Management’s
Discussion
and Analysis |
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Nonpower
Roles and Responsibilities Transition
TVA’s responsibilities for managing public resources began with
its creation in 1933. Today these resource management activities help
sustain the interconnected tributaries and the main stem of the Tennessee
River—the nation’s fifth largest river system. Multiple objectives
are balanced to provide flood control, navigation, electric power production,
recreation and environmental protection. Funding for these programs
historically has included Federal appropriations, power revenues and
nonpower revenues such as user fees.
In October 1997
Congress directed TVA to fund essential stewardship activities related
to its management of the Tennessee River system and TVA properties with
power funds in the event that there were insufficient appropriations
or other available funds to pay for such activities in any fiscal year.
Congress did not provide any appropriations to TVA to fund such activities
in 2000 and is not expected to in 2001. Consequently, during 2000, TVA
paid $72 million for essential stewardship activities primarily with
power revenues, with the remainder funded by a combination of user fees
and other forms of nonpower revenue and fund balances unused in prior
years. TVA spent approximately $75 million for such activities in both
1999 and 1998.
During 1999 TVA
received total Federal appropriations of $50 million, of which $43 million
was for essential stewardship activities and $7 million was for TVA’s
Land Between The Lakes National Recreation Area (LBL). During 1998 TVA
received total Federal appropriations of $70 million, of which $63 million
was for stewardship activities, including $3 million for environmental
cleanup work at the Muscle Shoals, Ala., reservation, and $7 million
was for LBL.
In addition, administrative
jurisdiction over LBL was transferred to the Secretary of Agriculture
effective October 1, 1999. TVA is responsible for certain transition
costs associated with the transfer of LBL, which are estimated to be
approximately $10 million. This liability was accrued on the nonpower
balance sheet at September 30, 1999, and partially liquidated in 2000.
At September 30, 2000, TVA had transferred $56 million of property and
equipment to the U.S. Forest Service, leaving a liability of approximately
$7 million of transition costs remaining.
TVA retains responsibility
for management of the remaining nonpower assets and settlement of nonpower
obligations. TVA remains committed to carrying out those essential stewardship
activities related to its management of the Tennessee River system and
TVA properties and to the protection and equitable distribution of public
benefits that are central to TVA’s management of its integrated
system.
Accounting
Standards
TVA accounts for the financial effects of regulation in accordance with
SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.”
As a result, TVA records certain regulatory assets and liabilities that
would not be recorded on the balance sheet under generally accepted
accounting principles for nonregulated entities.
TVA has approximately
$979 million of regulatory assets (see note 1—Other
deferred charges and Debt issue and reacquisition costs) along with
approximately $6.3 billion of deferred nuclear plants as of September
30, 2000. In the event that restructuring of the utility industry changes
the application of SFAS No. 71, TVA would be required to evaluate such
regulatory assets and deferred nuclear plants under the provisions of
SFAS No. 121, “Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of.” SFAS
No. 121 establishes criteria for evaluating and measuring asset impairments
and states that regulatory assets no longer probable of recovery through
future revenues be charged to earnings. Such an event may have a material
adverse effect on future results of operations from the write-off of
regulatory assets. However, TVA intends to seek full recovery of any
regulatory assets that may result from the transition to a competitive
market.
New
Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” which requires that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded
on the balance sheet as either an asset or a liability measured at its
fair value. The statement requires that changes in the derivative’s
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. In June 2000, the FASB issued SFAS No.
138, “Accounting for Certain Derivative Instruments and Certain
Hedging Activities—An Amendment of FASB Statement No. 133,”
further clarifying certain SFAS No. 133 implementation issues.
During 2000 TVA
formed a cross-functional team to identify and evaluate business contracts
and accounting transactions to determine the applicability of SFAS No.
133, and to develop required contemporaneous documentation and valuation
methodologies for identified contracts to assess the effect on TVA’s
financial condition and results of operations upon adoption.
Effective October
1, 2000, TVA adopted the provisions of SFAS Nos. 133 and 138. Qualifying
derivative contracts consisted of various purchased option contracts
and certain currency and interest rate swap agreements (see
note 5—Foreign currency transactions and interest rate swap).
