and procedures and its internal control over financial reporting;
Problems attracting and retaining a qualified workforce;
Changes in technology;
Failure of TVA’s information technology assets to operate as planned and the failure of TVA’s cyber security program to protect TVA’s information technology assets from cyber attacks;
Differences between estimates of revenues and expenses and actual revenues and expenses incurred; and
Unforeseeable events.

See also Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.  New factors emerge from time to time, and it is not possible for TVA 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.

GENERAL INFORMATION

Fiscal Year

References to years (2011, 2010, etc.) in this Annual Report are to TVA’s fiscal years ending September 30 except for references to years in the biographical information about directors and executive officers in Item 10, Directors, Executive Officers and Corporate Governance, as well as to years that are preceded by “CY,” which references are to calendar years.

Notes

References to “Notes” are to the Notes to Financial Statements contained in Item 8, Financial Statements and Supplementary Data in this Annual Report.

Property

TVA does not own real property.  TVA acquires real property in the name of the United States, and such legal title in real property is entrusted to TVA as the agent of the United States to accomplish the purposes of the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee (as amended, the “TVA Act”).  TVA acquires personal property in the name of TVA.  Accordingly, unless the context indicates the reference is to TVA’s personal property, any statement in this Annual Report referring to TVA property shall be read as referring to the real property of the United States which has been entrusted to TVA as its agent.

Available Information

TVA's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are available on TVA's web site, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).  TVA's web site is www.tva.gov.  Information contained on TVA’s web site shall not be deemed to be incorporated into, or to be a part of, this Annual Report.  TVA's SEC reports are also available to the public without charge from the web site maintained by the SEC at www.sec.gov.  In addition, the public may read and copy any reports or other information that TVA files with or furnishes to the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549.  The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
   

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PART I

ITEM 1.  BUSINESS

The Corporation

In response to a request by President Franklin D. Roosevelt, the U.S. Congress in 1933 enacted legislation that created the Tennessee Valley Authority (“TVA”), a government corporation.  TVA was created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA’s service area in the southeastern United States, and sell the electricity generated at the facilities TVA operates.

Today, TVA operates the nation’s largest public power system and supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of northern Georgia, western North Carolina, and southwestern Virginia to a population of over nine million people.  In 2011, the revenues generated from TVA’s electricity sales were $11.7 billion and accounted for virtually all of TVA’s revenues.

TVA also manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity.  Consistent with these primary purposes, TVA also manages the river system to provide recreational opportunities, adequate water supply, improved water quality, natural resource protection, and economic development.  TVA performs these management duties in cooperation with other federal and state agencies which have jurisdiction and authority over certain aspects of the river system.  TVA’s stewardship responsibilities are conducted within the Tennessee Valley watershed, whose boundaries are similar to, though not exactly the same as, the TVA service area.  TVA’s management of the Tennessee River, its tributaries, and certain shorelines is sometimes referred to as TVA’s “stewardship” program in this Annual Report.

Initially, all TVA operations were funded by federal appropriations.  Direct appropriations for the TVA power program ended in 1959, and appropriations for TVA’s stewardship, economic development, and multipurpose activities ended in 1999.  Since 1999, TVA has funded all of its operations almost entirely from the sale of electricity and power system financings.  The TVA Board also established a council under the Federal Advisory Council Act to advise TVA on its stewardship activities. TVA’s power system financings consist primarily of the sale of debt securities and secondarily of alternative financings such as lease financings.  As a wholly-owned government corporation, TVA is not authorized to issue equity securities.

Service Area

The area in which TVA sells power, its service area, is defined by the TVA Act.  Under the TVA Act, subject to certain minor exceptions, TVA may not, without specific authorization from the U.S. Congress, enter into contracts that would have the effect of making it, or the distributor customers of its power, a source of power supply outside the area for which TVA or its distributor customers were the primary source of power supply on July 1, 1957.  This provision is referred to as the “fence” because it bounds TVA’s sales activities, essentially limiting TVA to power sales within a defined service area.

In addition, an amendment to the Federal Power Act (“FPA”) includes a provision that helps protect TVA’s ability to sell power within its service area.  This provision, called the "anti-cherrypicking" provision, prevents the Federal Energy Regulatory Commission (“FERC”) from ordering TVA to provide access to its transmission lines to others for the purpose of using TVA’s transmission lines to deliver power to customers within substantially all of TVA’s defined service area.  As a result, the anti-cherrypicking provision reduces TVA’s exposure to loss of customers.


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TVA’s revenues by state for each of the last three years are detailed in the table below.
 
Operating Revenues By State
For the years ended September 30
(in millions)
 
2011
 
2010
 
2009
Alabama
$
1,699

 
$
1,495

 
$
1,526

Georgia
272

 
253

 
264

Kentucky
1,159

 
1,195

 
1,252

Mississippi
1,095

 
974

 
1,017

North Carolina
58

 
53

 
58

Tennessee
7,370

 
6,693

 
6,970

Virginia
60

 
48

 
51

Subtotal
11,713

 
10,711

 
11,138

Sale for resale and other
10

 
2

 
4

Subtotal
11,723

 
10,713

 
11,142

Other revenues
118

 
161

 
113

Operating revenues
$
11,841

 
$
10,874

 
$
11,255



Customers

TVA is primarily a wholesaler of power.  It sells power to distributor customers which then resell power to their customers at retail rates.  TVA’s distributor customers consist of (1) municipalities and other local government entities (referred to collectively below as “municipalities”) and (2) cooperative organizations of citizens (“cooperatives”).  These municipalities and

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cooperatives operate public power electric systems that are not doing business for profit but are operated primarily for the purpose of supplying electricity to their own citizens or members.  TVA also sells power to directly served customers, consisting primarily of federal agencies and customers with large or unusual loads.  In addition, power that exceeds the needs of the TVA system may, where consistent with the provisions of the TVA Act, be sold under exchange power arrangements with other electric systems.
Operating Revenues by Customer Type
For the years ended September 30
(in millions)
 
2011
 
2010
 
2009
Sales of electricity
 
 
 
 
 
Municipalities and cooperatives
$
10,144

 
$
9,275

 
$
9,644

Industries directly served
1,440

 
1,321

 
1,367

Federal agencies and other
139

 
117

 
131

Total sales of electricity
11,723

 
10,713

 
11,142

Other revenues
118

 
161

 
113

Operating revenues
$
11,841

 
$
10,874

 
$
11,255


Municipalities and Cooperatives

Revenues from distributor customers accounted for 86 percent of TVA’s total operating revenues in 2011.  At September 30, 2011, TVA had wholesale power contracts with 155 municipalities and cooperatives.  Each of these contracts requires distributor customers to purchase from TVA all of their electric power and energy used within the TVA service area.

All distributor customers purchase power under one of three basic termination notice arrangements:

Contracts that require five years’ notice to terminate;
Contracts that require 10 years’ notice to terminate; and
Contracts that require 15 years’ notice to terminate.

The number of distributor customers with the contract arrangements described above, the revenues derived from such arrangements in 2011, and the percentage of TVA’s 2011 total operating revenues represented by these revenues are summarized in the table below.
TVA Distributor Customer Contracts
At September 30, 2011
Contract Arrangements(1)
Number of Distributor Customers
 
Sales to
Distributor
Customers
in 2011
 
Percentage of Total Operating Revenues in 2011
 
 
 
(in millions)
 
 
15-year termination notice
5

 
$
112

 
0.9
%
10-year termination notice
47

 
3,390

 
28.6
%
5-year termination notice
103

 
6,642

 
56.1
%
Total
155

 
$
10,144

 
85.6
%
Note
(1)  Ordinarily the distributor customer and TVA have the same termination notice period; however, in contracts with six of the distributor customers with five-year termination notices, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority). Also, under TVA’s contract with Bristol Virginia Utilities, a five-year termination notice may not be given by the distributor customer until January 2018.

TVA’s two largest distributor customers — Memphis Light, Gas and Water Division (“MLGW”) and Nashville Electric Service (“NES”) — have contracts with five-year and 10-year termination notice periods, respectively.  Although no single customer accounted for 10 percent or more of TVA’s total operating revenues in 2011, sales to MLGW and NES accounted for nine percent and eight percent, respectively.

The power contracts between TVA and the distributor customers provide for purchase of power by the distributor customers at the wholesale rates established by the TVA Board of Directors (the "TVA Board").  Under section 10 of the TVA Act, the TVA Board is authorized to regulate the municipal and cooperative distributors of TVA power to carry out the purposes of the TVA Act through contract terms and conditions as well as through rules and regulations.  TVA regulates distributor customers primarily through the provisions of TVA’s wholesale power contracts.  All of the power contracts between TVA and the distributor customers require that power purchased from TVA be sold and distributed to the ultimate consumer without discrimination among consumers of the same class, and prohibit direct or indirect discriminatory rates, rebates, or other special concessions.  In addition, there are a number of wholesale power contract provisions through which TVA seeks to ensure that

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the electric system revenues of the distributor customers are used only for electric system purposes.  Furthermore, almost all of these contracts specify the specific resale rates and charges at which the distributor customers must resell TVA power to their customers.  These rates are revised from time to time, subject to TVA approval, to reflect changes in costs, including changes in the wholesale cost of power.  The regulatory provisions in TVA’s wholesale power contracts are designed to carry out the objectives of the TVA Act, including the objective of providing for an adequate supply of power at the lowest feasible rates. See RatesRate Methodology below.

Other Customers

Revenues from directly served industrial customers accounted for 12 percent of TVA’s total operating revenues in 2011.  Contracts with these customers are subject to termination by the customer or TVA upon a minimum notice period that varies according to the customer’s contract demand and the period of time service has been provided.

The United States Enrichment Corporation (“USEC”) is TVA’s largest directly served industrial customer.  Sales to USEC for its Paducah, Kentucky, facility represented four percent of TVA’s total operating revenues in 2011.  TVA’s current power supply contract with USEC expires on May 31, 2012.  See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management ActivitiesCounterparty Credit Risk Credit of Customers.  In January 2004, USEC announced its decision to construct a new commercial centrifuge facility in Piketon, Ohio, which is outside TVA’s service area.  TVA believes USEC will reduce its electricity purchases at the Paducah, Kentucky, facility.  Loss of the USEC load would result in a loss of revenue, but the resulting lower demand on the TVA system could result in opportunities to reduce TVA's reliance on less economical power sources.

Rates

Rate Authority

The TVA Act gives the TVA Board sole responsibility for establishing the rates TVA charges for power.  These rates are not subject to judicial review or to review or approval by any state or federal regulatory body.

Under the TVA Act, TVA is required to charge rates for power which will produce gross revenues sufficient to provide funds for:

Operation, maintenance, and administration of its power system;
Payments to states and counties in lieu of taxes (“tax equivalents”);
Debt service on outstanding indebtedness;
Payments to the U.S. Treasury in repayment of and as a return on the government’s appropriation investment in TVA’s power facilities (the “Power Program Appropriation Investment”); and
Such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding bonds, notes, or other evidences of indebtedness (“Bonds”) in advance of maturity, additional reduction of the Power Program 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.

Rate Methodology

In view of demand for electricity and the level of competition, it is reasonable to assume that rates, set at levels that will recover TVA’s costs, can be charged and collected from customers.  Further, the TVA Board has the discretion to determine when costs will be recovered in rates.  As a result of these factors, TVA records certain assets and liabilities that result from the self-regulated ratemaking process that could not otherwise be so recorded under accounting principles generally accepted in the United States.  See Note 1 — Cost-Based Regulation and Note 7.

In setting rates to cover the costs set out in the TVA Act, TVA uses a wholesale rate structure that is comprised of a base rate and a fuel rate that is automatically determined by the operation of the fuel cost adjustment formula each month.  In setting the base rates, TVA uses a debt-service coverage (“DSC”) methodology to derive annual revenue requirements in a manner similar to that used by other public power entities that also use the DSC rate methodology.  Under the DSC methodology, rates are calculated so that an entity will be able to cover its operating costs and to satisfy its obligations to pay principal and interest on debt.  This ratemaking approach is particularly suitable for use by entities financed primarily, if not entirely, by debt capital, such as TVA.

TVA’s revenue requirements for costs or projected costs (other than the fuel, purchased power, and related costs covered by the fuel rate) are calculated under the DSC methodology as the sum of the following components:

Operating and maintenance costs;

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Tax equivalents (other than the amount attributable to fuel cost-related revenues);
Other costs in accordance with the TVA Act; and
Debt service coverage.

This methodology reflects the cause-and-effect relationship between TVA's costs and the corresponding rates TVA charges for its regulated products and services.  Once the revenue requirements (or projected costs) are determined, they are compared to the projected revenues for the year in question, at existing rates, to arrive at the shortfall or surplus of revenues as compared to the projected costs.  Power rates are adjusted by the TVA Board to a level deemed by the TVA Board to be sufficient to produce revenues approximately equal to projected costs (exclusive of the costs collected through the fuel rate).

Prior to April 2011, TVA’s wholesale rate structure was largely based on end-use customer demand and/or energy consumption.  Under this rate structure, wholesale charges were specified for each customer classification, and each distributor customer’s wholesale bill reflected the application of these charges to actual end-use customers’ volumes within each classification.  Wholesale meter-reading was used only to bill distributors for losses occurring between the wholesale meters and the retail meters.

At its August 20, 2010 meeting, the TVA Board approved revised wholesale and retail rate structures which became effective in April 2011.  The new wholesale and retail rate structures include time-of-use (“TOU”) and seasonal demand and energy (“SDE”) 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 effects on their bills), but are intended to more closely align TVA's revenues with its costs. 

For distributor customers, the default rate structure is TOU with an option to elect an SDE structure for a limited time.  The TVA Board-approved rate structures provide that all distributor customers are to be on a TOU wholesale structure by no later than October 2012; however, TVA will continue to have discussions with distributors on alternative rate structures.

For directly served and most distributor-served customers with contract demands in excess of five MW, the default rate structure is a TOU structure.  In addition, an optional SDE structure is available.  A majority of directly served and these distributor-served customers transitioned to TOU or SDE pilot rates during the three months ended December 31, 2010 to take advantage of lower transitional fall and winter rates. 

As noted above, TVA’s rates also include a fuel cost adjustment that automatically adjusts TVA's rates each month to recover TVA’s fuel costs.  Prior to April 2011, a portion of TVA's fuel costs were included in the base rate, and the fuel cost adjustment formula adjusted the energy rates to collect the total fuel costs relative to the fuel amount included in the base rate.

The new rate structure that became effective in April 2011 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. TVA sometimes refers to this separate fuel rate as the total fuel rate or the total monthly fuel cost.

The TVA Board approved a rate adjustment at its August 18, 2011 meeting that went into effect in October 2011.  The rate adjustment is expected to increase existing wholesale base rate charges by two percent.  See Item 7, Management's Discussion of Financial Condition and Results of Operations — 2011 Highlights Rate Changes and Adjustments

Current Power Supply

General

Power generating facilities operated by TVA at September 30, 2011, included 29 conventional hydroelectric sites, one pumped storage hydroelectric site, 11 coal-fired sites, three nuclear sites, 12 natural gas and/or oil-fired sites, two diesel generator sites, one wind energy site (currently nonoperational), and 14 solar energy sites.  In addition, TVA has biomass cofiring capability at one of its coal-fired sites and digester gas cofiring capability at a second coal-fired site. TVA acquires power under power purchase agreements of varying durations as well as short-term contracts of less than 24-hours in duration.

TVA’s generation fleet is among the oldest of any utility in the southeastern United States.  TVA has invested substantially less in maintaining its coal-fired generation assets than surrounding utilities.  Although TVA is planning to increase its maintenance expenditures on its generating assets in 2012, some assets may not operate as planned in the future due to their age and condition.


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The following table summarizes TVA’s net generation in millions of kilowatt-hours (“kWh”) by generating source and the percentage of all electric power generated by TVA for the years indicated:
Power Supply from TVA-Operated Generation Facilities
For the years ended September 30
(millions of kWh)
 
2011
 
2010
 
2009
 
Coal-fired
74,583

 
52
%
 
74,590

 
51
%
 
76,794

 
53
%
 
Nuclear
49,562

 
34
%
 
53,339

 
36
%
 
53,047

 
37
%
 
Hydroelectric
12,706

 
9
%
 
14,013

 
9
%
 
11,421

 
8
%
 
Natural gas and/or oil-fired
6,809

 
5
%
 
5,475

 
4
%
 
3,481

 
2
%
 
Renewable resources (non-hydro)
17

(1) 
<1%

 
4

(1) 
<1%

 
29

 
<1%

 
Total
143,677

 
100
%
 
147,421

 
100
%
 
144,772

 
100
%
 
Note
(1) Operation and maintenance issues reduced the available renewable generation during 2011 and 2010 from several facilities, including those utilizing methane, solar, and wind.


