10-Q 1 tve-06302012x10q.htm 10-Q FILING TVE-06.30.2012-10Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
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)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the registrant 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer  o                                                                                    Accelerated filer o
Non-accelerated filer    x                                                                                   Smaller reporting company  o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No x
 


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Table of Contents
 
 
 
 
GLOSSARY OF COMMON ACRONYMS......................................................................................................................................
FORWARD-LOOKING INFORMATION.........................................................................................................................................
GENERAL INFORMATION............................................................................................................................................................
 
 
 
 
 
ITEM 1. FINANCIAL STATEMENTS.............................................................................................................................................
Consolidated Statements of Operations (unaudited)............................................................................................................
Consolidated Balance Sheets (unaudited)............................................................................................................................
Consolidated Statements of Cash Flows (unaudited)...........................................................................................................
Consolidated Statements of Changes in Proprietary Capital (unaudited).............................................................................
Notes to Consolidated Financial Statements (unaudited).....................................................................................................
 
 
Executive Overview...............................................................................................................................................................
Results of Operations............................................................................................................................................................
Liquidity and Capital Resources............................................................................................................................................
2012 Key Initiatives and Challenges.....................................................................................................................................
Environmental Matters..........................................................................................................................................................
Legal Proceedings................................................................................................................................................................
Other Matters........................................................................................................................................................................
Off-Balance Sheet Arrangements..........................................................................................................................................
Critical Accounting Policies and Estimates...........................................................................................................................
New Accounting Standards and Interpretations....................................................................................................................
 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................................................
 
 
ITEM 4. CONTROLS AND PROCEDURES..................................................................................................................................
     Disclosure Controls and Procedures......................................................................................................................................
     Changes in Internal Control over Financial Reporting............................................................................................................
 
 
             PART II - OTHER INFORMATION
 
 
 
ITEM 1. LEGAL PROCEEDINGS..................................................................................................................................................
 
 
ITEM  1A. RISK FACTORS...........................................................................................................................................................
 
 
ITEM  6. EXHIBITS.......................................................................................................................................................................
 
 
SIGNATURES...............................................................................................................................................................................
 
 
EXHIBIT INDEX............................................................................................................................................................................

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GLOSSARY OF COMMON ACRONYMS
Following are definitions of terms or acronyms frequently used in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (the “Quarterly Report”):
 
Term or Acronym
 
Definition
AFUDC
 
Allowance for funds used during construction
ARO
 
Asset retirement obligation
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
CAIR
 
Clean Air Interstate Rule
CCOLA
 
Combined construction and operating license application
CCR
 
Coal combustion residual
CME
 
Chicago Mercantile Exchange
CO2
 
Carbon dioxide
COLA
 
Cost of living adjustment
CSAPR
 
Cross State Air Pollution Rule
CTs
 
Combustion turbine unit(s)
CVA
 
Credit valuation adjustment
CY
 
Calendar year
EPA
 
Environmental Protection Agency
FASB
 
Financial Accounting Standards Board
FTP
 
Financial Trading Program
GAAP
 
Accounting principles generally accepted in the United States of America
GAO
 
U.S. Government Accountability Office
GHG
 
Greenhouse gas
JSCCG
 
John Sevier Combined Cycle Generation LLC
kWh
 
Kilowatt hour(s)
LIBOR
 
London Interbank Offer Rate
MD&A
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
mmBtu
 
Million British thermal unit(s)
MtM
 
Mark-to-market
MW
 
Megawatt
NAV
 
Net asset values
NDT
 
Nuclear Decommissioning Trust
NEPA
 
National Environmental Policy Act
NOx
 
Nitrogen oxides
NPDES
 
National Pollutant Discharge Elimination System
NRC
 
Nuclear Regulatory Commission
NSPS
 
New Source Performance Standards
OCI
 
Other Comprehensive Income (Loss)
PM
 
Particulate matter
QTE
 
Qualified technological equipment and software
REIT
 
Real Estate Investment Trust
SACE
 
Southern Alliance for Clean Energy
SEC
 
Securities and Exchange Commission
SERP
 
Supplemental Executive Retirement Plan
Seven States
 
Seven States Power Corporation

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SO2
 
Sulfur dioxide
SSSL
 
Seven States Southaven, LLC
TCWN
 
Tennessee Clean Water Network
TDEC
 
Tennessee Department of Environment & Conservation
TOU
 
Time-of-use
TVARS
 
Tennessee Valley Authority Retirement System
TWQCB
 
Tennessee Water Quality Control Board
USEC
 
United States Enrichment Corporation, or its parent company, USEC, Inc.
VIE
 
Variable interest entity
XBRL
 
eXtensible Business Reporting Language


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FORWARD-LOOKING INFORMATION

This Quarterly Report contains forward-looking statements relating to future events and future performance.  All statements other than those that are purely historical may be forward-looking statements.  In certain cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “project,” “plan,” “predict,” “assume,” “forecast,” “estimate,” “objective,” “possible,” “probably,” “likely,” “potential,” "speculate," 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, or 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;
Settlements, natural resource damages, fines and penalties 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, flood control, and related assets, including coal combustion residual (“CCR”) facilities;
Modernizing aging coal-fired generating units and installing emission control equipment to meet existing and anticipated emissions reduction requirements which could render continued operation of many of these units not cost-effective and result in their removal 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 use or 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;
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;

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Failure of TVA's assets to operate as planned and the failure of TVA's cyber security program to protect TVA's assets from cyber attacks;
Differences between estimates of revenues and expenses and actual revenues earned 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 in TVA’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011 (the “Annual Report”) and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report.  New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the extent to which any factor or combination of factors may impact TVA’s business or cause results to differ materially from those contained in any forward-looking statement.  TVA undertakes no obligation to update any forward-looking statement to reflect developments that occur after the statement is made.

GENERAL INFORMATION

Fiscal Year

References to years (2012, 2011, etc.) in this Quarterly Report are to TVA’s fiscal years ending September 30.  Years that are preceded by “CY” are references to calendar years.

Notes

References to “Notes” are to the Notes to Consolidated Financial Statements contained in Part I, Item 1, Financial Statements in this Quarterly Report.

Available Information

TVA's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are 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 Quarterly 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 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

  TENNESSEE VALLEY AUTHORITY
 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 (in millions)

 
Three Months Ended June 30
 
Nine Months Ended June 30
 
2012
 
2011
 
2012
 
2011
Operating revenues
 
 
 
 
 
 
 
Sales of electricity
$
2,741

 
$
2,628

 
$
7,850

 
$
8,362

Other revenue
36

 
29

 
99

 
91

Total operating revenues
2,777

 
2,657

 
7,949

 
8,453

Operating expenses
 

 
 

 
 

 
 

Fuel
683

 
584

 
1,847

 
2,071

Purchased power
277

 
387

 
925

 
1,026

Operating and maintenance
882

 
994

 
2,625

 
2,677

Depreciation and amortization
505

 
436

 
1,439

 
1,296

Tax equivalents
152

 
174

 
452

 
464

Total operating expenses
2,499

 
2,575

 
7,288

 
7,534

Operating income
278

 
82

 
661

 
919

Other income (expense), net
21

 
4

 
16

 
25

Interest expense
 

 
 

 
 

 
 

Interest expense
366

 
358

 
1,092

 
1,072

Allowance for funds used during construction and nuclear fuel expenditures
(44
)
 
(32
)
 
(125
)
 
(93
)
Net interest expense
322

 
326

 
967

 
979

Net income (loss)
$
(23
)
 
$
(240
)
 
$
(290
)
 
$
(35
)
The accompanying notes are an integral part of these consolidated financial statements.


