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continued
1. Summary of significant
accounting policies
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Interest
and capital costs
During 2000, 1999 and 1998 cash paid for interest on outstanding indebtedness
(net of amount capitalized) was $1,669 million, $1,740 million and $1,886
million, respectively. In addition to paying interest on outstanding
indebtedness, the TVA Act requires TVA to make annual payments to the
U.S. Treasury. The annual Treasury payments represent a repayment of
the original appropriation investment, along with a return on the appropriation
investment (see note 4).
Risk-management
activities
TVA is
exposed to market risk from changes in interest rates and currency exchange
rates. To manage volatility relating to these exposures, TVA has entered
into various derivative transactions, principally an interest rate swap
agreement and foreign currency swap agreements (see
note 5—Foreign currency transactions and interest rate swap).
TVA is exposed to credit losses in the event of nonperformance by counterparties
on the risk-management instruments. TVA monitors such risk and does
not believe that there is a significant risk of nonperformance by any
of the parties of these instruments. TVA’s 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.
TVA may engage
in hedging activities using forwards, futures or options to hedge the
impact of market fluctuations on energy commodity prices. As of September
30, 1999, TVA accounted for these transactions using the deferral method,
and gains and losses were recognized in the accompanying financial statements
when the related hedged transaction occurred. Effective October 1,2000,
TVA adopted SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” which requires that derivatives be reported
at their fair market value on the statement of financial position. 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).
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. 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.
Cash
and cash equivalents
Cash and cash equivalents include the cash available in commercial bank
accounts and U.S. Treasury accounts, as well as short-term securities
held for the primary purpose of general liquidity. Such securities mature
within three months from the date of acquisition.
Insurance
TVA is primarily self-insured for property loss, workers’ compensation,
general liability and automotive liability. TVA is also self-insured
for health care claims for eligible active and retired employees. Consulting
actuaries assist TVA in determining certain liabilities for self-insured
claims. TVA maintains nuclear liability insurance and nuclear property,
decommissioning and decontamination insurance with an outside party
(see note 9—Nuclear insurance).
Management
estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the related amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Other
Certain reclassifications have been made to the 1998 and 1999 financial
statements to conform to the 2000 presentation.
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