10-Q 1 tve-3rdquarter2014x063014x.htm 10-Q **TVE-3rd Quarter 2014-06.30.14-10Q
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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, 2014
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 Statements of Comprehensive Income (Loss) (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............................................................................................................................................
Key Initiatives and Challenges..............................................................................................................................................
Environmental Matters..........................................................................................................................................................
Legal Proceedings................................................................................................................................................................
Compensation Matters..........................................................................................................................................................
Off-Balance Sheet Arrangements.........................................................................................................................................
Critical Accounting Policies and Estimates...........................................................................................................................
New Accounting Standards and Interpretations....................................................................................................................
Corporate Governance..........................................................................................................................................................
Other Matters........................................................................................................................................................................
 
 
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 that may be used in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (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
CCP
 
Coal combustion products
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
DOE
 
Department of Energy
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
GAO
 
Government Accountability Office
GHG
 
Greenhouse gas
GWh
 
Gigawatt hour(s)
JSCCG
 
John Sevier Combined Cycle Generation LLC
kWh
 
Kilowatt hour(s)
LIBOR
 
London Interbank Offered Rate
LPC
 
Local power company customer of TVA
MD&A
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MISO
 
Midcontinent Independent System Operator, Inc.
mmBtu
 
Million British thermal unit(s)
MtM
 
Mark-to-market
MW
 
Megawatt
NAV
 
Net asset value
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
OCI
 
Other Comprehensive Income (Loss)
PM
 
Particulate matter

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QTE
 
Qualified technological equipment and software
REIT
 
Real Estate Investment Trust
SACE
 
Southern Alliance for Clean Energy
SCCG
 
Southaven Combined Cycle Generation, LLC
SCRs
 
Selective catalytic reduction systems
SEC
 
Securities and Exchange Commission
SERP
 
Supplemental Executive Retirement Plan
Seven States
 
Seven States Power Corporation
SHLLC
 
Southaven Holdco, LLC
SMR
 
Small modular reactor(s)
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
TN Board
 
Tennessee Board of Water Quality, Oil, and Gas
USEC
 
United States Enrichment Corporation
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 amended laws, regulations, or administrative determinations, including those related to environmental matters, and the costs of complying with these laws, regulations, and administrative determinations;
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") or Asset Retirement Trust ("ART");
Events at a TVA 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, ownership, 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 preserving Bellefonte Nuclear Plant ("Bellefonte") Unit 1 for possible completion, 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;
Costs and liabilities that are not anticipated in TVA’s financial statements for third-party claims, natural resource damages, or fines or penalties associated with events such as the Kingston Fossil Plant ("Kingston") ash spill;
Failure of TVA's assets to operate as planned;
Failure of TVA's cyber security program to protect TVA's assets from cyber attacks;
The outcome of legal and administrative proceedings;
Significant changes in demand for electricity which may result from, among other things, economic downturns, loss of customers, increased energy efficiency and conservation, and improvements in distributed generation and other alternative generation technologies;
Addition or loss of customers;
The failure of TVA's generation, transmission, flood control, and related assets, including coal combustion residual ("CCR") facilities, to operate as anticipated, resulting in lost revenues, damages, and other costs that are not reflected in TVA’s financial statements or projections;
The cost of complying with known, anticipated, and new emissions reduction requirements, some of which could render continued operation of many of TVA's aging coal-fired generation 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 or changes 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 and those that increase flows across TVA's transmission grid, as well as inadequacies in the supply of water to TVA's generation facilities;
Inability to obtain, or loss of, regulatory approval for the construction or operation of assets, including Watts Bar Unit 2;
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;
Changes in the timing or amount of 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 substantially reaching the limit on bonds, notes, and other evidences of indebtedness specified in the TVA Act of 1933;

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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;
Actions taken, or inaction, by the U.S. government to address the situation of approaching its debt limit;
Changes in the economy and volatility in financial markets;
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;
Inability to eliminate identified deficiencies in TVA's systems, standards, controls, and corporate culture;
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, 2013 (the “Annual Report”) and
Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report for a discussion of factors that could cause actual results to differ materially from those in a forward-looking statement.  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 (2014, 2013, 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 reports are 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.  


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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
 
2014
 
2013
 
2014
 
2013
Operating revenues
 
 
 
 
 
 
 
Sales of electricity
$
2,618

 
$
2,572

 
$
7,869

 
$
7,830

Other revenue
33

 
30

 
102

 
92

Total operating revenues
2,651

 
2,602

 
7,971

 
7,922

Operating expenses
 

 
 

 
 

 
 

Fuel
698

 
652

 
1,904

 
2,118

Purchased power
279

 
263

 
843

 
796

Operating and maintenance
880

 
866

 
2,480

 
2,662

Depreciation and amortization
463

 
412

 
1,357

 
1,248

Tax equivalents
133

 
131

 
395

 
404

Total operating expenses
2,453

 
2,324

 
6,979

 
7,228

Operating income
198

 
278

 
992

 
694

Other income (expense), net
10

 
10

 
37

 
36

Interest expense
 

 
 

 
 

 
 

Interest expense
334

 
343

 
1,009

 
1,057

Allowance for funds used during construction and nuclear fuel expenditures
(45
)
 
(43
)
 
(127
)
 
(124
)
Net interest expense
289

 
300

 
882

 
933

Net income (loss)
$
(81
)
 
$
(12
)
 
$
147

 
$
(203
)
The accompanying notes are an integral part of these consolidated financial statements.


