ML023640420

Part 1 of 2, Attachment to Tennessee Valley Authority'S Posthearing Proposed Findings of Fact and Conclusions of Law

ML023640420
Person / Time
Site:	Browns Ferry, Watts Bar, Sequoyah
Issue date:	12/20/2002
From:	Marquand B Tennessee Valley Authority
To:	Atomic Safety and Licensing Board Panel
SECY RAS
Shared Package
ML023640450	List: ML023640384 ML023640420 ML023640422
References
+adjud/rulemjr200506, 50-259-CIVP, 50-260-CIVP, 50-296-CIVP, 50-327-CIVP, 50-328-CIVP, 50-390-CIVP, ASLBP 01-791-01-CIVP, EA-99-234, RAS 5159
Download: ML023640420 (52)

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TABLE of Financial Highlights Corporate Profile Letter From the Chairman Stimulating Sustainable Economic Growth Supplying Low-Cost, Reliable Power Supporting a Thriving River System Highlights From 1999 Financial Table of Contents Management's Discussion and Analysis Financial Statements Notes to Financial Statements Auditor's and Management's Reports Investor Information 11-Year Comparative Data Executive Committee Forward-Looking Statements

FINANCIAL HIGHLIGHTS Financial Highlights-Power Program At September 30 or for the years ended September 30, as appropriate

-,.*(_ II .- -

(in mrthons) 1999 1998 Percent Change Operatlng revenues Operat~ngexpenses Operatlng Income Other (expense) income, net (9) 1 12 1 NM Interest expense t (1,777) (1,959) (9)

Cumulat~veeffect of change In accounting pr~nciple 217 - Nhi Net income $ 119 S 233 NM Total assets $ 33,386 S 33,615 (1)

Discount notes $ 982 1 $ 1,7571 (44)

Long-term debt, including current matur~tles 25,394 24,927 2 Total indebtedness J 26,376 $ 26,684 (1)

Cash flows from operations Capital expenditures Power System Statistics For the years ended September 30 1998 1 Percent Change System input [millions of kilowatt-hours)

System generatlon Hydro, including pumped storage Fossil Nuclear Combustion turb~ne Total net generatlon Purchased Total system input System output (millions of kilowatt-hours)

Sales bfuniclpal~tiesand cooperatives Industries directly served Federal agencles and other Total sales Other Losses Total system output Net winter dependable capacity (megawatts)

System peak load (megawatts)--summer System peak load (megawatts)--winter Annual load factor N u m b e r of employees as of September 30 Percent net winter dependable capacity by fuel source Foss~l 53%

Nuclear 20%

Hydro 19%

Combustion turblne 8%

Tennessee Valley Aurhorrty I I

generating

-bro@erztv in t b s VALLEY ...

ELECTRICITY Avemam Monthly -1 P o w r sJI 1,000 kllowatt-hours Los Angeles St Louls Weigh Rlchmond Chatlhn tjttle Rock Charlotte Birmingham Denver Newms Jackmnvilb Jackson TVA S d c e Area LauWlle CORPORATE Seama overview M E TENNESSEE VALLEY AUTHORTTY (TVA),

W A p w i h porwr to the Valley at the l w t fwibk price, msistent with its f&al ~n&te.

a wholly awned U.S. government corporation Iwlnamm Po8wiptlon established by the WA Act in 1933, generates + Nation's largest wholesale producer af electricity prosperity ro improve the qualiry of life for + 28,502 megawatts of capacity (net winter dependable) nearly eight million people in the Tennmsee + 11 fossil plants (59 units)

Valley region. As the nation's largest wholesale + 3 nuclear plants ( 5 units) producer of electricity and the operator of the + 29 hydro phnrs (109 units) nation's largest public power system, TVA + 4 combustion turbine plants (48 unirs) strengthens the regional economy by promoting + 1 pumped storage plant (4 units) economic development, supplying low-cost, reliable power, and supporting a thriving river system. W A provides power to the Valley by balancing the competing needs of power supply, flood control, wigation, land use, water quality, and recreation.

TVA generates and transmits an ample supply of power to the pmple of the Valley at the lowest h i b l e rates meeting all its financial needs through cash flows and by issuing debt. No U.S.

tax dollars support the TVA power system.

IluhuDaApbn ~~b thr Valley in 1988

+Relilt undx w mn[ingmdes t Nition'! fhhahgtn fivu spttm

+V e l pitiond ponu tmh t 6)O mil^ of nnvighle river

+ llflmiI6 d m~rnisionline t 21 h h r fiwdcontml t lfl,WO m$mi~ion-lmietum +480,000 m of rectation h t BlO individd inttrhagt snd delive~ypints + U,Munr dresetvoi~Y

+ 1)0b ill ion in tn~quivnlmtpyments to Valley states and counties

+ 1829 m i b dapitalinvestment in the Valley I+

t l82S million WA pyd Ij,j22'IM iob

+ 12) m'iion deconomic~dtveloprnentI m commitmtnt 10 Vdq h i n ~ i t s

~ and eni ices t l9jl milion spma with Vdlq firms f o p~oducrs t $m h li tons mf gooQ shipptd t Milliom d d o h in id damage avoided I(1 t~ IMPROVE ibr

Cha~rmanCraven SINCE ITS CREATION IN 1933, THE TENNESSEE Greater reliance on electronic technology by our Crowell at Norris Dam, Valley Authority has honored ~ t congressional s customers also will make power reliabil~tymore Norris, Tenn. mandate to support and enhance the economlc Important than ever Only electrlclry has the vitallty of the seven-state Tennessee Valley reglon. flexlblllty and precision to fuel this technological Thls 1s a role TVA takes seriously as it carrles out englne. As our customers Integrate more sophistl-the mlsslon of public power--of serving the publlc cated technology Into their business operations and

~nterest-in a vibrant and dynamlc reglon. ~ t y availability of day-to-day Ilves, the r e l ~ a b ~ land TVA has long been an integral part of thls econ- TVA power will become ever more vltal to the omy, whlch IS now growing at almost twlce the contlnued growth of our reg~onaleconomy In national rate. By supply~ngone of the most basic llght of lncreaslng demand, TVA 1s conducting a ingredients of economlc growth--electric power- comprehensive study to ensure that future capaclty TVA is a key partner In helplng generate prosperity and transmission demands are met for the nearly eight mill~onpeople we serve. Beyond assurlng that TVA power is fellable and Because TVA's core product is so essent~alto so ava~lable,TVA has an obllgat~onto ensure that its many, the rel~abllltyand avallabillty of our power power IS an affordable, competlrlve value. W e keep plants and transmlsslon system 1s a top priority. our customers' energy costs as low as poss~bleso Through met~culousattention to maintenance and that they, In turn, can offer compet~tivevalue to modernization, aggresslve pursult of greater pro- thelr customers. As a result, TVA's energy prlces ductivity, and optimlz~ngthe use of assets, TVA 1s are among the lowest In the natlon.

able to ensure its plants are ava~lablewhen they are TVA's contlnued success ~n offering competltlve needed most Our commitment to rellablllty and aval- rates 1s a result of our aggresslve approach to a b ~ l ~pt y d off d u n g July and August when TVA met lowering costs, ~ncludlnginterest expense. TVA's 16 peak demands h~gherthan our 1998 record and set Innovative financ~ngstrategies and the refinanc~ng a new all-t~mepeak of 28,295 megawatts of the debt held formerly by the Federal Flnanclng 4 1 Tennessee Valley A~lthorrty

Bank have enabled TVA to reduce its outstandlng Now more than ever, electricity IS the energy of debt by $1.3 bill~onsince 1996, lowering the choice, and TVA 1s working to be the supplier of weighted-average coupon rate on outstandlng choice In the Tennessee Valley reglon I t is a lead-r n t h e VALLEY ...

long-term debt from 7.35 percent to 6.67 percent ershlp role we embrace as we look toward the new and attracting more than 370,000 Investors In all m~llennlumand the challenges and opportunities 50 states and 35 countries. ~t will br~ng.

TVA's operations init~atlvesalso have resulted In January 1999 D~rectorJohnny Hayes resigned In significant improvements In productivity The to join the Gore 2000 presldentlal campaign. In net capaclty factor at our nuclear plants has more May, Director Bill Kennoy completed his e ~ g h t -

than doubled slnce 1993, allowing our five nuclear year term of office. It was a great pleasure to serve unlts to generate power for a record-settlng total w ~ t hboth of them of more than 1,000 combined operating days Equivalent availability of our generatlng plants has rlsen to more than 8 7 percent.

Perhaps the most impress~vemeasure of produc-t ~ v ~ist yTVA's generation and transmission costs, which in 1998 were nearly 29 percent below the natlonal average of investor-owned utlllties TVA's generation and transmlsslon costs were the lowest when compared wlth ~ t largest s generatlng com-petltors' costs.

So, as we prepare to enter the new m~llennium, TVA is powerfully positioned, consistently competi-tive, and fiscally fit. TVA gives the Valley and the nation an edge In fostering new investment that w ~ l l generate even greater prosperity In 1999 alone, almost 15,000 commercial and Industrial customers began operations in the Tennessee Valley.

As always, TVA is more than a power company.

In the nearly seven decades slnce its creation, TVA has been guided by the higher purpose of serving the publlc and promoting economic growth In the Tennessee Valley. In laying the foundation for a In November 1999 Sklla Harris and Glenn R. Chairman Crowell better qual~tyof I~fe,TVA continues to build on ~ t s McCullough Jr. were confirmed by the U.S Senate presides at an bedrock vislon for generatlng economlc prosperity as TVA directors. Director Harris w ~ l serve l a term Executive Meet,ng, with in the Valley. endlng in 2008 Director McCullough, who Chief Financial Officer TVA wlll contlnue to be an advocate for the assumed the remaining term of Johnny Hayes, wlll publlc good, ensurlng that the benefits of electr~c serve until 2005. David Smith (far left) utillty restructuring accrue to all consumers, Director Harris, a Kentucky natlve, has more and President and Chief

~ncludlngthose in rural areas of llttle interest to than 12 years of exper~enceIn the energy Industry, Operating Officer profit-oriented util~ties.TVA will also contlnue to including work wlth the U.S. Department of Ike Zeringue.

be a good steward for the environment, preserv~ng Energy. Director McCullough's credentials In and protecting the natural resources with whlch economic development include leadership roles in our region has been so abundantly blessed state and local economlc develoment efforts and h ~ s With the creation of the Publlc Power recent responslbll~tiesas mayor of Tupelo, Institute, TVA will develop technologies and M~sslssippl.

address national issues of alr quallty, renewable Together they bring to the Board a unlque blend energy supply, and efficient energy production of expertise and diversity that supports TVA's vision and use. The Institute is an extension of TVA's of generatlng prosperity In the Valley. We welcome commitment to publlc power and the environment Sk~laand Glenn at a tlme when-thanks to the and a symbol of the high standards TVA sets for ded~catedefforts of our employees-TVA is fiscally the electr~cut111ty Industry. sound, our rates are stable, and our power system For most electrlc utilltles, megawatts are yard- continues to set records whlle meetlng unprecedented s t ~ c k sby whlch they measure their own economlc demands for public power performance. For TVA, the nat~on'slargest whole- I look forward to worklng with Skila and Glenn in sale producer of electric power, energy production preparing TVA for the oppormnlties of dolng business has always been a means to a much greater end. In the restructured marketplace of the future T e n n e s s e e V a l l e j Aurhorzry 15

6 I Tennessee V a l l e ) A n t b o r r t )

god A Q ~ l dselvces e based on m e expert~se to solve reg~onalproblems, protect natural resources, create jobs, and bulld partnerships for publ~cbenefit.

