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Management’s
Discussion
and Analysis
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Market Risk
Risk
Policies
TVA is exposed to market risks, including changes in interest rates,
foreign currency exchange rates and volatility of certain commodity
and equity market prices. To manage the volatility attributable to these
exposures, TVA has entered into various nontrading derivative transactions,
principally an interest rate swap agreement, foreign currency swap contracts,
forwards, futures and option contracts. TVA has established its Risk
Management Committee, which maintains responsibility for reviewing and
approving controls and procedures for TVA-wide risk management activities
including the oversight of models and assumptions used to measure risk,
the review of counterparty exposure limits and the establishment of
formal procedures for use of financial hedging instruments.
TVA is exposed
to losses in the event of counterparties’ nonperformance and accordingly
has established controls to determine the creditworthiness of counterparties
in order to mitigate exposure to counterparty credit risk. With respect
to hedging activities, TVA risk management policies allow the use of
derivative financial instruments to manage financial exposures but prohibit
the use of these instruments for speculative or trading purposes. Prior
to October 1, 2000, TVA’s effective implementation date for Statement
of Financial Accounting Standards (SFAS) No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” TVA accounted for
such hedging activities using the deferral method, with gains and losses
recognized in the accompanying financial statements when the related
hedged transaction occurs. See further
discussion related to TVA’s 2001 adoption of SFAS No. 133 at New
Accounting Pronouncements.
Interest
Rate and Foreign Currency Risk
TVA manages its daily cash needs through issuance of discount notes
and other short-term borrowings. These borrowings with maturities of
less than one year expose TVA to fluctuations in short-term interest
rates. TVA is not exposed to changes in interest rates on most of its
long-term debt until such debt matures and may be refinanced at the
then-applicable rates. An interest rate swap is used to hedge TVA’s
exposure related to its inflation-indexed accreting principal bonds,
and currency swap contracts are used as hedges for foreign currency
denominated debt issues (see note 5—Foreign
currency transactions and interest rate swap). Based on TVA’s
overall interest rate exposure at September 30, 2000, including derivative
and other interest rate sensitive instruments, a near-term one percentage
point change in interest rates would not have a material impact on TVA’s
financial position or results of operations for 2000.
Commodity
Price Risk
TVA is exposed to the impact of market fluctuations in the price and
transportation costs of certain commodities and fuels including, but
not limited to, coal, natural gas and electricity. TVA employs established
policies and procedures to manage risks associated with these market
fluctuations by using various commodity-based derivative instruments,
including futures, forwards and option contracts. To monitor the risk
of commodity trading activities, TVA employs a daily Value at Risk (VaR)
methodology, which utilizes a statistical-based approach to determine
adjusted historical changes in the value of a market risk sensitive
commodity-based financial instrument to estimate the amount of change
in the current value of the instrument that could occur at a specified
confidence level over a specified interval. Based on TVA’s VaR
analysis of its overall commodity price risk exposure at September 30,
2000, management does not anticipate a materially adverse effect on
TVA’s financial position or results of operations as a result of
market fluctuations.
Equity
Price Risk
TVA maintains trust funds, consistent with the United States Nuclear
Regulatory Commission requirements, to fund certain costs of decommissioning
its nuclear generating units. These funds are managed by various money
managers and are primarily invested in marketable equity securities,
which are exposed to price fluctuations in equity markets. TVA actively
monitors the trust funds’ portfolios by benchmarking the performance
of their investments against certain price indices. The accounting for
nuclear decommissioning recognizes that, based on expected performance
of the portfolio, sufficient funds have been set aside to fully fund
expected decommissioning obligations, and, therefore, fluctuations in
trust fund marketable security returns do not affect the earnings of
TVA (see notes 1 and 9—Decommissioning
costs).
Futures
Contracts
TVA may enter into electricity and gas futures contracts for the sole
purpose of limiting or otherwise hedging TVA’s economic risks directly
associated with electric power generation, purchases and sales. The
Chicago Board of Trade has designated the TVA power transmission system
as a hub for electricity futures contracts.
Other Issues
Year
2000 Readiness
The “Year 2000” issue concerned the inability of information
technology systems to properly recognize and process date-sensitive
information related to the year 2000 and beyond. TVA did not experience
any significant Year 2000 problems in its power production, delivery
system, administration, billing and accounting systems. The total cost
of addressing Year 2000 systems readiness was approximately $40 million.
Spent
Nuclear Fuel
TVA has entered into a contract with the Department of Energy (DOE)
for the disposal of spent nuclear fuel. Payments are based on TVA’s
nuclear generation and charged to expense. The provisions of the contract
called for DOE to begin accepting spent nuclear fuel from utilities
on January 31, 1998, the date provided by the Nuclear Waste Policy Act
of 1982. However, as of September 30, 2000, DOE has not accepted any
spent fuel. TVA’s spent nuclear fuel storage facilities will be
sufficient to provide storage space for spent fuel generated on TVA’s
system through 2004 for its Sequoyah Plant, through 2006 for its Browns
Ferry Plant and through 2018 for its Watts Bar Plant. TVA plans to extend
storage capability through life-of-plant if necessary by using higher
density racks in its existing storage pools or dry storage casks. Additional
storage capacity increases will require NRC approval. However, all of
the above methods of extending storage capability have been licensed
by the NRC at other facilities.
Labor
Agreements
On September 30, 2000, TVA had 13,145 employees, of which 5,078 were
trades and labor employees. Neither the Federal labor relations laws
covering most private sector employees nor those covering most Federal
agencies are applicable to TVA. However, the Board has a longstanding
policy of acknowledging and dealing with recognized representatives
of its employees, and this policy is reflected in long-term agreements
to recognize trades and labor unions (or their successors) through 2007
and salary policy unions (or their successors) through 2012. Federal
law prohibits TVA employees from engaging in strikes against TVA.
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