  TENNESSEE VALLEY AUTHORITY
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in millions)
 
Three Months Ended June 30
 
Nine Months Ended June 30
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income (loss)
$
(81
)
 
$
(12
)
 
$
147

 
$
(203
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized gain (loss) on cash flow hedges
1

 
9

 
23

 
(7
)
Reclassification to earnings from cash flow hedges
(26
)
 
(1
)
 
(55
)
 
57

Total other comprehensive income (loss)
$
(25
)
 
$
8

 
$
(32
)
 
$
50

Total comprehensive income (loss)
$
(106
)
 
$
(4
)
 
$
115

 
$
(153
)
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, 2014

September 30, 2013
Current assets
(Unaudited)

 
Cash and cash equivalents
$
505

 
$
1,602

Restricted cash and investments

 
33

Accounts receivable, net
1,550

 
1,567

Inventories, net
1,063

 
1,091

Regulatory assets
566

 
561

Other current assets
70

 
52

Total current assets
3,754

 
4,906

 
 
 
 
Property, plant, and equipment
 

 
 

Completed plant
47,243

 
47,073

Less accumulated depreciation
(24,233
)
 
(23,157
)
Net completed plant
23,010

 
23,916

Construction in progress
5,624

 
4,704

Nuclear fuel
1,275

 
1,256

Capital leases
59

 
47

Total property, plant, and equipment, net
29,968

 
29,923

 
 
 
 
Investment funds
1,903

 
1,701

 
 
 
 
Regulatory and other long-term assets
 

 
 

Regulatory assets
8,566

 
9,131

Other long-term assets
504

 
445

Total regulatory and other long-term assets
9,070

 
9,576

 
 
 
 
Total assets
$
44,695

 
$
46,106

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, 2014
 
September 30, 2013
Current liabilities
(Unaudited)
 
 
Accounts payable and accrued liabilities
$
1,722

 
$
1,627

Environmental cleanup costs - Kingston ash spill
82

 
102

Accrued interest
312

 
378

Current portion of leaseback obligations
75

 
69

Current portion of energy prepayment obligations
100

 
100

Regulatory liabilities
181

 
212

Short-term debt, net
1,759

 
2,432

Current maturities of power bonds
1,032

 
32

Current maturities of long-term debt of variable interest entities
31

 
30

Total current liabilities
5,294

 
4,982

 
 
 
 
Other liabilities
 
 
 
Post-retirement and post-employment benefit obligations
5,410

 
5,348

Asset retirement obligations
3,067

 
3,472

Other long-term liabilities
1,911

 
1,861

Leaseback obligations
617

 
692

Energy prepayment obligations
335

 
410

Environmental cleanup costs - Kingston ash spill

 
67

Regulatory liabilities
2

 
1

Total other liabilities
11,342

 
11,851

 
 
 
 
Long-term debt, net
 
 
 
Long-term power bonds, net
21,012

 
22,315

Long-term debt of variable interest entities
1,295

 
1,311

Total long-term debt, net
22,307

 
23,626

 
 
 
 
Total liabilities
38,943

 
40,459

 
 
 
 
Proprietary capital
 
 
 
Power program appropriation investment
261

 
268

Power program retained earnings
4,917

 
4,767

Total power program proprietary capital
5,178

 
5,035

Nonpower programs appropriation investment, net
603

 
609

Accumulated other comprehensive income (loss)
(29
)
 
3

Total proprietary capital
5,752

 
5,647

 
 
 
 
Total liabilities and proprietary capital
$
44,695

 
$
46,106

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)
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income (loss)
$
147

 
$
(203
)
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)
1,391

 
1,280

Amortization of nuclear fuel cost
205

 
186

Non-cash retirement benefit expense
429

 
467

Prepayment credits applied to revenue
(75
)
 
(77
)
Fuel cost adjustment deferral
(91
)
 
93

Fuel cost tax equivalents
1

 
2

Environmental cleanup costs – Kingston ash spill – non cash
51

 
54

Changes in current assets and liabilities
 

 
 

Accounts receivable, net
15

 
169

Inventories and other, net
33

 
(58
)
Accounts payable and accrued liabilities
22

 
(258
)
Accrued interest
(66
)
 
(52
)
Regulatory assets costs
(49
)
 
(8
)
Pension contributions
(132
)
 
(6
)
Environmental cleanup costs – Kingston ash spill
(65
)
 
(81
)
Insurance recoveries
175

 
5

Other, net
(4
)
 
(35
)
Net cash provided by operating activities
1,987

 
1,478

Cash flows from investing activities
 

 
 

Construction expenditures
(1,694
)
 
(1,510
)
Nuclear fuel expenditures
(272
)
 
(238
)
Loans and other receivables
 

 
 

Advances
(3
)
 
(4
)
Repayments
5

 
7

Other, net
3

 

Net cash used in investing activities
(1,961
)
 
(1,745
)
Cash flows from financing activities
 

 
 

Long-term debt
 

 
 

Issues of power bonds

 
1,080

Redemptions and repurchases of power bonds
(363
)
 
(1,417
)
Redemptions of variable interest entities
(15
)
 
(6
)
Short-term debt issues (redemptions), net
(674
)
 
887

Payments on leases and leasebacks
(70
)
 
(78
)
Financing costs, net

 
(7
)
Payments to U.S. Treasury
(10
)
 
(19
)
Other, net
9

 
(61
)
Net cash (used in) provided by financing activities
(1,123
)
 
379

Net change in cash and cash equivalents
(1,097
)
 
112

Cash and cash equivalents at beginning of period
1,602

 
868

Cash and cash equivalents at end of period
$
505

 
$
980

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, 2014 and 2013
(in millions)
 
Power Program Appropriation Investment
 
 
Power Program Retained Earnings
 
Nonpower Programs Appropriation Investment, Net
 
Accumulated
Other
Comprehensive
Income (Loss)
from
Net Gains (Losses) on Cash Flow Hedges
 
 
 
Total
Balance at March 31, 2013 (unaudited)
$
278

 
$
4,302

 
$
616

 
$
(32
)
 
$
5,164

Net income (loss)

 
(9
)
 
(3
)
 

 
(12
)
Total other comprehensive income (loss)

 

 

 
8

 
8

Return on power program appropriation investment

 
(1
)
 

 

 
(1
)
Return of power program appropriation investment
(5
)
 

 

 

 
(5
)
Balance at June 30, 2013 (unaudited)
$
273

 
$
4,292

 
$
613

 
$
(24
)
 
$
5,154

 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2014 (unaudited)
$
263

 
$
4,997

 
$
605

 
$
(4
)
 
$
5,861

Net income (loss)

 
(79
)
 
(2
)
 

 
(81
)
Total other comprehensive income (loss)

 

 

 
(25
)
 
(25
)
Return on power program appropriation investment

 
(1
)
 

 

 
(1
)
Return of power program appropriation investment
(2
)
 

 

 