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TENNESSEE VALLEY AUTHORITY
 CONSOLIDATED BALANCE SHEETS
 (in millions)
ASSETS
 
June 30, 2012

September 30, 2011
Current assets
(Unaudited)

 
Cash and cash equivalents
$
247

 
$
507

Restricted cash of variable interest entity
30

 

Restricted cash and investments
11

 
11

Accounts receivable, net
1,636

 
1,739

Inventories, net
1,145

 
1,028

Regulatory assets
854

 
543

Other current assets
129

 
215

Total current assets
4,052

 
4,043

 
 
 
 
Property, plant, and equipment
 

 
 

Completed plant
45,684

 
44,187

Less accumulated depreciation
(21,772
)
 
(20,643
)
Net completed plant
23,912

 
23,544

Construction in progress
4,486

 
4,662

Nuclear fuel
1,134

 
1,073

Capital leases
44

 
26

Total property, plant, and equipment, net
29,576

 
29,305

 
 
 
 
Investment funds
1,345

 
1,168

 
 
 
 
Regulatory and other long-term assets
 

 
 

Regulatory assets
11,403

 
11,505

Other long-term assets
449

 
372

Total regulatory and other long-term assets
11,852

 
11,877

 
 
 
 
Total assets
$
46,825

 
$
46,393

The accompanying notes are an integral part of these consolidated financial statements.


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TENNESSEE VALLEY AUTHORITY
 CONSOLIDATED BALANCE SHEETS
 (in millions)
LIABILITIES AND PROPRIETARY CAPITAL
 
June 30, 2012
 
September 30, 2011
Current liabilities
(Unaudited)
 
 
Accounts payable and accrued liabilities
$
1,785

 
$
1,840

Environmental cleanup costs - Kingston ash spill
117

 
182

Accrued interest
340

 
403

Current portion of leaseback obligations
448

 
80

Current portion of energy prepayment obligations
103

 
105

Regulatory liabilities
168

 
280

Short-term debt, net
2,530

 
482

Current maturities of power bonds
1,395

 
1,537

Current maturities of long-term debt of variable interest entities
12

 

Total current liabilities
6,898

 
4,909

 
 
 
 
Other liabilities
 
 
 
Post-retirement and post-employment benefit obligations
6,156

 
6,007

Asset retirement obligations
3,254

 
3,138

Other long-term liabilities
2,819

 
2,405

Leaseback obligations
762

 
1,202

Energy prepayment obligations
535

 
612

Environmental cleanup costs - Kingston ash spill
173

 
194

Regulatory liabilities
113

 
285

Total other liabilities
13,812

 
13,843

 
 
 
 
Long-term debt, net
 
 
 
Long-term power bonds, net
20,189

 
22,412

Long-term debt of variable interest entities
988

 

Total long-term debt, net
21,177

 
22,412

 
 
 
 
Total liabilities
41,887

 
41,164

 
 
 
 
Proprietary capital
 
 
 
Power program appropriation investment
293

 
308

Power program retained earnings
4,141

 
4,429

Total power program proprietary capital
4,434

 
4,737

Nonpower programs appropriation investment, net
622

 
630

Accumulated other comprehensive income (loss)
(118
)
 
(138
)
Total proprietary capital
4,938

 
5,229

 
 
 
 
Total liabilities and proprietary capital
$
46,825

 
$
46,393

The accompanying notes are an integral part of these consolidated financial statements.


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TENNESSEE VALLEY AUTHORITY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the nine months ended June 30
 (in millions)
 
2012
 
2011
Cash flows from operating activities
 
 
 
Net income (loss)
$
(290
)
 
$
(35
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 

 
 

Depreciation and amortization (including amortization of debt issuance costs and premiums/discounts)
1,457

 
1,311

Nuclear refueling outage amortization cost

 
38

Amortization of nuclear fuel cost
195

 
158

Non-cash retirement benefit expense
456

 
349

Prepayment credits applied to revenue
(79
)
 
(79
)
Fuel cost adjustment deferral
(12
)
 
7

Fuel cost tax equivalents
28

 
75

Environmental cleanup costs – Kingston ash spill – non cash
55

 
57

Changes in current assets and liabilities
 

 
 

Accounts receivable, net
103

 
100

Inventories and other, net
(136
)
 
(92
)
Margin cash collateral, net
(318
)
 
(24
)
Accounts payable and accrued liabilities
(137
)
 
19

Accrued interest
(63
)
 
(73
)
Environmental cleanup costs – Kingston ash spill, net
(81
)
 
(74
)
Preconstruction costs

 
(96
)
Other, net
74

 
62

Net cash provided by operating activities
1,252

 
1,703

Cash flows from investing activities
 

 
 

Construction expenditures
(1,617
)
 
(1,678
)
Nuclear fuel expenditures
(264
)
 
(184
)
Loans and other receivables
 

 
 

Advances
(2
)
 
(26
)
Repayments
9

 
9

Other, net
7

 
(1
)
Net cash used in investing activities
(1,867
)
 
(1,880
)
Cash flows from financing activities
 

 
 

Long-term debt
 

 
 

Issues of power bonds
135

 
1,582

Issues of variable interest entities
1,000

 

Redemptions and repurchases of power bonds
(2,690
)
 
(1,020
)
Short-term debt issues (redemptions), net
2,047

 
(27
)
Proceeds from leasebacks

 
5

Payments on leases and leasebacks
(75
)
 
(109
)
Proceeds from call monetization
60

 

Financing costs, net
(72
)
 
(19
)
Change in restricted cash of variable interest entity
(30
)
 

Payments to U.S. Treasury
(21
)
 
(20
)
Other, net
1

 
(1
)
Net cash provided by financing activities
355

 
391

Net change in cash and cash equivalents
(260
)
 
214

Cash and cash equivalents at beginning of period
507

 
328

Cash and cash equivalents at end of period
$
247

 
$
542

The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)
For the three months ended June 30, 2012, and 2011
(in millions)
 
Power Program Appropriation Investment
 
 
Power Program Retained Earnings
 
Nonpower Programs Appropriation Investment, Net
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Total
 
 
Comprehensive Income (Loss)
Balance at March 31, 2011 (unaudited)
$
318

 
$
4,470

 
$
635

 
$
(52
)
 
$
5,371

 
 
Net income (loss)

 
(239
)
 
(1
)
 

 
(240
)
 
$
(240
)
Other comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
 

Net unrealized gain (loss) on future cash flow hedges

 

 

 
(12
)
 
(12
)
 
(12
)
Reclassification to earnings from cash flow hedges

 

 

 
(1
)
 
(1
)
 
(1
)
Total other comprehensive income (loss)

 

 

 
(13
)
 
(13
)
 
(13
)
Total comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
$
(253
)
Return on power program appropriation investment

 
(1
)
 

 

 
(1
)
 
 

Return of power program appropriation investment
(5
)
 
$

 

 

 
(5
)
 
 

Balance at June 30, 2011 (unaudited)
$
313

 
$
4,230

 
$
634

 
$
(65
)
 
$
5,112

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2012 (unaudited)
$
298

 
$
4,164

 
$
625

 
$
(100
)
 
$
4,987

 
 

Net income (loss)

 
(20
)
 
(3
)
 

 
(23
)
 
$
(23
)
Other comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
 

Net unrealized gain (loss) on future cash flow hedges

 

 

 
(36
)
 
(36
)
 
(36
)
Reclassification to earnings from cash flow hedges

 

 

 
18

 
18

 
18

Total other comprehensive income (loss)

 

 

 
(18
)
 
(18
)
 
(18
)
Total comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
$
(41
)
Return on power program appropriation investment

 
(3
)
 

 

 
(3
)
 
 

Return of power program appropriation investment
(5
)
 

 

 

 
(5
)
 
 

Balance at June 30, 2012 (unaudited)
$
293

 
$
4,141

 
$
622

 
$
(118
)
 
$
4,938

 
 

The accompanying notes are an integral part of these consolidated financial statements.