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Net Capability

The following table summarizes the summer net capability in MW TVA had available at September 30, 2011:

SUMMER NET CAPABILITY(1)
At September 30, 2011
 
Source of Capability
 
Location
 
Number
 of Units
 
Summer Net Capability (MW)
 
Date First Unit Placed in Service
 
Date Last Unit Placed in Service
TVA-Operated Generating Facilities
 
 
 
 
 
 
 
 
 
Coal-Fired
 
 
 
 
 
 
 
 
 
Allen (2)
Tennessee
 
3

 
702

 
1959
 
1959
Bull Run
Tennessee
 
1

 
870

 
1967
 
1967
Colbert
Alabama
 
5

 
1,184

 
1955
 
1965
Cumberland
Tennessee
 
2

 
2,386

 
1973
 
1973
Gallatin
Tennessee
 
4

 
976

 
1956
 
1959
     John Sevier (3)
Tennessee
 
4

 
704

 
1955
 
1957
     Johnsonville (3)
Tennessee
 
10

 
1,206

 
1951
 
1959
Kingston
Tennessee
 
9

 
1,398

 
1954
 
1955
Paradise
Kentucky
 
3

 
2,201

 
1963
 
1970
     Shawnee (3)
Kentucky
 
9

 
1,206

 
1953
 
1955
     Widows Creek (3)
Alabama
 
3

 
974

 
1954
 
1965
Total Coal-Fired
 
 
53

 
13,807

 
 
 
 
Nuclear
 
 
 

 
 

 
 
 
 
Browns Ferry
Alabama
 
3

 
3,300

 
1974
 
1977
Sequoyah
Tennessee
 
2

 
2,282

 
1981
 
1982
Watts Bar
Tennessee
 
1

 
1,109

 
1996
 
1996
Total Nuclear
 
 
6

 
6,691

 
 
 
 
Hydroelectric
 
 
 

 
 

 
 
 
 
Conventional Plants
Alabama
 
36

 
1,188

 
1925
 
1962
 
Georgia
 
2

 
35

 
1931
 
1956
 
Kentucky
 
5

 
223

 
1944
 
1948
 
North Carolina
 
6

 
492

 
1940
 
1956
 
Tennessee
 
60

 
1,889

 
1912
 
1972
Pumped Storage
Tennessee
 
4

 
1,616

 
1978
 
1979
Total Hydroelectric
 
 
113

 
5,443

 
 
 
 
Natural Gas and/or Oil-Fired(4)
 
 
 

 
 

 
 
 
 
Simple Cycle Combustion Turbine
 
 
 
 
 
 
 
 
 
Allen
Tennessee
 
20

 
456

 
1971
 
1972
Brownsville
Tennessee
 
4

 
468

 
1999
 
1999
Colbert
Alabama
 
8

 
392

 
1972
 
1972
Gallatin
Tennessee
 
8

 
600

 
1975
 
2000
Gleason
Tennessee
 
3

 
360

 
2000
 
2000
Johnsonville
Tennessee
 
20

 
1,128

 
1975
 
2000
Kemper
Mississippi
 
4

 
312

 
2002
 
2002
Lagoon Creek
Tennessee
 
12

 
904

 
2001
 
2002
Marshall County
Kentucky
 
8

 
616

 
2002
 
2002
  Subtotal Simple Cycle Combustion Turbine
 
 
87

 
5,236

 
 
 
 
Combined Cycle Combustion Turbine
 
 
 
 
 
 
 
 
 
Caledonia
Mississippi
 
3

 
765

 
2003
 
2003
Lagoon Creek
Tennessee
 
2

 
540

 
2010
 
2010
Magnolia
Mississippi
 
3

 
909

 
2003
 
2003
Southaven
Mississippi
 
3

 
774

 
2003
 
2003
  Subtotal Combined Cycle Combustion Turbine
 
 
11

 
2,988

 
 
 
 
Total Natural Gas and/or Oil-Fired
 
 
98

 
8,224

 
 
 
 
Diesel Generator
 
 
 

 
 

 
 
 
 
Meridian
Mississippi
 
5

 
9

 
1998
 
1998
Albertville
Alabama
 
4

 
4

 
2000
 
2000

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Total Diesel Generators
 
 
9

 
13

 
 
 
 
TVA Renewable Resources (non-hydro)(5)
 
 
 

 
< 1

 
 
 
 
Total TVA-Operated Generating Facilities
 
 
 

 
34,178

 
 
 
 
Contract Renewable Resources (non-hydro)(6)
 
 
 

 
35

 
 
 
 
Power Purchase and Other Agreements
 
 
 

 
3,087

 
 
 
 
Total Summer Net Capability
 
 
 

 
37,300

 
 
 
 
Notes
(1)   Net capability is defined as the ability of an electric system, generating unit, or other system component to carry or generate power for a specified time period.
(2)   17 MW of cofired methane is accounted for as coal generation as opposed to TVA Renewable Resources.
(3) See Current Power Supply Coal-Fired for a discussion of TVA’s idling plans for coal-fired units.
(4) See
Current Power Supply — Natural Gas and/or Oil-Fired for a discussion of TVA-operated natural gas and/or oil-fired facilities subject to leaseback and long-term lease arrangements.
(5)   TVA’s three wind turbines (2 MW) at its Buffalo Mountain site are currently not operational and do not appear to be economical for returning to operation.  TVA owns 0.3 MW of solar installations at 14 sites.
(6)   Contract Renewable Resources (non-hydro) include wind, landfill gas, and Generation Partners contracts. See
Current Power Supply — Purchased Power and Other Agreements for a discussion of TVA's Generation Partners program.


Coal-Fired

TVA began its coal-fired plant construction program in the 1940s, and its coal-fired units were placed in service between 1951 and 1973. Coal-fired units are either active or inactive. TVA considers units to be in an active state when the unit is generating, available for service, or is temporarily unavailable due to equipment failures, inspections, or repairs.  As of September 30, 2011, TVA had 11 coal-fired plants consisting of 53 active units, accounting for 13,807 MW of summer net capability. TVA considers units to be inactive if those units have been retired, mothballed, or placed in inactive reserve.  As of September 30, 2011, TVA had six inactive units, discussed below.

Inactive units may be in three categories: retired, mothballed, or inactive reserve. Retired units are unavailable for service and are not expected to return to service in the future.  TVA currently has no retired units. Mothballed units are unavailable for service but can be brought back into service after some repairs with appropriate amount of notification, typically weeks or months.  As of September 30, 2011, TVA had three mothballed units: Shawnee Unit 10, Widows Creek Unit 2, and Widows Creek Unit 5.  Inactive reserve is the state in which a unit is unavailable for service but can be brought back into service after some minor repairs in a relatively short duration of time, typically measured in days.  As of September 30, 2011, TVA had three units in inactive reserve: Widows Creek Unit 1, Widows Creek Unit 3, and Widows Creek Unit 4.  Effective October 1, 2011, Widows Creek Unit 6 was placed in inactive reserve.  TVA refers to units which are in inactive reserve or mothballed status as idled.

Coal-fired plants have been subject to increasingly stringent regulatory requirements over the last few decades, including those of the Clean Air Act ("CAA") and subsequent laws and regulations. On April 14, 2011, TVA entered into two agreements (collectively, the "Environmental Agreements").  The first agreement is a Federal Facilities Compliance Agreement with the Environmental Protection Agency ("EPA").  The second agreement is with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, National Parks Conservation Association, and Our Children’s Earth Foundation.   Under the Environmental Agreements, TVA agreed to retire 18 of its 59 coal-fired units by the end of 2017 and was generally absolved, 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 agreements. Failure to comply with the terms of the Environmental Agreements would subject TVA to penalties stipulated in the agreements. TVA is taking actions necessary to comply with the Environmental Agreements.


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The following table summarizes the actions TVA is required to take under the Environmental Agreements, and actions TVA has already taken or is planning to take with respect to its coal-fired units.

 
Plant
 
Total Units
 
Existing Scrubbers and SCRs(2)
 
Requirements Under Environmental Agreements
 
Actions Taken or Planned to Be Taken by TVA
Allen
3
SCRs on all three units
Install scrubbers or retire no later than December 31, 2018
Add scrubbers on all three units by December 31, 2018
Bull Run
1
Scrubber and SCRs on unit
Continuously operate current and any new emission control equipment
Continuously operate existing emission control equipment
Colbert
5
SCR on Unit 5
· Remove from service, control(1), convert(3), or retire Units 1-4 no later than June 30, 2016
· Remove from service, control(1), or retire Unit 5 no later than December 31, 2015
· Control or retire removed from service units within three years
TVA has not yet decided what actions to take with respect to the Colbert units.
Cumberland
2
Scrubbers and SCRs on both units
Continuously operate current and any new emission control equipment
Continuously operate existing emission control equipment
Gallatin
4
None
Control(1), convert(3), or retire all four units no later than December 31, 2017
Add scrubbers and SCRs on all four units by December 31, 2017
John Sevier
4
None
· Retire two units no later than December 31, 2012
· Remove from service two units no later than December 31, 2012 and control(1), convert(3), or retire those units no later than December 31, 2015
· Retire two units by December 31, 2012
· Remove from service the other two units by December 31, 2012.  TVA has not yet decided what additional actions to take with respect to these two units.
Johnsonville
10
None
· Retire six units no later than December 31, 2015
· Retire four units no later than December 31, 2017
· Retire six units by December 31, 2015
· Retire four units by December 31, 2017
Kingston
9
Scrubbers and SCRs on all nine units
Continuously operate current and any new emission control equipment
Continuously operate existing emission control equipment
Paradise
3
Scrubbers and SCRs on all three units
Upgrade scrubbers on Units 1 and 2 no later than December 31, 2012
Upgrade scrubbers on Units 1 and 2 by December 31, 2012
Shawnee
10
None
Control(1), retire, or convert(3) Units 1 and 4 no later than December 31, 2017
· Idled Unit 10 in October 2010
· TVA has not yet decided what actions to take with respect to Units 1 and 4.
Widows Creek
8
Scrubbers and SCRs on Units 7 and 8
· Retire two of Units 1-6 no later than July 31, 2013
· Retire two of Units 1-6 no later than July 31, 2014
· Retire two of Units 1-6 no later than July 31, 2015
· Continuously operate current and any new emissions control equipment on Units 7 and 8.
·  As of September 30, 2011, TVA had idled Units 1-5.
· TVA idled Unit 6 effective October 1, 2011.
· Continuously operate current or equivalent emissions control equipment on Units 7 and 8
Notes
(1)  If TVA decides to add emission controls to these units, TVA must continuously operate the emission controls once they are installed.
(2)  Selective catalytic reduction systems ("SCRs").
(3) Convert to renewable biomass.

TVA’s long-range plans will continue to attempt to balance the costs and benefits of significant investments at its remaining coal-fired plants without scrubbers and/or SCRs. TVA expects to decide whether to control, convert, or retire its remaining coal-fired capacity on a unit-by-unit schedule.

Coal Combustion Residual Facilities

TVA retained an independent third-party engineering firm to perform a multi-phased evaluation of the overall stability and safety of all existing embankments associated with TVA’s wet coal combustion residual (“CCR”) facilities.  The first phase of the evaluation, which is finished, involved a detailed inspection of all wet CCR facilities, detailed documentation reviews, and a determination of any immediate actions necessary to reduce risks.  The second phase of the program, which is also complete, included geotechnical explorations, material testing, stability analyses, and studies.  The study showed that none of TVA’s other coal-fired plants showed the same set of conditions that existed at Kingston Fossil Plant (“Kingston”) at the time of the ash spill, and that the ongoing remediation work being done at the plants should bring all of them within industry standards in terms of stability.  The third phase of the program, which is implementation of recommended actions, is ongoing.  This phase includes risk mitigation steps such as performance monitoring, designing and completing repairs, developing planning documents, obtaining permits, and generally implementing the lessons learned from the Kingston ash spill at TVA’s other wet CCR facilities.  As a part of this effort, an ongoing dam oversight program has been undertaken, and TVA employees have received additional training in dam safety and monitoring.


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TVA is planning to convert all of its wet CCR facilities to dry collection facilities. The expected cost of the CCR work is between $1.5 billion and $2.0 billion, and the work is expected to be completed by 2022.  At September 30, 2011, $275 million of costs had been incurred since the start of the work. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — 2011 Challenges — Coal Combustion Residuals for a discussion of the challenges of dealing with coal combustion residuals, and Note 8 for a discussion of the Kingston ash spill.

On December 15, 2010, a leak was identified in the clay liner of the gypsum pond at Kingston. TVA submitted to the Tennessee Department of Environment and Conservation ("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 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.

Nuclear

TVA has three nuclear sites consisting of six units in operation.  The units at Browns Ferry Nuclear Plant (“Browns Ferry”) are boiling water reactor units, and the units at the Sequoyah Nuclear Plant (“Sequoyah”) and Watts Bar Nuclear Plant (“Watts Bar”) are pressurized water reactor units.  Statistics for each of these units are included in the table below.
 
TVA Nuclear Power
At September 30, 2011
 Nuclear Unit
 Status
 
Nameplate Capacity (MW)
 
Net Capacity
Factor for
2011
 
Date of Expiration
of Operating
License
 
Date of Expiration of Construction Permits
Sequoyah Unit 1
Operating
 
1,221
 
81.1
 
2020
 
Sequoyah Unit 2
Operating
 
1,221
 
86.8
 
2021
 
Browns Ferry Unit 1
Operating
 
1,150
 
80.5
 
2033
 
Browns Ferry Unit 2
Operating
 
1,190
 
77.7
 
2034
 
Browns Ferry Unit 3
Operating
 
1,190
 
83.7
 
2036
 
Watts Bar Unit 1
Operating
 
1,230
 
80.9
 
2035
 
Watts Bar Unit 2
Under construction
 
1,220
 
 
 
2013

Response to Recent Events.  TVA management has established a response team to analyze the March 2011 events at the Fukushima Daiichi Nuclear Power Plant (“Fukushima Daiichi”) in Japan.  A comprehensive review is in progress to determine the status of safety-related equipment and other aspects of plant operations that affect nuclear, radiological, and personal safety so that TVA can make any necessary changes.  In response to the Japanese nuclear events and the April 27 and April 28, 2011, storms that caused significant damage to the TVA system, TVA is analyzing the ability of its nuclear plants to shut down safely during simultaneous natural disasters.

The nuclear industry and regulators have been working to understand the events that damaged the Fukushima Daiichi reactors and spent fuel storage pools and whether any changes might be necessary at nuclear plants in the United States.  As part of its response to the events at Fukushima Daiichi, the Nuclear Regulatory Commission ("NRC") conducted special inspections of nuclear power plants in the United States, including TVA’s three nuclear power plants.  The focus of the inspections was on the licensee’s capability to mitigate conditions that could result from fire and flood events during an earthquake.  The results of the inspections are reported in letters from the NRC dated May 13, 2011.  The NRC’s reactor oversight process will further evaluate any issues identified during the inspection and will determine, in a separate report, whether there are regulatory findings or violations, but no response to the May 13, 2011 letters was required.  Although the NRC is still evaluating the inspection results, no material concerns have been identified relating to any of TVA’s nuclear power plants nor have any of these activities yet resulted in new regulatory requirements affecting any of the plants.

The NRC also formed the Near-Term Task Force ("task force") on the Fukushima Event to perform a systematic and methodical review of its regulations and practices to determine if any changes should be made to further ensure health and safety protections in light of what has been learned from the Japanese nuclear events.  On July 13, 2011, the task force released its first report.  The task force report recommends that the NRC pursue both short-term and long-term actions to improve its safety regulations and oversight. The report also recommends that the NRC propose safety improvements in areas ranging from loss of power to earthquakes, flooding, spent fuel pools, containment venting, and emergency preparedness.  The task

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force’s recommended strategy includes several rulemaking activities to establish new requirements and interim actions to be taken while the rulemaking activities are conducted.  The NRC staff reviewed the task force's July 2011 report and provided a proposal to the NRC Commissioners on its recommendations. On October 19, 2011, the NRC voted to fast track seven of the 12 recommendations from the task force. Recommendations for action in the short-term include reevaluating seismic and flood hazards; strengthening the ability to withstand complete loss of power; improving spent fuel monitoring instrumentation; and bolstering emergency operating procedures and plant staff training. Longer-term actions include improvements to the containment structures that surround nuclear reactors, especially for the 23 U.S. reactors with designs similar to those in Japan (including TVA's Browns Ferry), and improvements to venting systems that are used to relieve steam pressure inside the containment structures following an accident. TVA does not yet know the extent to which the changes in the regulations, programs, and processes of the NRC as a result of the recommendations of the task force will affect its operations.  See Note 20 Legal Proceedings — Petitions Resulting from Japanese Nuclear Events.

The Japanese nuclear events have also created broader economic uncertainties that may affect future nuclear plant operating costs.  The political climate, public pressure, or other forces may make it more difficult or expensive to continue to operate, construct, or improve nuclear power generation facilities.  Internationally, some governments are changing their positions on nuclear power.  For example, operations have been suspended at several existing nuclear power facilities in Japan, and Germany has committed to the elimination of its use of nuclear power altogether by 2022.  Legislation has been introduced in the U.S. Congress that would require an overhaul of the NRC safety regulations.  TVA cannot predict whether this or any similar legislation may be enacted and, if enacted, the impact on the operation and costs of TVA’s nuclear power plants.  These broader economic uncertainties could adversely affect the demand for nuclear power, and TVA cannot know their impact on its operations.

Sequoyah License Renewal.  On August 5, 2009, TVA notified the NRC of its intent to submit license renewal applications for both Sequoyah units in the third quarter of 2013.  If approved, the licenses for both units would be extended by an additional 20 years to 2040 for Unit 1 and 2041 for Unit 2.  On May 25, 2011, TVA amended its schedule and notified the NRC of its intent to submit license renewal applications for both Sequoyah units in the second quarter of 2013. In June 2011, TVA issued a final Supplemental Environmental Impact Statement ("SEIS") that addresses the impacts of renewing Sequoyah's operating licenses. On August 18, 2011, the TVA Board approved proceeding with the license renewal application development and submittal. The NRC's review of the applications is expected to take up to three years after their submission.

Completion of Nuclear Units.  On August 1, 2007, the TVA Board approved the completion of Watts Bar Unit 2.  This unit is expected to be completed in CY 2013 and to provide approximately 1,180 MW of summer net capability.   In addition, on August 18, 2011, the TVA Board approved the completion of Bellefonte Nuclear Plant (“Bellefonte”) Unit 1.  This unit is expected to be completed by 2020 and to provide approximately 1,260 MW of summer net capability.  See Future Power Supply — Nuclear Generation for more information regarding these projects.

Other Nuclear Matters. See Fuel Supply — Nuclear Fuel below for a discussion of spent nuclear fuel and low-level radioactive waste, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — 2011 Challenges — Construction Projects for a discussion of challenges associated with the Watts Bar Unit 2 construction project, challenges associated with the construction of a cooling tower at Browns Ferry, a problem involving a Browns Ferry Unit 1 low pressure coolant injection valve, and the impact of extreme weather on the operation of Browns Ferry Unit 1, Note 20 Contingencies for a discussion of TVA's nuclear decommissioning liabilities and the related trust and nuclear insurance, and Note 20 — Legal Proceedings for a discussion of legal and administrative proceedings related to TVA's nuclear program, which discussions are incorporated herein by reference.

Hydroelectric

TVA maintains 29 conventional hydroelectric dams throughout the Tennessee River system and one pumped-storage facility for the production of electricity.  At September 30, 2011, these facilities accounted for 5,443 MW of summer net capability.  The amount of electricity that TVA is able to generate from its hydroelectric plants depends on a number of factors, including the amount of precipitation, runoff, initial water levels, and the need for water for competing water management objectives.  The amount of electricity generated also depends on the availability of TVA's hydroelectric generation plants.  When these factors are unfavorable, TVA must increase its reliance on more expensive generation plants and purchased power.  In addition, four hydroelectric dams owned by a third party on the Little Tennessee River and eight U.S. Army Corps of Engineers dams on the Cumberland River contribute to the TVA power system.  See Weather and Seasonality.

TVA’s Hydro Modernization Program began in 1992 to address reliability issues on a majority of its conventional hydroelectric units and on its Raccoon Mountain pumped storage facility.  At September 30, 2011, uprates to 57 hydroelectric units were completed.  The capacity gain was 565 MW, and the average efficiency gain was approximately five percent.  There are 38 units remaining to be uprated for reliability and/or capacity increases.

A preliminary analysis performed as part of an update to TVA’s hydrology model indicated that under "probable maximum flood" assumptions, four of TVA's dams would not be high enough to contain the flood waters. A "maximum flood” is an extremely unlikely event, and TVA is taking actions with the aim of ensuring that flood waters would pass safely. TVA implemented interim dam modifications in the second quarter of 2010. Permanent dam modifications are being assessed to

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determine appropriate changes needed at TVA dams.

As a result of the update to TVA’s hydrology model, TVA is performing additional hydrological assessments at all of its other dams.  The total financial impact of permanent modifications to any additional dams identified as a result of the assessment is being evaluated and should be completed during the later part of 2012. 