STIMULATING TVA IS IN BUSINESS NOT TO MAKE MONEY, allowing the plant to stay open and but to make a d~fference,not to produce profits, even plan for expansion.

but to work for the publlc good. North Georgia EMC also made The relat~onshlpbetween TVA, as a publlc TVA's engineering expertise part of enterprise, and ~ t customers s goes far beyond that ~ t bld s for a new Dalton-area super-of a private utillty Electrlc~ty1s such a fundamental market The dlstrlbutor proposed part of everyday life that TVA's success In produc- installing and maintaining a TVA-ing and transmlttlng power efficiently, wlthout designed lightlng system for the federal appropnatlons, translates dlrectly Into pros- grocer's parklng lot. The proposal perlty and jobs helped North Georgla EMC win a new customer and saved the grocery Competitive Rates cham $40,000 In construction costs.

The prlce of electr~citycan be a significant cost for In Middleton, Tennessee, the business and ~ndustry,and Valley customers enjoy Thyssen Dover Elevator Company was some of the most competitlve power rates In the faced with the decislon on where to natlon. consol~dateits manufacturing opera-The advantage of lower rates gives TVA and tlons Thyssen Dover asked T~ppah dlstr~butorsof TVA power an Important tool for Electr~cPower Association to analyze fostering new investment In the Tennessee Valley the power needs associated wlth the expanston and consolidation of thelr Distributor P a r t n e r s h i p s operations In M~ddleton.In turn, In addltion to provldlng power at competitlve Tlppah EPA called on TVA's Compre-prices, TVA works closely wlth local power dlstr~b- henslve Services, whlch assisted on a utors and community leaders to develop lnnovatlve redesign and renovation of the existlng ways to attract quality tnvestments bullding and grounds, lncludlng a industries. This year, Slnce 1995 TVA has offered Valley businesses landscape deslgn and an outdoor lightlng plan Comprehensive and industr~es$90 milllon In economlc develop- Throughout the Valley, TVA's S ~ t Selector e

ment loans These loans and other technical and program is an Information partnership with eight Services did the lighting economic development servlces leveraged an addl- reglonal lndustrlal development assoclatlons that design for seven ball tlonal $3 1 billlon In capital Investment, helplng helps relocating businesses and lndustr~esfind sltes f~elds,allowing us to create and retain more than 222,000 jobs that best fit thelr needs Site Selector software provide the design with-TVA's Comprehensive Services Program 1s one offers detailed data on prospective sltes and navlga- out charging the county such partnership that makes TVA's englneering ble 3-D computer images of available bulldings one penny."

and technical assistance available to current or It also provldes statlstlcs for the surrounding potentla1 customers through ~ t distributors.

s county, lncludlng such lnformatlon as unemploy- -Jim Ahney (rtght),

Alanager of hlarhetrng and When North Georgla Electrlc Membersh~p ment figures and transportation optlons Econon~rcDavlopt~zent,Nwtb Corporat~onIn Dalton, Georgla, asked TVA to Last fall TVA joined distr~butorsand busmess Georgra Efertrrc A fembersbrp Corporatron, Dalton, G o ,

evaluate electr~cityuse at a plant in Lafayette at r ~ s k and community leaders at groundbreaklng cere- wlth hlark Fletcher, County of closure, TVA engineers found ways the plant monies for a new 440-megawatt power-production Conzmrssroner, Carwsa County, Ga , D~strrctI could reduce ~ t electricity s bill by $237,000 a year, fac~l~ty-the Red Hills Power Project in northeast Tennessee V a l l e ) Authorrty 1

h l ~ s s ~ s s ~The p p ~power

. plant 1s costs by sharlng space, services, and equipment owned by Tractebel Power Inc. and hiost Incubators offer on-slte technical support, will be operated by Choctaw and TVA's incubator loan fund helps some tenants Generat~on,a subsid~aryof Tractebel meet short-term needs for cap~taland cash flow Power. The power plant will use clean-coal technology to burn l ~ g n ~ t e Residential Incentives coal mlned near the plant. The mlne TVA's commltment to economlc growth extends to IS a j o ~ n tventure between Phlll~ps residentla1 consumers. TVA and distr~butorsof Coal Company and North Amerlcan TVA power have worked together to create the Coal Company TVA has contracted energy rzghtg program, whlch offers a combination with Choctaw to buy the plant's out- of low-interest loans and incentives to customers put, wlth product~onscheduled to who install heat pumps and who buy all-electr~c begin In lare 2000. homes and energy-efficient manufactured homes T h ~ program, s which grew by 2 9 percent In Small-Business S u p p o r t 1999, has had a posltlve impact on more than TVA's commltment to economlc 110,000 Valley homes slnce its inception.

development 1s not l i m ~ t e dto large and mining operations, projects. In the past decade 18 small- C o r p o r a t e Citizen has already helped business incubators jointly sponsored by TVA and TVA is Itself a Valley resldent and takes p r ~ d eIn local communit~eshave helped launch more than belng a good corporate cit~zen,stoklng the fires of boost one town's sales 650 actlve buslnesses and create 4,900 active jobs economlc growth through ~ t own s payroll, purchases, tax revenues 30% high-Incubators help new buslnesses mlnlmlze start-up and tax-equivalent payments er than last year's and w ~ lhelpl spur further economlc growth in the area."

-Randy Ransdell, Director, Plant ~\lanager, Red f f ~ l /Power r Plant, Choctaw Count), ilfrrr

" N A helped Thyssen Dover perform engi-neering analys~swork of our power needs. As a result we were able to reduce the cost require-ments for electrical equipment by 25%. TVA also advised us on our landscaping. We took their suggestions and improved our whole building facade 1,000%

because of the way it looks."

-V~nce Av~rett,

~ l t n u f a f l ~ ~ rProjertr tng

~ l t n a g e rThyssen

, Dolw Elers?tor Co , r\l~ddIeton, Tenn 8 1 Tennerree V a l l e y Aurho

covered everything from The wages and salaries of TVA's 13,322 children, or helping local communities attract new hybridizing tomatoes to employees add more than $800 mill~ona year to jobs . . . boardroom pol~tics.

the reg~onaleconomy. TVA purchases of goods Whether it's helping homeowners get the most If N A hadn't donat-and servlces for the past year brought more than from every energy dollar, or helping small busi-ed its surplus comput-

$950 million to the coffers of Valley-based busi- nesses get off the ground . .

ers, as well as the nesses. And in 1999 Valley schools and other com- Wherever there has been a need for technical munity endeavors shared In more than $300 mil- expertise . . . mentoring and tutoring lion that TVA paid state and local governments In Whenever a need has amen for the broad-based by N A employees, we'd tax-equivalent payments, m a k ~ n gTVA one of the support only a public utility can provide, TVA have been two years region's biggest "taxpayers." has been there, consistently work~ngfor the public behind!,

good as a faithful steward of the Valley's resources

-Tom Scruggs, Conclusion and a champion for high-quality economic Prmc~pa!,Oakhatvn school, Whether it's helping Valley res~dentseducate their growth. ~ l m p h z s Tenn Tennessee Valley A u t h o r r t y 19

10 I T e n t ~ e s r r eV a l l e y A u r h o r ~ r y g 0 d L e $ t the changlng needs of power dlstnbutors and dlrectly senled customers for energy products and servlces in chang~ngmarkets TVA HELPS GENERATE PROSPERITY IN THE TVA has also been able to rel~ablymeet Increas-Valley by p r o v ~ d ~ nthe g electric power to meet the lng demand for power because the power system as changing needs of power d~stributorsand directly a whole 1s operating more efficiently than at any served customers tlme In the past three decades TVA's nuclear sys-Throughout the year TVA's power system pro- tem ended the vear wlth a net caDac-duced record amounts of power, wlth a remarkable ~ t factor y of 90.5 percent, generatlng degree of rellabillty. In particular, the summer of an all-t~mehigh of more than 44.5 1999 was the most challenging ever for our power- mlllion megawatt-hours TVA's fossil generatlng facilities and transmlsslon system. and hydro modernlzatlon efforts con-On July 30, durlng the extended heat wave that tinue to reduce costs, Improve effi-tested power producers across the natlon, TVA met ciency and boost generatlng output an all-tlme peak demand of 28,295 megawatts, Overall, TVA has increased output by marklng the seventh time in nlne days that TVA about 20 percent since 1993 met demands hlgher than the 1998 record of TVA's ablllty to support regional 27,253 megawatts By summer's end TVA's power economlc growth is dependent upon system met 16 peak demand days hlgher than the both a reliable supply of power and 1998 peak. From July 22 through July 31 TVA set competltlve prices. TVA's Ten-Year a new system generatlon record of more than 5 2 Buslness Plan challenges TVA to blll~onkilowatt-hours. For the year, TVA generated ensure that its electricity prlces more than 148 b~llionkilowatt-hours remaln competitive as the electrlc In llne with TVA's long-term commltmenr to power Industry is restructured meeting the electric~tyneeds of the Tennessee Since TVA adopted the Ten-Year Valley, we have taken the steps necessary to keep Busmess Plan In 1997, it has made up wlth our reglon's ever-increasing demand for progress toward ensurlng that ~ t s a lot over the last electric power. Durlng the past 1 0 years, as the prlces remain competitive through excellent opera- several years, and the Valley's economy grew at about 4 percent annually, t~onalperformance and sound financial manage- No. 1 rating from the the demand for TVA power increased an average of ment with the follow~ngresults Institute of Nuclear around 3 percent annually, compared wlth our + Reducing debt by a total of $1 3 b ~ l l ~ ofrom n

earlier projections of 2.2 percent. its peak In 1996. Power Operations TVA has added baseload generating capaclty in + Savlng over $350 milllon In annual Interest conflrms that everyone the past five years, and we are study~nghow we costs at Watts Bar is doing can best meet future demand S ~ n c e1994 TVA has + Reducing the amount of interest expense a great job!'

added substantial generatlng capaclty, lncludlng compared to sales to 26 9 percent-the lowest -Donna H~tch,Radro 2,321 megawatts from the restart of Browns Ferry percentage in 20 years Chemrral Lboratmy Analyst, Nuclear Unit 3, the start-up of Watts Bar U n ~ 1, t + Managing a $724 mlllion fund to cover the wart^ Bar N I I C I M Spnng Czty, Tenn Plant,

~

and the power upgrades of Browns Ferry U n ~ t s2 future costs of decommisslonlng all of TVA's and 3. Over the next several years TVA plans to nuclear plants add another 2,100 megawatts of generat~ngcapacl- Efforts by the Tennessee Valley Congressional ty through improvements to existing unlts and the Delegation and the Admlnlstration on behalf of addltion of peaklng unlts TVA in 1998 to refinance the $3 2 blll~onIn high-Tennessee V a l l e y A u t h o r r t y I I1

"Our piping system had 16 bends, and wherever the ash hit the plpe, it would wear out. Every week we had to replace a part of it. The Economizer Transport Piping Team took most of the bends out and changed the velocity. This has freed up people to work on other jobs, and Operations doesn't have to go every day to check the line for wear."