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TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)
For the nine months ended June 30, 2012, and 2011
(in millions)
 
Power Program Appropriation Investment
 
 
Power Program Retained Earnings
 
Nonpower Programs Appropriation Investment, Net
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Total
 
 
Comprehensive Income (Loss)
Balance at September 30, 2010
$
328

 
$
4,264

 
$
640

 
$
(95
)
 
$
5,137

 
 
Net income (loss)

 
(29
)
 
(6
)
 

 
(35
)
 
$
(35
)
Other comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
 

Net unrealized gain (loss) on future cash flow hedges

 

 

 
51

 
51

 
51

Reclassification to earnings from cash flow hedges

 

 

 
(21
)
 
(21
)
 
(21
)
Total other comprehensive income (loss)

 

 

 
30

 
30

 
30

Total comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
$
(5
)
Return on power program appropriation investment

 
(5
)
 

 

 
(5
)
 
 

Return of power program appropriation investment
(15
)
 

 

 

 
(15
)
 
 

Balance at June 30, 2011 (unaudited)
$
313

 
$
4,230

 
$
634

 
$
(65
)
 
$
5,112

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2011
$
308

 
$
4,429

 
$
630

 
$
(138
)
 
$
5,229

 
 

Net income (loss)

 
(282
)
 
(8
)
 

 
(290
)
 
$
(290
)
Other comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
 

Net unrealized gain (loss) on future cash flow hedges

 

 

 
27

 
27

 
27

Reclassification to earnings from cash flow hedges

 

 

 
(7
)
 
(7
)
 
(7
)
Total other comprehensive income (loss)

 

 

 
20

 
20

 
20

Total comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
$
(270
)
Return on power program appropriation investment

 
(6
)
 

 

 
(6
)
 
 

Return of power program appropriation investment
(15
)
 

 

 

 
(15
)
 
 

Balance at June 30, 2012 (unaudited)
$
293

 
$
4,141

 
$
622

 
$
(118
)
 
$
4,938

 
 

The accompanying notes are an integral part of these consolidated financial statements.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions except where noted)


1.  Summary of Significant Accounting Policies

General

The Tennessee Valley Authority (“TVA”) is a corporate agency and instrumentality of the United States that was created in 1933 by legislation enacted by the United States (“U.S.”) Congress in response to a request by President Franklin D. Roosevelt.  TVA was initially 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.

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.

The power program has historically been separate and distinct from the stewardship programs.  It is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, and other evidences of indebtedness (“Bonds”).  Although TVA does not currently receive congressional appropriations, it is required to make annual payments to the U.S. Treasury in repayment of, and as a return on, the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment").  In the 1998 Energy and Water Development Appropriations Act, Congress directed TVA to fund essential stewardship activities related to its management of the Tennessee River system and nonpower or stewardship properties with power revenues in the event that there were insufficient appropriations or other available funds to pay for such activities in any fiscal year.  Congress has not provided any appropriations to TVA to fund such activities since 1999.  Consequently, during 2000, TVA began paying for essential stewardship activities primarily with power revenues, with the remainder funded with user fees and other forms of revenues derived in connection with those activities.  The activities related to stewardship properties do not meet the criteria of an operating segment under accounting principles generally accepted in the United States of America ("GAAP").  Accordingly, these assets and properties are included as part of the power program, TVA's only operating segment.

Power rates are established by the TVA Board of Directors (“TVA Board”) as authorized by the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee (as amended, the “TVA Act”).  The TVA Act requires TVA to charge

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rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; payments to states and counties in lieu of taxes ("tax equivalents”); debt service on outstanding indebtedness; payments to the U.S. Treasury in repayment of and as a return on 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 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.  Rates set by the TVA Board are not subject to review or approval by any state or other federal regulatory body.

Fiscal Year

TVA's fiscal year ends September 30.  Years (2012, 2011, etc.) refer to TVA's fiscal years unless they are preceded by “CY,” in which case the references are to calendar years.

Cost-Based Regulation

Since the TVA Board is authorized by the TVA Act to set rates for power sold to its customers, TVA is self regulated.  Additionally, TVA's regulated rates are designed to recover its costs of providing electricity.  In view of demand for electricity and the level of competition, TVA believes that rates, set at levels that will recover TVA's costs, can be charged and collected.  As a result of these factors, TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred, because such costs are probable of future recovery in customer rates.  Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods.  TVA assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, potential legislation, and changes in technology.  Based on these assessments, TVA believes the existing regulatory assets are probable of recovery.  This determination reflects the current regulatory and political environment and is subject to change in the future.  If future recovery of regulatory assets ceases to be probable, or any of the other factors described above cease to be applicable, TVA would no longer be considered to be a regulated entity and would be required to write off these costs.  Most regulatory asset write-offs would be required to be recognized in earnings in the period in which future recovery ceases to be probable.

Basis of Presentation

TVA prepares its consolidated interim financial statements in conformity with GAAP for interim consolidated financial information. Accordingly, TVA's consolidated interim financial statements do not include all of the information and notes required by GAAP for annual financial statements. As such, they should be read in conjunction with the audited financial statements for the year ended September 30, 2011, and the notes thereto, which are contained in TVA's Annual Report on Form 10-K for the year ended September 30, 2011 (the “Annual Report”).

The accompanying consolidated financial statements include the accounts of TVA and two variable interest entities, created in January 2012, of which TVA is the primary beneficiary. See Note 7. Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included.

Use of Estimates

The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the consolidated financial statements.  Although the consolidated financial statements are prepared in conformity with GAAP, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period.  Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results.  Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial condition, results of operations, or cash flows.

Reclassifications

Certain reclassifications have been made to the 2011 financial statements to conform to the 2012 presentation.  In the Cash flows from operating activities section of the Statements of Cash Flows, $75 million previously reported as changes in Accounts payable and accrued liabilities for the nine months ended June 30, 2011, was reclassified as Fuel cost tax equivalents, and $(24) million previously reported as changes in Inventories and other, net for the nine months ended June 30, 2011 was reclassified as changes in Margin cash collateral, net.

Sales of electricity for the three and nine months ended June 30, 2011, previously reported in the Statements of Operations as Sales of electricity to Municipalities and cooperatives of $2.3 billion and $7.2 billion, respectively, Industries

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directly served of $310 million and $1.1 billion, respectively, and Federal agencies and other of $31 million and $95 million, respectively, have been combined and reported as Sales of electricity of $2.6 billion and $8.4 billion, respectively.

Allowance for Uncollectible Accounts

The allowance for uncollectible accounts reflects TVA's estimate of probable losses inherent in its accounts and loans receivable balances.  TVA determines the allowance based on known accounts, historical experience, and other currently available information including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements after 90 days.  It also reflects TVA's corporate credit department's assessment of the financial condition of customers and the credit quality of the receivables.

Depreciation

TVA determined depreciation rates based on a new depreciation study during the second quarter of 2012. Implementation of the new study, exclusive of the impact of idling decisions discussed below, resulted in a $2 million and a $3 million decrease in depreciation expense during the three and nine months ended June 30, 2012. It is expected to decrease depreciation expense an additional $2 million for the remainder of 2012, exclusive of the impact of the idling decisions below.

TVA has announced the idling of several of its coal-fired units. As a result, depreciation rates have been adjusted so that the coal-fired units to be idled will be fully depreciated by the applicable idle dates. TVA idled Johnsonville Fossil Plant (“Johnsonville”) Units 7, 8, 9 and 10 on March 1, 2012, and announced plans to idle Johnsonville Units 5 and 6 and Colbert Fossil Plant (“Colbert”) Unit 5 by October 1, 2012.  Additionally, two units at John Sevier Fossil Plant (“John Sevier”) will be retired by December 31, 2012, the remaining two units at John Sevier will be idled by December 31, 2012, and Johnsonville Units 1-4 will be retired by December 31, 2017. As a result of TVA's decision to idle or retire these 15 units, TVA recognized $100 million and $236 million in accelerated depreciation expense related to these units during the three and nine months ended June 30, 2012, respectively. TVA expects to recognize $100 million in accelerated depreciation for the remainder of 2012. Due to anticipated capacity constraints during the third and fourth quarters of 2012, TVA placed Johnsonville Units 9 and 10 back into service and may return other idled units into service as needed. Johnsonville Units 9 and 10 have no remaining book value, having been fully depreciated by the formerly planned idle date of March 1, 2012.