Natural Gas and/or Oil-Fired

On August 31, 2011, TVA purchased the Magnolia Combined Cycle Plant ("Magnolia") for $436 million.  The three-unit natural gas-fired plant is located in Benton County, Mississippi, and has a summer net capability of 909 MW.  At September 30, 2011, TVA operated 98 combustion turbine units, 87 of which are simple-cycle and 11 of which are combined cycle.  The 87 simple-cycle units provide a maximum of 5,236 MW of summer net capability.  The 11 combined cycle units provide a maximum of 2,988 MW of summer net capability.  Eighty of the simple-cycle units are fueled by either natural gas or diesel fuel.  The remaining seven simple-cycle units as well as the 11 combined cycle units are fueled by natural gas only.  Seventy-six of the simple-cycle units are capable of quick-start response allowing full generation capability in approximately 10 minutes.  TVA uses simple-cycle units as peaking or backup units.  Their relatively low capital requirements and quick start-up capabilities make them favorable for intermittent operation to generate power in periods of high demand or to provide ancillary services. Additionally, low natural gas prices during 2011 have made these units more economical to operate.  At September 30, 2011, 24 of the simple-cycle combustion turbine units were leased by private entities and leased back to TVA under long-term leases. TVA also leases the three Caledonia combined cycle units under a long-term lease.  Since April 17, 2009, Seven States Southaven, LLC (“SSSL”) has owned an undivided 90 percent interest in the three Southaven combined cycle units, and TVA has entered into an agreement under which TVA leases SSSL’s undivided 90 percent interest in Southaven and operates the entire facility through April 23, 2013.  For additional details, see Note 12.

Diesel Generators

TVA has two diesel generator plants consisting of nine units.  At September 30, 2011, these facilities provided 13 MW of summer net capability.

Renewable Resources

TVA owns three wind turbines, capability for digester gas cofiring and biomass cofiring (located at coal-fired sites), and 14 solar energy sites.  At September 30, 2011, the wind sites did not provide any summer net capability because they were not operational and the digester gas cofiring site and solar sites provided less than 1 MW of summer net capability.   

Purchased Power and Other Agreements

TVA acquires power from a variety of power producers through long-term and short-term power purchase agreements as well as through power spot market purchases.  During 2011, TVA acquired approximately 20 percent of the power that it purchased on the power spot market, six percent through short-term power purchase agreements (agreements with a duration of one year or less but longer than the term of spot market purchase), and approximately 74 percent through long-term power purchase agreements (agreements with a duration of more than one year).

A portion of TVA’s capability provided by power purchase agreements is provided under contracts that expire between 2012 and 2032, and the most significant of these contracts are described below.
Power Purchase Contracts (Excluding Wind Contracts)
At September 30, 2011
Type of facility
Location
Summer Net Capability
(MW)
Contract Termination Date
Natural gas
Alabama
720
2012
Natural gas
Alabama
500
2012
Natural gas
Mississippi
690
2013
Lignite
Mississippi
440
2032
    
Under federal law, TVA is required to purchase energy from qualifying facilities, cogenerators, and small power producers at TVA's avoided cost of self-generating or purchasing this energy from another source.  At September 30, 2011, there were five suppliers, with a combined capacity of 914 MW, whose power is purchased by TVA under this law.

At September 30, 2011, TVA was a party to nine contracts of approximately 20 years' duration for the purchase of up to 1,565 MW of energy from wind generation in various midwest states.  TVA began receiving up to 415 MW of energy under these contracts during 2010 and expects to begin receiving energy under the remainder of the contracts during 2012 and 2013 as long as environmental and other contingencies in these contracts are satisfied. TVA may work with counterparties to renegotiate or

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even terminate existing arrangements based on its evaluation of the economics of the contracts given that bringing power from distant locations raises transmission issues and costs.

Renewable Wind Contracts
At September 30, 2011
Location of Wind Farm
Wind Farm Nameplate Capacity
(in MW)
Date Delivery Began or Is Expected to Begin
Illinois
300 *
2010
Iowa
115
2010
Iowa
83
2012
Iowa
101
2012
Kansas
201
2012
Kansas
165
2013
Illinois
200
2012
Illinois
150
2012
South Dakota
250
2013
Note
*TVA is currently purchasing the energy output of this 300 MW of generation. The owner of the facility retains the renewable attributes, but TVA has the option to purchase the renewable attributes of this generation in the future.

In addition, TVA has contracted for 27 MW of nameplate renewable energy generation from 15 wind turbine generators located in Buffalo Mountain near Oak Ridge, Tennessee.

In 2003, TVA developed a Generation Partners program to test the interest and feasibility of renewable consumer-owned generation as a source of power for TVA.  Since 2009, TVA has seen the program grow from 79 installations to nearly 700 installations in operation providing more than 30 MW of solar, wind, and biomass generation.  In addition, there are more than 300 projects approved by TVA that are in various stages of construction.  Those projects represent an additional 45 MW of renewable power.

The Renewable Standard Offer program is a pilot program that began in October 2010. Under the program, TVA will accept up to 100 MW of renewable energy. At September 30, 2011, TVA had 8 MW of renewable energy signed up under the program, including two landfill gas generation projects and two solar projects.

Technology advancements will be needed to address some of the operational issues associated with some renewable energy sources, such as energy storage to address intermittency.   In addition, most renewable energy resources are geographically specific.  Some regions of the United States have an abundance of wind and solar resources, whereas other regions have more hydroelectric resources.  Regional differences and limitations play a primary role in the types and amount of renewable and clean energy developed across the country.  Within the area served by TVA, two of the most abundant renewable resources are hydroelectric and biomass.  Feasible wind energy in this region is primarily associated with mountain top and ridgeline installations, and the total potential capacity is more limited when compared to other parts of the nation where wind energy is more abundant.  If TVA is required to increase its use of renewable resources and the cost of doing so is greater than the costs of other sources of generation, TVA’s costs may increase.

During the past five years, TVA supplemented its power generation through power purchases as follows:
Purchased Power*
For the years ended September 30
 
2011
 
2010
 
2009
Millions of kWh
27,168

 
28,782

 
22,088

Percent of TVA’s Total Power Supply
15.9
%
 
16.3
%
 
13.1
%
Note
* Purchased power amounts include generation from Caledonia, which is currently a leased facility operated by TVA. Additionally, purchased power amounts include generation from Magnolia for 2009, 2010, and for a portion of 2011. On August 31, 2011, TVA acquired Magnolia.

Future Power Supply

During 2011, the TVA Board accepted an Integrated Resource Plan (“IRP”), the purpose of which is to create a framework for the analysis of alternatives to address the electricity needs in TVA's service area for the next 20 years. TVA has adopted a vision to lead the nation toward a cleaner energy future. TVA intends to balance production capabilities with power supply requirements by promoting the conservation and efficient use of electricity and, when necessary, buying, building and/or

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leasing assets or entering into purchased power agreements.  TVA also intends to employ a diverse mix of energy generating sources and is working toward obtaining greater amounts of its power supply from clean (low or zero carbon emitting) or renewable resources.

Coal-Fired Generation

Consistent with its vision and IRP, TVA is planning to significantly reduce its reliance on coal-fired generation in the future.  See Current Power Supply — Coal-Fired above.

Nuclear Generation

Watts Bar Unit 2.  On August 1, 2007, the TVA Board approved the completion of Watts Bar Unit 2. The project was originally scheduled to be completed in CY 2012 for an anticipated cost of approximately $2.5 billion, excluding allowance for funds used during construction (“AFUDC”) and the cost of the initial fuel load. TVA has a license to receive and store new nuclear fuel for use in the unit.  TVA has applied for an operating license from the NRC and plans to load the new fuel into the Watts Bar Unit 2 reactor following the receipt of the operating license. The project's schedule has experienced some delays as a result of lower than expected construction productivity. Additional delays are expected related to licensing, including a delay from a hearing to be scheduled to take place before an Atomic Safety and Licensing Board to resolve a pending aquatic contention. See Note 20 — Legal Proceedings — Administrative Proceedings Regarding Watts Bar Nuclear Plant Unit 2. As a result, the completion of Watts Bar Unit 2 will take longer than originally planned. As discussed above, on July 13, 2011, the NRC's Near-Term Task Force on the Fukushima Event released its review of insights from the Japanese nuclear events. The report and recommendations based upon it could result in TVA being required to make changes to its operating nuclear units and Watts Bar Unit 2. Such changes are expected to impact the cost and schedule of the project. As a result of one or more of the above developments, TVA believes that the Watts Bar Unit 2 completion date will extend into CY 2013, rather than the last quarter of CY 2012. 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 approximately $2.5 billion. Updates to the schedule and cost estimates are expected to be completed by the second quarter of  FY 2012.

Bellefonte Units 1 and 2.  On August 18, 2011, the TVA Board approved the completion of Bellefonte Unit 1.  The project is expected to be completed by 2020 for anticipated additional costs of $4.9 billion, exclusive of AFUDC and the cost of the initial fuel load.  Advance notification by TVA and additional reviews by both TVA and the NRC are required before construction activities resume.  In addition, the TVA Board directed TVA staff not to resume construction activities until the initial loading of fuel at Watts Bar Unit 2 has been accomplished.  See Note 20 — Legal Proceedings  —  Case Regarding Bellefonte Nuclear Plant Units 1 and 2. On September 29, 2011, the NRC extended the Unit 1 and Unit 2 construction permits for Bellefonte to October 2020. The extension is expected to provide the time necessary to complete engineering, licensing, and construction of Unit 1. Bellefonte's construction permits are currently in deferred plant status. TVA will provide notice to the NRC at least four months in advance of activating construction. Asset-preservation and equipment-maintenance activities for Units 1 and 2 are continuing at the site, as well as Unit 1 engineering design work, detailed plant system physical reviews, and assessments.

Bellefonte Units 3 and 4.  In October 2007, TVA submitted a combined construction and operating license application ("CCOLA") to the NRC for two new designed Advanced Passive 1000 reactors to be located at the Bellefonte site and designated as Bellefonte Units 3 and 4.  On September 29, 2010, TVA notified the NRC that the recently completed final SEIS had determined that completion of the partially constructed Bellefonte Unit 1 is the preferred alternative for near-term additional generating capacity at the Bellefonte site.  Consequently, with the exception of the ongoing review of hydrology-related portions of the application, TVA requested that the NRC defer review of the Bellefonte Units 3 and 4 CCOLA pending a final decision of the TVA Board regarding new generation capacity at the Bellefonte site.  Contentions have been filed with respect to this application.  See Note 20 — Legal Proceedings — Administrative Proceedings Regarding Bellefonte Units 3 and 4.

Extended Power Uprate.  TVA is undertaking an Extended Power Uprate (“EPU”) project at Browns Ferry which is expected to increase the amount of electrical generation by increasing the amount of steam produced by the reactors. Additional fuel would be added to the reactors during each refueling outage to support the increased steam production.  The NRC license for each reactor must be modified to allow reactor operation at the higher power level.  TVA has submitted license amendment requests and is currently in discussions with the NRC on selected technical issues affecting EPU licensing.  The result of these discussions may impact the amount of power level increase realized by the EPU.  Completion of the licensing process will determine the final implementation schedule.
 
Other Nuclear Initiatives.  TVA signed a letter of intent to begin evaluating a site and perform studies for a small modular reactor ("SMR") at its Clinch River site in Oak Ridge, Tennessee. The SMR would have a scalable, modular design allowing utilities to add electrical generation capacity in increments of 150-300 MW. The SMR could be competitive with and able to be built more quickly than larger reactors on the market. TVA notified the NRC in August 2010 that it intends to submit a construction permit application for up to six SMR units on the Clinch River site by the third quarter of 2012.

Impact of Recent Events.  TVA believes that the responses to the Japanese nuclear events could translate into changes in plant operations, design, or safety and the imposition of additional requirements by the NRC or other regulatory

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bodies.  Should potential changes prove to be significant, the schedule for the commercial operation of Watts Bar Unit 2, as well as future plans for construction at Bellefonte Unit 1 or other facilities, could be affected.  To date, several petitions have been filed with the NRC that seek to take actions in response to the Japanese nuclear events that could impact TVA nuclear operations or licensing activities if the requested actions are taken by the NRC.  See Note 20 — Legal Proceedings — Petitions Resulting from Japanese Nuclear Events.

Natural Gas-Fired Generation

Part of TVA’s strategy of portfolio diversification and reducing air emissions involves the addition of natural gas plants to its generation fleet in the near future.  During 2011, TVA expanded its fleet of natural gas-fired units by purchasing Magnolia in Benton County, Mississippi. In addition, TVA is in the process of completing the John Sevier Combined Cycle Facility in northeastern Tennessee.  TVA expects to complete this 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. TVA may also decide to make further strategic investments in natural gas-fired facilities in the future.  See Current Power SupplyNatural Gas and/or Oil-Fired and Note 19 — New GenerationCombined Cycle.  

Hydroelectric Generation

Hydroelectric generation will continue to be an important part of TVA’s energy mix as TVA strives to provide clean and low-cost energy.  TVA through its Hydro Modernization Program continues to assess its conventional hydroelectric units for reliability and/or capacity increases through 2030.  Annual hydroelectric generation is highly dependent on weather conditions and can vary significantly from year to year.

Future Wind Contracts

For a discussion of future wind contracts, see Current Power SupplyPurchased Power and Other Agreements.

Power Purchases

Purchasing power from others will likely remain a component of how TVA addresses the power needs of its service area.  TVA intends to balance production capabilities with power supply requirements by promoting the conservation and efficient use of electricity and, when necessary, entering into purchased power agreements.

Energy Efficiency and Demand Response Programs

TVA, in partnership with its distributors and directly served customers, is developing a broad portfolio of energy efficiency and demand response programs designed to help reduce long-term energy supply costs in the TVA service area.  An effective set of energy efficiency and demand response programs is consistent with TVA's vision to be one of the nation's leading providers of low-cost and cleaner energy by 2020 and its goal to become the regional leader in energy efficiency.  TVA is currently working with its power distributors and directly served customers to develop a five-year plan for its energy efficiency and demand response programs building on success of its program in 2010 and 2011.  TVA realized 210 gigawatt hour ("GWh") and 559 GWh of energy efficiency savings in 2010 and 2011, respectively, and expects those savings to continue to grow through 2015.

Fuel Supply

General

TVA’s consumption of various types of fuel depends largely on the demand for electricity by TVA’s customers, the availability of various generating units, and the availability and cost of fuel.  The following table summarizes TVA’s expenses for various fuels for the years indicated:

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Fuel for TVA-Operated Facilities*
For the years ended September 30
(in millions)
 
2011
 
2010
 
2009
Coal
$
2,315

 
$
2,126

 
$
2,127

Natural gas
265

 
236

 
129

Fuel oil
54

 
38

 
38

Nuclear fuel
261

 
277

 
267

Total fuel
$
2,895

 
$
2,677

 
$
2,561

Note
* Excludes effects of the fuel cost adjustment deferrals and amortization on fuel expense in the amount of $31 million, $(585) million, and $553 million for the years ended September 30, 2011, 2010, and 2009, respectively.

The following table indicates TVA’s average fuel expense by generation-type for the years indicated:
Fuel Expense Per kWh*
For the years ended September 30
(cents/kWh)
 
2011
 
2010
 
2009
Coal
3.17

 
2.90

 
2.81

Natural gas and fuel oil
3.96

 
4.37

 
3.77

Nuclear
0.53

 
0.52

 
0.50

Average fuel cost per kWh net
thermal generation from all sources
2.21

 
2.01

 
1.92

Note
* Excludes effects of the fuel cost adjustment deferrals and amortization on fuel expense.

TVA also has tolling agreements under which it obtains electricity from outside suppliers.  Under these tolling agreements, TVA supplies the fuel to the outside supplier, and the outside supplier converts the fuel into electricity.  The following table indicates the cost of fuel supplied by TVA under these agreements and also the average fuel expense per kWh for the years indicated:
Natural Gas Purchases for Tolling Plants
For the years ended September 30
 
2011
 
2010
 
2009
Cost of fuel (in millions)
$
343

 
$
381

 
$
255

Average fuel expense (cents/kWh)
5.40

 
5.93

 
6.54


Coal

Coal consumption at TVA’s coal-fired generating facilities during 2011 was approximately 36 million tons.  At September 30, 2011, and 2010, TVA had 29 days and 36 days of system-wide coal supply at full burn rate, respectively, with net book values of $404 million and $465 million, respectively.

TVA utilizes both short-term and long-term (longer than one year) coal contracts.  During 2011, long-term contracts made up 96 percent of coal purchases and short-term contracts accounted for the remaining four percent.  TVA plans to continue using contracts of various lengths, terms, and coal quality to meet its expected consumption and inventory requirements.  During 2011, TVA purchased coal by basin as follows:

38 percent from the Illinois Basin;
33 percent from the Powder River Basin in Wyoming;
18 percent from the Uinta Basin of Utah and Colorado; and
11 percent from the Appalachian Basin of Kentucky, Pennsylvania, Tennessee, Virginia, and West Virginia.

Total system coal inventories were at or below target levels for most of 2011.  During 2011, 38 percent of TVA’s coal supply was delivered by rail, 22 percent was delivered by barge, and 32 percent was delivered by a combination of barge and rail.  The remainder was delivered by truck.


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Natural Gas and Fuel Oil

During 2011, TVA purchased substantially all of its natural gas requirements from a variety of suppliers under contracts with terms of one year or less but managed its exposure to spot market volatility through its Financial Trading Program ("FTP"). At September 30, 2011, all but 18 of TVA’s gas generation units were dual fuel capable, and TVA has fuel oil stored on each site for its dual fuel combustion turbines as a backup to natural gas.

During 2011, TVA purchased substantially all of its fuel oil on the spot market, but managed its exposure to spot market volatility through its FTP.  At September 30, 2011, and 2010, the net book value of TVA’s natural gas in inventory was $7 million and $8 million, respectively, and the net book value of TVA’s fuel oil in inventory was $77 million and $66 million, respectively.

Nuclear Fuel

Converting uranium to nuclear fuel generally involves four stages: the mining and milling of uranium ore to produce uranium concentrates; the conversion of uranium concentrates to uranium hexafluoride gas; the enrichment of uranium hexafluoride; and the fabrication of the enriched uranium hexafluoride into fuel assemblies.  For its forward five-year (2012-2016) requirements, TVA currently has 100 percent of its uranium mining and milling, conversion services, enrichment services, and fabrication services requirements either in inventory or under contract.  TVA anticipates being able to fill its needs beyond this period by normal contracting processes as market forecasts indicate that the fuel cycle components will be readily available.

TVA, the Department of Energy ("DOE"), and certain nuclear fuel contractors have entered into agreements providing for surplus DOE highly enriched uranium (uranium that is too highly enriched for use in a nuclear power plant) to be blended with other uranium.  The enriched uranium that results from this blending process, which is called blended low enriched uranium (“BLEU”), is fabricated into fuel that can be used in a nuclear power plant.  This blended nuclear fuel was first loaded in a Browns Ferry reactor in 2005 and is expected to continue to be used to reload the Browns Ferry reactors through at least 2016.  BLEU fuel was loaded into Sequoyah Unit 2 in CY 2008, CY 2009 and CY 2011.

Under the terms of an interagency agreement between the DOE and TVA, in exchange for supplying highly enriched uranium materials for processing into usable BLEU fuel for TVA, the DOE participates to a degree in the savings generated by TVA’s use of this blended nuclear fuel.  See Note 1 — Blended Low Enriched Uranium Program for a more detailed discussion of the BLEU project.