TVA determined the fair value of such contracts to be approximately
$51 million at October 1, 2000, by utilizing a variety of independent
market sources. In accordance with SFAS No. 133, these contracts qualify
for cash-flow hedge treatment. Accordingly, the effective portion of
gains and losses related to such contracts is reported in accumulated
other comprehensive income, while the ineffective portion is recognized
through the creation of a regulatory asset/liability. The amounts accumulated
in other comprehensive income and regulatory asset/liability are recognized
in earnings upon settlement of the related contracts. Such treatment
reflects TVA’s ability and intent to account for these derivative
instruments on a settlement basis for rate-making purposes. As of October
1, 2000, TVA determined the effective portion of the gains related to
the derivative contracts to be approximately $51 million, which was
recorded as a cumulative-effect type transition adjustment of accumulated
other comprehensive income and approximately $0.3 million related to
the ineffective portion (loss), which was recorded as a regulatory liability.
In December 1999
the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements,”
summarizing the SEC’s views in applying generally accepted accounting
principles to selected revenue recognition issues. In June 2000 an amendment
was issued that delays the implementation until no later than the fourth
quarter of fiscal years beginning after December 15, 1999. Although
TVA is not required to do so, it will comply with the statement and
believes that its practices already comply with the provisions of the
bulletin. Its adoption is expected to have no material impact on TVA’s
reported results of operations, financial position or cash flows.
The FASB is proceeding
with its project regarding accounting practices related to obligations
associated with the retirement of long-lived assets and issued an Exposure
Draft on Accounting for Obligations Associated with the Retirement of
Long-Lived Assets in the first quarter of 2000. The proposed Statement
would be effective for financial statements issued for fiscal years
beginning after June 15, 2001. A second Exposure Draft on Accounting
for the Impairment or Disposal of Long-Lived Assets and for Obligations
Associated with Disposal Activities is currently out for comment. This
proposed Statement would be effective for financial statements issued
for fiscal years beginning after December 15, 2001. At the present time,
TVA is unable to predict whether the implementation of these standards
will be material to its results of operations or financial position.
Nuclear
Decommissioning Costs
The FASB has undertaken a project regarding the accounting for closure
and removal of long-lived assets, including the decommissioning of nuclear
generating units. The FASB has reached several tentative conclusions
with respect to the project; however, it is uncertain when a final statement
will be issued and what impact it may ultimately have on TVA’s
financial position or results of operations.
TVA’s accounting
policy recognizes all obligations related to closure and removal of
its nuclear units as incurred (see note 1—Decommissioning
costs). The liability for closure is measured as the present value
of the estimated cash flows required to satisfy the related obligation
and discounted at a determined risk-free rate of interest. The corresponding
charge to recognize any additional obligation is effected through the
creation of a regulatory asset. In addition, earnings from decommissioning
fund investments, amortization expense of the decommissioning regulatory
asset and interest expense on the decommissioning liability are deferred
in accordance with SFAS No. 71.
Forward-Looking
Information
TVA’s 2000 Annual Report contains forward-looking statements relating
to future events and future performance. Any statements regarding expectations,
beliefs, plans, projections, estimates,
objectives, intentions or assumptions or otherwise relating to future
events or performance may be forward-looking.
Some examples of
forward-looking statements include statements regarding TVA’s projections
of future power and energy requirements, future costs related to environmental
compliance, impacts of potential legislation on TVA and the likelihood
of enactment of such legislation, targets for TVA’s future competitive
position and the impacts of pending litigation and administrative orders,
such as the administrative order issued to TVA in November 1999 by the
EPA. Although 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 laws, regulations
and administrative orders, especially those related to restructuring
of the electric power industry and various environmental matters; increased
competition among electric utilities; legal and administrative proceedings
affecting TVA; the financial environment; performance of TVA’s
generating facilities; fuel prices; the demand for electricity; weather
conditions; changes in accounting standards and unforeseeable events.
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