-Jerry Ball (rtght), Sfeanzjtter, CumberIand Foss~lPlant, Cumber-I a n d C ~ f yT, e n n , wtth hts son and fellow team member, Daryl lnterest debt held by the Federal Flnanclng Bank (FFB) slgnlficantly contributed to lowering TVA'F lnterest costs I n 1999 Complet~onof the FFB refinancing I n 1999 marked the transltlon of all power bonds ~ n t o the publlc bond market, where W A has used innovatlve Issues to steadlly expand

~ t lnvestor s base to more than 370,000 investors I n all 50 states and I n 35 countries around the world, contrlbutlng to lower interest costs for TVA.

But the best measure of TVA's progress on uzth D A V I D S M Shouldn't the playlng Intended to protect or TVA's Board to keep utlllzatlon. Second, the serve and In which we field be leveled for all serve the publlc Interest. prlces as low as feaslble southeastem U S. has hold power property.

electric utilities as the But since TVA's funda- for the power that TVA IS some of the natlon's These payments are industry is restruc- mental mlsslon IS to charged wlth provldlng lowest electnclty prlces slmllar to the property tured? serve the publlc Interest, to the Tennessee Valley. because of the low-cost and state income The essence of the lmposlng addltlonal coal mlned In the area taxes pald by prlvate questlon IS whether all requirements and bur- Why are TVA's electnc- and the broad mlx of utllltles Industry partlclpants dens on TVA would ity prices among the generation made possl- As far as federal should be treated the serve no purpose other lowest in the nation? ble by the varlety of fuel Income taxes are con-same The fact IS the pn- than to Increase prlces There are several rea- sources (hydro, coal, cerned, we are not mary purpose of public- for TVA's customers and sons, but none more gas, and nuclear) avail- obligated to pay a power agencles llke TVA slow economlc growth Important than the fact able In the reglon "share" of our income IS to serve and protect wrthln the Tennessee that we run an extremely I cannot leave thls to the federal govem-the publlc Interest, whlle Valley reglon efficient power system. question, though, with- ment as prlvate utllltles the primary purpose of In the future, TVA's Naturally, our S I Z ~ out respondrng to crltlcs must, because, as our prlvate utllltles IS to rates and those of most as the largest publlc who complarn that TVA's owner, the federal gov-Increase shareholder competitors should be power producer in the low rates are the result ernment IS entltled to wealth. We belleve that regulated by the forces country-helps spread of "subsldres." Congress all our retalned income electrlc Industry restruc- of a freely competltlve flxed costs over a large has not provlded TVA I say "retalned turing should be marketplace buslness base wlth any taxpayer funds ~ncome"to dlstlngulsh designed to ensure far But remember what Geography also IS for ~ t spower program for thls from the dlvldend-competltlon between regulates TVA's actions Important, for a couple nearly 40 years1 l~kepayment we make public-power providers now TVA, as a wholly of reasons. Rrst, our to the federal govem-and prlvate utllrties, owned government cor- service territory IS In the Shouldn't TVA have t o ment each year, based allowing them to coexlst poration, IS governed by rapldly growlng south- pay taxes? on the government's wlth thelr d~fferences. a Board of presldentlal eastem Unlted States, TVA does pay taxes! orlglnal Investment In Don't forget that appointees who are whlch covers portlons of People can be confused TVA To date, our most of the calls to charged first and fore- seven states, two tlme by labels, but In 1999 payments to the U S.

"level the playlng field" most wlth servlng the zones and two yearly TVA made payments of Treasury on ~ t sorlglnal would Impose addltlonal publrc Interest. peaklng periods, wlnter more than $300 million $1.4 bllllon Investment regulatory requirements The President and and summer, affording In tax-equ~valentpay- In TVA have totaled or financial burdens Congress have dlrected TVA optlmum facrllty ments to the states we more than $3 bllllon.

12 I Tennerree V a I l e ) A u t h o r ~ t y

meeting the object~vesof the Ten-Year Busmess Plan IS its prlce of electricity. TVA's power prices are among the most competit~vein the natlon, wlth res~dentlalprices paid by consumers In the Tennessee Valley 23 percent lower than the nation-a1 average TVA's commercial and lndustr~alprices are similarly competitlve. These compet~tiveprices are achleved wlthout TVA's recelvlng any federal funding for the operation of its power program.

Based on these prlces, it's not hard to understand why lndlvlduals and bus~nessesare choosing to reslde or make investments In the Tennessee Valley TVA is competitlve today, and we are dedicated to remaining competit~vein the future. W e plan to meet this goal through a comblnatlon of lowerlng fixed costs, Improving operating efficiency, opti-mizlng capltal spending, and Increasing power revenues through economic growth TVA also must contlnue to provide a rel~ablesource of electrlclty to meet the needs of our customers in a rapidly expanding economy in the Tennessee Valley.

While speclfic targets establlshed In 1997 In the Ten-Year Busmess Plan have changed, the plan st111provides the blueprint to meet these chal-lenges and to keep TVA compet~tive.

Fulfilling the Commitment to Deliver Clean, Reliable Public Power In the spring of 1999 TVA establlshed the P u b l ~ c Power Inst~tuteto help fulfill TVA's res~onslbllltv to sustaln and enhance the environment whlle con- we have developed a t i n u ~ n gto provide low-cost, rel~ableelectric~ty. gram generates electrlc~ty"In our own backyard," great partnership. We Located at TVA's slte in Muscle Shoals, Crowell s a ~ dat the Nat~onalTown Meeting H e are extremely proud to Alabama, the Institute w ~ l develop l and demon- also noted TVNs commitment to "place-based val- be one of N A ' s service strate technologies, strategies, and p o l ~ c ~ for es ues" has led TVA to reduce pollution In the seven- providers. Our Improving air qual~tyand sustalnlng a rellable state reglon ~t serves. "If we carelessly pollute our partnership with TVA energy supply for TVA and other publ~c-power environment to produce power, we'll suffer the prov~ders consequences in the air we breathe and the water has put our firm on TVA IS committing up to $5 mill~onIn fundlng we drink the map."

to the Institute durlng ~ t first s three years to lever- "The whole concept of sustalnable growth and -Ron Blaylock, Chairman 15 age investments from other lnstltutlons that sup- development ~ s n ' treally new to us at TVA. CEO, Bkzjlod G Partners LP, h'ew Y d ,NY port publlc power. Env~ronmentalstewardship has always been one of "We hope the Institute wlll stand as a symbol the prlmary values of TVA "

of the v~sionthat publlc-power companies such as TVA brlng to the energy industry," TVA Chalrman Y2K Compliance Craven Crowell said at a National Town Meeting The rel~abll~ty and avallablllty of TVA power is for a Sustainable Amenca, hosted by V ~ c ePresident vital to our customers As of September 30, 1999, A1 Gore In Detrolt In May 1999. "It's a vlslon that 100 percent of all m~sslon-cr~tical Items being puts the publlc good ahead of the bottom Ilne, and tracked In TVA's Year 2000 Program were com-a vis~onthat values long-term benefits over short- pleted and tested In addltlon, TVA is developing term gains " contingency plans to address potentlal unforeseen The Institute will serve as both a research labo- problems, working wlth d~stributorsof TVA ratory seeklng more sustalnable power production power, interconnectlng utlllties, other customers, and as a publ~c-pol~cy clearinghouse for energy and and suppl~ersto mlnlmize the Impact of dlsrup-environmental issues. tlons that may occur along the supply cham See TVA's commitment to cleaner energy has always page 24 for further lnformatlon on TVA's Year been insplred by the awareness that ~ t powers pro- 2000 Program.

Tennerree V a l l e ) Authorrty 1 '3

I

" O L dm\'kze

(?

~ ROO^ damage, m a ~ n t a ~

navtgat~on, n

support power production, Improve water quality, protect publlc health and the env~ronment,and support recreat~onaluses SUPPORTING a 0

-3 B)

Managing a Major U.S. Waterway Since ~ t lnceptlon, s TVA has been leader in flood control, navlgatlon, and recreatlon management The Tennessee Rlver and ~ t tsr ~ b u t a r ~ make es up the fifth-largest river system In the natlon In managlng chis system, TVA fulfi 11s flood-control, navlgatlon, and recreatlon commitments that greatly benefit the reg~onaleconomy TVA's flood-control efforts annually prevent an est~mated$138 mlll~onof potentla1 damage In the Tennessee Valley, as well as another $ 9 mlll~onof potentla1 losses along the Ohlo and hfississ~ppi rlvers TVA also 1s responsible for malntalnlng and managlng a safe and efficient watenvay thar totals 8 0 0 miles of commerc~allynavigable rlver T h ~ s lncludes a 652-mile maln channel from Knoxville, Tennessee, to Paducah, Kentucky, and 148 miles of tr~butarychannels Transportat~onbenefits are est~matedto total more than $500 rnlll~on annually.

In addit~on,the Tennessee R ~ v e system r

by convening and faclll- comprises a vast resource for outdoor recreatlon tatlng more ongolng TVA HAS LONG BEEN RECOGNIZED AS A The demand for recreat~onaluse of TVA reservoirs, d~scussionsamong our world-class leader for ~ t river-management s system. whlch have a total surface area of 480,000 acres stakeholders so that The methods and tools used by TVA In the and 11,000 mlles of shorellne, has steadlly Integrated development and operation of the Increased over the years TVA operates about 100 their changing values Tennessee R ~ v e are r known ~nternat~onally as the recreatlon areas that Include boat-launch~ngramp5, and pr~orit~es rernaln "TVA model " plcnlc facll~t~es,nature trails, w~ldlife-v~ew~ng, the foundat~onfor our In the past year TVA took several steps to sw~mming,shorellne fishing, camplng areas, and business activrt~es." further strengthen its system of managlng flood other amenltles. Many of the Valley's rlvers and control, rlver navlgatton, and publlc lands and streams also offer fishing, canoeing, and whlte-waters In the Tennessee Valley In February TVA water boarlng Water-based recreatlon on the merged into one organization all responsib~l~ties Tennessee River system generates mill~onsof dol-for managlng the rlver system, lncludlng lars annually for the reg~on'seconomy.

hydropower operations and rlver management.

That organlzatlon, Rlver System Operat~ons& Working to Maintain the Valley's Watershed Environment, IS led by Execut~veV ~ c ePres~dent TVA formed 11 new Watershed Teams across the Kate Jackson, who also serves as TVA's Tennessee Valley In 1999 to lmprove c o n d ~ t ~ o nIns Environmental Executive. the Tennessee R ~ v e watershed r

I 14 T e n n e s s e e V a l l e y Authorrt)

Tennessee Valle) Authortty I I5

The new m u l t ~ d ~ s c ~ p l i nteams a r y replaced and comblned the functions of TVA's former Land htanagement Offices and River Actlon Teams The actlvltles of the new teams include stablllzlng shoreline, lmprov~ngwater qual~ty,handl~ng requests for waterfront development and use of TVA lands, helping comrnun~tiesprotect and restore t h e ~ watersheds, r and educat~ngthe publlr about the conservation of natural and cultural resources.