TVA owns all nuclear fuel held for its nuclear plants.  At September 30, 2011, and 2010, the net book value of this nuclear fuel was $1.1 billion.

Mixed Oxide Nuclear Fuel.  TVA signed an interagency agreement with the DOE on February 25, 2010, for pre-planning and evaluation activities under which the DOE would reimburse TVA for its costs in investigating the potential use of mixed oxide (“MOX”) fuel in TVA’s Browns Ferry and Sequoyah nuclear reactors.  The MOX fuel is a mixture of plutonium and depleted uranium oxide with the plutonium originating from surplus nuclear weapon material.  The DOE is building a plant near Aiken, South Carolina to produce MOX fuel.

The DOE is completing a SEIS with TVA as a cooperating agency to evaluate the potential impact of MOX fuel at Sequoyah and Browns Ferry.  TVA is in the evaluation phase and has not committed to using MOX fuel.  TVA will only go forward with the program if TVA believes it is safe to do so and will result in a benefit to TVA customers.  A decision on whether to go from the evaluation to a licensing phase is expected at the end of 2012.  A significant regulatory and planning effort must be completed before the first potential delivery of MOX fuel in 2018.

Low-Level Radioactive Waste.  Low-level radioactive waste (“radwaste”) results from the normal operation of nuclear units and includes such materials as disposable protective clothing, mops, and filters.  TVA has certain types of radwaste processed and shipped to a disposal facility in Clive, Utah, and TVA also stores some radwaste at its own facilities.  In June 2011, TVA entered into a six year contract to enable shipments of radwaste to a new burial facility in Andrews, TexasTVA is also capable of storing radwaste at its facilities for an extended period of time.

Spent Nuclear Fuel.  Under the Nuclear Waste Policy Act of 1982, TVA (and other domestic nuclear utility licensees) entered into a contract with the DOE for the disposal of spent nuclear fuel.  Payments to the DOE are based upon TVA’s nuclear generation and charged to nuclear fuel expense.  Although the contracts called for the DOE to begin accepting spent nuclear fuel from the utilities by January 31, 1998, the DOE has yet to establish a permanent disposal site for spent nuclear fuel.  TVA, like other nuclear utilities, stores spent nuclear fuel at its nuclear sites.  TVA would have had sufficient space to continue to store spent nuclear fuel in storage pools indefinitely had the DOE begun accepting spent nuclear fuel.  The DOE’s failure to do so in a timely manner required TVA to construct dry cask storage facilities at Sequoyah and Browns Ferry and to purchase special storage containers for the spent nuclear fuel.  The Sequoyah and Browns Ferry dry cask storage facilities have been in use since 2004 and 2005, respectively, and are expected to provide storage capacity through 2026 at Sequoyah and 2018 at Browns Ferry.  Watts Bar has sufficient storage capacity in its spent fuel pool to last until approximately 2015.  In September 2010, the NRC announced its approval of final revisions to its waste confidence findings and regulations expressing the NRC’s confidence that spent nuclear fuel can be safely stored for at least 60 years beyond the licensed life of any reactor and that sufficient

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repository capacity will be available when necessary.

To recover the cost of providing long-term, on-site storage for spent nuclear fuel, TVA filed a breach of contract suit against the United States in the Court of Federal Claims in 2001.  In August 2006, the United States paid TVA almost $35 million in damages awarded by the Court of Federal Claims, which offset partially the construction costs of the dry cask storage facilities that TVA incurred through 2004.  The United States has also paid TVA approximately $35 million in damages to offset costs for on-site storage from 2005 to 2008.  TVA entered into a settlement agreement with the United States in July 2011 that delineates recoverable and non-recoverable costs from the United States for the disposal of spent nuclear fuel and that sets forth a claim submittal and review process. TVA anticipates submitting additional claims to the DOE on an annual basis pursuant to the settlement agreement.

Tritium-Related Services.  TVA and the DOE are engaged in a long-term interagency agreement under which TVA will, at the DOE’s request, irradiate tritium producing burnable absorber rods to assist the DOE in producing tritium for the Department of Defense (“DOD”).  This agreement, which ends in 2035, requires the DOE to reimburse TVA for the costs that TVA incurs in connection with providing irradiation services and to pay TVA an irradiation services fee at a specified rate per tritium-producing rod over the period when irradiation has occurred.

In general, tritium-producing rods are irradiated for a full fuel cycle, which lasts about 18 months.  At the end of the cycle, TVA removes the irradiated rods and loads them into a shipping cask.  The DOE then ships them to its tritium-extraction facility.  TVA loads a fresh set of tritium-producing rods into the reactor during each refueling outage.  Irradiating the tritium-producing rods does not affect TVA’s ability to operate the reactors to produce electricity.

The interagency agreement provides for irradiation services to be performed in Watts Bar Unit 1 and Sequoyah Units 1 and 2.  TVA has provided irradiation services using only Watts Bar Unit 1 since 2003.  TVA believes it can meet the DOE and the DOD tritium requirements using Watts Bar Unit 1 while maintaining Sequoyah reactors as backups.

Transmission

The TVA transmission system is one of the largest in North America.  TVA’s transmission system has 62 interconnections with 14 neighboring electric systems, and delivered nearly 168 billion kWh of electricity to TVA customers in 2011.  In carrying out its responsibility for grid reliability in the TVA service area, TVA has operated with 99.999 percent reliability over the last 12 years in delivering electricity to customers. See Item 2, Properties — Transmission Properties.

To the extent that federal law requires access to the TVA transmission system, the TVA transmission organization offers transmission services to others to transmit power at wholesale in a manner that is comparable to TVA's own use of the transmission system.  TVA has also adopted and operates in accordance with a published Standards of Conduct for Transmission Providers and separates its transmission functions from its marketing functions.

TVA is subject to federal reliability standards that are set forth by the North American Electric Reliability Corporation (“NERC”) and approved by the FERC.   These standards are designed to maintain the reliability of the bulk electric system, including TVA’s generation and transmission system.  These standards include areas such as maintenance, training, operations, planning, modeling, critical infrastructure, physical and cyber security, vegetation management, and facility ratings.  TVA recognizes that reliability standards and expectations are becoming more complex and stringent for transmission systems. Compliance with these standards and expectations may necessitate additional personnel and expanded programs to address the associated exposure to risk of noncompliance.  TVA continues to evaluate its options to meet these new measures.

Weather and Seasonality

Weather affects both the demand for and the market prices of electricity.  TVA uses degree days to measure the impact of weather on its power operations.  Degree days measure the extent to which average temperatures in the five largest cities in TVA's service area vary from 65 degrees Fahrenheit.  During 2011, TVA had 280, or nearly eight percent, fewer heating degree days and 215, or over nine percent, fewer cooling degree days than in 2010.
 
2011
 
Percent Change
 
2010
 
Percent Change
 
2009
Combined degree days
(normal 5,223)
5,541

 
(8.2
)%
 
6,036

 
15.9
%
 
5,209


TVA’s power system is generally a dual-peaking system where the demand for electricity peaks during the summer and winter months to meet cooling and heating needs.  TVA met an all-time summer peak demand of 33,482 MW on August 16, 2007, at 102 degrees Fahrenheit and an all-time winter peak demand of 32,572 MW on January 16, 2009, at nine degrees Fahrenheit.  As a result of a cold wave during the first week of January 2010, TVA set a number of energy demand records.  A new total daily energy demand record of 701 GWh was set on January 8, 2010, and a total weekly energy demand record of 4,633 GWh was set for the seven-day period ended January 10, 2010, when TVA experienced an average demand of 27,582 MW per hour for the entire week.


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After several years of dry weather and drought conditions in the TVA service area, rainfall and runoff totals improved in the Tennessee Valley during 2011 and 2010.  Rainfall in the Tennessee Valley was 96 percent of normal in 2011 and 93 percent of normal in 2010.  Runoff was 95 percent of normal in 2011 and 111 percent of normal in 2010.  Runoff is the amount of rainfall that is not absorbed by vegetation or the ground and actually reaches the rivers and reservoirs that TVA manages.  TVA’s conventional hydroelectric generation decreased nine percent in 2011 over 2010, and increased 21 percent in 2010 over 2009.  Conventional hydroelectric generation was 94 percent of normal in 2011 and 103 percent of normal in 2010.  See Item 1A, Risk Factors, for a discussion of the potential impact of weather on TVA.

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.  See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — 2011 Challenges — Weather Extremes for more information regarding the impact of the storms on TVA.  In addition, during the summer of 2011, as in prior years, TVA had to reduce generation from certain nuclear and coal-fired plants to prevent issues associated with high water temperatures in the Tennessee and Cumberland Rivers.

Competition

TVA provides electricity in a service area that is largely free of competition from other electric power providers.  This service area is defined primarily by two provisions of law: the fence and the anti-cherrypicking provision.  The fence limits the region in which TVA or distributors of TVA power may provide power.  The anti-cherrypicking provision limits the ability of others to use the TVA transmission system for the purpose of serving customers within TVA’s service area.

From time-to-time there have been efforts to erode the protection of the anti-cherrypicking provision, and the protection of the anti-cherrypicking provision could be limited and perhaps eliminated by Congressional legislation at some time in the future.

Research and Development

TVA makes investments in science and technological innovation to help enable TVA to meet future challenges in a variety of areas.  TVA is currently focused on the following initiatives:

Development of roadmaps for technologies, including smart grid for transmission, SMRs, and strategic transportation electrification;
Development and testing of infrastructure and technologies to enable consumer awareness and access to demand response and energy efficiency tools;
Development and demonstration of coal ash utilization technologies;
Evaluation, demonstration, and implementation of clean and renewable energy technologies that reduce TVA's environmental footprint, including participation in technology evaluations for carbon capture and sequestration and biomass conversion;
Evaluation, demonstration, and implementation of technologies that improve the operational efficiency and extend asset life of TVA's generation fleet (fossil, nuclear, and hydroelectric);  
Demonstration of Smartwires technology to enable control of individual transmission line power flow;
Establishment of an integrated carbon sequestration and environmental stewardship pilot project to provide education about carbon cycle, carbon sequestration, and carbon offsets, bioenergy, and TVA's reforestation and environmental stewardship activities; and
Development of techniques to secure critical cyber transmission assets.

TVA seeks to leverage research and development activities through partnerships with distributors of TVA power, the Electric Power Research Institute (“EPRI”), the DOE, Oak Ridge National Laboratory, other utilities, universities, and industry vendors.  Some of these activities include developing technologies to make electric vehicles and the charging stations that fuel them work together efficiently, dealing with demands on the power grid caused by charging stations, finding ways to minimize demands on the power grid, including solar-assisted charging stations and distributed energy storage, and refining existing processes for power system control to maximize energy efficiency.

Environmental Stewardship Activities

TVA’s mission includes managing the Tennessee River, its tributaries, and public lands along the shoreline to provide, among other things, year-round navigation, flood damage reduction, affordable and reliable electricity, and, consistent with these primary purposes, recreational opportunities, adequate water supply, improved water quality, and natural resource protection. There are 49 dams that comprise TVA’s integrated reservoir system.  The reservoir system provides 800 miles of commercially navigable waterways and also provides significant flood reduction benefits both within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers.  The reservoir system also provides a water supply for residential and industrial customers, as well as cooling water for some of TVA’s coal-fired and nuclear power plants.  TVA’s Environmental Policy provides objectives for an integrated approach related to providing cleaner, reliable, and affordable energy, supporting sustainable economic growth, and engaging in proactive environmental stewardship.  The Environmental Policy provides additional direction in several environmental stewardship areas, including water resource protection and improvements,

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sustainable land use, and natural resource management.  TVA also manages approximately 293,000 acres of reservoir lands for natural resource protection, recreation, and other purposes.

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 Activities

Since its creation in 1933, TVA has promoted the development of the Tennessee Valley.  TVA works with its distributor customers, regional, state, and local agencies, and communities to showcase the advantages available to businesses locating or expanding in TVA’s service area.  At its October 30, 2008 meeting, the TVA Board approved a new economic development initiative, the Valley Investment Initiative.  Under the Valley Investment Initiative, TVA and its distributor customers provide an incentive award to new and existing companies in TVA’s  service area that demonstrate a multi-year commitment to sustained capital investment, the creation of quality jobs, compatible and efficient power use, and a commitment to remain in the TVA service area. Continued recruitment of desirable companies and retention of the current industrial and manufacturing base also continue to be critical to TVA’s economic development mission.

Governance

TVA is governed by the TVA Board.  The TVA Act provides that the TVA Board shall be composed of nine members, at least seven of whom shall be legal residents of the TVA service area. TVA Board members are appointed by the President of the United States with the advice and consent of the U.S. Senate.  TVA Board members serve five-year terms, and at least one member’s term ends each year.  The TVA Board, among other things, establishes broad goals, objectives, and policies for TVA; develops long-range plans to guide TVA in achieving these goals, objectives, and policies; approves annual budgets; and establishes a compensation plan for employees.  Information about members of the TVA Board and TVA’s executive officers is discussed in Item 10, Directors, Executive Officers and Corporate Governance.

Regulation

Congress

TVA exists pursuant to legislation enacted by Congress and carries on its operations in accordance with this legislation.  Congress can enact legislation expanding or reducing TVA’s activities, change TVA’s structure, and even eliminate TVA.  Congress can also enact legislation requiring the sale of some or all of the assets TVA operates or reduce the United States’s ownership in TVA.  To allow TVA to operate more flexibly than a traditional government agency, Congress exempted TVA from certain general federal laws that govern other agencies, such as federal labor relations laws and the laws related to the hiring of federal employees, the procurement of supplies and services, and the acquisition of land.  Other federal laws enacted since the creation of TVA have been made applicable to TVA, including those related to paying employees overtime and protecting the environment, cultural resources, and civil rights.

Securities and Exchange Commission

Section 37 of the Securities Exchange Act of 1934 (the “Exchange Act”) requires TVA to file with the SEC such periodic, current, and supplementary information, documents, and reports as would be required pursuant to section 13 of the Exchange Act if TVA were an issuer of a security registered pursuant to section 12 of the Exchange Act.  Section 37 of the Exchange Act exempts TVA from complying with section 10A(m)(3) of the Exchange Act, which requires each member of a listed issuer’s audit committee to be an independent member of the board of directors of the issuer.  Since TVA is an agency and instrumentality of the United States, securities issued or guaranteed by TVA are “exempted securities” under the Securities Act of 1933, as amended (the “Securities Act”), and may be offered and sold without registration under the Securities Act.  In addition, securities issued or guaranteed by TVA are “exempted securities” and “government securities” under the Exchange Act.  TVA is also exempt from sections 14(a)-(d) and 14(f)-(h) of the Exchange Act (which address proxy solicitations) insofar as those sections relate to securities issued by TVA, and transactions in TVA securities are exempt from rules governing tender offers under Regulation 14E of the Exchange Act.  Also, since TVA securities are exempted securities under the Securities Act, TVA is exempt from the Trust Indenture Act of 1939 insofar as it relates to securities issued by TVA, and no independent trustee is required for these securities.

Federal Energy Regulatory Commission

Under the FPA, TVA is not a “public utility,” a term which generally includes investor-owned utilities.  Therefore, TVA is not subject to the full jurisdiction that FERC exercises over public utilities under the FPA.  TVA is, however, an “electric utility” and a “transmitting utility” as defined in the FPA and, thus, is directly subject to certain aspects of FERC’s jurisdiction.


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Under section 210 of the FPA, TVA can be ordered to interconnect its transmission facilities with the electrical facilities of qualified generators and other electric utilities that meet certain requirements.  It must be found that the requested interconnection is in the public interest and would encourage conservation of energy or capital, optimize efficiency of facilities or resources, or improve reliability.  The requirements of section 212 concerning the terms and conditions of interconnection, including reimbursement of costs, must also be met.

Under section 211 of the FPA, TVA can be ordered to transmit power at wholesale rates provided that the order (1) does not impair the reliability of the TVA or surrounding systems and (2) meets the applicable requirements of section 212 concerning terms, conditions, and rates for service.  Under section 211A of the FPA, TVA is subject to FERC review of the transmission rates and the terms and conditions of service that TVA provides others to ensure comparability of treatment of such service with TVA’s own use of its transmission system and that the terms and conditions of service are not unduly discriminatory or preferential.  The anti-cherrypicking provision of section 212 of the FPA precludes TVA from being ordered to wheel another supplier’s power to a customer if the power would be consumed within TVA’s defined service territory.

Sections 221 and 222 of the FPA, applicable to all market participants, including TVA, prohibit (1) using manipulative or deceptive devices or contrivances in connection with the purchase or sale of power or transmission services subject to FERC’s jurisdiction and (2) reporting false information on the price of electricity sold at wholesale or the availability of transmission capacity to a federal agency with intent to fraudulently affect the data being compiled by the agency.

Under section 215 of the FPA, TVA must comply with certain standards designed to maintain transmission system reliability.  These standards are approved by FERC and enforced by the Electric Reliability Organization.

Section 206(e) of the FPA provides FERC with authority to order refunds of excessive prices on short-term sales (transactions lasting 31 days or less) by all market participants, including TVA, in market manipulation and price gouging situations if such sales are under a FERC-approved tariff.

Section 220 of the FPA provides FERC with authority to issue regulations requiring the reporting, on a timely basis, of information about the availability and prices of wholesale power and transmission service by all market participants, including TVA.

Under sections 306 and 307 of the FPA, FERC may investigate electric industry practices, including TVA’s operations previously mentioned that are subject to FERC’s jurisdiction.

Under sections 316 and 316A of the FPA, FERC has authority to impose civil penalties of up to $1 million a day for each violation on entities subject to the provisions of Part II of the FPA, which includes the above provisions applicable to TVA.  Criminal penalties may also result from such violations.

Finally, while not required to do so, TVA has elected to implement various FERC orders and regulations pertaining to public utilities on a voluntary basis to the extent that they are consistent with TVA’s obligations under the TVA Act.

Nuclear Regulatory Commission

TVA operates its nuclear facilities in a highly regulated environment and is subject to the oversight of the NRC, an independent agency which sets the rules that users of radioactive materials must follow.  The NRC has broad authority to impose requirements relating to the licensing, operation, and decommissioning of nuclear generating facilities.  In addition, if TVA fails to comply with requirements promulgated by the NRC, the NRC has the authority to impose fines, shut down units, or modify, suspend, or revoke TVA’s operating licenses.

Environmental Protection Agency

TVA is subject to regulation by the EPA in a variety of areas, including air quality control, water quality control, and management and disposal of hazardous wastes.  See Environmental Matters.

States

The Supremacy Clause of the U.S. Constitution prohibits states, without congressional consent, from regulating the manner in which the federal government conducts its activities.  As a federal agency, TVA is exempt from regulation, control, and taxation by states except in certain areas such as air and water quality where Congress has given the states limited powers to regulate federal activities.


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Other Federal Entities

TVA’s activities and records are also subject to review to varying degrees by other federal entities, including the Government Accountability Office and the Office of Management and Budget.  There is also an Office of the Inspector General which reviews TVA’s activities and records.