2.  Impact of New Accounting Standards and Interpretations

Fair Value Measurement.  In May 2011, the Financial Accounting Standards Board ("FASB") issued amendments to achieve common fair value measurement and disclosure requirements to create consistency between GAAP and International Financial Reporting Standards ("IFRS”). These changes became effective for TVA on January 1, 2012.  The adoption of this guidance did not materially affect TVA's financial condition, results of operations, or cash flows.  See Note 14.

The following accounting standards have been issued, but as of June 30, 2012, were not effective and had not been adopted by TVA.

Comprehensive Income.  In June 2011, the FASB issued guidance that will require adjustments to the presentation of TVA's financial information.  The guidance eliminates the current option to report comprehensive income and its components in the statement of changes in proprietary capital. The guidance allows for presentation of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. These changes become effective for TVA on October 1, 2012. The adoption of this guidance is not expected to have a material effect on TVA's financial condition, results of operations, or cash flows.

Balance Sheet. In December 2011, the FASB issued guidance that requires disclosure about balances presented on a net basis in the consolidated financial statements, derivative assets and derivative liabilities, repurchase agreements, and financial assets and financial liabilities executed under a master netting or similar arrangement. These changes become effective for TVA on October 1, 2013.  TVA is currently evaluating the potential impact of these changes on its consolidated financial statements and related disclosures.


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3.  Accounts Receivable, Net

Accounts receivable primarily consist of amounts due from customers for power sales.  The table below summarizes the types and amounts of TVA’s accounts receivable:

Accounts Receivable, Net 
 
At June 30, 2012
 
At September 30, 2011
Power receivables
$
1,560

 
$
1,638

Other receivables
82

 
102

Allowance for uncollectible accounts
(6
)
 
(1
)
Accounts receivable, net
$
1,636

 
$
1,739


4.  Inventories, Net

The table below summarizes the types and amounts of TVA’s inventories:

Inventories, Net 
 
At June 30, 2012
 
At September 30, 2011
Materials and supplies inventory
$
606

 
$
555

Fuel inventory
563

 
489

Emission allowance inventory
12

 
11

Allowance for inventory obsolescence
(36
)
 
(27
)
Inventories, net
$
1,145

 
$
1,028


5.  Other Long-Term Assets

The table below summarizes the types and amounts of TVA’s other long-term assets:

Other Long-Term Assets 
 
At June 30, 2012
 
At September 30, 2011
Loans and other long-term receivables, net
$
200

 
$
74

Coal contract derivative assets
111

 
285

Other
138

 
13

Total other long-term assets
$
449

 
$
372


TVA guarantees repayment on certain loans receivable from end-use customers in association with the EnergyRight® Solutions program.  TVA sells the loans receivable to a third party bank and has agreed with the bank to purchase any loan receivable that has been in default for 180 days or more or that TVA has determined is uncollectible. The loans receivable and the associated obligation to purchase those loans are shown in Other long-term assets and Other long-term liabilities, respectively, on TVA's consolidated balance sheets.  The current portion of the loans receivable and the associated obligation to purchase those loans are shown in Current assets and Current liabilities, respectively, on TVA's consolidated balance sheets.  As of June 30, 2012, the carrying amount of the loans receivable, net of discount, was approximately $148 million.  The carrying amount of the associated obligation to purchase those loans was approximately $182 million.


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6.  Regulatory Assets and Liabilities

Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates.  Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods.  Components of regulatory assets and regulatory liabilities are summarized in the table below.
 
Regulatory Assets and Liabilities 
 
At June 30, 2012
 
At September 30, 2011
Current regulatory assets
 
 
 
Unrealized losses on commodity derivatives
$
441

 
$
225

Deferred nuclear generating units
236

 
236

Environmental agreements
87

 

Environmental cleanup costs – Kingston ash spill
70

 
73

Fuel cost adjustment receivable
19

 
7

Deferred capital leases
1

 
2

Total current regulatory assets
854

 
543

Non-current regulatory assets
 

 
 

Deferred pension costs and other post-retirement benefits costs
5,537

 
5,807

Unrealized losses on swaps and swaption
1,350

 
1,164

Nuclear decommissioning costs
942

 
1,012

Environmental cleanup costs - Kingston ash spill
817

 
874

Construction costs
619

 
619

Non-nuclear decommissioning costs
548

 
519

Deferred nuclear generating units
532

 
709

Unrealized losses on commodity derivatives
446

 
221

Environmental agreements
251

 
346

Other non-current regulatory assets
361

 
234

Total non-current regulatory assets
11,403

 
11,505

Total regulatory assets
$
12,257

 
$
12,048

 
 
 
 
Current regulatory liabilities
 

 
 

Fuel cost adjustment tax equivalents
$
155

 
$
127

Unrealized gains on commodity derivatives
13

 
153

Total current regulatory liabilities
168

 
280

 Non-current regulatory liabilities
 

 
 

Unrealized gains on commodity derivatives
113

 
285

Total non-current regulatory liabilities
113

 
285

Total regulatory liabilities
$
281

 
$
565

 

7.  Variable Interest Entities

A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of owning a controlling financial interest. The analysis to determine whether an entity is a VIE considers factors such as contracts with an entity, credit support for an entity, the adequacy of the equity investment of an entity, the extent of an entity's activities that either involve or are conducted on behalf of an investor with disproportionate voting rights and the relationship of voting power to the amount of equity invested in an entity. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The determination of the primary beneficiary requires continual reassessment.

On January 17, 2012, TVA entered into a $1.0 billion transaction with John Sevier Combined Cycle Generation LLC

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("JSCCG"), a newly formed entity. In connection with this transaction, TVA and the United States of America agreed to lease the John Sevier Combined Cycle Facility ("John Sevier CCF") located in Hawkins County, Tennessee, to JSCCG for a term of fifty years (the "Head Lease"). TVA also entered into a construction management agreement ("CMA") with JSCCG under which TVA was obligated to use commercially reasonable efforts to cause the John Sevier CCF to achieve substantial completion by January 14, 2013, or as soon thereafter as commercially practicable. John Sevier CCF began commercial operations on April 30, 2012.

Also on January 17, 2012, TVA and JSCCG entered into a transaction under which TVA agreed to lease the John Sevier CCF from JSCCG (the "Facility Lease") through January 15, 2042. Throughout the term of the Facility Lease, TVA is responsible for the operation and maintenance (and improvement to the extent required by applicable law) of the John Sevier CCF and takes all power generated by the facility. On or after January 17, 2042, as long as TVA has made all payments as prescribed by the Facility Lease and there is no payment or bankruptcy default with respect to which JSCCG has exercised dispossessory remedies, the Head Lease will terminate on January 17, 2042, and TVA will own John Sevier CCF at no additional cost to TVA.

JSCCG is a special single-purpose limited liability company formed to finance the John Sevier CCF through a $900 million secured note issuance (the “JSCCG notes”) and the issuance of $100 million of membership interests subject to mandatory redemption. The membership interests were purchased by John Sevier Holdco LLC (“Holdco”). Holdco is a newly formed special single-purpose entity established to acquire and hold membership interests in JSCCG. A non-controlling interest in Holdco is held by a third party through nominal membership interests, to which none of the income or expenses of Holdco are allocated.
 
The membership interests held by Holdco in JSCCG were purchased with proceeds from the issuance of $100 million of secured notes (the “Holdco notes") and are subject to mandatory redemption pursuant to scheduled amortizing, semi-annual payments due each January 15 and July 15, with a final payment due on January 15, 2042. The payment dates for the mandatorily redeemable membership interests mirror those of the Holdco notes. The sale of the JSCCG notes, the membership interests in JSCCG and the Holdco notes closed on January 17, 2012. See Note 11 — Debt Securities ActivitySecured Debt of VIEs. The JSCCG notes are secured by TVA’s lease payments and the Holdco notes are secured by Holdco's investment in and amounts receivable from JSCCG. TVA’s lease payments, under the terms of the Facility Lease, are equal to and payable on the same dates as JSCCG’s and Holdco’s semi-annual debt service payments. In addition to the lease payments, TVA pays the administrative or miscellaneous expenses incurred by JSCCG and Holdco. Certain agreements related to this transaction contain default and acceleration provisions.
 