 
(2
)
Balance at June 30, 2014 (unaudited)
$
261

 
$
4,917

 
$
603

 
$
(29
)
 
$
5,752

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


TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)
For the nine months ended June 30, 2014 and 2013
(in millions)
 
Power Program Appropriation Investment
 
 
Power Program Retained Earnings
 
Nonpower Programs Appropriation Investment, Net
 
Accumulated
Other
Comprehensive
Income (Loss)
from
Net Gains (Losses) on Cash Flow Hedges
 
 
 
Total
Balance at September 30, 2012
$
288

 
$
4,492

 
$
620

 
$
(74
)
 
$
5,326

Net income (loss)

 
(196
)
 
(7
)
 

 
(203
)
Total other comprehensive income (loss)

 

 

 
50

 
50

Return on power program appropriation investment

 
(4
)
 

 

 
(4
)
Return of power program appropriation investment
(15
)
 
$

 

 

 
(15
)
Balance at June 30, 2013 (unaudited)
$
273

 
$
4,292

 
$
613

 
$
(24
)
 
$
5,154

 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2013
$
268

 
$
4,767

 
$
609

 
$
3

 
$
5,647

Net income (loss)

 
153

 
(6
)
 

 
147

Total other comprehensive income (loss)

 

 

 
(32
)
 
(32
)
Return on power program appropriation investment

 
(3
)
 

 

 
(3
)
Return of power program appropriation investment
(7
)
 

 

 

 
(7
)
Balance at June 30, 2014 (unaudited)
$
261

 
$
4,917

 
$
603

 
$
(29
)
 
$
5,752

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 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, or 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 (the "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 (2014, 2013, 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.  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 future 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 consolidated interim 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, 2013, and the notes thereto, which are contained in TVA's Annual Report on Form 10-K for the year ended September 30, 2013 (the “Annual Report”). In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included in the interim financial statements.

The accompanying consolidated interim financial statements include the accounts of TVA and three variable interest entities ("VIEs"), of which TVA is the primary beneficiary. See Note 8. Intercompany balances and transactions have been eliminated in consolidation.

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 Consolidated Statement of Cash Flows for the nine months ended June 30, 2014 in the Cash flows from operating activities section as $(14) million previously reported as Other, net was reclassified to $(8) million of Regulatory assets costs and $(6) million of Pension contributions. In addition, $5 million previously reported as Environmental cleanup costs — Kingston ash spill, net was reclassified to $5 million of Insurance recoveries.


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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.

The allowance for uncollectible accounts was $1 million at both June 30, 2014 and September 30, 2013 for accounts receivable. Additionally, loans receivable of $105 million and $73 million at June 30, 2014 and September 30, 2013, respectively, are included in Other long-term assets and reported net of allowances for uncollectible accounts of $10 million.

Depreciation    

Depreciation expense was $391 million and $341 million for the three months ended June 30, 2014, and 2013, and $1.1 billion and $1.0 billion for the nine months ended June 30, 2014, and 2013, respectively. On November 14, 2013, TVA determined that Paradise Fossil Plant ("Paradise") Units 1 and 2 will be idled on March 31, 2017, and depreciation expense is being accelerated over the remaining useful life. This resulted in additional depreciation expense of $21 million and $34 million during the three and nine months ended June 30, 2014, respectively. It is expected that the decision to idle Paradise Units 1 and 2 on March 31, 2017, will increase depreciation expense by approximately $21 million for the remainder of 2014.    

Asset Retirement Obligations

TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets. These obligations relate to nuclear generating plants, fossil fuel-fired generating plants, hydroelectric generating plants/dams, transmission structures, and other property-related assets. These other property-related assets include, but are not limited to, easements and coal rights. Activities involved with retiring these assets could include decontamination and demolition of structures, removal and disposal of wastes, and site reclamation. Revisions to the estimates of asset retirement obligations ("AROs") are made whenever factors indicate that the timing or amounts of estimated cash flows have changed. Any accretion or depreciation expense related to these liabilities and assets is charged to a regulatory asset. See Note 11Asset Retirement Obligations.

Blended Low-Enriched Uranium Program

Under the blended low-enriched uranium ("BLEU") program, TVA, the Department of Energy ("DOE"), and certain nuclear fuel contractors have entered into agreements providing for the DOE's surplus of enriched uranium to be blended with other uranium down to a level that allows the blended uranium to be fabricated into fuel that can be used in nuclear power plants. Under the terms of an interagency agreement between TVA and the DOE, in exchange for supplying highly enriched uranium materials to the appropriate third-party fuel processors 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. Over the life of the program, TVA projects that the DOE’s share of savings generated by TVA’s use of this blended nuclear fuel could result in payments to the DOE of as much as $160 million. TVA accrues an obligation with each BLEU reload batch related to the portion of the ultimate future payments estimated to be attributable to the BLEU fuel currently in use. At June 30, 2014, TVA had paid out approximately $101 million for this program, and the obligation recorded was $16 million.

2.  Impact of New Accounting Standards and Interpretations

The following accounting standards became effective for TVA on October 1, 2013.

Balance Sheet. In December 2011, the Financial Accounting Standards Board ("FASB") issued guidance that requires additional disclosures relating to the rights of offset or other netting arrangements of assets and liabilities that are presented on a net or gross basis in the consolidated balance sheets. In January 2013, FASB issued additional guidance to limit the scope of the new offsetting disclosure requirements to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions.  The guidance requires the disclosure of the gross amounts subject to offset, actual amounts offset in accordance with GAAP, and the related net exposure. These changes became effective for TVA on October 1, 2013, and have been applied on a retrospective basis. This guidance relates solely to enhanced disclosures in the notes to the consolidated financial statements and did not have an impact on TVA's financial condition, results of operations, or cash flows.

Comprehensive Income. In February 2013, FASB issued guidance that requires public reporting companies under the Securities Act of 1933 to present information about reclassification adjustments from accumulated other comprehensive income (loss) ("AOCI") in their annual and interim financial statements in a single location. The guidance requires that companies present the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification. This information may be disclosed either in a single note or parenthetically on the face of the financial statements. If a component is not required to be reclassified to net income in its entirety, companies

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must cross reference to the related footnote for additional information. These changes became effective for TVA on October 1, 2013, and have been applied on a prospective basis. TVA has chosen to disclose the required information in a single note. This guidance relates solely to enhanced disclosures and did not have an impact on TVA's financial condition, results of operations, or cash flows.