The reams prov~de~nforrnat~on, help establish partnersh~ps,and find fundlng for worthwhile cornmunlty projects that promote good resource stewardsh~p Keeping Lines of Communication Open In order t o o p t ~ m l z ethe resources of the Tennessee R~ver,TVA is t a k ~ n gnew steps to seek Input and listen to the needs and concerns of ~ t diverse s stakeholders TVA routinely seeks ~ n p u from t the publlc on managlng the land and water resources In the Valley. In the past year TVA establ~sheda new advlsory group to gather lnslght and knowledge from stakeholders What is "integrated best results for the over- our operation of the ducers n terms of envl- system operations?

river management"? all publ~cgood reservoir system has ronmentally sound rlver Headlng Into June 1999, To manage the helped prevent more management ralnfall across the Tennessee Rlver and ~ t s Why does TVA begin than $5 bllllon In poten- Our comprehensive Tennessee Valley had tnbutarles and lakes, lowering the levels of tlal losses from flood monltonng program- been below normal slnce TVA must address many its storage-reservoir damage slnce the des~gnedspeclflcally to the prevlous summer.

object~ves-flood con- lakes each August? 1930s gulde watershed protec- But because of our inte-trol, navlgatlon, power The dectston to begln Also, whenever pos- tlon and lmprovernent grated system, we were generation, water quall- the draw-down of reser- s~ble,we release the actlvltles-IS an exam- able to reach mlnrmum ty, and recreation. volr levels August 1 IS water durlng draw- ple. Another IS our reser- summer target levels on Everyone In the gulded by several objec- downs through the tur- vo~r-releaseImprove- all but two of our lakes Tennessee Valley IS tives, lncludlng water blnes at our hydroelec- ment program, whlch by June 1 by releasing affected to some degree quallty, environmental tnc dams to generate ensures a rnlnlmum flow only enough water to by how we deal wlth concerns, rnosqulto electrlclty and help keep of water and plenty of protect downstream these objectlves. And at control, power genera- power rates low for oxygen for aquatlc llfe water quality any given tlme, the tlon, and navlgat~on.The Valley residents below l V A dams We In addltlon, heavy deslres of one group will declslon also can be also work wlth federal rams In June and July lnevltably compete or affected by excessive What about maintain- and state agencles and allowed us to generate confllct wlth the deslres ralnfall or drought. Ing water quality? wlth local groups to power at peak levels of other groups So ~t's But the overrldlng Because TVA IS a pub- ldentlfy pollution prob- dunng an extended heat only by an Integrated- conslderatlon IS flood- IIC- power provider, our lems and Implement wave. Our hydroelectric or a coordinated-man- storage capaclty We comrnltment to water ~mprovements. units played a cruc~al agement of the river that must make room to quallty goes beyond role In helprng W s we can balance all of store hlgh-elevat~on meetlng regulatory How did the drought power system meet our objectlves to meet runoff water from winter requirements Our goal conditions that hit record-setting demands our obllgatlons under the and sprlng rams. e to set the standard for much of the nation in for electrlclty last TVA Act and achleve the Studles lndlcate that other hydropower pro- 1999 affect TVA's river- summer 16 I T e n n e r r e e I'allrj Azrthorrty

Regional Resource Stewardship Council n ~ t Valley h cltizens and elected officials about In June 1999 TVA announced the creatlon of a TVA's management of reservoir levels TVA's annu-cltlzen advisory councll to provlde Input on man- al drawing down of reservoirs to create storage aging the natural resources of the Tennessee capacity for potential floods, to help maintain Valley. The Reglonal Resource Stewardship water quality, and to generate low-cost hydroelec-Council wlll advise TVA on policies, practices, and trlc power durlng times of hlgh energy consump-priorities in deciding how best to use the Valley's tion is naturally a matter of Intense publlc Interest.

resources for the benefit of the general publlc. As TVA works to malntaln open lines of com-Governors of the seven Valley states will municatlon, it is also gearing up for a systemwide nominate one member each to the council Other reevaluation of its reservoir-management processes members wlll represent distributors of TVA power, and activities TVA is collecting and studylng dlrectly served customers, beneficlarles of navlga- reservoir-vls~tat~on records and Natlonal Weather tlon and flood-control actlvlties, and recreational Servlce data on seasonal rainfall frequenc~es.TVA is and env~ronmentalinterest groups also worklng on a systematic approach to calculate flood-r~skimpacts that could result from various Reservoir Planning Process pollcy changes in reservoir operatrons, as well as TVA's Rlver Operations organization continues to updating the tools used to assess the env~ronmental look for more effectlve methods of communicating effects of TVA's reservoir-management pol~cles Tennessee V a l l e y A~ithorrty 1 I7

LJ from

+ TVA and the U S Env~ronmentalProtect~on Agency (EPA) slgned a partnership agreement to cooperate on env~ronmentalprograms, ~ncludlng env~ronmentalresearch, pollcy, and demonstration projects Under the agreement, TVA and EPA will exchange semlces and share equipment, research f a c ~ l ~ t ~data, e s , and

~ n f o r m a t ~ oThe n agencles wlll work together on Issues ranglng from alr and water quality to responses to environmental + For the thlrd consecut~veyear a leadlng nuclear-emergencies Industry publ~cation,Nirr/eonlcs Week, ranked three TVA unlts among the 25 best In the natlon based

+ In February a ruptured on productlvtty, total generatlon, and operations pipeline at a prlvate storage and malntenance costs.

facil~tysp~lledsome 45,000 gal-lons of d~eselfuel lnto the + For the thlrd consecutlve tlme, Sequoyah Tennessee Rlver at Knox- Nuclear Plant employees set a world refuel~ng v~lle,Tennessee. 'IlrA's techn~cal record for plants of sim~lardeslgn by returning expertise and speclal operations U n ~ 2t to semlce In just 23 days, beating the old at two dams upstream and one record by almost a week downstream of the spill helped m ~ n ~ r n env~ronmental

~ze damage + U n ~ 1t at Watts Bar Nuclear Plant set a TVA graphically developed.

and facllltate cleanup. record for pressurized water reactors by operating continuously for 352 days before shuttlng down fix It has changed the way

+ After recelvlng extensive publlc Input, TVA planned refueling and malntenance we're do~ngproposals, announced a new shorel~ne-managementpolicy, shortened our response whlch Includes mod~fiedstandards for docks, ero- + hlodlficatlons made during refueling outages at time, enhanced the look slon control, and vegetation The new policy Browns Ferry and Watts Bar nuclear plants and the professional- t y accommodating shoreline-increases f l e x l b ~ l ~In increased generatlon capaclty by 126 megawatts development needs whlle ensurlng conservation of ism, and taken our presentat~onsand our natural and cultural resources + In January TVA's Transrn~ss~onIPoner Supply Group restored power the same day that tornadoes, community's presenta- + TVA received a patent In hiarch for a cost-effec- whlch destroyed or damaged parts of Jackson and tions to a whole differ- tive wastewater-treatment technology that effi- Clarksvllle, Tennessee, also damaged 58 transmis-ent level." c~entlyremoves pollutants from water uslng natur- slon structures and 15 transmission lines

-Xi~ke Phllpot, Executrtr al wetlands processes The technology is b e ~ n g D~rector,West Tennessee Indus-trral Asrocratron.Jachson. Tenn demonstrated in seven locat~onsto treat municipal + Work 1s in progress to automate the operation of sewage and contaminated surface and groundwater. all 29 TVA hydro facllit~es Douglas Dam In upper The new system is about 50 percent less expensive northeast Tennessee 1s the first hydro f a c ~ l ~ to t y be to operate and malntain than convent~onalsystems. controlled and managed from TVA's new Hydro 18 I Tennesree V a l l e y Aurhorrry

Dispatch Control Center. Automation work at ments of the Clean Air Act. Low nltrogen o x ~ d e generating Cherokee, Fontana, and Norrls dams was also burners and other nltrogen reduct~onmethods have L

m.y?ejp~ryI J completed in 1999. been Installed on 41 coal-fired units Modlficatlons to three TVA cyclone unlts currently reduce nitro-s n t h e VALLEY ...

+ For 1997, Electric Lzght G Pourer ranked TVA as gen oxide em~ssionsthrough the use of over-fire the largest generator of electric~tyin the country alr Results from tests performed at these unlts are for the t h ~ r dstraight year. Among the 50 largest being used In des~gning utlllty generators in the country. TVA was ranked control measures for TVA's the thlrd lowest in total operations and marnte- remaining cyclone unlts nance costs

+ The U.S. Department of

+ Electric Lrght G Power also ranked Bull Run Fossll Agr~cultureGraduate Plant No 3 among the country's steam plants In School awarded TVA heat rate, a measure of efic~ency.John Sevier Fossll Un~versitythe prestigious Plant was ranked No. 17 on the list. W. Edwards Demlng Outstanding Training

+ The Gallatin Fossll Plant generated over 7,000 Award (shown at right) in mlllron k~lowatt-hoursof electricity, the most gen- recogn~tionof TVAU's erated by the plant slnce 1988 and the second lnnovatlve employee devel-highest In the last 30 years opment and tralning Initla-tlves TVAU was estab-

+ In both 1998 and 1999, TVA's combust~on l~shedIn 1994 as the turbine units generated more electrlclty than in umbrella for all education any year slnce 1978 and trainrng at W A .

+ The summer rel~abil~ty of TVA's fossll unlts + In the area of was successfully improved thrs year to meet the Procurement, Improve-growing peak demand for power In the Valley. ments over the past two The fossil system generated 34 mill~onmegawatt- years have reduced TVA's force. whose knowl- I hours durlng the 1999 summer season, the most total-ownership costs for materials and sewlces by edge and skills are slnce the summer of 1995 Summer outage rates more than $100 mrll~on,as supply-cham employ-sharply honed through for the Colbert and Johnsonville Fossll Plants were ees have ex~andedthen roles bevond tradit~onal continuous learning.

the lowest since 1990, and for Wrdows Creek admlnlstrative funct~onsto better manage supply Fossil Plant summer outages have dropped by contracts, reduce inventory, and lower total costs of AS w'nner the almost 4 0 percent In the last two years. procurement. Procurement IS consolidating ~ t s Deming award, N A numerous computer purchasing systems into a sln- University is recognized -

+ The Economizer Transport P ~ p i n gTeam from gle program to further optlmize Inventory, nationally as a leader in Cumberland Fossll Plant was selected as a finallst lmprove overall efficiency, and save an estimated providing the resources in the government dlvlsion of the 1999 Rochester $54 million over five years Inst~tuteof TechnologylUSA Today Qual~tyCup and opportunities to competition Team members Jerry Ball and hls son + In September 1999 Infomatron Week magazine make that happen-"

Daryl were honored for developing an innovative ranked 'IXA No. 1 among the nat~on'sutlhty -Dr John Turner, redes~gnof a prplng system. The prevlous system T V A i Senror V ~ c Presrdent e

companies In using Information technology to of Educatron, Trarnzng and had been plagued by frequent plpe failures. The meet buslness objectlves I t also rated TVA No. 15 D~trrslty new system, which reduced the fallure rate by among the top 500 business users of technology.

95 percent, 1s savlng more than $130,000 annually.