Due to its participation in the design, business conduct and credit and financial support of JSCCG and Holdco, TVA is deemed to have a variable interest in each of these entities. Accordingly, TVA has made qualitative evaluations regarding which interest holders have the power to direct the activities that most significantly impact the economic performance of the entities and have the obligation to absorb losses or receive benefits that could be significant to the entities. The evaluations consider the purpose and design of the businesses, the risks that the businesses were designed to create and pass along to other entities, the activities of the businesses that can be directed and which party can direct them, and the expected relative impact of those activities on the economic performance of the businesses. TVA has the power to direct the activities of an entity when it has the ability to make key operating, investing and financing decisions, including, but not limited to, capital investment and the issuance or redemption of debt. Based on its analysis, TVA has determined that it is the primary beneficiary of JSCCG and Holdco and, as such, is required to account for the VIEs on a consolidated basis. Holdco’s membership interests in JSCCG are eliminated in consolidation.
 

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The table below summarizes the carrying amounts and classifications of the JSCCG and Holdco assets and liabilities:

JSCCG and Holdco
Summary of Assets and Liabilities
 
At June 30, 2012
Current assets
 
Restricted cash of variable interest entity
$
30

Total assets
$
30

 
 
Current liabilities
 

Accrued interest
$
22

Current maturities of long-term debt of variable interest entities
12

Total current liabilities
34

Long-term debt, net
 
Long-term debt of variable interest entities
988

Total long-term debt, net
988

Total liabilities
$
1,022


JSCCG’s and Holdco’s creditors do not have any recourse to the general credit of TVA. TVA does not have any obligations to provide financial support to JSCCG or Holdco other than as prescribed in the terms of the Facility Lease and other agreements related to this transaction.

8.  Kingston Fossil Plant Ash Spill

The Event

In December 2008, one of the dredge cells at the Kingston Fossil Plant ("Kingston") failed, and approximately five million cubic yards of water and coal fly ash flowed out of the cell. TVA is continuing cleanup and recovery efforts in conjunction with federal and state agencies.  TVA completed the removal of time-critical ash from the river during the third quarter of 2010, and removal of the remaining ash is considered to be non-time-critical.  TVA estimates that the physical cleanup work (final removal) will be completed in the last quarter of CY 2014.  A final assessment, issuance of a completion report, and approval by the State of Tennessee and the Environmental Protection Agency ("EPA") are expected to occur by the second quarter of CY 2015.  

Claims and Litigation

See Note 17 — Legal Proceedings Related to the Kingston Ash Spill and — Civil Penalty and Natural Resource Damages for the Kingston Ash Spill.

Financial Impact

Because of the uncertainty at this time of the final costs to complete the work prescribed by the ash disposal plan, a range of reasonable estimates has been developed by cost category.  Known amounts, most likely scenarios, or the low end of the range for each category have been accumulated and evaluated to determine the total estimate.  The range of costs varies from approximately $1.1 billion to approximately $1.2 billion.

TVA recorded an estimate of $1.1 billion for the cost of cleanup related to this event.  In August 2009, TVA began using regulatory accounting treatment to defer all actual costs already incurred and expected future costs related to the ash spill.  The cost is being charged to expense as it is collected in rates over 15 years, beginning October 1, 2009.  As the estimate changes, additional costs may be deferred and charged to expense prospectively as they are collected in future rates.

As work continues to progress and more information is available, TVA will review its estimates and revise them as appropriate.  TVA has accrued a portion of the estimated cost in current liabilities, with the remaining portion shown as a long-term liability on TVA's consolidated balance sheets.  Amounts spent since the event through June 30, 2012, totaled $834 million.  The remaining estimated liability at June 30, 2012, was $290 million.

TVA has not included the following categories of costs in the above estimate since it has been determined that these costs are currently either not probable or not reasonably estimable: penalties (other than the penalties set out in the June 2010 Tennessee Department of Environment and Conservation ("TDEC") order), regulatory directives, natural resources damages (other than payments required under a memorandum of agreement with TDEC and the U.S. Fish and Wildlife Service

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establishing a process and a method for resolving the natural resource damages claim), future lawsuits, future claims, long-term environmental impact costs, final long-term disposition of the ash processing area, costs associated with new laws and regulations, or costs of remediating any mixed waste discovered during the ash removal process.  There are certain other costs that will be incurred that have not been included in the estimate as they are appropriately accounted for in other areas of the consolidated financial statements.  Associated capital asset purchases are recorded in property, plant, and equipment.  Ash handling and disposition costs from current plant operations are recorded in operating expenses.  A portion of the dredge cell closure costs is also not included in the estimate as it is included in the non-nuclear Asset retirement obligation ("ARO") liability.

Insurance

TVA had property and excess liability insurance programs in place at the time of the Kingston ash spill.  TVA pursued claims under both the property and excess liability programs and has settled all of its property insurance claims and some of its excess liability insurance claims.  TVA has received insurance proceeds of $45 million.  In April 2012, TVA initiated arbitration proceedings against the remaining excess liability insurance companies in accordance with the policies’ dispute resolution provisions. TVA is seeking recovery of certain costs incurred in the cleanup project, including the costs of removing ash from property or waters owned by the State of Tennessee, and related expenses. Any amounts received related to insurance settlements are being recorded as reductions to the regulatory asset and will reduce amounts collected in future rates.

9.  Other Long-Term Liabilities

Other long-term liabilities consist primarily of liabilities related to certain derivative agreements as well as liabilities under agreements in respect of compliance with certain environmental regulations (see Note 17 — Environmental Agreements). The table below summarizes the types and amounts of Other long-term liabilities:

Other Long-Term Liabilities
 
At June 30, 2012
 
At September 30, 2011
Interest rate swap liabilities
$
1,741

 
$
463

Environmental agreements liability
252

 
346

Coal contract derivative liabilities
236

 
119

Currency swap liabilities
104

 
131

Commodity swap derivative liabilities
90

 
78

Swaption liability

 
1,077

Other
396

 
191

Total other long-term liabilities
$
2,819

 
$
2,405


On April 15, 2012, the counterparty to TVA’s swaption exercised its option to enter into a swap with TVA. See Note 13 — Derivatives Not Receiving Hedge Accounting Treatment for additional details of this transaction.

TVA guarantees repayment on certain loans receivable from end-use customers in association with the EnergyRight® Solutions program. TVA sells the loans receivable to a third party bank and has agreed with the bank to purchase any loan receivable that has been in default for 180 days or more or that TVA has determined is uncollectible. As of June 30, 2012, the carrying amount of the associated obligation to purchase those loans was approximately $182 million. See Note 5.

10.  Asset Retirement Obligations

During the nine months ended June 30, 2012, TVA's total ARO liability increased $116 million. The increase resulted primarily from accretion. This item was partially offset by ash area settlement projects that were conducted during the nine months ended June 30, 2012. The nuclear and non-nuclear accretion were deferred as regulatory assets, and $41 million of the related regulatory assets was amortized into expense since this amount was collected in rates.