The following accounting standards have been issued, but as of June 30, 2014, were not effective and had not been adopted by TVA.

Revenue RecognitionIn May 2014, the FASB issued a new revenue recognition standard that applies to revenue from contracts with customers. The standard requires that an entity recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The standard becomes effective for TVA on October 1, 2017, and allows for either a full retrospective or a modified retrospective application.  Early adoption of the standard is not permitted. TVA is currently evaluating the potential impact of these changes on its consolidated financial statements and related disclosures and the application method to be used.

Liabilities. In February 2013, FASB issued ASU 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date," which defines how entities measure obligations from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date and for which no guidance exists, except for obligations addressed within existing guidance in GAAP. The guidance also requires entities to disclose the nature and amount of the obligation as well as other information about those obligations. The standard becomes effective for TVA on October 1, 2014. Retrospective presentation for all comparative periods presented is required and early adoption is permitted. TVA has evaluated the impact of adopting this guidance and expects no material impact on TVA's financial condition, results of operations, or cash flows.

3.  Restructuring

TVA is undertaking cost reduction initiatives with the goal of keeping rates low, keeping reliability high, and continuing to fulfill its broader mission of environmental stewardship and economic development. TVA’s current focus is on reducing operating and maintenance costs through further efficiency gains and streamlining the organization. TVA’s goal is to reduce operating and maintenance costs by $500 million by 2015 as compared to its 2013 budget. Certain employees will be eligible for severance payments as a result of these cost reduction initiatives. During the three and nine months ended June 30, 2014, TVA recorded expense for probable estimated severance. These amounts are included in Accounts payable and accrued liabilities on the June 30, 2014 Consolidated Balance Sheet. The table below summarizes the activity related to severance costs:
Severance Cost Liability Activity
 
Three Months Ended June 30, 2014
 
Nine Months Ended
June 30, 2014
Severance cost liability at beginning of period
$
32

 
$

Liabilities incurred during the period
21

 
56

Actual costs paid during the period
(7
)
 
(10
)
Severance cost liability at end of period
$
46

 
$
46


4.  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, 2014
 
At September 30, 2013
Power receivables
$
1,484

 
$
1,495

Other receivables
67

 
73

Allowance for uncollectible accounts
(1
)
 
(1
)
Accounts receivable, net
$
1,550

 
$
1,567



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5.  Inventories, Net

The table below summarizes the types and amounts of TVA’s inventories:
Inventories, Net 
 
At June 30, 2014
 
At September 30, 2013
Materials and supplies inventory
$
611

 
$
620

Fuel inventory
479

 
494

Emission allowance inventory
13

 
14

Allowance for inventory obsolescence
(40
)
 
(37
)
Inventories, net
$
1,063

 
$
1,091


6.  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, 2014
 
At September 30, 2013
EnergyRight® receivables
$
119

 
$
117

Unamortized debt issue cost of power bonds
65

 
75

Loans and other long-term receivables, net
105

 
73

Prepaid capacity payments
55

 
62

Restricted cash
56

 

Currency swap asset, net
15

 
28

Coal contract derivative assets
2

 
1

Other
87

 
89

Other long-term assets
$
504

 
$
445


In association with the EnergyRight® Solutions program, local power company customers of TVA ("LPCs") offer financing to end-use customers for the purchase of energy-efficient equipment. TVA purchases the resulting loans receivable from its LPCs. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loan receivable that has been in default for 180 days or more or that TVA has determined is uncollectible. Given this continuing involvement, TVA accounts for the transfer of the loans receivable as secured borrowings. The current and long-term portions of the loans receivable are reported in Accounts receivable, net and Other long-term assets, respectively, on TVA’s Consolidated Balance Sheets. As of June 30, 2014 and September 30, 2013, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately $33 million. See Note 10 for information regarding the associated financing obligation.     


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7.  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 deferrals 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, 2014
 
At September 30, 2013
Current regulatory assets
 
 
 
Deferred nuclear generating units
$
237

 
$
237

Unrealized losses on commodity derivatives
137

 
183

Environmental agreements
77

 
73

Environmental cleanup costs - Kingston ash spill
53

 
68

Fuel cost adjustment receivable
62

 

Total current regulatory assets
566

 
561

 
 
 
 
Non-current regulatory assets
 

 
 

Deferred pension costs and other post-retirement benefits costs
3,875

 
4,076

Unrealized losses on interest rate derivatives
898

 
808

Nuclear decommissioning costs
898

 
893

Environmental cleanup costs - Kingston ash spill
449

 
681

Non-nuclear decommissioning costs
577

 
571

Deferred nuclear generating units
1,308

 
1,438

Environmental agreements
139

 
189

Unrealized losses on commodity derivatives
112

 
139

Other non-current regulatory assets
310

 
336

Total non-current regulatory assets
8,566

 
9,131

Total regulatory assets
$
9,132

 
$
9,692

 
 
 
 
Current regulatory liabilities
 

 
 

Fuel cost adjustment tax equivalents
$
177

 
$
176

Fuel cost adjustment liability

 
29

Unrealized gains on commodity derivatives
4

 
7

Total current regulatory liabilities
181

 
212

 
 
 
 
Non-current regulatory liabilities
 

 
 

Unrealized gains on commodity derivatives
2

 
1

Total non-current regulatory liabilities
2

 
1

Total regulatory liabilities
$
183

 
$
213


8.  Variable Interest Entities

A 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.

When TVA determines that it has a variable interest in a variable interest entity, a qualitative evaluation is performed to assess which interest holders have the power to direct the activities that most significantly impact the economic performance of the entity and have the obligation to absorb losses or receive benefits that could be significant to the entity. The evaluation considers the purpose and design of the business, the risks that the business was designed to create and pass along to other entities, the activities of the business that can be directed and which party can direct them, and the expected relative impact of

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those activities on the economic performance of the business through its life. TVA has the power to direct the activities of an entity when it has the ability to make key operating and financing decisions, including, but not limited to, capital investment and the issuance of debt.