Taxation and Tax Equivalents

TVA is not subject to federal income taxation.  In addition, neither TVA nor its property, franchises, or income is subject to taxation by states or their subdivisions.  Section 13 of the TVA Act does, however, require TVA to make tax equivalent payments to states and counties in which TVA conducts power operations or in which TVA has acquired power-producing properties previously subject to state and local taxation.  The total amount of these payments is five percent of gross revenues from the sale of power during the preceding year excluding sales or deliveries to other federal agencies and off-system sales with other utilities, with a provision for minimum payments under certain circumstances.  Except for certain direct payments TVA is required to make to counties, distribution of tax equivalent payments within a state is determined by individual state legislation.

Environmental Matters

TVA’s power generation activities, like those across the utility industry and in other industrial sectors, are subject to most federal, state, and local environmental laws and regulations.  Major areas of regulation affecting TVA’s activities include clean air control, water quality control, and management and disposal of solid and hazardous wastes.  In the future, regulations in all of these areas are expected to become more stringent and to apply to additional emissions and sources.

Clean Air Regulations

The CAA establishes a comprehensive program to protect and improve the nation’s air quality and control sources of air emissions.  The major CAA programs that affect TVA’s power generation activities are described below.

National Ambient Air Quality Standards.  The CAA requires the EPA to set minimum National Ambient Air Quality Standards (“NAAQS”) for certain air emissions and the EPA has done this for ozone, particulate matter ("PM"), sulfur dioxide ("SO2 "), and nitrogen dioxide (“NO2”).  The CAA established two types of NAAQS: (1) primary standards, which set limits to protect public health, and (2) secondary standards, which set limits to protect public welfare.  Most NAAQS require measurement over a defined period of time (typically one hour, eight hours, twenty-four hours, or one year) to determine the average concentration of the pollutant present in a defined geographic area.

When a NAAQS has been established, each state must recommend, and the EPA must designate, the areas within its boundaries that meet NAAQS (“attainment areas”) and those that do not (“non-attainment areas”).  Each state must develop a state implementation plan (“SIP”) to bring non-attainment areas into compliance with NAAQS and maintain good air quality in attainment areas.  Non-attainment designations can have serious repercussions by, among other things, causing states to impose stricter controls on industrial facilities, including TVA’s power plants, and complicating the air permitting process for the construction, expansion, or modification of industrial facilities.  If counties in which TVA facilities are located are designated as non-attainment for one or more types of emissions, TVA’s expansion or modification plans could be affected, possibly resulting in increased costs or schedule delays.  The NAAQS that affect or potentially affect TVA operations are summarized below.

NAAQS for Ozone.  In March 2008, the EPA issued final rules adopting new, more stringent eight-hour NAAQS for ozone.  The EPA lowered the primary standard from 84 parts per billion to 75 parts per billion and promulgated a new secondary standard that is the same as the primary standard.  Virtually all of the larger cities in the TVA service area, as well as those rural counties where ozone monitors are present, will likely be designated as non-attainment areas under the new standard.  States must submit to the EPA no later than CY 2014 plans that demonstrate attainment with the standard.  Areas must reach attainment by deadlines that vary (CY 2016 to CY 2030) depending on the severity of the ozone problem.

On January 19, 2010, the EPA published a proposed rule that would establish more stringent primary and secondary ozone NAAQS.  The EPA announced that it planned to publish the final rule with the new ozone standards before the end of CY 2011.  However, on September 2, 2011, the EPA decided to reconsider the proposal at the request of the White House.  This effectively leaves the 75 parts per billion ozone standard in place until the required review in 2013.  As the ozone standards become more stringent, utilities are expected to come under increasing pressure to further reduce nitrogen oxides ("NOx") emissions from their existing fossil plants.

NAAQS for Particulate Matter.  The EPA has developed annual NAAQS for coarse particulate matter (defined as particles of 10 micrometers or larger) and both annual and 24-hour NAAQS for fine particulate matter (particles with a size of up to 2.5 micrometers).  The EPA has stated they will not be changing the current standard for coarse particulate matter. On October 8, 2009, the EPA issued non-attainment designations for areas not meeting the 24-hour NAAQS for fine particulate matter.   In the TVA service area, some counties have been designated as non-attainment.  TVA operates coal-fired power plants in Anderson and Roane Counties, which have been designated as

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non-attainment. TVA also operates a coal-fired plant in Jackson County, Alabama, and part of that county is designated non-attainment for the annual fine particulate standard.  State and some local governments will be required to take steps to control fine particulate pollution affecting these non-attainment areas.  Those steps may include stricter controls on industrial facilities, possibly including TVA’s power plants, and additional planning requirements for transportation-related sources.  States must submit their SIPs to the EPA within three years after the EPA makes final nonattainment area designations.  Areas are required to attain the standard no later than five years after the effective date of the designations.  The EPA may grant attainment date extensions for up to five additional years in areas with more severe fine particulate matter problems as well as in areas where emissions control measures are not available or feasible.  The EPA is currently reconsidering the annual and 24-hour fine particulate standards, and if lowered as expected, it is likely that there will be additional non-attainment designations in the TVA service area.

NAAQS for SO2.  On June 2, 2010, the EPA established a new one-hour SO2 NAAQS at 75 parts per billion and revoked the 24 hour and annual SO2 NAAQS.  The EPA expects to designate areas as attainment, non-attainment, or unclassifiable by January 2012 based on the existing monitoring network.  The State of Tennessee has submitted two areas in the state to the EPA to be considered for non-attainment designations.  These recommended designations are based on actual monitoring data from these areas.  Non-attainment designations are expected to result in lower SO2 emission limits for sources of SO2 in or near these areas.  The EPA expects to make attainment designations based on modeling by 2015.  Several areas in the TVA service area are expected to be designated non-attainment, and the new standard is expected to make permitting for some new and modified sources, including TVA sources, more difficult.  SO2 emission reductions from some existing TVA and industrial sources may be required.

NAAQS for NO2.  On January 22, 2010, the EPA established a new one-hour NAAQS for NO2 at the level of 100 parts per billion.  To determine compliance with the new standard, the EPA is establishing new ambient air monitoring requirements near major roads as well as in other locations where maximum concentrations are expected.  Although existing air quality monitors do not currently show exceedances of this new standard in the TVA service area, additional community and roadside monitoring is expected to result in the designation of new non-attainment areas.  The EPA intends to re-designate areas in CY 2016 or CY 2017, as appropriate, based on the air quality data from the new monitoring network.  This new short-term standard could make permitting new and modified sources, including TVA sources, more difficult.  Several areas in the TVA service area are expected to be designated non-attainment.  The EPA considers the TVA service areas as unclassifiable until the required monitoring is completed.

New Source Review.  The NSR provisions of the CAA require persons constructing new major air emission sources or making major modifications to existing air pollution sources to obtain a permit prior to such construction or modifications.  Major modifications are non-routine physical or operational changes that increase the emissions from an air emission source above specified thresholds.  In order to proceed with a project, the facility must first obtain a permit which requires the identification and implementation of Best Available Control Technology (“BACT”) for all regulated air pollutants emitted above the prescribed thresholds and an analysis of the ambient air quality impacts of the new construction or major modification.  In 1999, the EPA announced plans to actively pursue NSR enforcement actions against electric utilities for making changes to their coal-fired power plants without obtaining an NSR permit.  Under section 114 of the CAA, the EPA has the authority to request from any person who owns or operates an emission source information and records about operation, maintenance, and emissions as well as other data relating to such source for the purpose of developing regulatory programs, determining if a violation occurred (such as the failure to comply with NSR), or carrying out other statutory responsibilities.  If violations are found to have occurred, the EPA or, possibly, other enforcement authorities could require the installation of new pollution control equipment and could impose fines and penalties.  See Current Power SupplyCoal-Fired and Note 20 — Legal ProceedingsEnvironmental Agreements, Case Involving Alleged Violations of the New Source Review Regulations at Bull Run,John Sevier Fossil Plant Clean Air Act Permit,Paradise Fossil Plant Clean Air Act Permit, Shawnee Fossil Plant Clean Air Act Permit, and — Information Request from the EPA for a discussion of the Environmental Agreements into which TVA entered that resolve most issues concerning NSR. Possible claims for NSR violations involving increases in greenhouse gases (“GHG”) and sulfuric acid mist from projects can still be pursued in the future.

Cross State Air Pollution Rule. On July 7, 2011, the EPA announced the final Cross State Air Pollution Rule ("CSAPR"). This rule, required by court order, will replace the existing Clean Air Interstate Rule ("CAIR") effective January 1, 2012.  CSAPR will regulate SO2 and NOx emissions from upwind states that are negatively impacting ozone and fine particulate air quality in downwind states. This rule will affect electrical generating utilities within 27 states, including TVA coal and gas-fired plants in Alabama, Kentucky, Mississippi, and Tennessee. Stringent state level emission caps for SO2 and NOx will begin in 2012 with further reductions required in 2014 for some states. TVA is in the process of evaluating the impact of the rule. On October 6, 2011, the EPA proposed revisions to CSAPR which will allow slightly more ozone season NOx emissions in Mississippi, where TVA has purchased a combined cycle natural gas plant. It also proposes to reduce the SO2 and NOx allowances allocated to coal-fired plants in Alabama, Kentucky, and Tennessee to match the more stringent requirements of the Environmental Agreements for the years 2013, 2018, and 2019.

Hazardous Air Pollutants from Industrial, Commercial, and Institutional Boilers.  On March 21, 2011, the EPA published a final rule to establish standards for hazardous air pollutants emitted from industrial, commercial, and institutional boilers and process heaters.  The final rule will have minor impacts beginning in CY 2014 for some of TVA’s startup and auxiliary boilers. Most boilers will require scheduled maintenance to ensure optimized combustion, and a few may require the installation of

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controls.  Concurrently with the issuance of the rule, the EPA announced reconsideration of several elements in the rule.  Until the reconsideration process is completed, final specific requirements are too uncertain to predict.  The EPA expects to issue final standards by the end of April 2012.

Hazardous Air Pollutants from Steam Electric Utility Units.  On March 16, 2011, the EPA released for public comment a proposed rule to establish standards for hazardous air pollutants emitted from steam electric utility units.  As proposed, the rule would require additional controls for hazardous air pollutants including mercury, non-mercury metals, and acid gasses for many of TVA’s coal-fired units in the 2015-2016 timeframe.  Boiler combustion systems will require scheduled maintenance to ensure optimized combustion to minimize emissions of organic hazardous air pollutants.  TVA may choose to idle or retire some units in lieu of investing in additional controls.  The EPA also is proposing to revise the New Source Performance Standards (“NSPS”) for new and reconstructed coal and oil-fired units for emissions of PM, SO2, and NOx.  New PM and NOx standards for modified units are also included in the NSPS.  The EPA intends to issue the final rule for utility hazardous air pollutants in December 2011.  Until the final rules are published, specific requirements are too uncertain to predict.

The Environmental Agreements.  The Environmental Agreements became effective on June 13, 2011.  These Agreements settled several outstanding legal challenges resulting in TVA agreeing to pay, among other payments, a total of $10 million in civil penalties to the EPA, Alabama, Kentucky, and Tennessee.  In the agreements TVA agreed to retire 18 coal-fired units by the end of 2017 and to remove from service, control, convert, or retire an additional 16 units by June 20, 2019.  See Note 20 — Legal ProceedingsEnvironmental Agreements.

Multi-Pollutant Legislation.  The U.S. Congress has expressed interest in prior years in adopting multi-pollutant control legislation focused on the electric power sector.  Among other things, such an approach could seek to establish coordinated caps for power plant emissions of mercury, SO2, NOx, and, in some cases, carbon dioxide ("CO2").  TVA cannot predict whether multi-pollutant legislation will ultimately become law.  The legislative and regulatory landscape is continuing to change for these and other issues, and the outcome cannot be predicted accurately at this time.

Acid Rain Program.  Congress established the Acid Rain Program to achieve reductions in emissions of SO2 and NOx, the primary causes of acid rain.  The program includes a cap-and-trade emission reduction program for SO2 emissions from power plants.  By CY 2000, the program established a nationwide cap on power plant SO2 emissions of 8.9 million tons per year.  The program also contains requirements for power plants to reduce NOx emissions through the use of available combustion controls. The EPA's CAIR and CSAPR programs are more stringent in the Tennessee Valley region than the Acid Rain Program legislation established by Congress. Therefore, TVA forecasts that the Acid Rain Program will have no impact on TVA other than administrative reporting.

Regional Haze Program.  On June 15, 2005, the EPA issued the Clean Air Visibility Rule, amending its CY 1999 regional haze rule, which had established time lines for states to improve visibility in national parks and wilderness areas throughout the United States.  Under the amended rule, certain types of older sources may be required to install best available retrofit technology.  To comply with this requirement, certain utilities, including TVA, may have to install additional controls for particulate matter, SO2, and NOx emissions. TVA does not anticipate that this program has the potential to impact any unit other than Colbert Unit 5.
 
Opacity.  Opacity, or visible emissions, measures the denseness (or color) of power plant plumes and has traditionally been used by states as a means of monitoring good maintenance and operation of particulate control equipment.  Under some conditions, retrofitting a unit with additional equipment to better control SO2 and NOx emissions can adversely affect opacity performance, and TVA and other utilities are addressing this issue.  The evaluation of a utility’s compliance with state opacity requirements is coming under increased scrutiny, especially compliance during periods of startup, shutdown, and malfunction. SIPs developed under the CAA typically exclude periods of startup, shutdowns, and malfunctions.  The EPA recently reversed its previous approval of Alabama's SIP for opacity and this has been challenged in court.

Climate Change

Legislation.  Although it is unlikely that climate change legislation will pass during the 112th Congress, Congress may consider climate change and energy-related proposals.  It is not unreasonable to anticipate that new EPA regulations or laws may set limits on GHG emissions for the electric utility sector.  Prospects for future proposals becoming law, and the resulting potential impact on electric rates, are not clear at this time.  However, if GHG emission reductions from electricity generating facilities become mandatory, the costs and impacts are expected to be significant, especially for coal-fired plants.

Regulation.  On April 2, 2007, the U.S. Supreme Court issued a decision in Massachusetts v. EPA holding that GHG emissions, including CO2, are “air pollutants” under the CAA and requiring the EPA to determine whether GHGs from new motor vehicles pose a threat to health and welfare.  On December 15, 2009, the EPA published its finding under the CAA that six identified GHGs contribute to air pollution that may endanger public health or welfare, which triggered the statutory requirement that the EPA regulate emissions of GHGs from motor vehicles.  CAA permitting programs for stationary sources must now, as of January 2011, also address GHGs.

PSD/Title V Permitting Programs.  On May 13, 2010, the EPA issued a final rule to establish applicability thresholds that

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trigger reviews under the Prevention of Significant Deterioration ("PSD") and Title V permitting programs for GHG emissions from major stationary sources.  The threshold levels established by this rule, known as the Tailoring Rule, include both a mass-based calculation and a metric known as the carbon dioxide equivalent (“CO2e”), which incorporates the global warming potential for each of the six individual gases identified in the endangerment finding.  This final rule “tailors” the requirements of these CAA permitting programs to designate which facilities will be required to obtain PSD and Title V permits.  Under the Tailoring Rule, the EPA will phase in the CAA permitting requirements for emissions of GHG from stationary sources in at least three phases, the first two of which are relevant to large GHG sources such as TVA’s coal-fired generation facilities.

The first phase of the Tailoring Rule became effective January 2, 2011, and applies only to sources that were already subject to PSD and/or Title V programs because of their emission levels of other regulated pollutants.  Under the first phase, a source will be subject to PSD requirements for GHGs if (1) the source is already subject to PSD requirements for another pollutant and (2) the source increases its GHG emissions by at least 75,000 tons per year on a CO2e basis.  Those sources may be required to conduct a BACT review for their GHG emissions.  The EPA has issued guidance on the technologies or operations that would constitute BACT for GHGs.  Pending the commercial demonstration of technologies such as carbon capture and sequestration, it is expected that the use of energy efficiency measures will constitute BACT.   Additionally, under the first phase, any source that was required to have a Title V permit for a non-GHG pollutant is required to address GHG requirements, including monitoring, record keeping, and reporting requirements, when it applies for, renews, or revises its Title V permit.

The second phase of the Tailoring Rule became effective July 1, 2011, and, unlike the first phase, is not limited to sources that are already subject to PSD and/or Title V programs.  Under the second phase, the EPA has established different thresholds for construction and modification activities.  Construction of a major source will become subject to PSD requirements for GHGs if the construction results in an increase in GHG emissions of at least 100,000 tons per year on a CO2e basis.  The modification of an existing major source will become subject to PSD requirements for GHGs if the modification results in an increase in GHG emissions of at least 75,000 tons per year on a CO2e basis.  Additionally, under the second phase, sources that emit GHGs in an amount equal to at least 100,000 ton per year on a CO2e basis will be required to obtain a Title V permit if they do not have one already.

New Source Performance Standards for GHG Emissions.  In December 2010, the EPA entered into a settlement agreement with various states and environmental groups that establishes a schedule for setting new standards for regulating GHG emissions from oil and coal-fired electric generating units.  On June 13, 2011, the EPA and these states and environmental groups agreed to a two-month postponement of the EPA’s deadline to propose GHG limits on new and modified power plants.  The original deadline for the EPA to propose NSPS standards for power plants was July 26, 2011.  The deadline was extended to September 30, 2011, but the EPA announced that it will miss that deadline and is working on developing a new schedule for the rule.  The original deadline for the final rule was May 26, 2012, but it is possible that the EPA will request an extension for the final rule deadline.  These rules will affect TVA, but the extent of the impact is not yet known.

Biomass CO2 Emissions.  On July 1, 2011, the EPA’s final rule that determined that GHG emissions from biomass combustion will not be counted toward emission thresholds for PSD and Title V permitting under the second phase of the EPA’s Tailoring Rule for a period of three years became effective.  During this three-year interim period, the EPA will examine how to evaluate CO2 emissions from biomass.  The EPA released a companion document that provides guidance for the determination of BACT in PSD proceedings involving biogenic CO2 emissions from bioenergy facilities.

GHG Emission Reporting.  On October 30, 2009, the EPA published the final rule for mandatory monitoring and annual reporting of GHG emissions from various categories of facilities, including fossil fuel suppliers, industrial gas suppliers, direct GHG emitters (such as electric generating facilities), and manufacturers of heavy-duty and off-road vehicles and engines.  This rule does not require controls or limits on emissions, but requires data collection beginning January 1, 2010, with the first annual reports due on September 30, 2011.  The requirements for monitoring, reporting, and record keeping with respect to GHG emissions from existing units should not have a material impact on TVA.

Executive Orders. In October 2009, President Obama signed Executive Order (“EO”) 13514, which requires federal agencies to establish GHG emission reduction targets and prepare inventories of GHG emissions including emissions of CO2, methane, nitrous oxide, hydroflourocarbons, perfluorocarbon gases, and sulfur hexafluoride.  The White House Council on Environmental Quality (“CEQ”) released final Federal Greenhouse Gas Accounting and Reporting Guidance on October 6, 2010, which is the basis for these inventories. TVA submitted its first Strategic Sustainability Performance Plan to OMB in June 2010 and updated it per the Executive Order.

