Management’s
Discussion
and Analysis |
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Nonpower
Roles and Responsibilities
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.
During 1999, TVA
received total Federal appropriations of approximately $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
approximately $70 million, of which $60 million was for essential stewardship
activities, $7 million was for LBL, and $3 million was for TVA’s
Environmental Research Center.
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. Consequently, during 2000, TVA will pay 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. TVA expects to spend approximately $43 million from
power revenues for these activities during 2000.
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 recorded against available
nonpower fund balances at September 30, 1999.
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 Statement of
Financial Accounting Standards (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 non-regulated entities.
TVA has approximately
$1.6 billion 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, 1999. 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.” Statement 121 establishes criteria for evaluating
and measuring asset impairments, and states that regulatory assets that
are 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 fully recover any regulatory and other deferred assets
that may result from TVA’s 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 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. TVA may engage in hedging activities using futures,
forward contracts, options and swaps to hedge the impact of market fluctuations
on energy commodity prices, interest rates, and foreign currencies.
In July 1999, the FASB deferred the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. TVA is currently assessing
the effect, if any, on its financial statements of implementing SFAS
No. 133.
In March 1998,
the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued Statement of Position (SOP) 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use,” which provides guidance on accounting for the
costs of computer software developed or obtained for internal use. Under
SOP 98-1, certain costs which are currently expensed may now be capitalized
and amortized over some future period. SOP 98-1, which is effective
for TVA in 2000, is not expected to have a material impact on TVA’s
financial position or results of operations.
In December 1998,
the Emerging Issues Task Force of the FASB issued EITF 98-10, “Accounting
for Contracts Involved in Energy Trading and Risk Management Activities.”
Some energy-related companies have been entering into contracts for
the purchase and sale of energy commodities and netting those activities
in the income statement (settlement basis). In EITF 98-10, the Task
Force stated that energy trading contracts are to be recorded at fair
value on the balance sheet, with related gains and loses included in
earnings. EITF 98-10, which is effective for TVA in 2000, is not expected
to have a material impact on TVA’s financial position or results
of operations.
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 and expects to issue an exposure draft in
the first quarter of 2000; 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.
Effective for 1998,
TVA changed its method of accounting for decommissioning costs and related
liabilities in order to comply with certain of the FASB’s tentative
conclusions, as well as certain rate-setting actions. TVA’s current
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 at 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 the additional obligation is effected through the
creation of a regulatory asset. TVA further modified its method of accounting
for decommissioning costs such that 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 1999
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 include
statements regarding TVA’s projections of future power and energy
requirements, future costs related to environmental compliance, targets
for TVA’s future competitive position and the potential effect
of the Year 2000 issue on TVA’s operations. 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 forward-looking
statements. Such factors include, among other things, new laws and regulations,
especially those related to the 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; the efficacy of TVA’s Year 2000 remediation
efforts and the efforts of those entities with which TVA interfaces;
and unforeseeable events.•
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