Southaven

On August 9, 2013, TVA entered into a lease financing arrangement with Southaven Combined Cycle Generation, LLC ("SCCG") for the lease by TVA of the Southaven Combined Cycle Facility ("Southaven CCF"). SCCG is a special single-purpose limited liability company formed in June 2013 to finance the Southaven CCF through a $360 million secured notes issuance (the “SCCG notes”) and the issuance of $40 million of membership interests subject to mandatory redemption. The membership interests were purchased by Southaven Holdco, LLC ("SHLLC"). SHLLC is a special single-purpose entity, also formed in June 2013, established to acquire and hold the membership interests of SCCG. A non-controlling interest in SHLLC is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows of SHLLC are allocated.

The membership interests held by SHLLC were purchased with proceeds from the issuance of $40 million of secured notes (the “SHLLC notes”) and are subject to mandatory redemption pursuant to scheduled amortizing, semi-annual payments due each August 15 and February 15, with a final payment due on August 15, 2033. The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes. The sale of the SCCG notes, the membership interests in SCCG, and the SHLLC notes all closed on August 9, 2013. The SCCG notes are secured by TVA’s lease payments, and the SHLLC notes are secured by SHLLC’s investment in, and amounts receivable from, SCCG. TVA’s lease payments to SCCG are payable on the same dates as SCCG’s and SHLLC’s semi-annual debt service payments and are equal to the sum of (i) the amount of SCCG’s semi-annual debt service payments, (ii) the amount of SHLLC’s semi-annual debt service payments, and (iii) the amount of scheduled pre-determined payments to be made to Seven States Southaven, LLC on each lease payment date by SHLLC as agreed in SHLLC’s formation documents. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by SCCG and SHLLC. Certain agreements related to this transaction contain default and acceleration provisions.

TVA participated in the design, business conduct, and financial support of SCCG and has determined that it has a direct variable interest in SCCG resulting from risk associated with the value of the Southaven CCF at the end of the lease term. Based on its analysis, TVA has determined that it is the primary beneficiary of SCCG and, as such, is required to account for the VIE on a consolidated basis.

John Sevier

On January 17, 2012, TVA entered into a $1.0 billion construction management agreement and lease financing arrangement with John Sevier Combined Cycle Generation LLC ("JSCCG") for the completion and lease by TVA of the John Sevier Combined Cycle Facility ("John Sevier CCF"). JSCCG is a special single-purpose limited liability company formed in January 2012 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 special single-purpose entity, also formed in January 2012, established to acquire and hold the 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, expenses, and cash flows 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 are the same as those of the Holdco notes. The sale of the JSCCG notes, the membership interests in JSCCG, and the Holdco notes all closed on January 17, 2012. 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 to JSCCG 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 administrative and 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 has determined that it has a variable interest in both of these entities. Based on its analysis, TVA has concluded 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.

The financial statement items attributable to carrying amounts and classifications of JSCCG, Holdco, and SCCG as of June 30, 2014 and September 30, 2013, as reflected in the Consolidated Balance Sheets are as follows:

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Summary of Impact of VIEs on Consolidated Balance Sheets
 
At June 30, 2014
 
At September 30, 2013
Current liabilities of VIE
 
 
 

Accrued interest of VIE
$
27

 
$
12

Current portion of membership interests of VIE subject to mandatory redemption
2

 
2

Current maturities of long-term debt of VIE
31

 
30

Total current liabilities of VIE
60

 
44

Other liabilities of VIE
 
 
 
Membership interests of VIE subject to mandatory redemption
37

 
38

Long-term debt of VIE, net
 
 
 
Long-term debt of VIE
1,295

 
1,311

Total liabilities of VIE
$
1,392

 
$
1,393


Creditors of the VIEs do not have any recourse to the general credit of TVA. TVA does not have any obligations to provide financial support to the VIEs other than as prescribed in the terms of the agreements related to these transactions.

9.  Kingston Fossil Plant Ash Spill

The Event

In December 2008, one of the dredge cells at the Kingston Fossil Plant ("Kingston") failed, and over 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.  In November 2012, the Environmental Protection Agency ("EPA") and the Tennessee Department of Environment and Conservation ("TDEC") approved a plan to allow the Emory River's natural processes to remediate the remaining ash in the river, and to conduct a long-term monitoring program. TVA estimates that the physical cleanup work (final cleanup work and closure) will be completed in the spring of 2015.  A final assessment, issuance of a completion report, and approval by the State of Tennessee and the EPA are expected to occur by the third quarter of 2015.  

Claims and Litigation

See Note 18Legal ProceedingsLegal 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.  Amounts spent since the event through June 30, 2014, totaled $1.0 billion.  The remaining estimated liability at June 30, 2014, was $82 million and is included in Current liabilities.

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 a June 2010 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 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, and costs associated with new laws and regulations.  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 are also excluded from the estimate, as they are included in the non-nuclear ARO liability.

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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.  In April 2012, TVA initiated arbitration proceedings against the remaining three excess liability insurance companies in accordance with the policies’ dispute resolution provisions. TVA has successfully resolved two of these proceedings and is pursuing the third, which began in June 2014. 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. TVA has received insurance proceeds of $267 million, of which $14 million and $175 million were received during the three and nine months ended June 30, 2014, respectively. The insurance proceeds are being recorded as reductions to the regulatory asset and will reduce amounts collected in future rates.

10.  Other Long-Term Liabilities

Other long-term liabilities consist primarily of liabilities related to certain derivative instruments as well as liabilities under agreements related to compliance with certain environmental regulations (see Note 18Legal ProceedingsEnvironmental Agreements). The table below summarizes the types and amounts of Other long-term liabilities:
Other Long-Term Liabilities
 
At June 30, 2014
 
At September 30, 2013
Interest rate swap liabilities
$
1,289

 
$
1,199

Environmental agreements liability
139

 
190

EnergyRight® purchase obligation
150

 
149

Coal contract derivative liabilities
53

 
35

Membership interests of VIE subject to mandatory redemption
37

 
38

Commodity swap derivative liabilities
18

 
36

Currency swap liabilities
2

 
15

Other
223

 
199

Total other long-term liabilities
$
1,911

 
$
1,861


TVA purchases certain loans receivable from its LPCs in association with the EnergyRight® Solutions program. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loan receivable that has been in default for 180 days or more or that TVA has determined is uncollectible. Given this continuing involvement, TVA accounts for the transfer of the loans receivable as secured borrowings. The current and long-term portions of the resulting financing obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA’s Consolidated Balance Sheets. As of June 30, 2014 and September 30, 2013, the carrying amount of the financing obligation reported in Accounts payable and accrued liabilities was approximately $37 million. See Note 6 for information regarding the associated loans receivable.