In March 2011, the CEQ issued formal guidance to federal agencies on the development of climate change adaptation plans, intended to assist those agencies in fulfilling the requirements of EO 13514.  Pursuant to EO 13514, TVA incorporated climate change-related considerations into its existing planning processes, including the development of measurable goals and performance metrics to guide adaptation efforts and assess whether efforts are achieving desired outcomes. TVA completed all 2011 EO 13514 requirements.
  
International Accords.  The Kyoto Protocol was adopted in 1997 by the United Nations to address global climate change by reducing emissions of CO2 and other GHGs.  Although the United States has not adopted the Kyoto Protocol, the

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United States pledged to reduce its GHG emissions in the range of 17 percent below CY 2005 levels by CY 2020 in connection with the 15th Conference of the Parties to the United Nations Framework Convention on Climate Change.  An act of the U.S. Congress is required to make such a reduction in GHG emissions enforceable.  TVA is unable to predict whether any such climate-related legislation requiring such reductions in GHG emissions ultimately will become law.

Litigation.  In addition to legislative activity, climate change issues are the subject of a number of lawsuits, including lawsuits against TVA.  See Note 20 — Legal Proceedings Cases Arising out of Hurricane Katrina and — Global Warming Cases, Southern District of New York.

Indirect Consequences of Regulation or Business Trends.  Legal, technological, political, and scientific developments regarding climate change may create new opportunities and risks.   The potential indirect consequences could include an increase or decrease in electricity demand, increased demand for generation from alternative energy sources, and subsequent impacts to business reputation and public opinion.  See Future Power Supply.

Physical Impacts of Climate Change.  The United States Global Change Research Program has concluded, in its 2009 Global Climate Change Impacts in the U.S., that warming of the climate is unequivocal and that the warming observed over the past 50 years is due primarily to human-induced emissions of GHGs.  Climate change creates physical and financial risk. Physical risks from climate change may include an increase in sea level and changes in weather conditions, such as changes in precipitation and extreme weather events.  TVA does not serve any coastal communities, so the possibility of sea level rise does not directly affect TVA or its customers.  Changes in weather conditions, primarily temperature and humidity, will vary TVA’s customers’ energy needs.  Energy use may increase or decrease depending on the duration and magnitude of the changes, having a positive or negative effect on TVA revenues.  To the extent climate change impacts the economic health of the TVA service area, it will also impact TVA’s revenues as TVA’s financial performance is tied to the regional economies it serves.

In November 2009, EPRI published a report entitled Potential Impacts of Climate Change on Natural Resources in the Tennessee Valley Authority Region (the “EPRI Report”).  TVA co-sponsored this report, with the objective of providing preliminary information on climate change impacts across the TVA service area.  The EPRI Report was based on data from the Fourth Assessment Report of the Interagency Panel on Climate Change published in CY 2007.  Subject to substantial uncertainties, the EPRI Report predicted that future (2020-2100) precipitation in the TVA service area will increase approximately three percent during the winter and will be unchanged over the summer in the eastern portion of the TVA service area, but will decline six to seven percent over the western portion of TVA’s service area.  In addition, extreme weather events such as droughts and floods are also expected to become more frequent, although their frequency is difficult to quantify.  The EPRI Report also predicted that temperatures could increase across the TVA service area by approximately one degree Celsius by 2020, two degrees Celsius by 2050, and three to four degrees Celsius by 2100.

If realized, projected changes in precipitation and increasing temperatures could impact future TVA management of water resources in the Tennessee Valley in the following ways:

Power generation.  Power generation depends on having sufficient water flow available for hydroelectric generation.  Hydroelectric generation will depend on the precipitation runoff within each reservoir drainage basin and the upstream flow into each reservoir.  Power generation also depends on having water available for cooling fossil and nuclear power plants.  Cooling water is withdrawn and then returned to the source.  Increasing water temperatures would require withdrawing more water to achieve the same amount of cooling at fossil and nuclear power plants, increasing the cooling capacities of plants, or reducing power generation to match the available water supply.  See Water Quality Control Developments.

Agricultural, municipal, and industrial uses.  Agricultural, municipal, and industrial water uses are driven by temperature and extreme weather.  Warmer temperatures and drought will increase water demand for these purposes.

Navigation.  Commercial navigation relies on maintaining the minimum channel depth as well as reasonable flow rates. Increasingly frequent extreme weather events (drought episodes and flooding) may create more challenges to maintaining the entire length of a commercial navigation channel.
 
Aquatic life.  Water quality impacts the aquatic life dependent on the river system. Changes in water flow due to the increasing frequency of extreme weather events may impact the habitats and biodiversity of the Tennessee River system.

As changes in future precipitation and temperature develop, the current river management system employed by TVA may require periodic re-evaluations to balance the competing water use interests across the Tennessee Valley.

Actions Taken by TVA to Reduce GHG Emissions.  TVA has taken significant voluntary steps to reduce GHG emissions, including the following:

As discussed earlier in this Item 1, Business, TVA has increased its nuclear capacity, modernized its hydroelectric program, increased its purchases of renewable resources, and helped reduce demand for electricity through its

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energy efficiency initiatives.

In 2011, TVA began planting carbon sequestration test plots near Watts Bar Dam in Rhea County, Tennessee.  The test plots are designed to demonstrate the beneficial use of two types of vegetation in the terrestrial sequestration of CO2.  While TVA has a long history of tree planting and reforestation efforts, this project is the first time TVA is planting trees to generate offsets from CO2 sequestration.  The project will also evaluate growing biomass as a sustainable energy crop and investigate how terrestrial CO2 sequestration, wildlife habitat, and land protection can be integrated with environmental stewardship.

TVA is a member of the Southeast Regional Carbon Sequestration Partnership and is working with EPRI and other electric utilities on projects investigating technologies for CO2 capture and geologic storage, as well as CO2 sequestration via reforestation. TVA is also a federal agency participant in the Southeast Climate Center and the Appalachian Landscape Conservation Cooperative.

Under the Environmental Agreements, TVA agreed to significantly reduce its reliance on coal-fired generation in the future.  See Current Power SupplyCoal-Fired for a discussion of the Environmental Agreements and TVA’s plans with respect to coal-fired generation.

In August 2011, the TVA Board approved the completion of Bellefonte Unit 1.  This unit is expected to be completed by 2020 and to provide approximately 1,260 MW of capacity.

TVA’s CO2 Emissions.  In FY 2011, TVA produced about 85 million tons of CO2.  Historically, TVA has produced about 100 million tons of CO2 per year.  TVA produced less CO2 in 2011 because of a decrease in coal-fired generation.

Renewable Energy Standards

It is unclear whether the U.S. Congress will adopt a law that will require TVA to acquire a certain percentage of electric generation from a specified list of eligible renewable energy technologies. Under legislation proposing a federal renewable energy standard, TVA would likely be required to ensure that a certain percentage of the electricity it sells is produced by defined renewable energy sources.  Although TVA considers all hydroelectric generation a renewable source, it is unlikely all hydroelectric generation will contribute to a future renewable portfolio standard requirement.  Some proposals would allow utilities to count hydroelectric facility upgrade generation as renewables for these purposes. In addition, utilities may be allowed to pay alternative compliance payments if the required percentage of electricity generation by renewable energy sources could not be met because of certain restrictions.

Some states have established various requirements for electric utilities to generate a certain amount of electricity from renewable sources, including one state in the TVA service area (North Carolina). The North Carolina program does not apply directly to TVA but does apply to TVA distributor customers located in that state.  TVA's policy is to provide compliance assistance to any distributor of TVA power, and TVA is providing assistance to the four distributors that sell TVA power in North Carolina.

Water Quality Control Developments

The EPA proposed a new rule on March 28, 2011, designed to minimize the adverse impacts to fish and shellfish from the design and operation of cooling water intake structures at existing power plants.  The new rule identifies proposed changes in the operation of cooling water intakes and modifications to their design.  All of the intakes at TVA’s existing coal-fired and nuclear generating facilities are likely to be subject to the new rule.  Because of the uncertainty of the final rule development, the impacts of the rulemaking are uncertain at this time.  However, compliance with the final rule could potentially result in significant increases in TVA’s capital costs and operating and maintenance costs.

The EPA and many states are taking increased interest in potential effects of hydrothermal discharges.  TVA is working with states and the EPA to demonstrate that the data collected in the vicinity of TVA plants is sufficient to assess the impacts of thermal discharges on the aquatic environment and validate existing thermal limits.  TVA expects to collect substantially more in-stream biological and temperature data than in the past to justify current thermal limits.  Specific data requirements in the future will be determined based on negotiations between TVA and regulators.

Water temperature issues at TVA’s Cumberland Fossil Plant ("Cumberland") continue to be complicated by reduced flows in the Cumberland River due to ongoing repairs at Wolf Creek and Center Hill dams initiated by the U.S. Army Corps of Engineers in CY 2007.  The greatly reduced flows, combined with thermal discharges at Cumberland, have resulted in increased stress to aquatic organisms and have contributed to a portion of Barkley Reservoir being included on the State of Tennessee’s CY 2008 list of impaired waters.  The lower river flows are expected to continue to impact TVA’s ability to operate Cumberland at normal rates, which may result in increased spending for power purchases. TVA continues to work with the U.S. Army Corps of Engineers and TDEC to alleviate aquatic impacts in the Barkley Reservoir and to improve the conditions in the reservoir.

The effluent guidelines required by the Clean Water Act for the Steam Electric Power Generating Category were last

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revised by the EPA in CY 1982.  The EPA is currently conducting studies and surveys of wastewater discharges from the industry, and is expected to issue a proposed rule to revise the existing guidelines in CY 2012.  A future rule is expected to focus on wastewaters from ash handling and clean air control systems. The revised effluent guidelines are likely to require more restrictive discharge limitations through more advanced wastewater treatment, resulting in significant additional expenditures to meet the new requirements.

As is the case in other industrial sectors, TVA and other utilities are also facing more stringent requirements related to the protection of wetlands, reductions in storm water impacts from construction activities, new water quality criteria for nutrients and other pollutants, wastewater analytical methods, and regulation of herbicide discharges.  In addition, other new environmental requirements under the Clean Water Act related to mountain top mining of coal in the Appalachian region may result in additional increases in the costs of fuel for TVA’s coal-fired power plants.

Cleanup of Solid and Hazardous Wastes

Liability for releases and cleanup of hazardous substances is primarily regulated under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), and other federal and parallel state statutes.  In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years.

Non-TVA Sites.  TVA is aware of alleged hazardous-substance releases at eight non-TVA areas for which it may have some liability.  There is little or no known evidence that TVA contributed any significant quantity of hazardous substances to six of the non-TVA areas.  There is evidence that TVA sent some materials to the remaining two non-TVA sites: the David Witherspoon site in Knoxville, Tennessee and the Ward Transformer site in Raleigh, North Carolina.

David Witherspoon Site.  The David Witherspoon site in Knoxville, Tennessee, was contaminated with radionuclides, polychlorinated biphenyls (“PCBs”), and metals.  The DOE admitted to being the main contributor of materials to the site and cleaned the site up at a reported cost of about $35 million.  Although the DOE asked TVA to “cooperate” in completing the cleanup, TVA believes it sent only a relatively small amount of equipment to the site and that none of it was radioactive; accordingly, TVA believes that its liability for these cleanup costs is limited.

Ward Transformer Site.  The Ward Transformer site in Raleigh, North Carolina, is contaminated by PCBs from electrical equipment.  There is documentation showing that TVA sent a limited amount of electrical equipment containing PCBs to the site in CY 1974.  A working group of potentially responsible parties (the “PRP Work Group”) is cleaning up on-site contamination in accordance with an agreement with the EPA.  The cleanup effort has been divided into four areas: two phases of soil cleanup; cleanup of off-site contamination in the downstream drainage basin; and supplemental groundwater remediation.  The cost estimate for the first phase of soil cleanup is approximately $55 million.  The cost estimate for the second phase of soil cleanup is $10 million.  Estimates for cleanup of off-site contamination in the downstream drainage basin range from $6 million to $25 million.  There are no reliable estimates for the supplemental groundwater remediation phase.  On April 30, 2009, the PRP Work Group filed an amended complaint in federal court against potentially responsible parties who had not yet settled, including TVA, regarding the two phases of soil cleanup.  TVA settled this lawsuit and its potential liability for the two phases of soil cleanup for $300 thousand and has been dismissed as a party.  Although the settlement with respect to the first two phases does not prohibit TVA from having liability in connection with the other two phases or any natural resource damages, the U.S. Department of Justice is attempting to negotiate a government-wide settlement of the liability of all federal agencies (including TVA) for cleanup of offsite contamination in the downstream drainage basin and the investigative portion of the supplemental groundwater remediation.

TVA operations at some TVA facilities have resulted in oil spills and other contamination that TVA is addressing. At September 30, 2011, TVA’s estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate is approximately $22 million and is included in Other liabilities on the Balance Sheet.

Coal Combustion Wastes

On May 4, 2010, the EPA released the text of a proposed rule describing two possible regulatory options it is considering under the Resource Conservation and Recovery Act (“RCRA”) for the disposal of coal combustion wastes ("CCWs") generated from the combustion of coal by electric utilities and independent power producers.  Under either option, the EPA would regulate the construction of impoundments and landfills, and seek to ensure both the physical and environmental integrity of disposal facilities. CCWs include fly ash, bottom ash, boiler slag, and flue gas desulfurization materials. If these materials are beneficially reused, they are referred to as coal combustion products ("CCP"). If these materials are destined for disposal, they are referred to as CCRs.

Under the first proposed regulatory option, the EPA would list CCRs destined for disposal in landfills or surface impoundments as “special wastes” subject to regulation under Subtitle C of RCRA.  Subtitle C regulations set forth the EPA’s hazardous waste regulatory program, which regulates management and disposal of wastes.  The proposed rule would create a new category of waste so that CCRs would be subject to many of the Subtitle C regulatory requirements.  Under this option, coal

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ash would be subject to technical requirements from the point of generation to final disposal.  Transporters and treatment, storage, and disposal facilities would be subject to federal requirements and permits.  The EPA is considering imposing disposal facility requirements such as liners, groundwater monitoring, fugitive dust controls, financial assurance, corrective action, closure of units, and post-closure care.  This first option also proposes requirements for dam safety and stability for surface impoundments, land disposal restrictions, treatment standards for coal ash, and a prohibition on the disposal of treated CCRs below the natural water table.  This first option would not apply to certain beneficial reuses of CCWs.

Under the second proposed regulatory option, the EPA would regulate the disposal of CCRs under Subtitle D of RCRA, the regulatory program for non-hazardous solid wastes.  Under this option, the EPA is considering issuing national minimum criteria to ensure the safe disposal of CCRs, which would subject disposal units to location standards, composite liner requirements, groundwater monitoring, corrective action standards for releases, closure and post-closure care requirements, and requirements to address the stability of surface impoundments.  This second option would not regulate the storage or treatment of CCRs prior to disposal, and no federal permits would be required.

The proposed rule also states that the EPA is considering listing CCRs as a hazardous substance under CERCLA, and includes proposals for alternative methods to adjust the statutory reportable quantity for CCRs.  The extension of CERCLA to CCRs could significantly increase TVA’s liability for cleanup of past and future CCR disposal.

The EPA has not announced which regulatory approach it will take with respect to the management and disposal of CCWs.  TVA is therefore unable to determine the effects of this proposed rule at this time.

Kingston Ash Spill

See Note 8 for a discussion of the environmental issues associated with the Kingston ash spill.

 Environmental Investments

From 1977 to 2011, TVA spent approximately $5.4 billion to reduce emissions from its power plants, including $34 million, $58 million, and $172 million in 2011, 2010, and 2009, respectively.  Among other things, TVA has taken the following steps to reduce emissions:

SO2 Emissions.  To reduce SO2 emissions, TVA installed scrubbers on 17 of its coal-fired units, and switched to lower-sulfur coals at 41 coal-fired units.  In addition, in August 2011, the TVA Board approved adding scrubbers to three units at Allen Fossil Plant and four units at Gallatin Fossil Plant.

NOx Emissions.  To reduce NOx emissions, TVA installed SCRs on 21 coal-fired units, installed selective non-catalytic reduction systems on two coal-fired units (although TVA is no longer operating one of these systems because of technical challenges), installed High Energy Reagent Technology systems on seven coal-fired units, installed low-NOx burners or low-NOx combustion systems on 46 coal-fired units, optimized combustion on 12 coal-fired units, and began operating NOx control equipment year round when units are operating (except during maintenance periods) starting in October 2008.

Particulate Emissions.  To reduce particulate emissions, TVA has equipped all of its coal-fired units with scrubbers, mechanical collectors, electrostatic precipitators, or baghouses.

Primarily on account of the actions described above, emissions of NOx on the TVA system have been reduced by 86 percent below peak 1995 levels, and emissions of SO2 on the TVA system have been reduced by 90 percent below 1977 levels. In addition, the actions described above have also provided a co-benefit of reducing hazardous air pollutants, including mercury, at some units.

TVA estimates that compliance with future CAA requirements (excluding GHG requirements) could lead to additional costs of $3.4 billion from 2012 to 2018.   There could be additional material costs if reductions of GHGs, including CO2, are mandated under the CAA or by legislation, or if future legislative, regulatory, or judicial actions lead to more stringent emission reduction requirements for conventional pollutants.  These costs cannot reasonably be predicted at this time because of the uncertainty of such potential actions.

In addition to the costs described above, TVA is planning to invest between $1.5 billion and $2.0 billion to convert wet CCR facilities to dry storage facilities to be completed by 2022.  See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — 2011 ChallengesRegulatory ComplianceCoal Combustion Residuals.

Estimated Required Environmental Expenditures

The following table contains information about TVA’s current estimates on projects related to environmental laws and regulations.

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Air, Water, and Waste Quality Estimated Potential Environmental Expenditures
At September 30, 2011
(in millions)
 
Estimated Timetable
 
 
 
Total Estimated Expenditures
Site environmental remediation costs(1)
2012+
 
 
 
$
22

Coal combustion residuals(2)
2012-2022
 
 
 
$
1,542

Proposed clean air projects(3)
2012-2018
 
 
 
$
3,436

Clean Water Act requirements(4)
2015-2020
 
 
 
TBD*

Notes
(1) Estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate.
(2) Includes closure of impoundments, construction of lined landfills, and construction of dewatering systems.
(3) Includes air quality projects that TVA is currently planning to undertake to comply with existing and proposed air quality regulations, but does not include any projects that may be required to comply with potential GHG regulations.
(4) Compliance plans to meet the requirements of a revised or new implementing rule under Section 316(b) of the Clean Water Act and the EPA’s revised steam electric effluent guidelines will be determined upon finalization of the rules.
 *  TBD – to be determined as regulations become final.

Employees

On September 30, 2011, TVA had 12,893 employees, of whom 4,771 were trades and labor employees.  Under the TVA Act, TVA is required to pay trades and labor workers hired by TVA and certain of its contractors the rate of wages for work of a similar nature prevailing in the vicinity where the work is being performed.  Neither the federal labor relations laws covering most private sector employers nor those covering most federal agencies apply to TVA.  However, the TVA Board has a long-standing policy of acknowledging and dealing with recognized representatives of its employees, and that policy is reflected in long-term agreements to recognize the unions (or their successors) that represent TVA employees.  Federal law prohibits TVA employees from engaging in strikes against TVA.