+ TVA continued to work wlth Valley power

+ Construction is under way on WA's first distributors In preparation for restructuring of the Selective Catalytic Reduct~on(SCR) Faclllty at industry. A significant milestone was reached Paradrse Fossil Plant Unit 2. By further reducrng when TVA and the Tennessee Valley Publrc Power nltrogen o x ~ d eem~ssions,the SCR facllltres Assoclatlon (TVPPA), whlch represents the d ~ s t r ~ b u -

Improve alr qual~tyand help reduce ozone levels In tors, agreed upon and submitted to Congress a Valley states The Paradise SCR 1s scheduled for pos~tionpaper on slgnlficant Issues relating to complet~onIn the year 2000 deregulatron and legislat~onthat will l~kelydrlve rt TVA IS lnvolved In ongoing development of rate

+ TVA continues to reduce nltrogen oxide e m s - products and contract optlons to help local utllltles sions from its fossll plants to comply wlth requlre- remain successful as the Industry changes.

Tennessee V a l l e y Aurhorrry I 19

financial TABLE of 21 cBB Management's Discuss~onand Analysls illanagenzent's assessnzent of the company's finanaal conditzon, znclr/dzr~gthe przncipal factors that affect the resrrlts of operatzons 28 Q Balance Sheets The year-end status of assets, lzabzlities, andproprzetavy capztal /or both the por~jvrprogra7rz and all prograrns 30 '3 Statements of Income-Power Program Ra~enrres,expenses, and net znconze for the current Isearand past tulo)ears 31 3 Statements of Cash Flows Details of the soirrces and rises of cash for both the pourr program and all ptogranzs 32  :> Statements of Changes in Proprietary Cap~tal-Power Program Details ofthe changes zn pourr program proprzetary capztal and atrzotlnts retained at the end of the year 32 :3 Statements of Net Expense-Nonpower Programs Expendztures of nonpou8erprogranzs by budget category 32 $3Statements of Changes In Proprietary Capltal-Nonpower Programs Detazls of the approprzatzons and net nonpou.er progratn expense and atlrozrnts retazned at the end of the )ear 33 6B Notes to Financial Statements Additzonal disclosr~resrelating to the financzal statements 42 O Report of Independent Accountants Pnceu~aterbor/srCooperrLLP i opinion on the financzal statements 42 8 Report of Management 12lanager~zent'sre~ponsibzlztzesfor the fazr presentatzon of the financ~alrtatements 43 Q) Investor Information Selected TVA znfirnzatzon /or inr'estors 44 8 Statlst~caland Flnanclal Summaries A table of selected operatzng andfinanczal infowrzationfor the rrrwent year and past 10 years 20 1 Tennesree Valley A ~ t h o r r t j

'ill'smmgemem has devrld and will continue to twvduatc plans nnd strategies it beliwes will position Nh to messfuly compete in a restrumd rlettricity wket,ln July 1997,TYA l r l d its Ttn-Year B sn icss Plan (the Plan)that ser wgets for athiwing a tod cost of pwer thr would be competirive with proj~tedmsrket prices in 2007.

TVA's total cost of delivered pwer for 1999 was approxinut&

ly 4,15cents per kwh. As oikptember 30,1999, TYA had Heating Degras ICooling Oegree - Normal Degree reduced its total debt by moa than $1.3 billion since September oaVa bva Diva 30,1996. These orhiwtments nfl~tprfmnn in lint with the Plan's goal of providing a compcdtivt cwt of p er in the ownd utilities and publicly and consumer owned eleatit power fum.Whilc the Plan was built on assumptions that were suppliers like TVA and the distributors of W!power. It is likely reaso~bdoleat the time, numerous hors,such as those described that the level of govment regulation, particularly for the in the "Fornard-hoking Statements"xrtion ofthis Aand publicly and consumer owned pwtr suppliers, would intreue, t results to dibr maeidy from those Rrpon, could c a ~actual Hearings on various topics of competition and electric industry projected,TYA continuen to pmictt ht the Plan will result in n restructuring haw h nheld in the How of Reprrsrntstivel competitive total cost of power in the future, dthough somt of and the Stare, TVA nnticiphs that in the event any restrumm the original assumptions and estimates conrsind in the Plan ing legislationsi mscted,such legislation would enable TVA hive changed, TYA expect1 to update the Phin 2000, and rhe distributors of its power to take part, rrcipmeallp, in competition outside the nrra for which thry mn now bc a sourcc TyArndOMn~~ of electric power supply.

Inthefum,itislikelythatthecurcntlswthat~mstolimit InMay1999,bilhtontainingtheClintonAdministration's comprtition betwoen TVA and other power systems will change. legislarive proposal for resrructuring the electric utility industry In the past two yean, numerous bills have knintroduced in were introduced in both the House of ffepresentatives and the Congrrss designed to twtrurmre the tlctric utility industry and hate,TIA endorses he Administration's proposal which mandate or promote competition in the indust!, Passage of includes pmvisions regarding RAs ' power business that are these types of bills wodd result in major changes in the dearit largcly based on agreements among TVA, distributors of TVA power industry that would signifiontly impact both privately power, the U.S. Depsrtment oiEnergy and many other TYA

intd dgeaex iad mpmowtq~\~W,RI i~ 1V rmgmo id~mhtd 19bilion debt Iimit], Mdtt Riik I nmu~m lbt US.Gatnm~~t' initid~appmpbtion Y Hbh h

m m r in p erk/!ua,pfu a tep~pntof tht itli- !&' ir mrmdn hbinc1udiajchpifl iamt tid i n v e s i~p~ifed glow,The combitledppent fof am,hp i ~mnq&ge fa&, and yolatiliry ofccmin 1999M fl million, Tod cwnulatiw repgymenti and IMW~ rommoditpd qqahpric~s, To amp thc filatilif~

oo inamtblWl to r6t U,S, Twqe~cd13bil ion, ~aihdiem tk tym, %hmterdinto wiou g wruw,principdy interest fib nonmmdinkinti2 MC R lYl swapp r ~biip h mq swy cmm,fmdf, Na (ah pmvided iyprmpmgram oplr~tim161 1999) 1998 4$opia c011tmts~R hu sabMib Risk d lfl7 w# lI,431 milion, fiJ$Y mil ion d 16 /68 hgement Commimcwhi, ch maiataim qnsibi1iq h

.lion, mppidl,nil pid~td ~h impmvemtnts mitwigmio igetdad p~(]cduresii~flA#vide pp n

mdt in pat@ dviti~dunlog tht k*ptwpiod rirk maywnt &titi hd$i the oversig6t ofmakb rouphd wdi rat irmtni l9% mdmpo tinsdmmrs ik,tbeteyiwof hk r ~ wd ~e s 1998 id m u ~ t tq h in inwti~~ i ~ i ~f oi 1999, pu climb, and thesrbbent ofbrmal

~r 1991nus miloi~1142 , miuioi,and8 II0mil ion, p d m l uu d fiauwial hrdgig illsrn~ac~ts~

u I

~t~phl~, llrIll4doin kwboa 1998to 1994was TU bp dto kbiaai it ort drouatc~iEsl phuyli dut m la intnrr immion expendim of nmpd~rmaaadarcdn ig1yi estab1ished roatm1s to 1192diia dmn i jthconsmioa of 1~1ualg4 combus. &mine du d wto h w

ii dmun~bin 01de1 to tioo aubi~ahpc~pwet~ The I162oillim inrmfrom mitigge llpawr m ~ u n fdcit~rikIWi~hN P ~toE ~

1991td 1998pdrmd)dmthe I997seleofccrtain itdjing rtivitio,llllPmymeatpolicies dlow the USC receiy~bJ6, ddrnlfitivt flmcd iumntsto mp h cdiy ures

Wuwt~mdl~Cumnoyllll q m qn w,-- .----

TYA manages in daily ruh nee& tbroujh irsuce ofdi~aum  ?%A maintiips tmt funds,or nquired by the Nurlcar nores and other short-term bomwiags. That bowwingwith Regulntoy Commission, to hd rtDrraio costs oidecornmi~si~n~

msturirir~of b th one year cnpm VA ro flurmstiona in ni! io nutlsr gcaerntin~unia, These funds an mamgcd by shortm inmt lam, TlGI is not exposed to chon~e$in wiour money managers and are primarily itvested in inretest rlra on most of its lonpurrn debt until ruch debt marketable equity securidrr, which an expd to pin A u c t u m maws ad may bc refi4ancrd at he thm appIichIe rates, An rim in equity mku,TVA Pniwy monitos the tlun funds' iarmsr rate jwap is uspd to hedge lWlr exposure rdaterl to its pordolirw by benchmarkin8 thc pdirman~e6 btir inmtmtnts inflation-indexed accrning principl bonds, and cwenrgswap qaint crcrmin price indicer, The counting for nudrar dmm-coorracn src ured rs halgrs for fortiin cumncy dtaomimted missioninj recognize^ rhst suficirnt funds have brm sct aide to debt issues (sre ate i-Folrigo tuency rm~tionsand intmt fully fund expected decommi3sioaing obligatioos, and, threfore, rate swap), Besed 00 RAJ 'o dl inrtrtsr rite exposwe at flumutions in tnut fund mlrketable security returns do wt Sgrmbn30,1999, iatludiag derivative and other interest rate the cYniqs of m( (anatt 1-Dammmirioning costs).

refitire insrments,a sear-term I pureatage point chgr ia intmt rates would not have a materid impa on RAs ' iiaan.

till pitian or resda of opaadons for 1999, Ofhq h##

YwrnWm WW~@M*MBI The "Yw2000"issue concmw the innbilitg dinformttiantdb WAis ~pwldrc thc impact ofmuct flucttions in h wloeg s wsM properly mopnixnndpmm dstea~itive prict and transprtaiw COSQ oiccrtain commodities and h/s hhinfwon nhtd to the yru 2000 and brprA, TWl's Yenr iacludiog, but not limited ro, c dn adgsr snd rlmricity. 2000 dm bgentrally f otd on (1) developing iiYtar TVA employs esttblished policies nnd p d u m to muwge risk$ 2000 remedietion srmegy, (2) invtntoqiing and mini h usociatd with these mket flucntations by usin1various con- priority dims that may be &ted by the Ycar 2000 issue, (3) modirpbad deriwtive insrments,inrluding htures, o irwds repkin!, qiriag or converti~item thnr are not Year MOO and option contram, To monitor thc risk of commodity trading dy, (4) ratingsnd diduiag the Year 2000 mdiness d anivicin, TVh mploys a daily Value at Bilk (VnR)metbalolo- ~pked,repaiid ad convened irms nnd (I)implementiog ihc gy which utilizes n sutbtidbwd appmch to detrrmine w ofrepked,+red nnd convened item!. AJ of September d j d hitorid thanpi in the vdut d o market ~isk~ensitivitivr 30, 1999,F Ahed completed this iiv~tcppmm with nspm comrnodiy-budfiomtisl instrument to stimstethe mount of to lOO prrcent of the owr 20,000 mhaionucritid Year 2000 change in rhe mnt due of the imtrumeat that codd ~ r r mat imsthat TL4 has brm tracking in its Yw ZOO0 p r o p ,

MANAGEMENT'S DISCUSSION A N D ANALYSIS The Nuclear Regulatory Commlsslon (NRC) has notlfied all labor relations laws coverlng most private sector employees nor utllit~esoperatlng nuclear power plants that they are requlred to those coverlng most Federal agencles are applicable to TVA inform the NRC of steps they are taklng to ensure that their However, the Board has a longstanding pollcy of acknowledging computer systems wlll hnctlon properly by the year 2000 In a and deallng with recognized representatives of ~ t employees, s

June 29, 1999, letter to the NRC, TVA confirmed that those whlch pollcy is reflected In long-term agreements to recognize plant systems requlred for the safe and rellable operation of TVA's trades and labor unlons (or their successors) through 2007 Browns Ferry, Sequoyah and Watts Bar nuclear plants were Year and salary pollcy unlons (or their successors) through 2012.