11.  Asset Retirement Obligations

During the nine months ended June 30, 2014, TVA's total ARO liability decreased $352 million.

To estimate its decommissioning obligation related to its nuclear generating stations, TVA uses a probability-weighted, discounted cash flow model which, on a unit-by-unit basis, considers multiple outcome scenarios that include significant estimations and assumptions. Those assumptions include (1) estimates of the cost of decommissioning, (2) the method of decommissioning and the timing of the related cash flows, (3) the license period of the nuclear plant, considering the probability of license extensions, (4) cost escalation factors, and (5) the credit adjusted risk free rate to measure the obligation at the present value of the future estimated costs. Prior to June 30, 2014, TVA based its decommissioning cost estimates on cost elements prescribed by the Nuclear Regulatory Commission ("NRC") to dismantle and decommission the radioactive portion of each site with the assumption that decommissioning would occur within the first seven years after plant shut down, which approximates the DECON method of decommissioning. The DECON method requires that radioactive contamination is removed from a site and safely disposed of or decontaminated to a level that permits the site to be released for unrestricted use shortly after it ceases operation. On June 30, 2014, TVA recorded a change in estimate based on site-specific decommissioning cost studies. Additionally, TVA determined it appropriate to reflect an increase in the probability that certain of its nuclear operating licenses will be extended and that there is a probability that it will be able to delay ultimate decommissioning activities under a SAFSTOR method of decommissioning. The SAFSTOR method allows nuclear facilities to be placed and maintained in a condition that allows the facilities to be safely stored and subsequently decontaminated to levels that permit release for unrestricted use. As such, TVA ascribed probabilities to both the SAFSTOR and DECON methods of decommissioning in order

20

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to estimate its decommissioning obligation. Decommissioning cost studies will be updated for each of TVA’s nuclear units at least every five years.
Additionally, both the nuclear and non-nuclear liabilities were increased by periodic accretion. This was partially offset by ash area settlement projects that were conducted during the nine months ended June 30, 2014. The nuclear and non-nuclear accretion were deferred as regulatory assets, and $30 million of the related regulatory assets was amortized into expense as this amount was collected in rates.
Asset Retirement Obligation Activity
 
 
 
 
 
 
 
 
Nuclear
 
Non-Nuclear
 
Total
 
Balance at September 30, 2013
$
2,399

 
$
1,089

 
$
3,488

 
Settlements (ash storage areas)

 
(10
)
 
(10
)
 
Change in estimate as a result of nuclear site-specific studies
(471
)
 

 
(471
)
 
Change in estimate (ash storage areas)

 
(10
)
 
(10
)
 
Accretion (recorded as regulatory asset)
100

 
39

 
139

 
Balance at June 30, 2014
$
2,028

 
$
1,108

 
$
3,136

(1 
) 

Note
(1) The current portion of ARO in the amount of $69 million is included in Accounts payable and accrued liabilities at June 30, 2014.

12.  Debt and Other Obligations

Debt Outstanding

Total debt outstanding at June 30, 2014, and September 30, 2013, consisted of the following:
Debt Outstanding 
 
At June 30, 2014
 
At September 30, 2013
Short-term debt
 
 
 
Short-term debt, net
$
1,759

 
$
2,432

Current maturities of long-term debt of variable interest entities
31

 
30

Current maturities of power bonds
1,032

 
32

Total current debt outstanding, net
2,822

 
2,494

Long-term debt
 

 
 

Long-term debt of variable interest entities
1,295

 
1,311

Long-term power bonds(1)
21,092

 
22,400

Unamortized discounts, premiums, and other
(80
)
 
(85
)
Total long-term debt, net
22,307

 
23,626

Total outstanding debt
$
25,129

 
$
26,120


Note
(1) Includes net exchange losses from currency transactions of $98 million at June 30, 2014 and $43 million at September 30, 2013.


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Debt Securities Activity

The table below summarizes the long-term debt securities activity for the period from October 1, 2013, to June 30, 2014.
Debt Securities Activity
 
Date
 
Amount
 
Interest Rate
Redemptions/Maturities(1)
 
 
 
 
 
electronotes®
First Quarter 2014
 
$
4

 
3.56
%
electronotes®
Second Quarter 2014
 
326

 
4.52
%
electronotes®
Third Quarter 2014
 
3

 
3.14
%
2009 Series A
November 2013
 
2

 
2.25
%
2009 Series B
December 2013
 
1

 
3.77
%
2009 Series A
May 2014
 
2

 
2.25
%
2009 Series B
June 2014
 
25

 
3.77
%
Total redemptions/maturities of power bonds
 
 
363

 
 
Variable interest entities
Second Quarter 2014
 
15

 
4.30
%
Total redemptions/maturities of debt
 
 
$
378

 
 
Note
(1) All redemptions were at 100 percent of par.

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 was renewed for 2014 with a maturity date of September 30, 2014. Access to this credit facility or other similar financing arrangements with the U.S. Treasury has been available to TVA since the 1960s. 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 outstanding borrowings under the facility at June 30, 2014. The availability of this credit facility may be impacted by how the U.S. government addresses the situation of approaching its debt limit.

TVA also has funding available in the form of three long-term revolving credit facilities totaling $2.5 billion. One $1.0 billion credit facility matures on June 25, 2017, another $1.0 billion credit facility matures on December 13, 2017, and the $500 million credit facility matures on April 5, 2018. The interest rate on any borrowing under these facilities varies 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 that TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA's senior unsecured long-term non-credit-enhanced debt. At
June 30, 2014, and September 30, 2013, there were approximately $900 million and $800 million, respectively, of letters of credit outstanding under the facilities, and there were no borrowings outstanding. See Note 14Other Derivative Instruments Collateral.