ITEM 1A. RISK FACTORS

The risk factors described below, as well as the other information included in this Annual Report, should be carefully considered.  Risks and uncertainties described in these risk factors could cause future results to differ materially from historical results as well as from the results anticipated in forward-looking statements.  Although the risk factors described below are the ones that TVA considers significant, additional risk factors that are not presently known to TVA or that TVA presently does not consider significant may also impact TVA’s business operations.  Although the TVA Board has the authority to set TVA’s own rates and may thus mitigate some risks by increasing rates, there may be instances in which TVA would be unable to partially or completely eliminate one or more of these risks through rate increases over a reasonable period of time or at all.   Accordingly, the occurrence of any of the following could have a material adverse effect on TVA’s cash flows, results of operations, and financial condition.
 
New laws, regulations, and administrative orders may negatively affect TVA’s cash flows, results of operations, and financial condition, as well as the way TVA conducts its business.

Because TVA is a corporate agency and instrumentality established by federal law, it may be affected by a variety of laws, regulations, and administrative orders that do not affect other electric utilities.  For example, Congress may enact legislation that expands or reduces TVA’s activities, changes its governance structure, requires TVA to sell some or all of the assets that it operates, reduces or eliminates the United States’s ownership of TVA, or even liquidates TVA.  Although it is difficult to predict exactly how new laws, regulations, and administrative orders may impact TVA, some of the possible effects are described below.

TVA may lose its protected service territory.

TVA’s service area is defined by the fence and protected by the anti-cherrypicking provision.  If Congress were to eliminate or reduce the coverage of the anti-cherrypicking provision but retain the fence, TVA could more easily lose customers that it could not replace within its specified service area.  The loss of these customers could adversely affect TVA’s cash flows, results of operations, and financial condition.
 
The TVA Board may lose its sole authority to set rates for electricity.

Under the TVA Act, the TVA Board has the sole authority to set the rates that TVA charges for electricity, and these rates are not subject to further review.  If the TVA Board loses this authority or if the rates become subject to outside review, there could be material adverse effects on TVA including, but not limited to, the following:

The TVA Board might be unable to set rates at a level sufficient to generate adequate revenues to

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service TVA’s financial obligations, properly operate and maintain its power assets, and provide for reinvestment in its power program; and

TVA might become subject to additional regulatory oversight that could impede its ability to manage its business.
 
TVA may lose responsibility for managing the Tennessee River system.

TVA’s management of the Tennessee River system is important to effective operation of the power system. TVA’s ability to integrate management of the Tennessee River system with power system operations increases power system reliability and reduces costs.  Restrictions on how TVA manages the Tennessee River system could negatively affect its operations.

TVA may lose responsibility for managing real property currently under its control.

TVA's management of certain reservoir shorelines and real property containing power generation and transmission structures is important for navigation, flood control, and the effective operation of the power system.  The integrated management of the shorelines and property assists TVA in fulfilling its overall mission.  Restrictions on or the loss of the authority to manage these properties could negatively affect TVA's operations, change the way it conducts such operations, or increase costs.

TVA may become subject to additional environmental regulation.

New environmental laws, regulations, and orders may become applicable to TVA or the facilities it operates, and existing environmental regulations may be revised or reinterpreted in a way that adversely affects TVA.  Possible areas of future regulation include, but are not limited to, the following:

Greenhouse gases.  Costs to comply with future regulation of CO2 and other GHGs may negatively impact TVA’s cash flows, financial position, and results of operations.  The cost impact of legislation or regulation cannot be determined at this time.

Coal combustion residuals.  The federal government has proposed stronger regulations concerning coal-combustion residuals, and state governments may impose additional regulations.  These regulations may require TVA to make additional capital expenditures, increase operating and maintenance costs, or even lead it to shut down certain facilities.

Renewable energy portfolio standards.  TVA is not currently obligated to provide a percentage of the power it sells from renewable sources but may be required to do so in the future.  Such developments could require TVA to make significant capital expenditures, increase its purchased power costs, or make changes in how it operates its facilities.

Existing laws, regulations, and orders may negatively affect TVA’s cash flows, results of operations, and financial condition, as well as the way TVA conducts its business.

TVA is required to comply with comprehensive and complex laws, regulations, and orders.  The costs of complying with these laws, regulations, and orders are expected to be substantial, and costs could be significantly more than TVA anticipates, especially in the environmental area.  To settle the EPA and other claims involving the NSR violations, TVA agreed to retire 18 units and pay various penalties.  The cost to install the necessary equipment to comply with existing environmental laws, regulations, settlement agreements, and orders at some other facilities may render some facilities uneconomical, which may cause TVA to retire or idle additional facilities.  In addition, TVA is required to obtain numerous permits and approvals from governmental agencies that regulate its business, and TVA may be unable to obtain or maintain all required regulatory approvals.  If there is a delay in obtaining required regulatory approvals or if TVA fails to obtain or maintain any approvals or to comply with any law, regulation, or order, TVA may have to change how it operates certain facilities, may be unable to operate certain facilities, or may have to pay fines or penalties.

TVA may be responsible for environmental clean-up activities.

TVA may be responsible for on-site liabilities associated with the environmental condition of facilities or property that TVA has acquired or that TVA operates regardless of when the liabilities arose, whether they are known or unknown, and whether they were caused by TVA, prior owners or operators, or a third party. TVA may also be responsible for off-site liabilities associated with the off-site disposal of waste materials containing hazardous substances or hazardous wastes.


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The costs associated with remediating the Kingston ash spill as well as other CCR facilities may be significantly higher than TVA anticipates.

TVA estimates that the cost of remediating the Kingston ash spill will be between $1.1 billion and $1.2 billion.  Actual costs could substantially exceed expected costs if, among other things, TVA has to remove more ash than currently anticipated, additional environmentally sensitive material is uncovered in the river sediment, there are delays in the ash removal process, or the methods of final remediation change.  Also, certain costs that are currently either not probable or reasonably estimable are not included in this estimate, such as any additional penalties and natural resource damages, future lawsuits, future claims, and costs associated with new laws and regulations.  In addition, TVA expects to spend between $1.5 billion and $2.0 billion to convert its wet CCR facilities to dry collection facilities.  Actual costs may substantially exceed expected costs.

TVA may have to make significant contributions in the future to fund its pension plans.

At September 30, 2011, TVA’s pension plans had assets of $6.5 billion compared to liabilities of $11.3 billion.  The qualified plan is mature with nearly 24,000 retirees receiving benefits of approximately $600 million per year. The costs of providing pension benefits depend upon a number of factors, including, but not limited to:
 
Provisions of the pension plans;

Changing employee demographics;

Rates of increase in compensation levels;

Rates of return on plan assets;

Discount rates used in determining future benefit obligations and required funding levels;

Future government regulation; and

Levels of contributions made to the plans.

Any of these factors or any number of these factors could keep at high levels or even increase the costs of providing pension benefits and require TVA to make significant contributions to the pension plans.  Financial market conditions such as those experienced during the recession of CY 2008 - 2009 and an unfavorable fourth quarter of 2011 may result in lower expected rates of return on plan assets, loss in value of the investments, and lower discount rates used in determining future benefit obligations.  These changes would negatively impact the funded status of the plans.  Additional contributions to the plans and absorption of additional costs would negatively affect TVA’s cash flows, results of operations, and financial condition.

Approaching or reaching TVA’s debt ceiling could limit TVA’s ability to carry out its business.  Additionally, TVA’s debt ceiling could be made more restrictive.

The TVA Act provides that TVA can issue Bonds in an amount not to exceed $30.0 billion outstanding at any time.  At September 30, 2011, TVA had $24.7 billion of Bonds outstanding (not including noncash items of foreign currency exchange loss of $7 million and net discount on sale of Bonds of $235 million).

Approaching or reaching the debt ceiling may adversely affect TVA’s business by limiting TVA’s ability to access capital markets and increasing the amount of debt TVA must service.  Also, Congress may lower TVA’s debt ceiling or broaden the types of financial instruments that are covered by the ceiling.  Either of these scenarios may also restrict TVA’s ability to raise capital to maintain power program assets, to construct additional generation facilities, to purchase power under long-term purchase power agreements, or to meet regulatory requirements.  In addition, approaching or reaching the debt ceiling may lead to increased legislative or regulatory oversight of TVA’s activities and could lead to negative credit rating actions.
 
Demand for electricity may be significantly reduced, negatively affecting TVA’s cash flows, results of operations, and financial condition.

Some of the factors that could reduce the demand for electricity include the following:

Economic downturns.  Renewed economic downturns in TVA’s service area or other parts of the United States could reduce overall demand for power and thus reduce TVA’s power sales and cash flows, especially if TVA’s industrial customers reduce their operations and thus their consumption of power.

Loss of customers.  The loss of customers could have a material adverse effect on TVA’s cash flows, results of

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operations, or financial condition, and could result in higher rates.

Change in technology.  Research and development activities are ongoing to improve existing and alternative technologies to produce electricity, including gas turbines, wind turbines, fuel cells, microturbines, solar cells, and distributed generation devices.  It is possible that advances in these or other alternative technologies could reduce the costs of electricity production from alternative technologies to a level that will enable these technologies to compete effectively with traditional power plants like TVA’s.  To the extent these technologies become a more cost-effective option for certain customers, TVA’s sales to these customers could be reduced, negatively affecting TVA’s cash flows, results of operations, and financial condition.

Catastrophic events may negatively affect TVA’s cash flows, results of operations, and financial condition.

TVA’s cash flows, results of operations, and financial condition may be adversely affected, either directly or indirectly, by catastrophic events such as fires, earthquakes, solar events, droughts, floods, tornadoes, wars, national emergencies, terrorist activities, pandemics, and other similar destructive events.  Examples of such events include, but are not limited to, the effect of the Japanese nuclear events, the April 2011 storms in TVA’s service area, and the August 2011 earthquake in the eastern United States.  These events, the frequency and severity of which are unpredictable, may, among other things, lead to legislative or regulatory changes that affect the construction, operation, and decommissioning of nuclear units and the storage of spent fuel; limit or disrupt TVA’s ability to generate and transmit power; reduce the demand for power; disrupt fuel or other supplies; require TVA to produce additional tritium; lead to an economic downturn; require TVA to make substantial capital investments for repairs, improvements, or modifications; and create instability in the financial markets.  If costs to construct nuclear units significantly increase or the public determines that nuclear power is less desirable as a result of any of these events, TVA may be forced to forego any future construction at its nuclear facilities or shut them down.  This would make it substantially more difficult for TVA to obtain greater amounts of its power supply from low or zero carbon emitting resources and to replace its generation capacity when faced with retiring or idling certain coal-fired units.  Additionally, some studies have predicted that climate change may cause certain catastrophic events, such as droughts and floods, to occur more frequently in the Tennessee Valley region, which could lead to adverse impacts on TVA.

Weather conditions may influence TVA’s ability to supply power and its customers’ demands for power.

Extreme temperatures may increase the demand for power and require TVA to purchase power at high prices to meet the demand from customers, while unusually mild weather may result in decreased demand for power and lead to reduced electricity sales.  In addition, in periods of below normal rainfall or drought, TVA’s low-cost hydroelectric generation may be reduced, requiring TVA to purchase power or use more costly means of producing power. Furthermore, high river water temperatures in the summer may limit TVA’s ability to use water from the Tennessee or Cumberland River systems for cooling at certain of TVA’s generating facilities, thereby limiting its ability to operate these generating facilities.

TVA may incur delays and additional costs in power plant construction and may be unable to obtain necessary regulatory approval.

TVA is completing the construction of Watts Bar Unit 2, planning to resume construction of Bellefonte Unit 1, completing construction of the John Sevier Combined Cycle Facility, scheduling major upgrades to and modernization of current generating plants, and evaluating construction of more generating facilities in the future.  These activities involve risks of schedule delays and overruns in the cost of labor and materials.  In addition, if TVA does not obtain the necessary regulatory approvals, is otherwise unable to complete the development or construction of a facility, decides to cancel construction of a facility, or incurs delays or cost overruns in connection with constructing a facility, TVA’s cash flows, financial condition, and results of operations could be negatively affected.  In addition, if construction projects are not completed according to specifications, TVA may suffer, among other things, reduced plant efficiency, reduced transmission system integrity and reliability, and higher operating costs.

TVA is the sole power provider for its customers within its service area, and if demand for power in TVA’s service area increases, TVA is contractually obligated to take steps to meet this increased demand.

If demand for power in TVA’s service area increases, TVA may need to meet this increased demand by purchasing additional power from other sources, building new generation and transmission facilities, or purchasing existing generation and transmission facilities.  Purchasing power from external sources, as well as acquiring or building new generation and transmission facilities, may negatively affect TVA’s cash flows, results of operations, and financial condition.

TVA’s assumptions about the future may be inaccurate.

TVA uses certain assumptions in order to develop its plans for the future.  Such assumptions include economic forecasts, anticipated commodity prices, cost estimates, construction schedules, power demand forecasts, the

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appropriate generation mix to meet demand, and potential regulatory environments.  Should these assumptions be inaccurate, or be superseded by subsequent events, TVA’s plans may not be effective in achieving the intended results which could negatively affect TVA’s ability to meet electricity demand, cash flows, results of operations, and financial condition, as well as the way TVA conducts its business.

Failure to meet TVA’s energy efficiency and demand reduction goals may negatively impact TVA’s cash flows, results of operations, and financial condition.

TVA’s energy efficiency and demand reduction initiatives are important components of TVA’s plan to meet future power needs in its service territory.  It is possible, however, that results from these programs may be less favorable than TVA anticipates.  If TVA fails to meet its energy efficiency and demand reduction goals, TVA may, among other things, need to purchase additional power from third parties or build or purchase additional generation facilities.
 
Owning and operating nuclear units subjects TVA to nuclear risks and may result in significant costs that adversely affect its cash flows, results of operations, and financial condition.

TVA has six operating nuclear units, has resumed construction of one nuclear unit that is scheduled to be placed in service in CY 2013, and is scheduled to resume construction on another unit to be placed in service by 2020.  Risks associated with these units include the following:

Nuclear Risks.  A nuclear incident at a TVA facility could have significant consequences including loss of life, damage to the environment, damage to or loss of the facility, and damage to non-TVA property.  Although TVA carries certain types of nuclear insurance, the amount that TVA is required to pay in connection with a nuclear incident could significantly exceed the amount of coverage provided by insurance.  Also, any nuclear incident in the United States, even at a facility that is not operated by or licensed to TVA, has the potential to impact TVA adversely by obligating TVA to pay up to $105 million per year and a total of $705 million per nuclear incident under the Price-Anderson Act.  In addition, a nuclear incident could negatively affect TVA by, among other things, obligating TVA to pay retrospective insurance premiums, reducing the availability and affordability of insurance, increasing the costs of operating nuclear units, or leading to increased regulation or restriction on the construction, operation, and decommissioning of nuclear facilities.  Moreover, Congress could impose revenue-raising measures on the nuclear industry to pay claims exceeding the limit for a single incident under the Price-Anderson Act.

Decommissioning Costs.  TVA maintains a nuclear decommissioning trust (“NDT”) for the purpose of providing funds to decommission its nuclear facilities.  The NDT is invested in securities generally designed to achieve a return in line with overall equity market performance.  TVA might have to make unplanned contributions to the trust if, among other things:
 
The value of the investments in the trust declines significantly, as it did during the 2008-2009 recession, or the investments fail to achieve the assumed real rate of return;

The decommissioning funding requirements are changed by law or regulation;

The assumed real rate of return on plan assets, which is currently five percent, is lowered by the TVA Board or is overly optimistic;

The actual costs of decommissioning are more than planned;

Changes in technology and experience related to decommissioning cause decommissioning cost estimates to increase significantly; or

TVA is required to decommission a nuclear plant sooner than it anticipates.

If TVA makes additional contributions to the NDT, the contributions may negatively affect TVA’s cash flows, results of operations, and financial condition.

Increased Regulation.  The NRC has broad authority to adopt requirements related to the licensing, operation, and decommissioning of nuclear generation facilities that can result in significant restrictions or requirements on TVA.  If the NRC modifies existing requirements or adopts new requirements, TVA may be required to make substantial capital expenditures at its nuclear plants or make substantial contributions to the NDT.  In addition, if TVA fails to comply with requirements promulgated by the NRC, the NRC has the authority to impose fines, shut down units, or modify, suspend, or revoke TVA’s operating licenses.


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TVA’s generation and transmission assets or their supporting infrastructure may not operate as planned.

Many of TVA’s generation and transmission assets have been operating since the 1950s or earlier and have been in nearly constant service since they were completed.  If these assets or their supporting infrastructure fail to operate as planned or if necessary repairs or upgrades are delayed, TVA, among other things:

May have to invest a significant amount of resources to repair or replace the assets or the supporting infrastructure;

May be unable to operate the assets for a significant period of time;

May have to purchase replacement power on the open market;

May not be able to meet its contractual obligations to deliver power;

May not be able to maintain the integrity or reliability of the transmission system at normal levels;

May have to remediate collateral damage caused by a failure of the assets or the supporting infrastructure;

May have to increase its efforts to reduce vegetation intrusions onto transmission lines to comply with applicable regulations; and

May be required to invest substantially to meet more stringent reliability standards.

In addition, the failure of TVA’s generation and transmission assets or their supporting infrastructure to perform as planned may cause health, safety, and environmental problems and may even result in events such as the failure of a dam, the failure of a containment pond, or a nuclear incident.  Any of these potential outcomes may negatively affect TVA’s cash flows, results of operations, and financial condition.

TVA’s information technology assets may not operate as planned.

TVA’s operations are extensively computerized, and a failure of TVA’s information technology assets may significantly disrupt operations.  Among other things, such a failure may negatively impact TVA’s accounting and administrative systems as well as TVA’s ability to generate and transmit power, and may also lead to the loss or inappropriate release of critical data.  Such a failure may be caused by, among other things, a cyber attack, a natural disaster, a solar event, an electromagnetic event, the age and condition of TVA’s information technology assets, and human error.  Any of these occurrences could negatively affect TVA’s cash flows, results of operations, and financial condition.

TVA’s organizational transformation efforts may fail.

TVA has been working to improve its control systems, operating standards, and corporate culture.  The failure to achieve or maintain improvements in these areas may contribute to the likelihood of incidents such as the Kingston ash spill occurring or other operational or financial challenges that could adversely affect TVA’s cash flow, results of operations, and financial condition.

TVA’s reputation may be negatively impacted.

As with any company, TVA’s reputation is a vital element of its ability to effectively conduct its business.  TVA’s reputation could be harmed by a variety of factors, including the failure of a generating asset or supporting infrastructure, a failure of its organizational transformation efforts, acts or omissions of TVA management, or a significant dispute with a TVA distributor-customer.  Any deterioration in TVA’s reputation may harm TVA’s relationships with its distributor-customers and stakeholders, may increase TVA’s cost of doing business, and may potentially lead to the imposition of additional laws and regulations that negatively affect the way TVA conducts its business.