2000 ready. TVA also noted that there still were actlons to be Federal law prohib~tsTVA employees from engaglng In strikes completed involving three computer programs that d ~ not d against TVA impact the continued safe and rel~ableoperation of the nuclear unlts These three computer programs have since been made Year Litigation 2000 ready O n s ~ t ereviews by the NRC at all three of TVA's TVA 1s party to varlous civil lawsults and clalms that have arlsen nuclear plants have Indicated that Year 2000 computer lssues in the ordlnary course of business Although the outcome of should not affect the abillty of TVA's nuclear plants to generate pend~ngl l t ~ g a t ~ ocannot n be predicted with any certainty, ~t 1s electricity safely and reliably as the year 2000 beglns the oplnlon of TVA counsel that the ultimate outcome should not In a July 7, 1999, letter to the North Amerlcan Electric have a mater~aladverse effect on TVA's financ~alposltlon or Rellabllity Council, TVA sald that it belleved ~ t mlss~on-critlcal s results of operatlons.

systems used to produce and deliver electr~citywere ready for date changes associated with the year 2000, wlth one exception Environmental Matters This exception was a clean-alr reporting module, and the Year TVA's operatlons are subject to varlous Federal, state and local 2000 changes to t h ~ smodule have slnce been Implemented in envlronrnental statutes and regulations. Major areas of regula-production tlon affecting TVA's operatlons include air pollution control, TVA has been worklng wlth business partners to mlnlmize the water pollution control, and management and d~sposalof solid possibll~tyof a Year 2000 problem Impacting TVA's business. As and hazardous wastes Because TVA 1s a Federal agency, it 1s of September 30, 1999, 100 percent of all TVA's mlsslon-crit~cal subject only to those state and local envlronmental requlrements suppliers had declared their Year 2000 readlness In addit~on,all where Congress has clearly waived Federal immunity. In the 159 dlstr~butorsof TVA power have declared that they Intend to major envlronmental areas, limlted walvers have been enacted by be Year 2000 ready on or before December 3 1, 1999 Congress. TVA's actlvltles may also be subject to other narrower COSTS. TVA estlmates the d~rectand lndlrect costs of ~ t Years env~ronmental-requirements or to envlronrnental requlrements 2000 work to be approx~mately$40 milllon As of September 30, that affect only Federal actlvlties 1999, TVA had expended approxlmately $37 mlllion of thls TVA has Incurred and continues to incur substantial capital amount TVA belleves that ~t has allocated suffic~entresources to expenditures and operating expenses to comply wlth envlron- 1 address the Year 2000 issue and does not expect addltional costs to be material to its financial posltlon and results of operations RISKS. Some of TVA's operatlons are extensively computerized and are also dependent on the lnformat~ontechnology systems of others with whom ~tinterfaces. Thus, the fallure by TVA or oth-mental requirements Because these requlrements change frequently, the total amount of these costs In the future 1s not presently determinable. It 1s anticipated that environmental requirements wlll become more stringent and that compl~ance costs wlll Increase, perhaps by substantla1 amounts.

I i

i ers wlth whom ~t Interfaces to become Year 2000 ready on a t~melybasis could have a material adverse effect on, among other thlngs, TVA's results of operatlons, liqu~dltyand financial condl-Under the Clean Air Act, the Environmental Protection Agency (EPA) has promulgated nat~onalambient alr quality standards for certaln alr pollutants, lncludlng sulfur d~oxlde,par-I 1

tlon and rts generatlon and transmission operatlons Speclfic r~sks to W A associated wlth the Year 2000 issue include, among other t~culatematter and nltrogen oxlde. Coal-fired generating unlts such as TVA's are major sources of these pollutants I

1 thlngs, power production and dellvery lnterruptlons and admlnls- The 1990 Amendments to the Clean Alr Act establ~sha number i 1

tratlon, bllllng and accounting system malfunctions. of new requlrements relatlng to acid rain control, including i CONTINGENCY PLANS. While TVA expects to contlnue to additional requirements relatlng to sulfur dloxide and nltrogen i I

provlde a rellable power supply as the Year 2000 beglns, TVA 1s ox~deemlssions. Through 1999, TVA had Invested approximate-preparing contlngency plans to mltigate any Year 2000 problems ly $935 mlll~onin capltal for Phase I and Phase I1 compllance that may arise Particular elements of TVA's contlngency plans TVA estlmates it wlll spend an addltional $160 mlllion in capl-Include scheduling key personnel to be on duty durlng the Year tal through 2005 to final~zethe Phase I1 compl~ancemeasures. k 2000 transitlon, carrylng addlt~onalpower generatlon reserves, Durlng 1998, TVA adopted a new clean alr strategy that 1s 1

and Implementing back-up communication systems. As of designed to reduce nltrogen oxlde (NOx) emlssions from its coal t

September 30, 1999, TVA had developed contlngency plans for firedplants by approxlmately 170,000 tons per year Under this approxlmately 8 9 percent of TVA's enterprise-wide rlsks strategy, TVA expects to Install NOx control equipment at five of its fossll plants no later than 2005 The cost of implementing Labor Agreements t h ~ strategy s 1s expected to be between $500 mill~onand $600 On September 30, 1999, TVA had 13,322 employees, of which milllon, in addit~onto amounts TVA has already spent to comply 5,068 were trades and labor employees Nelther the Federal wlth the 1990 Clean Alr Act Amendments Although TVA's Tennessee V a l l e y A u t b o r r t y 1 25

MANAGEMENT'S DISCUSSION A N D ANALYSIS new strategy will not by Itself brlng W A into compliance w ~ t h available funds to pay for such actlv~tlesIn any fiscal year EPA's ozone-related regulations, recent court d e c ~ s ~ o have ns Congress dld not provlde any approprlatlons to TVA to fund overturned or delayed these regulat~onsWhlle these court such actlvltles in 2000 Consequently, durlng 2000, W A will declslons may have some effect on TVA's plans, TVA is commlt- pay for essential stewardsh~pactlvltles p r ~ m a r ~ w l y~ c hpower red to ~rnprovlngthe air q u a l ~ t yof the region, and our N O x revenues, w ~ t hthe remainder funded w ~ t huser fees and other strategy was developed In part to help our reglon contlnue to forms of revenues derlved in connection w ~ t hthose actlvlt~es Improve ~ t alr s qual~ty W A expects to spend approxlmately $43 mlll~onfrom power Although W A cannot w ~ t hcertainty project the costs for revenues for these actlvltles durlng 2000 addlt~onalreductions of NOx, sulfur d ~ o x ~ and d e particulate In addition, admlnlstratlve j u r ~ s d ~ c t ~overo n LBL was trans-matter emlsslons beyond those requ~redby the a c ~ dram provr- ferred to the Secretary of Agriculture effect~veOctober 1, 1999 slons of the 1990 Clean Air Act Amendments, the costs for these TVA is respons~blefor certaln transltlon costs associated with the addlt~onalreduct~onscould exceed $2 5 blll~on. transfer of LBL, w h ~ c hare est~matedto be approx~mately$10 The EPA is lnvestlgating whether coal-fired utlllt~esIn the mlllion T h ~ llabllltys was recorded agalnst ava~lablenonpower eastern U S , lncludlng W A , may have modlfied t h e ~ coal-fired r fund balances a t September 30, 1999.

power plants without complying w ~ t hEPA's new source TVA retalns respons~bll~ty for management of the remalnlng program requlrernents TVA prov~dedEPA wlth the lnformatlon nonpower assets and settlement of nonpower obllgat~onsTVA that ~t requested regarding mod~ficat~ons to TVA's coal-fired remains comm~ttedto carrylng out those essential stewardsh~p plants durlng the per~odfrom 1978 to 1998 As a result of t h ~ s actlvltles related to ~ t management s of the Tennessee River lnvestlgatlon, EPA filed an admin~strat~ve order agalnst W A , system and W A propertles, and to the protectlon and equitable along w ~ t hlawsults against seven other hf~dwestand Southeast d l s t r ~ b u t ~ oofn publlc benefits that are central to WA's manage-utlllt~es,alleglng the u t ~ l ~ t l made es illegal modlficat~onsto cer- ment of lts Integrated system.

tain of t h e ~ coal-fired r plants hlalntenance projects performed at coal-fired plants to malntaln them In good worklng order, whlch utlllt~eshave always cons~deredroutine, are now belng consld- Accounting Standard.

ered major modlficat~onsby EPA EPA IS clalmlng that these TVA accounts for the financ~aleffects of regulation In accordancc projects have tr~ggeredrequirements for ~nscallationof new with Statement of Flnanc~alAccounting Standards (SFAS) emlsslon control technology The adm~ntstrativeorder requlres N o 71, Acconntzng for the E f f t s of Cwtazn Tjpes of Regz/latzon As a W A to revlew and determine, along w ~ c hEPA, what must be result, TVA records certaln regulatory assets and llabll~t~es that done to meet the new requlrements. W A will llkely contest the xvould not be recorded on the balance sheet under generally order Whlle the u l t ~ m a t eoutcome of t h ~ revlew s IS uncertain, ~t accepted accounting prlnc~plesfor non-regulated entitles could requlre W A to accelerate more than $1 b ~ l l ~ oofn the W A has approx~mately$1 6 bllllon of regulatory assets (see emlss~onreduct~ona c t ~ v i t ~discussed es In the preceding para- note 1-Other deferred charges and Debt Issue and reacqulsltion graph costs) along wlth approx~mately$ 6 3 billion of deferred nuclear plants as of September 30, 1999 In the event that restructuring of the utlllty lndustry changes the appllcatlon of SFAS No. 71, Nonpower Roles and Responsibilities TVA would be requlred to evaluate such regulatory assets and WA's r e s p o n s ~ b ~ l ~for t ~ emanaging s publlc resources began with deferred nuclear plants under the prov~sionsof SFAS N o 121,

~ t creatlon s In 1933. Today, chese resource management actlvl- A~co~mtztzg for the Ittzpazrvzent of Long-Lzrjed Assets and Long-Lzz~ed tles help sustain the Interconnected t r ~ b u t a r ~ande s the maln Assets to Be Disposed Of. Statement 12 1 establishes crlterla for stem of the Tennessee River-the nation's fifch largest rlver sys- evaluating and measuring asset lmpalrments, and states that tem. h l u l t ~ p l eobjectives are balanced to provlde flood control, regulatory assets that are no longer probable of recovery through navlgatlon, electr~cpower product~on,recreation, and envlron- future revenues be charged to earnlngs. Such an event may have a mental protectlon. Fundlng for these programs h~storlcallyhas mater~aladverse effect on future results of operations from the Included Federal appropriations, power revenues, and nonpower mr~te-offof regulatory assets However, TVA Intends to fully revenues such as user fees recover any regulatory and other deferred assets that may result Durlng 1999, W A received total Federal appropr~ationsof from WA's trans~tlonto a competltlve market.