Lease/Leaseback Obligations

Prior to 2004, TVA received approximately $945 million in proceeds by entering into lease/leaseback transactions for 24 new peaking combustion turbine units. TVA also received approximately $389 million in proceeds by entering into lease/leaseback transactions for qualified technological equipment and software 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, 2014, and September 30, 2013, the outstanding lease/leaseback obligations were $692 million and $761 million, respectively.

13.  Accumulated Other Comprehensive Income (Loss)

AOCI represents market valuation adjustments related to TVA’s currency swaps. The currency swaps are cash flow hedges and are the only derivatives in TVA’s portfolio that have been designated and qualify for hedge accounting treatment. TVA records exchange rate gains and losses on its foreign currency-denominated debt in net income and marks its currency swap assets and liabilities to market through other comprehensive income (loss) ("OCI"). TVA then reclassifies an amount out of AOCI into net income, offsetting the exchange gain/loss recorded on the debt. During the three and nine months ended

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June 30, 2014, TVA reclassified $26 million and $55 million, respectively, of gains related to its cash flow hedges from AOCI to Interest expense. See Note 14.

TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. As such, certain items that would generally be reported in AOCI or that would impact the statements of operations are recorded as regulatory assets or regulatory liabilities. See Note 7, Note 14 Overview of Accounting Treatment, Note 15Fair Value Measurements, and Note 17.
    
14.  Risk Management Activities and Derivative Transactions

TVA is exposed to various risks.  These 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, TVA's policy is 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 Gain (Loss) Recognized in OCI
 
 
 
 
 
 
Three Months Ended June 30
 
Nine Months Ended June 30
 
Derivatives in Cash Flow Hedging Relationship
 
Objective of Hedge Transaction
 
Accounting for Derivative
Hedging Instrument
 
2014
 
2013
 
2014
 
2013
 
Currency swaps
 
To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)
 
Unrealized gains and losses are recorded in AOCI and reclassified to interest expense to the extent they are offset by gains and losses on the hedged transaction
 
$
1

 
$
9

 
$
23

 
$
(7
)
 


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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
 
Nine Months Ended June 30
 
Derivatives in Cash Flow Hedging Relationship
 
2014
 
2013
 
2014
 
2013
 
Currency swaps
 
$
26

 
$
1

 
$
55

 
$
(57
)
 
Note
There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $30 million of losses from AOCI to interest expense within the next twelve months to offset amounts anticipated to be recorded in interest expense related to exchange gain on the debt.
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(1)
 
Nine Months Ended
June 30(1)
 
Derivative Type
 
Objective of Derivative
 
Accounting for Derivative Instrument
 
2014
 
2013
 
2014
 
2013
 
Interest rate swaps
 
To fix short-term debt variable rate to a fixed rate (interest rate risk)
 
Mark-to-market 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)
 
Mark-to-market 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.
 

 
(2
)
 

 
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
under financial trading program ("FTP")
 
To protect against fluctuations in market prices of purchased commodities (price risk)
 
Mark-to-market 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.
 
(6
)

(21
)
 
(29
)
 
(99
)
 

Note
(1) 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 months and nine months ended June 30, 2014 and 2013.


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Table of Contents                        

Mark-to-Market Values of TVA Derivatives
 
At June 30, 2014
 
At September 30, 2013
Derivatives that Receive Hedge Accounting Treatment
 
Balance
 
Balance Sheet Presentation
 
Balance
 
Balance Sheet Presentation
Currency swaps
 
 
 
 
 
 
 
£200 million Sterling
$
(2
)
 
Other long-term liabilities
 
$
(15
)
 
Other long-term liabilities
£250 million Sterling
64

 
Other long-term assets
 
51

 
Other long-term assets
£150 million Sterling
7

 
Other long-term assets
 
10

 
Other long-term assets
 
 
 
 
 
 
 
 
Derivatives that Do Not Receive Hedge Accounting Treatment
 
Balance
 
Balance Sheet Presentation
 
Balance
 
Balance Sheet Presentation
Interest rate swaps
 
 
 
 
 
 
 
$1.0 billion notional
(946
)
 
Other long-term liabilities
 
(886
)
 
Other long-term liabilities
$476 million notional
(331
)
 
Other long-term liabilities
 
(300
)
 
Other long-term liabilities
$42 million notional
(12
)
 
Other long-term liabilities
 
(13
)
 
Other long-term liabilities
Commodity contract derivatives
(150
)
 
Other long-term assets $2; Other current assets $3; Other long-term liabilities $(54); Accounts payable and accrued liabilities $(101)
 
(141
)
 
Other long-term assets $1; Other current assets $2; Other long-term liabilities $(35); Accounts payable and accrued liabilities $(109)
Derivatives under FTP(1)
(90
)
 
Other current assets $(56); Other long-term liabilities $(18); Accounts payable and accrued liabilities $(16)
 
(166
)
 
Other current assets $(97); Other long-term liabilities $(36); Accounts payable and accrued liabilities $(33)

Note
(1)  Fair values of certain derivatives under the FTP that were in net liability positions totaling $57 million and $100 million at June 30, 2014 and September 30, 2013, respectively, are recorded in TVA's margin cash accounts in Other current assets. These derivatives are transacted with futures commission merchants, and cash deposits have been posted to the margin cash accounts held with each futures commission merchant to offset the net liability positions in full.

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, 2014:
Currency Swaps Outstanding
At June 30, 2014
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 the Bond liability are included in Long-term debt, net.  The offsetting exchange losses or gains on the swap contracts are recognized in AOCI.  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.
    

25

Table of Contents                        

Derivatives Not Receiving Hedge Accounting Treatment

Interest Rate Derivatives.  TVA uses regulatory accounting treatment to defer the mark-to-market ("MtM") gains and losses on its interest rate swaps. 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 months ended June 30, 2014 and 2013, the changes in market value of the interest rate swaps resulted in deferred unrealized gains (losses) of $(65) million and $252 million, respectively. For the nine months ended June 30, 2014 and 2013, the changes in market value of the interest rate swaps resulted in deferred unrealized gains (losses) of $(90) million and $465 million, respectively.  