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Reconciliation of Asset Retirement Obligation Liability

 
 
 
 
 
 
 
Nuclear
 
Non-nuclear
 
Total
Balance at September 30, 2011
$
2,091

 
$
1,047

 
$
3,138

Settlements (ash storage areas)

 
(13
)
 
(13
)
Accretion (recorded as regulatory asset)
86

 
43

 
129

Additional obligations

 
2

 
2

Change in estimate

 
(2
)
 
(2
)
Balance at June 30, 2012
$
2,177

 
$
1,077

 
$
3,254



11.  Debt and Other Obligations

Debt Outstanding

Total debt outstanding at June 30, 2012, and September 30, 2011, consisted of the following:
 
Debt Outstanding 
 
At June 30, 2012
 
At September 30, 2011
Short-term debt
 
 
 
Discount notes (net of discount)
$
2,530

 
$
482

Current maturities of long-term debt of variable interest entities
12

 

Current maturities of power bonds
1,395

 
1,537

Total short-term debt, net
3,937

 
2,019

Long-term debt
 

 
 

Long-term debt of variable interest entities
988

 

Long-term power bonds
20,242

 
22,647

Unamortized discount, premiums and other
(53
)
 
(235
)
Total long-term debt, net
21,177

 
22,412

Total outstanding debt
$
25,114

 
$
24,431


Debt Securities Activity

The table below summarizes the long-term debt securities activity for the period from October 1, 2011, to June 30, 2012.

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Debt Securities Activity
 
Date
 
Amount
 
Interest Rate
 
 
 
 
 
 
Issues
 
 
 
 
 
Debt of variable interest entities
January 17, 2012
 
$
1,000

 
4.87
%
electronotes®
Three Months Ended
March 31, 2012
 
69

 
3.42
%
electronotes®
Three Months Ended
June 30, 2012
 
66

 
3.48
%
 
 
 
$
1,135

 
 
 
 
 
 
 
 
Redemptions/Maturities
 
 
 
 
 
2009 Series A
November 2011
 
$
2

 
2.25
%
2009 Series B
December 2011
 
1

 
3.77
%
1992 Series D
April 2012
 
1,000

 
8.25
%
1999 Series A
May 2012
 
2

 
4.50
%
2009 Series A
May 2012
 
2

 
2.25
%
2000 Series F
May 2012
 
29

 
7.14
%
2002 Series A
May 2012
 
1,486

 
6.79
%
1998 Series D
June 2012
 
5

 
4.73
%
2009 Series B
June 2012
 
1

 
3.77
%
electronotes®
Three Months Ended
December 31, 2011
 
16

 
4.82
%
electronotes®
Three Months Ended
March 31, 2012
 
106

 
4.50
%
electronotes®
Three Months Ended
June 30, 2012
 
40

 
4.04
%
Total
 
 
$
2,690

 
 

Putable Automatic Rate Reset Securities. The interest rate on the 1998 Series D Putable Automatic Rate Reset Securities (“1998 Series D Bonds”) was reset from 4.73 percent to 4.06 percent on June 1, 2012. The interest rate on the 1999 Series A Putable Automatic Rate Reset Securities (“1999 Series A Bonds”) was reset on May 1, 2012, from 4.50 percent to 4.15 percent. Because investors have the opportunity to redeem these securities in the event of a rate reset, and because the rates were expected to reset, TVA reclassified the outstanding principal balances of $330 million of the 1998 Series D Bonds and $274 million of 1999 Series A Bonds to current maturities of long-term debt at March 31, 2012. TVA redeemed $2 million of the 1999 Series A Bonds on May 1, 2012, and $5 million of the 1998 Series D Bonds on June 1, 2012. At June 30, 2012, the remaining outstanding balances of $325 million of the 1998 Series D Bonds and $272 million of the 1999 Series A Bonds were classified in long-term debt.

Power Bonds. The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30.0 billion outstanding at any time. Debt amounts outstanding include the effect of translations related to Bonds denominated in foreign currencies.

On April 15, 2012, TVA redeemed $1.0 billion of the 1992 Series D Bonds which had a coupon of 8.25 percent. The bonds were redeemed at 106 percent of par value, with a premium of $60 million paid by TVA. The premium was deferred as a regulatory asset.

Secured Debt of VIEs. On January 17, 2012, JSCCG issued secured notes totaling $900 million in aggregate principal amount that bear interest at a rate of 4.626 percent. Also on January 17, 2012, Holdco issued secured notes totaling $100 million that bear interest at a rate of 7.1 percent. The JSCCG notes and the Holdco notes require amortizing semi-annual payments on each January 15 and July 15, and mature on January 15, 2042. The Holdco notes require a $10 million balloon payment upon maturity.

Approximately $970 million of the proceeds from the secured notes issuances was paid to TVA in accordance with the terms of the Head Lease and CMA. See Note 7. JSCCG deposited approximately $30 million with a lease indenture trustee to fund the payments due on July 15, 2012, in connection with the JSCCG notes and Holdco's membership interests in JSCCG. The deposit is reflected as Restricted cash of variable interest entity on the face of the consolidated balance sheets. TVA intends to use the proceeds from the transaction to meet its requirements under the TVA Act.


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Credit Facility Agreements. TVA and the U.S. Treasury, pursuant to the TVA Act, have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility.  This credit facility matures on September 30, 2012, and is expected to be renewed.  TVA plans to use the U.S. Treasury credit facility as a secondary source of liquidity.  The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the United States with maturities from date of issue of one year or less.  There were no borrowings outstanding under the facility at June 30, 2012.

TVA also has funding available in the form of three long-term revolving credit facilities totaling $2.5 billion.  The $0.5 billion and one of the $1.0 billion credit facilities both mature on January 14, 2014, and the other $1.0 billion credit facility matures on June 25, 2017.  The credit facilities accommodate the issuance of letters of credit up to $1.8 billion.  The interest rate on any borrowing under these facilities is variable based on market factors and the rating of TVA's senior unsecured long-term non-credit enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.5 billion which TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, fluctuates depending on the rating of TVA's senior unsecured long-term non-credit enhanced debt.  At June 30, 2012, and September 30, 2011, there were $1.2 billion and $575 million, respectively, of letters of credit outstanding under the facilities, and there were no borrowings outstanding. See Note 13 — Other Derivative InstrumentsCollateral.

12.  Leaseback Obligations

Lease/Leasebacks

Prior to 2004, TVA received approximately $945 million in proceeds by entering into leaseback transactions for 24 new peaking combustion turbine units (“CTs”). TVA also received approximately $389 million in proceeds by entering into a leaseback transaction for qualified technological equipment and software (“QTE”) in 2003. Due to TVA's continuing involvement in the operation and maintenance of the leased units and equipment and its control over the distribution of power produced by the combustion turbine facilities during the leaseback term, TVA accounted for the lease proceeds as financing obligations. At June 30, 2012, and September 30, 2011, the outstanding leaseback obligations, related to CTs and QTE, were $827 million and $885 million, respectively.

Seven States Power Corporation ("Seven States"), through its subsidiary, Seven States Southaven, LLC ("SSSL"), exercised its option to purchase from TVA an undivided 90 percent interest in a combined cycle combustion turbine facility in Southaven, Mississippi.  As part of interim joint-ownership arrangements, Seven States has the right at any time, and for any reason, until the earlier of the date long-term operational and power sales arrangements are in place or April 23, 2013, to require TVA to buy back Seven States's interest in the facility.  TVA will buy back Seven States's interest if long-term operational and power sales arrangements for the facility among TVA, Seven States, and SSSL, or alternative arrangements, are not in place by April 23, 2013.  TVA's buy-back obligation will terminate if such long-term arrangements are in place by that date.  In the event of a buy-back, TVA will re-acquire Seven States's interest in the facility and the related assets.  The carrying amount of the Southaven obligation on TVA's consolidated balance sheets was approximately $383 million at June 30, 2012, and $397 million at September 30, 2011.  As of June 30, 2012, this obligation was recorded in Current portion of leaseback obligations on the Consolidated Balance Sheets.