approx~mately$50 million, of whlch $43 mlll~onwas for essential stewardsh~pactlvit~esand $7 mill~onwas for TVA's N e w Accounting Pronouncements Land Between The Lakes National Recreat~onArea (LBL) In June 1998, the Flnanclal Accounting Standards Board (FASB)

During 1998, TVA recelved total Federal approprlatlons of Issued SFAS N o 133, Accoz/ntzngfor Derizlarzza Instrr,vzents and approx~mately$70 mlll~on,of whlch $60 mlll~onwas for Hedgzng Actzr~ztzes,which requires that every derlvatlve instru-essential stewardsh~pactivit~es,$7 m~llionwas for LBL, and ment (lncludlng certaln d e r ~ v a t ~ vInstruments e embedded In

$3 mlll~onwas for WA's Environmental Research Center other contracts) be recorded on the balance sheet as elther an In October 1997, Congress dlrected TVA to fund essent~al asset or Ilabll~tymeasured at ~ t falr s value The statement stewardship actlvltles related to ~ t management s of the requires that changes In che derivative's falr value be recognized Tennessee River system and TVA propertles wlth power funds In currently In earnlngs unless speclfic hedge accounting crlterla are the event that [here were ~nsufficlentapproprlatlons or other met W A may engage in hedging a c t i v ~ t ~using es futures, 26 I Tennerree Valle) Auihorrty

MANAGEMENT'S DISCUSSION A N D ANALYSIS forward contracts, options and swaps to hedge the impact of certaln rate-settlng actlons TVA's current accountlng pollcy market fluctuat~onson energy commod~typrlces, Interest rates recognizes all obl~gat~ons related to closure and removal of its and forelgn currencies. In July 1999, the FASB deferred the nuclear units as incurred (see note 1-Decommission~ng costs) effective date of SFAS No. 133 to fiscal years beglnnlng after The l ~ a b l l ~for t y closure 1s measured at the present value of the June 15, 2000. TVA is currently assessing the effect, if any, on est~matedcash flows requlred to satisfy the related obl~gatlon

~ t financial s statements of implementing SFAS No. 133 and discounted at a determined r ~ s kfree rate of Interest. The In March 1998, the Accounting Standards Executive corresponding charge to recognize the add~tionalo b l ~ g a t ~ oISn Committee of the American Inst~tuteof Certified Publlc effected through the crearlon of a regulatory asset. TVA further Accountants issued Statement of Position (SOP) 98-1, Accountzng modlfied its method of accountlng.for decommlssioning costs fw the Costs of Computer Softu'are Da'iloped or Obtainedfor Internal such that earnlngs from decommiss~on~ng fund Investments, Use, which provides guidance on accounting for the costs of amortization expense of the decommlss~onlngregulatory asset, computer software developed or obtained for Internal use. and interest expense on the decomm~ssioningl~abilltyare Under SOP 98-1, certain costs whlch are currently expensed may deferred in accordance w ~ t hSFAS No. 7 1 now be capitalized and amortized over some future perlod SOP 98-1, which is effective for TVA in 2000, 1s not expected to have a material impact on TVA's financial posltlon or results of Forwurd-Looking Information operations. TVA's 1999 Annual Report contains forward-look~ngstatements In December 1998, the Emerging Issues Task Force of the relating to future events and future performance. Any statements FASB Issued EITF 98-10, Accountzngfor Contracts 1nmLz)edm regarding expectations, bel~efs,plans, projections, estimates, Energy Tradzng and Risk Afanagement Actzvztzes. Some energy-relat- objectives, intentions or assumptions or otherw~serelating to ed companies have been enterlng into contracts for the purchase future events or performance may be forward-look~ng and sale of energy commodlt~esand nettlng those actlvltles In Some examples include statements regardlng TVA's the Income statement (settlement bas~s)In EITF 98-10, the projections of future power and energy requlrements, future Task Force stated that energy tradlng contracts are to be record- costs related to environmental compl~ance,targets for TVA's ed at f a ~ value r on the balance sheet, with related galns and loses future competitive posltlon and the potentla1 effect of the Year included In earnings EITF 98-10, which 1s effectlve for TVA In 2000 issue on TVA's operations Although TVA belleves that the 2000, is not expected to have a mater~allmpact on TVA's finan- assumptions underlying the forward-look~ngstatements are c ~ aposit~on l or results of operat~ons reasonable, TVA does not guarantee the accuracy of these statements Nuclear Decommissioning Costs Numerous factors could cause actual results to d~ffer The FASB has undertaken a project regardlng the accountlng for mater~allyfrom those In forward-looking statements Such closure and removal of long-l~vedassets, lncludlng the decom- factors include, among other thlngs, new laws and regulat~ons, missioning of nuclear generating unlts The FASB has reached espec~allythose related to the restructuring of the electr~cpower several tentatlve conclus~onswith respect to the project and Industry and varlous env~ronmentalmatters; Increased expects to Issue an exposure draft In the first quarter of 2000; competit~onamong electric utlllties; legal and admln~stratlve however, ~t is uncertain when a final statement will be Issued proceedings affecting TVA, the financ~alenvironment; and what lmpact ~t may ultimately have on TVA's financ~al performance of TVA's generating faclllt~es,fuel prlces; the posiclon or results of operations demand for electnclty, weather cond~tions,changes in account-Effectlve for 1998, TVA changed ~ t method s of accounting for ing standards; the efficacy of TVA's Year 2000 remed~at~on decomm~ss~onlng costs and related l~ablllt~es In order to comply efforts and the efforts of those ent~tieswlth which TVA w ~ t hcertaln of the FASB's tentative conclusions, as well as ~nterfaces,and unforeseeable events T e n n e s s e e V a l l e ) Aurhorrty 1 27

FINANCIAL STATEMENTS Balance Sheets At Septenzher 30 ( i n rnrllzons) P o w e r Program All Programs Assets 1999 1998 1999 1998 Current assets Cash and cash equ~valents S 103 S 391 S 160 S 451 Accounts rece~vable 730 776 730 776 Invencor~esat average cost and other Fuel 178 153 178 153 Other 307 316 307 316 -

T o t a l c u r r e n t assets 1,318 1,656 1,375 1.716 Property, plant, and equipment Completed plant 27,569 29,055 30,685 30,166 Less accumulated deprec~at~on (8,762) (7,745) (9,074) (8,243) -

Nec completed plant 20,807 21,110 21,611 21,723 Conscructlon In progress 730 548 730 558 Deferred nuclear generating unlts 6,320 6,3 11 6,320 6.3 11 Nuclear fuel and cap~calleases 560 922 560 722 -

T o t a l property, plant, a n d e q u i p m e n t 28,417 28,871 29,221 27,714 Investment funds 731 578 73 1 578 Deferred charges and other assets Loans and ocher long-term rece~vables 122 104 153 151 Debc Issue and reacqursltlon coscs 1,188 86 1 1,188 861 Other deferred charges 1,610 1,525 1,610 1,525 -

Total deferred charges a n d o t h e r assets 2,920 2,170 2,951 2,537 -

Total assets S 33,386 S 33,615 S 34,278 S 34,545 -

The arcortzpanjzng notes ate a n zntegral part of these financral staterrrents 28 Tennesree Valley A~~thorrzj.

FINANCIAL STATEMENTS P o w e r Program All Programs Liabilrties and proprietary capital ' 1999 1998 1999 1998 Current liabilities Accounts payable $ 493 $ 521 $ 521 $ 538 Accrued liabllitles 178 175 182 180 Accrued interest 464 487 4 64 487 D~scountnotes 982 1,757 982 1,757 Current macurlties of long-term debt 1,000 1,500 1,000 1,500 Total current liabilities 3,117 4,440 3,149 4,462 Other liabilities 2,156 2,007 2,156 2,007 Long-term debt Publlc bonds-senior 23,294 19,127 23,294 19,127 Federal Financing Bank-senlor - 3,200 - 3,200 Publlc bonds-subordinated 1,100 1,100 1,100 1,100 Unamortized dlscount and other adjustments (491) (407) (491) (407)

Total long-term d e b t 23,903 23,020 23,903 23,020 Proprietary capital Appropriation investment 548 568 4,964 4,936 Retained earnlngs reinvested in power program 3,662 3,580 3,662 3,580 Accumulated net expense of nonpower programs - - (3,556) (3,460)

Total proprietary capital 4,210 4,148 5,070 5,056 Total liabilities and proprietary capital $ 33,386 $ 33,615 $ 34,278 $ 34,545 Tennessee V a l l e y Aurhorrry 1 29

FINANCIAL STATEMENTS Statements of Income-Power Program

~ - --

For the jears ended Septetrz6w 30 (zn mzllzons) 1999 1998 1997 Operating revenues Sales of electrlclty Alunic~palltiesand cooperaclves $ 5,510 S 5,554 S 4,811 Industr~esdlrectly served 642 523 4 64 Federal agencles and other 357 556 561 Other revenue 86 96 98 T o t a l operating revenues 6,595 6,729 5,937 Operating expenses Fuel and purchased power 1,777 1,900 1,593 Operating and maintenance 1,384 1,347 t ,20 1 Depreciation and amorc~zatlon 1,181 1,038 1,014 Tax-equivalents 304 264 272 Accelerated amort~zation(notes 1 and 7) 261 - -

Total operating expenses 4,707 4,549 4,0G Operating income 1,688 2,180 1,854 Other (expense) income, net (9) 12 157-Income before lnterest expense and cumulative effect of change In accounting principle 1,679 2,192 2,011 lnterest expense Interest on debt 1,753 1,930 1,993 Amortizat~onof debt discount, issue, and reacqu~sltroncosts, net 60 84 91 Allowance for funds used durlng construct~on (36) (55) (sl)

N e t interest expense 1,777 1,959 2,003 Cumulative effect of change In accounclng principle (notes 1 and 7) 217 - -

Net income $ 117 $ 233 $ 8 The arro~upanyrngnotes are a n zntegral part of these finanrzal statements.

30 I Tennersee V a l l e ) Auzhorrt~

F I N A N C I A L STATEMENTS Statements of Cash Flows Power Program All Programs For the years ended September 30 (in rnrllzons) 1999 1998 1 1997 Cash flows from operating activities Net power lncome $ 119 Net expense of nonpower programs -

Items not requiring (provldlng) cash Depreciatidn and amort~zation 1,250 Accelerated amort~zation 261 Allowance for funds used during construct~on (36)

Nuclear fuel amortlzatlon 177 Cumulative effect of change In accounting principle (217)

Other, net (26)

Changes in current assets and l~abilltles Accounts receivable 65 Inventor~esand other (35)

Accounts payable and accrued l ~ a b ~ l ~ t i e s (19)

Accrued lnterest (23)

Other (85)

Net cash provided by operating activities 1,431 Cash flows from investing activities Construction expenditures (829)

Allowance for funds used during construction 36 Nuclear fuel (135)

Proceeds from sale of investments -

Purchases of investments -

Proceeds from sale of loans receivable -

Other, net (28)

Net cash used in investing activities (956)

Cash flows from financing activities Long-term debt Issues 4,506 Redemptions (4,046)

Short-term borrow~ngs,net (775)

Flnanclng costs, net (391)

Congressional approprlatlons -

Payments to U.S Treasury -

Net cash used in financing activities Net change In cash and cash equivalents (288)

Cash and cash equivalents at beglnnlng of period 391 Cash and cash equivalents at end of period $ 103 The accompanying notes are an integral part of these financzal statements.