Commodity Derivatives. TVA enters into certain derivative contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. TVA marks to market all such contracts and defers the market values as regulatory assets or liabilities on a gross basis. At June 30, 2014, TVA's coal and natural gas contract derivatives had terms of four years and up to two years, respectively.
Commodity Contract Derivatives 
 
At June 30, 2014
 
At September 30, 2013
 
Number of Contracts
 
Notional Amount
 
Fair Value (MtM)
 
Number of Contracts
 
Notional Amount
 
Fair Value (MtM)
Coal contract derivatives
34
 
47 million tons
 
$
(146
)
 
19
 
43 million tons
 
$
(140
)
Natural gas contract derivatives
33
 
63 million mmBtu
 
$
(4
)
 
13
 
39 million mmBtu
 
$
(1
)

Derivatives Under FTP. TVA has an FTP under which it may purchase and sell 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 transaction limit discussed above. TVA's policy prohibits trading financial instruments under the FTP for speculative purposes.

At June 30, 2014 and September 30, 2013, the risks hedged under the FTP were the economic risks associated with the prices of natural gas, fuel oil, and crude oil. At June 30, 2014 and September 30, 2013, TVA had no outstanding coal contract derivatives under the FTP. There were no futures contracts or options contracts outstanding under the FTP at June 30, 2014, and swap contracts under the FTP had remaining terms of four years or less. TVA plans to continue to manage fuel price volatility through various methods, but is currently evaluating the future use of financial instruments.


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Table of Contents                        

Derivatives Under Financial Trading Program
 
At June 30, 2014
 
At September 30, 2013
 
Notional Amount
 
Fair Value (MtM)
(in millions)
 
Notional Amount
 
Fair Value (MtM)
(in millions)
Natural gas (in mmBtu)
 
 
 
 
 
 
 
Futures contracts

 
$

 

 
$

Swap contracts
117,575,000

 
(91
)
 
152,922,500

 
(169
)
Option contracts

 

 

 

Natural gas financial positions
117,575,000

 
$
(91
)
 
152,922,500

 
$
(169
)
 
 
 
 
 
 
 
 
Fuel oil/crude oil (in barrels)
 
 
 

 
 
 
 

Futures contracts

 
$

 

 
$

Swap contracts

 
1

 
1,205,000

 
3

Option contracts

 

 

 

Fuel oil/crude oil financial positions

 
$
1

 
1,205,000

 
$
3


Note
Fair value amounts presented are based on net commodity position with the futures commission merchant 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. In addition to the open commodity derivatives disclosed above, TVA had closed derivative contracts with market values of $(3) million at June 30, 2014, and $(8) million at September 30, 2013. Unrealized gains and losses related to the FTP at June 30, 2014 and September 30, 2013 were as follows:
Financial Trading Program Unrealized Gains (Losses)
FTP unrealized gains (losses) deferred as regulatory liabilities (assets)
 
At June 30, 2014
 
At September 30, 2013
 
 
 
 
 
Natural gas
 
$
(91
)
 
$
(169
)
Fuel oil/crude oil
 
1

 
3


Realized gains and losses related to the FTP for the three and nine months ended June 30, 2014 and 2013 were as follows:
Financial Trading Program Realized Gains (Losses)
 
 
For the Three Months Ended
June 30
 
For the Nine Months Ended
June 30
 
Decrease (increase) in fuel expense
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
Natural gas
 
$
(5
)
 
$
(13
)
 
$
(23
)
 
$
(60
)
 
Fuel oil/crude oil
 

 

 
2

 
2

 
Coal
 

 

 

 
(1
)
 


27

Table of Contents                        

Financial Trading Program Realized Gains (Losses)
 
 
For the Three Months Ended
June 30
 
For the Nine Months Ended
June 30
 
Decrease (increase) in purchased power expense
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
Natural gas
 
$
(1
)
 
$
(8
)
 
$
(9
)
 
$
(40
)
 

Offsetting of Derivative Assets and Liabilities

The amounts of TVA's derivative instruments as reported in the Consolidated Balance Sheets as of June 30, 2014, and September 30, 2013, are shown in the table below.
 
As of June 30, 2014
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Balance Sheet (1)
 
Net Amounts of Assets/Liabilities Presented in the Balance Sheet (2)
Assets
 
 
 
 
 
Currency swaps
$
71

 
$
(56
)
 
$
15

Commodity derivatives under FTP
56

 
(55
)
 
1

Total derivatives subject to master netting or similar arrangement
127

 
(111
)
 
16

Total derivatives not subject to master netting or similar arrangement
5

 

 
5

 
 
 
 
 
 
Total
$
132

 
$
(111
)
 
$
21

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Currency swap (3)
$
(2
)
 
$

 
$
(2
)
Interest rate swaps (3)
(1,289
)
 

 
(1,289
)
Commodity derivatives under FTP
(146
)
 
112

 
(34
)
Total derivatives subject to master netting or similar arrangement
(1,437
)
 
112

 
(1,325
)
Total derivatives not subject to master netting or similar arrangement
(155
)
 

 
(155
)
 
 
 
 
 
 
Total
$
(1,592
)
 
$
112

 
$
(1,480
)
 
 
 
 
 
 
 
As of September 30, 2013
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Balance Sheet (1)
 
Net Amounts of Assets/Liabilities Presented in the Balance Sheet (2)
Assets
 
 
 
 
 
Currency swaps
$
61

 
$
(33
)
 
$
28

Commodity derivatives under FTP
101

 
(98
)
 
3

Total derivatives subject to master netting or similar arrangement
162

 
(131
)
 
31

Total derivatives not subject to master netting or similar arrangement
3

 

 
3

 
 
 
 
 
 
Total
$
165

 
$
(131
)
 
$
34

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Currency swap (3)
$
(15
)
 
$

 
$
(15
)
Interest rate swaps (3)
(1,199
)
 

 
(1,199
)
Commodity derivatives under FTP
(267
)
 
198

 
(69
)
Total derivatives subject to master netting or similar arrangement
(1,481
)
 
198

 
(1,283
)
Total derivatives not subject to master netting or similar arrangement
(144
)
 

 
(144
)
 
 
 
 
 
 
Total
$
(1,625
)
 
$
198