Bond Ratings Downgrade

On August 8, 2011, a credit rating agency lowered the long-term rating of TVA's rated Bonds from AAA to AA+.  This downgrade constituted an event of default under the Amended and Restated Credit Agreement between Seven States and its lenders.  Upon the occurrence of such an event of default, Seven States's lenders may either impose a higher default interest rate on the loan or exercise an option to require TVA to re-acquire its interest in the Southaven facility and the related assets.  On November 1, 2011, Seven States and its lenders, with the consent of TVA, executed an Amendment to the Amended and Restated Credit Agreement.  In this amendment, Seven States's lenders agreed to waive this event of default and thus waive the lenders' right to force TVA to re-acquire Seven States's interest in the Southaven facility and the related assets or to force Seven States to pay the default interest rate for this event of default.  Also, the amendment ties the interest rate on Seven States's credit facilities to TVA's credit rating.  Seven States will pay interest on the loan at either (1) the London Interbank Offer Rate ("LIBOR") plus 62.5 basis points if TVA's corporate credit rating is AAA (or its equivalent) by the nationally recognized credit rating agencies, or (2) LIBOR plus 87.5 basis points if TVA's corporate credit rating is AA+ (or its equivalent) by one or more nationally recognized credit rating agencies.

Lease Ratings Downgrade

On November 29, 2011, one credit rating agency downgraded its ratings on various long-term leases backed by obligations of TVA from AA+ to AA-, and set the outlook on the ratings to stable.  The downgrades include leaseback obligations related to CTs, QTE, and office real estate.  According to the rating agency, the downgrade reflects the application of new criteria to the leases, rather than any TVA action, event, or change in business conditions.  While the downgrades do not change TVA's obligations under the leases, they may affect the cost to TVA of similar future financings.


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13.  Risk Management Activities and Derivative Transactions

TVA is exposed to various market risks.  These market risks include risks related to commodity prices, investment prices, interest rates, currency exchange rates, inflation, and counterparty credit and performance risks.  To help manage certain of these risks, TVA has entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures.  Other than certain derivative instruments in investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes.

Overview of Accounting Treatment

TVA recognizes certain of its derivative instruments as either assets or liabilities on its consolidated balance sheets at fair value.  The accounting for changes in the fair value of these instruments depends on (1) whether TVA uses regulatory accounting to defer the derivative gains and losses, (2) whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and (3) if so, the type of hedge relationship (for example, cash flow hedge).

The following tables summarize the accounting treatment that certain of TVA's financial derivative transactions receive.
Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1) 
 
 
 
 
 
 
Amount of Mark-to-Market(1) 
Gain (Loss) Recognized in Other Comprehensive Income (Loss)(2)
Three Months Ended
June 30
 
Amount of Mark-to-Market
Gain (Loss) Recognized in Other Comprehensive Income (Loss)
Nine Months Ended
June 30
Derivatives in Cash Flow Hedging Relationship
 
Objective of Hedge Transaction
 
Accounting for Derivative
Hedging Instrument
 
2012
 
2011
 
2012
 
2011
Currency swaps
 
To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)
 
Cumulative unrealized gains and losses are recorded in OCI and reclassified to interest expense to the extent they are offset by cumulative gains and losses on the hedged transaction
 
$
(36
)
 
$
(12
)
 
$
27

 
$
51


Notes
(1) Mark-to-Market ("MtM")
(2) Other Comprehensive Income (Loss) ("OCI")

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2) 
 
 
Amount of Gain (Loss) Reclassified from
OCI to Interest Expense
Three Months Ended
June 30
 
Amount of Gain (Loss) Reclassified from
OCI to Interest Expense
Nine Months Ended
June 30
Derivatives in Cash Flow
Hedging Relationship
 
2012
 
2011
 
2012
 
2011
Currency swaps
 
$
18

 
$
(1
)
 
$
(7
)
 
$
(21
)

Note
There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented.

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Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment





 
Amount of Gain
(Loss) Recognized in Income on Derivatives
Three Months Ended
June 30
 
Amount of Gain
(Loss) Recognized in Income on Derivatives
Nine Months Ended
June 30
Derivative Type
 
Objective of Derivative
 
Accounting for Derivative Instrument
 
2012
 
2011
 
2012
 
2011
Swaption
 
To protect against decreases in value of the embedded call (interest rate risk)
 
MtM gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses are recognized in gain/loss on derivative contracts.
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
To fix short-term debt variable rate to a fixed rate (interest rate risk)
 
MtM gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses are recognized in gain/loss on derivative contracts.
 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contract derivatives
 
To protect against fluctuations in market prices of purchased coal or natural gas  (price risk)
 
MtM gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses due to contract settlements are recognized in fuel expense as incurred.

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
under financial trading program ("FTP")
 
To protect against fluctuations in market prices of purchased commodities (price risk)
 
MtM gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses are recognized in fuel expense or purchased power expense when the related commodity is used in production.
 
(104
)
 
(29
)
 
(248
)
 
(106
)

Note
All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but
instead are deferred as regulatory assets and liabilities. As such, there was no related gain (loss) recognized in income for these unrealized gains (losses) for the
three and nine months ended June 30, 2012, and 2011.

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Mark-to-Market Values of TVA Derivatives
 
At June 30, 2012
 
At September 30, 2011
Derivatives that Receive Hedge Accounting Treatment:
 
Balance
 
Balance Sheet Presentation
 
Balance
 
Balance Sheet Presentation
Currency swaps:
 
 
 
 
 
 
 
£200 million Sterling
$
(40
)
 
Other long-term liabilities
 
$
(44
)
 
Other long-term liabilities
£250 million Sterling
(11
)
 
Other long-term liabilities
 
(24
)
 
Other long-term liabilities
£150 million Sterling
(53
)
 
Other long-term liabilities
 
(63
)
 
Other long-term liabilities
 
 
 
 
 
 
 
 
Derivatives that Do Not Receive Hedge Accounting Treatment:
 
Balance
 
Balance Sheet Presentation
 
Balance
 
Balance Sheet Presentation
 
Swaption:
 
 
 
 
 
 
 
$1.0 billion notional
$

 
N/A
 
$
(1,077
)
 
Other long-term liabilities
Interest rate swaps:
 
 
 
 
 
 
 
$1.0 billion notional
(1,258
)
 
Other long-term liabilities
 

 
N/A
$476 million notional
(465
)
 
Other long-term liabilities
 
(446
)
 
Other long-term liabilities
$42 million notional
(18
)
 
Other long-term liabilities
 
(17
)
 
Other long-term liabilities
Commodity contract derivatives
(331
)
 
Other long-term assets $111; Other current assets $10; Other long-term  liabilities $(236); Accounts payable and accrued liabilities $(216)
 
239

 
Other long-term assets $285; Other current assets $150; Other long-term  liabilities $(119); Accounts payable and accrued liabilities $(77)
Derivatives under FTP:
 
 
 
 
 
 
 
Margin cash account(1)
79

 
Other current assets
 
34

 
Other current assets
Derivatives under FTP(2)
(391
)
 
Current regulatory assets $(186); Regulatory assets $(210); Current regulatory liabilities $3; Regulatory liabilities $2
 
(234
)
 
Current regulatory assets $(135); Regulatory assets $(102); Current regulatory liabilities $3

Notes
(1)  In accordance with certain credit terms, TVA uses leverage to trade financial instruments under the FTP.  Therefore, the margin cash account balance does not represent 100 percent of the net market value of the derivative positions outstanding as shown in the Derivatives Under Financial Trading Program table. This balance also includes the $26 million deposited with MF Global Inc. In July 2012, TVA recovered an additional $1 million of this balance from the trustee. See Counterparty Credit Risk for details.
(2)  The June 30, 2012, and September 30, 2011 balances in the Derivatives Under Financial Trading Program table show all open derivative positions in the FTP. 