TVA’s service reliability could be affected by problems at other utilities or at TVA facilities or by the increase in intermittent sources of power.

TVA’s transmission facilities are directly interconnected with the transmission facilities of neighboring utilities and are thus part of the larger interstate power transmission grid.  Accordingly, problems at other utilities or at TVA’s facilities may cause interruptions in TVA’s service to its customers.  In addition, the increasing contribution of intermittent sources of power such as wind and solar may place additional strain on TVA’s system as well as on surrounding systems.  If TVA suffers a service interruption, TVA’s cash flows, results of operations, financial condition, and reputation may be negatively affected.


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Events which affect the supply of water in the Tennessee River system and Cumberland River system may interfere with TVA’s ability to generate power.

An inadequate supply of water in the Tennessee River system and Cumberland River system could negatively impact TVA’s cash flows, results of operations, and financial condition by reducing generation not only at TVA hydroelectric plants but also at its coal-fired and nuclear plants, which depend on water from the river systems near which they are located for cooling and for use in boilers where water is converted into steam to drive turbines.  An inadequate supply of water could result, among other things, from periods of low rainfall or drought, the withdrawal of water from the river systems by governmental entities or others, and incidents affecting bodies of water not managed by TVA.  While TVA manages the Tennessee River and large portions of its tributary system in order to provide much of the water necessary for the operation of its power plants, the U.S. Army Corps of Engineers operates and manages other bodies of water upon which some TVA facilities rely.  Events at these non-TVA managed bodies of water or their associated hydroelectric facilities may interfere with the flow of water and may result in TVA’s having insufficient water to meet the needs of its plants.  If TVA has insufficient water to meet the needs of its plants, TVA may be required to reduce generation at its affected facilities to levels compatible with the available supply of water.

TVA’s fuel and purchased power supplies may be disrupted.

TVA purchases coal, uranium, natural gas, fuel oil, and electricity from a number of suppliers.  Disruption in the acquisition or delivery of fuel or purchased power may result from a variety of physical and commercial events, political developments, or environmental regulations affecting TVA’s fuel and purchased power suppliers as well as from transportation or transmission constraints.  If one of TVA’s fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might have to purchase replacement fuel or power, perhaps at a significantly higher price than TVA was entitled to pay under the contract.  In some circumstances, TVA may not be able to recover this difference from the supplier.  In addition, any disruption of TVA’s fuel and purchased power supplies could require TVA to operate higher cost plants, thereby adversely affecting TVA’s cash flows, results of operations, and financial condition.  Moreover, if TVA is unable to acquire enough replacement power or fuel and does not have enough reserve generation capacity available to offset the loss of power or fuel, TVA may not be able to supply enough power to meet demand, resulting in power curtailments, brownouts, or even blackouts.

Failure to attract and retain an appropriately qualified workforce may negatively affect TVA’s results of operations.

TVA’s business depends on its ability to recruit and retain key executive officers as well as skilled professional and technical employees.  The inability to attract and retain an appropriately qualified workforce could adversely affect TVA’s ability to, among other things, operate and maintain generation and transmission facilities, complete large construction projects such as Watts Bar Unit 2 and Bellefonte Unit 1, and successfully implement its organizational transformation efforts.

TVA is involved in various legal and administrative proceedings whose outcomes may affect TVA’s finances and operations.

TVA is involved in various legal and administrative proceedings and is likely to become involved in other legal proceedings in the future in the ordinary course of business, as a result of catastrophic events or otherwise.  Although TVA cannot predict the outcome of the individual matters in which TVA is involved or will become involved, the resolution of these matters could require TVA to make expenditures in excess of established reserves and in amounts that could have a material adverse effect on TVA’s cash flows, results of operations, and financial condition.  Similarly, resolution of any such proceedings may require TVA to change its business practices or procedures and may require TVA to reduce emissions from its coal-fired units, including emissions of GHGs, to a greater extent than TVA had planned.

TVA is subject to a variety of market risks that may negatively affect TVA’s cash flows, results of operations, and financial condition.

TVA is subject to a variety of market risks, including, but not limited to, commodity price risk, investment price risk, interest rate risk, counterparty credit and performance risk, and currency exchange rate risk.

Commodity Price Risk.  Prices of commodities critical to TVA’s operations, including coal, uranium, natural gas, fuel oil, crude oil, construction materials, emission allowances, and electricity, have been extremely volatile in recent years.  If prices of these commodities increase, TVA’s rates may increase.

Investment Price Risk.  TVA is exposed to investment price risk in its NDT, its asset retirement trust (“ART”), and its pension plan.  If the value of the investments held in the NDT or the pension fund either decrease or fail to increase in accordance with assumed rates of return, TVA may be required to make substantial contributions to these funds.

Interest Rate Risk.  Changes in interest rates may increase the amount of interest that TVA pays on new Bonds that it

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issues, decrease the return that TVA receives on its short-term investments, decrease the value of the investments in TVA’s pension fund and trusts, and increase the losses on the mark-to-market valuation of certain derivative transactions into which TVA has entered.

Counterparty Credit and Performance Risk.  TVA is exposed to the risk that its counterparties will not be able to perform their contractual obligations.  If TVA’s counterparties fail to perform their obligations, TVA’s cash flows, results of operations, and financial condition may be adversely affected.  In addition, the failure of a counterparty to perform may make it difficult for TVA to perform its obligations, particularly if the counterparty is a supplier of electricity or fuel.

Currency Exchange Rate Risk.  Over the next several years, TVA plans to spend a significant amount of capital on clean air projects, capacity expansion, and other projects.  A portion of this amount may be spent on contracts that are denominated in one or more foreign currencies.  The value of the U.S. dollar compared with other currencies has fluctuated widely in recent years, and, if not effectively managed, foreign currency exposure could negatively impact TVA’s cash flows, results of operations, and financial condition.

TVA’s ability to use derivatives to hedge certain risks may be limited.
 
TVA currently uses derivatives to hedge a variety of risks.  Depending on how regulatory agencies interpret and implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, TVA’s hedging costs may increase and its ability to use derivatives to hedge certain risks may be limited.  These occurrences may, among other things, cause TVA to change its operations, increase the risks to which TVA is exposed, and negatively affect TVA’s cash flows.

TVA may be unable to meet its current cash requirements if TVA’s access to the debt markets is limited.

TVA uses cash provided by operations together with proceeds from power program financings to fund its current cash requirements.  It is critical that TVA continues to have access to the debt markets in order to meet its cash requirements.  The importance of having access to the debt markets is underscored by the fact that TVA, unlike many utilities, relies almost entirely on debt capital since TVA is not authorized to issue equity securities.

TVA's credit ratings may be impacted by Congressional actions or by a downgrade of the United States's sovereign credit ratings.

TVA's current credit ratings are not based solely on its underlying business or financial condition but are based to a large extent on the legislation that defines TVA's business structure. Key characteristics of TVA's business defined by legislation include (1) the TVA Board's ratemaking authority, (2) the current competitive environment, which is defined by the fence and the anti-cherrypicking provision, and (3) TVA's status as a corporate agency and instrumentality of the United States. Accordingly, if Congress takes any action that effectively alters any of these characteristics, TVA's credit ratings could be downgraded.

Although TVA Bonds are not obligations of the United States, TVA, as a corporate agency and instrumentality of the United States government, may be impacted if the sovereign credit ratings of the United States are downgraded. This occurred in August 2011, when one rating agency lowered its long-term rating on the United States and then lowered TVA's rating based on the application of the rating agency's government-related entities criteria. Among other things, an additional or further downgrade of the United States's sovereign credit ratings could have the following effects:

TVA's access to funds held in United States Treasury accounts could be limited or denied.

TVA's own credit ratings could be downgraded as a result of a downgrade of the United States's credit ratings.

The economy could be negatively impacted, resulting in reduced demand for electricity, increased expenses for borrowings, and increased cost of fuels, supplies, and other material required for TVA's operations.
  
TVA, together with owners of TVA securities, may be impacted by additional or further downgrades of TVA’s credit ratings.

Additional or further downgrades of TVA’s credit ratings may have material adverse effects on TVA’s cash flows, results of operations, and financial condition as well as on investors in TVA securities.  Among other things, a downgrade may have the following effects:

A downgrade could increase TVA’s interest expense by increasing the interest rates that TVA pays on new Bonds that it issues.  An increase in TVA’s interest expense may reduce the amount of cash available for other purposes, which may result in the need to increase borrowings, to reduce other expenses or capital investments, or to increase power rates.


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A downgrade may result in TVA’s having to post collateral under certain physical and financial contracts that contain rating triggers.

A downgrade below a contractual threshold may prevent TVA from borrowing under three credit facilities totaling $2.5 billion.

A downgrade may lower the price of TVA’s securities in the secondary market, thereby hurting investors who sell TVA securities after the downgrade and diminishing the attractiveness and marketability of TVA Bonds.

TVA’s financial control system cannot guarantee that all control issues and instances of fraud or errors will be detected.

No financial control system, no matter how well designed and operated, can provide absolute assurance that the objectives of the control system are met, and no evaluation of financial controls can provide absolute assurance that all control issues and instances of fraud or errors can be detected.  The design of any system of financial controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Payment of principal and interest on TVA securities is not guaranteed by the United States.

Although TVA is a corporate agency and instrumentality of the United States government, TVA securities are not backed by the full faith and credit of the United States.  If TVA were to experience extreme financial difficulty and were unable to make payments of principal or interest on its Bonds, the federal government would not be legally obligated to prevent TVA from defaulting on its obligations.  Principal and interest on TVA securities are payable solely from TVA’s net power proceeds.  Net power proceeds are the remainder of TVA’s gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein.

The market for TVA’s securities might be limited.

All of TVA’s Bonds are listed on the New York Stock Exchange except for TVA’s discount notes, which have maturities of less than one year, the 2009 Series A and B power bonds, and the power bonds issued under TVA’s electronotes® program, which is a medium-term retail notes program.  In addition, some of TVA’s Bonds are listed on foreign stock exchanges.

Although many of TVA’s Bonds are listed on stock exchanges, there can be no assurances that any market will develop or continue to exist for any Bonds.  Additionally, no assurances can be made as to the ability of the holders to sell their Bonds or as to the price at which holders will be able to sell their Bonds.  Future trading prices of Bonds will depend on many factors, including prevailing interest rates, the then-current ratings assigned to the Bonds, the amount of Bonds outstanding, the time remaining until the maturity of the Bonds, the redemption features of the Bonds, the market for similar securities, and the level, direction, and volatility of interest rates generally, as well as the liquidity of the markets for those securities.

If a particular series of Bonds is offered through underwriters, those underwriters may attempt to make a market in the Bonds.  Dealers other than underwriters may also make a market in TVA securities.  However, the underwriters and dealers are not obligated to make a market in any TVA securities and may terminate any market-making activities at any time without notice.

In addition, legal limitations may affect the ability of banks and others to invest in Bonds.  For example, national banks may purchase TVA Bonds for their own accounts in an amount not to exceed 10 percent of unimpaired capital and surplus.  Also, TVA Bonds are “obligations of a corporation which is an instrumentality of the United States” within the meaning of section 7701(a)(19)(C)(ii) of the Internal Revenue Code for purposes of the 60 percent of assets limitation applicable to U.S. building and loan associations.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.  PROPERTIES

TVA holds personal property in its own name but holds real property as agent for the United States of America.  TVA may acquire real property as an agent of the United States by negotiated purchase or by eminent domain.

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Generating Properties

At September 30, 2011, generating assets operated by TVA consisted of 53 active coal-fired units and six idled coal-fired units, six nuclear units, 109 conventional hydroelectric units, four pumped storage units, 11 combined cycle units, 87 simple cycle units, 9 diesel generator units, one wind energy site (currently nonoperational), and 14 solar energy sites.  In addition, TVA has biomass cofiring capability at one of its coal-fired sites and digester gas cofiring capability at a second coal-fired site. See Item 1, Business — Current Power Supply — Net Capability for a chart that indicates the location, capability, and in-service dates for each of these properties, which chart is incorporated by reference into this Item 2, Properties.  At September 30, 2011, 24 of the simple cycle combustion turbine units were leased to private entities and leased back to TVA under long-term leases, and TVA is leasing the three Caledonia combined cycle units under a long-term lease.  In addition, since April 17, 2009, SSSL has owned an undivided 90 percent interest in the three Southaven combined cycle units, and TVA has entered into a lease with SSSL under which TVA leases SSSL’s undivided 90 percent interest in the facility and operates the entire facility through April 23, 2013.  For additional details, see Note 12.  TVA is also in the process of constructing additional generating assets.  For a discussion of these assets, see Item 1, Business — Future Power Supply.

Transmission Properties

TVA’s transmission system interconnects with systems of surrounding utilities and consists primarily of the following assets:

Approximately 15,940 circuit miles of transmission lines (primarily 500 kilovolt and 161 kilovolt lines);
498 transmission substations, power switchyards, and switching stations; and
1,240 customer connection points (customer, generation, and interconnection).

At September 30, 2011, certain qualified technological equipment and other software related to TVA’s transmission system were leased to private entities and leased back to TVA under long-term leases.

Natural Resource Stewardship Properties

TVA operates and maintains 49 dams and manages the following natural resource stewardship properties:

Approximately 11,000 miles of reservoir shoreline;
Approximately 293,000 acres of reservoir land;
Approximately 650,000 surface acres of water; and
Over 100 TVA managed recreation facilities (campgrounds, boat ramps, fishing piers, hiking trails, and day use areas).

As part of its stewardship responsibilities, TVA approval is required to be obtained before any obstruction affecting navigation, flood control, or public lands can be constructed in or along the Tennessee River and its tributaries. TVA manages licenses, leases or easements on United States property entrusted to TVA to over 250 commercial campgrounds and over 200 commercial marinas.

Buildings

TVA has a variety of buildings throughout its service area in addition to the buildings located at its generation and transmission facilities, including office buildings, customer service centers, power service centers, warehouses, visitor centers, and crew quarters.  The most significant of these buildings are the Knoxville Office Complex and the Chattanooga Office Complex.  TVA purchased the majority of its Chattanooga Office Complex on January 1, 2011, and leases the remaining portion of this complex.  TVA plans to purchase the remaining portion of this complex after the lease expires on September 30, 2012.  TVA also has a significant number of buildings in Muscle Shoals, Alabama, and is currently evaluating strategies to further reduce its Muscle Shoals portfolio.

Disposal of Property

Under the TVA Act, TVA has broad authority to dispose of personal property but only limited authority to dispose of real property.  The primary but not exclusive sources of TVA's authority to dispose of real property are briefly described below:

Under section 31 of the TVA Act, TVA has authority to dispose of surplus real property at a public auction.
Under section 4(k) of the TVA Act, TVA can dispose of real property for certain specified purposes, including providing replacement lands for certain entities whose lands were flooded or destroyed by dam or reservoir construction and to grant easements and rights-of-way upon which are located transmission or distribution lines.
Under section 15d(g) of the TVA Act, TVA can dispose of real property in connection with the construction of generating plants or other facilities under certain circumstances.
Under 40 U.S.C. § 1314, TVA has authority to grant easements for rights-of-way and other purposes.

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In addition, the Basic Tennessee Valley Authority Power Bond Resolution adopted by the TVA Board on October 6, 1960, as amended on September 28, 1976, October 17, 1989, and March 25, 1992 (the “Basic Resolution”), prohibits TVA from mortgaging any part of its power properties and from disposing of all or any substantial portion of these properties unless TVA provides for a continuance of the interest, principal, and sinking fund payments due and to become due on all outstanding Bonds, or for the retirement of such Bonds.

ITEM 3.  LEGAL PROCEEDINGS

From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters (“Legal Proceedings”) that have arisen in the ordinary course of conducting TVA’s activities, as a result of catastrophic events or otherwise.  While the outcome of the Legal Proceedings to which TVA is a party cannot be predicted with certainty, any adverse outcome to a Legal Proceeding involving TVA may have a material adverse effect on TVA’s cash flows, results of operations, and financial condition.

For a discussion of Legal Proceedings involving TVA, see Note 20 — Legal Proceedings, which discussion is incorporated by reference into this Item 3.

ITEM 4. REMOVED AND RESERVED

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Not applicable.

ITEM 6.  SELECTED FINANCIAL DATA

The following selected financial data for the years 2007 through 2011 should be read in conjunction with the audited financial statements and notes thereto (collectively, the “Financial Statements”) presented in Item 8, Financial Statements and Supplementary Data.  Certain reclassifications have been made to the 2007, 2008, 2009, and 2010 financial statement presentation to conform to the 2011 presentation.

Selected Financial Data(1), (2)
For the years ended, or at, September 30
(dollars in millions)
 
2011
 
2010
 
2009
 
2008
 
2007
Sales (millions of kWh)
167,730

 
173,662

 
163,804

 
176,304

 
175,529

 
 
 
 
 
 
 
 
 
 
Peak load (MW)
31,434

 
31,778

 
32,572

 
32,027

 
33,482

 
 
 
 
 
 
 
 
 
 
Operating revenues
$
11,841

 
$
10,874

 
$
11,255

 
$
10,382

 
$
9,326

 
 
 
 
 
 
 
 
 
 
Fuel expense
$
2,926

 
$
2,092

 
$
3,114

 
$
2,756

 
$
2,249

 
 
 
 
 
 
 
 
 
 
Purchased power expense
$
1,427

 
$
1,127

 
$
1,631

 
$
1,420

 
$
1,200

 
 
 
 
 
 
 
 
 
 
Operating and maintenance expense
$
3,617

 
$
3,232

 
$
2,395

 
$
2,307

 
$
2,353

 
 
 
 
 
 
 
 
 
 
Net interest expense
$
1,305

 
$
1,294

 
$
1,272

 
$
1,376

 
$
1,232

 
 
 
 
 
 
 
 
 
 
Net income
$
162

 
$
972

 
$
726

 
$
817

 
$
423

 
 
 
 
 
 
 
 
 
 
Construction expenditures
$
2,417

 
$
2,015

 
$
1,793

 
$
1,984

 
$
1,379

 
 
 
 
 
 
 
 
 
 
Total assets
$
46,393

 
$
42,753

 
$
40,017

 
$
37,137

 
$
33,732

 
 
 
 
 
 
 
 
 
 
Financial obligations
 
 

 
 

 
 

 
 

 
 

Net long-term statutory debt, excluding current maturities
$
22,412

 
$
22,389

 
$
21,788

 
$
20,404

 
$
21,099

 
 
 
 
 
 
 
 
 
 
Discount notes
482

 
27

 
844

 
185

 
1,422

Current maturities of long-term debt, net
1,537

 
1,008

 
8

 
2,030

 
90

Total short-term statutory debt
2,019

 
1,035

 
852

 
2,215

 
1,512

 
 
 
 
 
 
 
 
 
 
Total statutory debt(3)
$
24,431

 
$
23,424

 
$
22,640

 
$
22,619

 
$
22,611

 
 
 
 
 
 
 
 
 
 
Capital leases(4)
$
5

 
$
47

 
$
77

 
$
95

 
$
104