Cash Flow Hedging Strategy for Currency Swaps

To protect against exchange rate risk related to three British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurred.  TVA had the following currency swaps outstanding as of June 30, 2012:

Currency Swaps Outstanding
At June 30, 2012
Effective Date of Currency Swap Contract
 
Associated TVA Bond Issues Currency Exposure
 
Expiration Date of Swap
 
Overall Effective
Cost to TVA
1999
 
£200 million
 
2021
 
5.81%
2001
 
£250 million
 
2032
 
6.59%
2003
 
£150 million
 
2043
 
4.96%

When the dollar strengthens against the British pound sterling, the transaction gain on the Bond liability is offset by a currency exchange loss on the swap contract.  Conversely, when the dollar weakens against the British pound sterling, the transaction loss on the Bond liability is offset by an exchange gain on the swap contract.  All such exchange gains or losses on

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the Bond liability are included in Long-term debt, net.  The offsetting exchange losses or gains on the swap contracts are recognized in Accumulated other comprehensive income (loss).  If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest expense.
    
Derivatives Not Receiving Hedge Accounting Treatment

Swaption and Interest Rate Swaps.  Prior to 2006, TVA entered into four swaption transactions to protect against decreases in value of the embedded call provisions on certain of its Bond issues.  A swaption is a derivative instrument that grants a third party the right to enter into an interest rate swap agreement with TVA under which TVA receives a floating rate of interest and pays the third party a fixed rate of interest equal to the interest rate on the Bond issue whose call provision TVA has monetized.  Prior to 2009, the counterparties to three of the swaptions exercised their rights to enter into interest rate swaps with TVA. As described in more detail below, the counterparty to the final swaption exercised its right to enter into an interest rate swap with TVA in March 2012.

In 2003, TVA monetized the call provisions on the TVA $1.0 billion 1992 Series D Bonds by entering into a swaption agreement with a third party in exchange for $175 million (the “1992 D Swaption”). In March 2012, the counterparty to the 1992 D Swaption transaction exercised its option to enter into a swap with TVA, effective April 15, 2012, requiring TVA to make fixed-rate payments to the counterparty of 8.25 percent and the counterparty to make floating rate payments to TVA based on LIBOR ending on April 15, 2042. These payments are based on a notional principal amount of $1.0 billion and began on July 15, 2012. In association with exercising its option to enter into the swap with TVA, the counterparty was required to pay TVA $60 million on the effective date of the swap.

TVA uses regulatory accounting treatment to defer the MtM gains and losses on the swaps and swaptions resulting from transactions in which the call provisions of TVA's debt issuances are monetized. The net deferred unrealized gains and losses are classified as regulatory assets or liabilities on TVA's consolidated balance sheets and are included in the ratemaking formula when the transactions settle. The values of these derivatives are included in Other long-term assets or Other long-term liabilities on the consolidated balance sheets, and realized gains and losses, if any, are included in TVA's consolidated statements of operations.

For the three and nine months ended June 30, 2012, the changes in market value resulted in deferred unrealized losses on the value of the interest rate swaps and swaption of $325 million and $186 million, respectively.  There were no realized gains or losses for the three and nine months ended June 30, 2012, and 2011. The net deferred unrealized gains and losses on the 1992 D Swaption were assigned to the resulting interest rate swap upon the effective date of the exercise.

Commodity Derivatives. TVA enters into certain derivative contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. At June 30, 2012, and September 30, 2011, TVA's coal contract derivatives had net market values of $(331) million and $239 million, respectively, which TVA deferred as regulatory assets and liabilities on a gross basis.  At June 30, 2012, TVA's coal contract derivatives had terms of up to six years.

TVA marks to market all of its natural gas derivative contracts that require physical delivery. The total market value of these natural gas derivative contracts at June 30, 2012, and September 30, 2011, was less than $1 million. At June 30, 2012, these natural gas derivative contracts had terms of up to three years.

Commodity Contract Derivatives 
 
At June 30, 2012
 
At September 30, 2011
 
Number of Contracts
 
Notional Amount
 
Fair Value (MtM)
 
Number of Contracts
 
Notional Amount
 
Fair Value (MtM)
Coal contract derivatives
18
 
53 million tons
 
$(331)
 
38
 
66 million tons
 
$239
Natural gas contract derivatives
24
 
75 million mmBtu
 
$—
 
13
 
5 million mmBtu
 
$—

Derivatives Under FTP. TVA has a FTP under which it purchases and sells futures, swaps, options, and combinations of these instruments (as long as they are standard in the industry) to hedge TVA’s exposure to (1) the price of natural gas, fuel oil, electricity, coal, emission allowances, nuclear fuel, and other commodities included in TVA’s fuel cost adjustment calculation, (2) the price of construction materials, and (3) contracts for goods priced in or indexed to foreign currencies. The combined transaction limit for the fuel cost adjustment and construction material transactions is $130 million (based on one-day value at risk). In addition, the maximum hedge volume for the construction material transactions is 75 percent of the underlying net notional volume of the material that TVA anticipates using in approved TVA projects, and the market value of all outstanding hedging transactions involving construction materials is limited to $100 million at the execution of any new transaction. The portfolio value at risk limit for the foreign currency transactions is $5 million and is separate and distinct from the $130 million

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transaction limit discussed above. TVA's policy prohibits trading financial instruments under the FTP for speculative purposes.

At June 30, 2012, the risks hedged under the FTP were the economic risks associated with the prices of natural gas, fuel oil, crude oil, and coal. Futures contracts and option contracts under the FTP had remaining terms of less than one year. Swap contracts under the FTP had remaining terms of six years or less.
Derivatives Under Financial Trading Program
 
At June 30, 2012
 
At September 30, 2011
 
Notional Amount
 
Fair Value (MtM)
(in millions)
 
Notional Amount
 
Fair Value (MtM)
(in millions)
Natural gas (in mmBtu)
 
 
 
 
 
 
 
Futures contracts

 
$

 
1,300,000

 
$
(4
)
Swap contracts
333,110,500

 
(387
)
 
232,295,000

 
(223
)
Option contracts

 
(1
)
 

 
(1
)
Natural gas financial positions
333,110,500

 
$
(388
)
 
233,595,000

 
$
(228
)
 
 
 
 
 
 
 
 
Fuel oil/crude oil (in barrels)
 
 
 

 
 

 
 

Futures contracts

 
$

 

 
$

Swap contracts
1,118,000

 
(2
)
 
1,591,000

 
(7
)
Option contracts

 

 
90,000

 

Fuel oil/crude oil financial positions
1,118,000

 
$
(2
)
 
1,681,000

 
$
(7
)
 
 
 
 
 
 
 
 
Coal (in tons)
 

 
 

 
 

 
 

Futures contracts

 
$

 

 
$

Swap contracts

 
(1
)
 
120,000

 
1

Option contracts

 

 

 

Coal financial positions

 
$
(1
)
 
120,000

 
$
1


Note
Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the broker or other counterparty.  Notional amounts disclosed represent the net absolute value of contractual amounts.

TVA defers all FTP unrealized gains (losses) as regulatory liabilities (assets) and records only realized gains or losses to match the delivery period of the underlying commodity contract. In addition to the open commodity derivatives disclosed above, TVA had closed derivative contracts with market values of $(39) million at June 30, 2012, and $(13) million at September 30, 2011. TVA experienced the following unrealized and realized gains and losses related to the FTP at the dates and during the periods, as applicable, set forth in the table below:

FTP Unrealized Gains (Losses)
 
 
 
 
 
FTP unrealized gains (losses) deferred as regulatory liabilities (assets)
 
At June 30, 2012
 
At September 30, 2011
 
 
 
 
 
Natural gas
 
$
(388
)
 
$
(228
)
Fuel oil/crude oil
 
(2
)
 
(7
)
Coal
 
(1
)
 
1



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FTP Realized Gains (Losses)
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30
 
For the Nine Months Ended June 30
Decrease (increase) in fuel expense
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Natural gas
 
$
(53
)
 
$

 
$
(69
)
 
$

Fuel oil/crude oil
 
1

 
7

 
9

 
11

Coal
 

 

 
1

 
1


FTP Realized Gains (Losses)
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30
 
For the Nine Months Ended June 30
Decrease (increase) in purchased power expense
 
2012
 
2011
 
2012
 
2011