Tennessee Valley Aurborrty I 31

F I N A N C I A L STATEMENTS Statements of Changes in Proprietdry Capitd-Power Progrum Por the years ended September 30 (zn mzllzons) 1999 1998 1997 Retained earnlngs reinvested a t beginning of perlod ;P 3,580 3 3,387 $ 3,420 Net lncome 119 233 8 Return on approprlatlon investment (37) (40) (4 1)

Retained earnings reinvested at end of period 3,662 3,580 3,387 Approprlatlon Investment at beginning of perlod 568 588 608 Return of approprlatlon ~nvestment (20) (20) (20)-

Approprlatlon investment at end of perlod 548 568 588 Proprietary capital a t end of period S 4,210 $ 1,148 s 3,9751 Statenzents of Net Expe~z~e-Nonpouier Progra??zs For the years ended Septettzber 30 (in mzlfzons) 1999 1998 1997 Water and Land Stemardsh~p S 72 $ 65 $ '8 Land Between The Lakes (note 10) 19 8 7 Econom~cDevelopment 5 8 22 Environmental Research Center - 10 14 Net expense S 96 S 91 $ 121 Statements of Changes in Proprietary Capital-Nonpozuer Progranzs For the years ended Septenlber 30 (m ~t~zllzons) 1999 1998 1997 Proprietary capltal at b e g ~ n n ~ nofg perlod S 908 S 930 3 944 Congressional approprlatlons 50 69 106 Net expense (96) (91) (121)

Other, net (2) - 1 Proprietary capital at end of period S 860 $ 908 s 930--

The arcottzpanqzng notes are an ~nregralpart of these finanrzal statetnents 32 1 Tennessee Valle) Autborrt)

NOTES TO FINANCIAL STATEMENTS I . Summary of significant accounting policies General struction The cost of current repalrs and mlnor replacements IS TVA is a wholly owned corporate agency and lnstrumentallty of charged to operating expense. Nuclear fuel IS valued at the lower the United States It was established by the TVA Act w ~ t hthe of cost or market uslng the average cost method for raw materl-objective of developing the resources of the Tennessee Valley als and the speclfic ~dentificatlonmethod for nuclear fuel In reac-region in order to strengthen the regional and natlonal economy tor. Amortlzatlon of nuclear fuel is calculated on a unlts of pro-and the natlonal defense by providing: (1) an ample supply of duction basis and 1s included In fuel expense. The TVA Act power withln the region, (2) navigable channels and flood con- requires TVA's Board of Directors to allocate the cost of com-trol for the Tennessee Rlver System, and (3) agricultural and pleted multl-purpose projects between the power and nonpower Industrial development and improved forestry in the reglon programs, subject to the approval of the President of the United TVA carrles out these regional and natlonal responsibll~tiesIn a States. The original cost of property retlred, together wlth service area that centers on Tennessee and parts of Alabama, removal costs less salvage value, 1s charged to accumulated Georg~a,Kentucky, Mississippi, North Carolina and Vlrginla. depreciation. Depreclatlon is generally computed on a straight-TVA's programs are dlvlded Into two types of activities - the llne bas~sover the estlmated servlce lives of the various classes of power program and the nonpower programs. Substantially all assets. Depreciation expense expressed as a percentage of the TVA revenues and assets are attributable to the power program average annual depreciable completed plant was 3.28 percent for The power program has historically been separate and dlstlnct 1999,3 23 percent for 1998 and 3 21 percent for 1997.

from the nonpower programs and 1s required to be self-support-lng from power revenues and proceeds from the Issuance of debt Decommissioning costs The power program receives no congressional appropr~atlonsand Effectlve for 1998, TVA changed ~ t method s of accountlng for 1s required to make annual payments to the U.S Treasury in decommisslon~ngcosts and related llabilltles TVA's current repayment of, and as a return on, the government's approprlatlon accountlng pollcy recognizes as Incurred all obllgatlons related Investment in TVA power facilltles. Most of the funding for to closure and removal of ~ t nuclear s unlts The charge to recog-TVA's nonpower programs has historically been provided by con- nlze the addltlonal obligation in 1998 was effected through the gressional appropriations Certaln nonpower actlvltles are also creation of a regulatory asset TVA further mod~fied~ t account-s funded by various revenues and user fees. Financial accounts for lng methodology such that earnlngs from decommisslonlng the power and nonpower programs are kept separately See note Investments, amortization of the decommlssioning regulatory 1 0 for a dlscussron related to future fundlng of TVA's nonpower asset, and interest expense on the decommlssioning lrabil~tyare programs. deferred (see note 9-Decommissioning costs) The effect of the Power rates are established by the TVA Board of D~rectorsas change was to decrease 1998 depreclatlon expense approximately authorized by the TVA Act. The TVA Act requlres TVA to charge $38 mlllion - primarily due to the deferral of the decommlsslon-rates for power that, among other thlngs, will produce gross rev- ing components of earnings, amortization and interest.

enues sufficient to provlde funds for operation, maintenance, and Durlng 1997, the excess of decommlss~on~ng lnvestment administration of ~ t power s system; payments to states In lieu of earnlngs over the annual decommissioning provis~onwas record-taxes; and debt service on outstanding Indebtedness ed as other lncome TVA's total lnvestment earnlngs were $151 mllllon Of this amount, $13 mllllon was recorded as an offset to Fiscal year the decomm~sslonlngprovision, and $138 rnllllon was recorded Unless otherwise lndlcated, years (1999, 1998, etc.) refer to as other Income.

TVA's fiscal years ended September 30.

Allowance for funds used during construction Revenue TVA capitalizes an allowance for funds used durlng construction Revenues from power sales are recorded as power is delivered to The allowance 1s applicable to construct~onIn progress, exclud-customers TVA accrues estlmated unbllled revenues for power ing deferred nuclear generating unlts sales provided to customers for the perlod of time from the end of the billing- cycle

. to month-end. Loans and other long-term receivables Off-system sales are presented In the accompany~ngstate- In June 1997, TVA entered into a five-year agreement wlth a ments of operations as a component of Sales of eleccrlclty- bank pursuant to whlch TVA agreed to sell certaln recelvables Federal agencies and other. Prlor to 1998, off-system sales and relatlng to TVA's consumer energy-conservation programs. As of purchases under exchange power agreements were reflected on a September 30, 1999, approximately $218 mlllion of the receiv-net basls In fuel and purchased power expense. Off-system sales ables have been sold for proceeds equal to their carrylng amount.

for 1997 have been reclasslfied to conform with the 1999 and Under the terms of the agreement, TVA has retalned substantially 1998 presentation the same risk of credit loss as ~fthe recelvables had not been sold and, accordingly, an appropriate llabll~tyaccount has been estab-Property, plant, and equipment and depreciation Ilshed.

Addltlons to plant are recorded at cost, whlch Includes dlrect and lndlrect costs and an allowance for funds used during con-Tennessee V a l l e ) Authorrty 1 33

NOTES TO FINANCIAL STATEMENTS Other deferred charges ances of such regulatory assets at September 30, 1999 and 1998, Other deferred charges prlmarlly include prepaid penslon costs were $641 mlllion and $674 m ~ l l ~ orespect~vely n,

and regulatory assets capitalized under the provisions of Statement of F~nanclalAccounting Standards (SFAS) N o 7 1, Tax-equivalents Acro~mtz~zgfor the Effects of Cettam Tjpes of Regnlatzon At The TVA Act requlres TVA to make payments to states and loc.~l September 30, 1999, other deferred charges lncluded total governments where the power operations of the corporation are unamortlzed regulatory assets of $968 mlllton--of whlch $343 conducted. The amount 1s 5 percent of gross revenues from the mlll~onrepresents a transltlon obllgatlon for certaln postemploy- prior year's sale of power, excluding sales to other Federal agen-ment benefits, $393 mlllion represents an additional obllgatlon cles and Interchange sales wlth other u t ~ l i t ~ ewith s , a provls~on related to the closure and removal of nuclear unlts (see note for m ~ n ~ m upayments m under certaln circumstances I-Decomm~ss~on~ng costs), $221 mlll~onrepresents an over-market portlon of nuclear fuel, and $11 m~lllonrepresents Accelerated amortization TVA's portion of the costs for decommlsslonlng the Department Effectlve for 1999, TVA adopted a new accounting pollcy whereby of Energy's (DOE) uranlum enr~chmentfac~lltiesAt September annual provisions for amortlzat~onof deferred charges will be 30, 1998, the unamort~zedbalances of regulatory assets of adjusted as necessary In order to achleve certaln earnlngs levels as

$1,260 mllllon lncluded $342 m ~ l l ~ orepresentlng n a caplrallzed set forth In resolut~onsadopted annually by the TVA Board of lnterest component of nuclear fuel, $377 mllllon representlng a Directors In connection with the rate revlew process. The targeted translt~onobllgatlon for certaln postemployment benefits, $478 earn~ngslevels will be based on the earnlngs requlrements of the mlll~onrepresentlng an addltlonal obllgatlon related to the clo- TVA Act and the Basic TVA Power Bond Resolution (see note sure and removal of nuclear unlts (see note 1-Decomm~ss~on~ng 5-Borrowing authority) Such adjustments may result In elther costs); and $63 mlll~onrepresentlng TVA's portlon of the costs contracting or extending the estimated amortlzatlon periods. Tht for decomm~ssionlngthe DOE'S uranium enrichment facll~ties amortlzatlon of such assets 1s prlnc~pallycomputed on a stralght-Effectlve for 1999, TVA reclass~fiedan a d d ~ t ~ o n $332 al mll- llne basls, over perlods ranglng from three to 15 years As a result Lon from nuclear fuel Inventory to deferred charges. Thls regula- of surplus earnings levels In 1999, due In part to a change In rory asset wlll be amortlzed on a straight-l~ne bas~sover an estl- accounting for pension costs (see note 7-Penslon plan), TVA accel-mated three-year period The effect of thls change was to erated amortization of certaln regulatory assets by $261 rn~lllon

~ncrease1999 expense approxlmately S 1 1 1 m~llton. under the new pollcy in 1999 Also effectlve for 1999, TVA changed ~ t method s of account-Ing for nuclear refueling outage maintenance costs whereby such lnterest and capital costs costs will be deferred and amortlzed on a stra~ght-llnebasls over Durlng 1999, 1998, and 1997, cash paid for interest on out-the estimated per~oduntll the next refueling outage, rather than stand~ngIndebtedness (net of amount capltallzed) was $1,740 expensed as Incurred The effect of the change was to decrease mllllon, 9 1,886 mllllon, and $1,911 mill~on,respect~vely In 1999 expense approxlmately $63 mllllon additlon to paylng lnterest on outstandlng ~ndebtedness,the TVA Act requlres TVA to make annual payments to the U S Investment funds Treasury The annual Treasury payments represent a repayment Investment funds consist p r ~ m a r ~ of l y trust funds designated to of the origlnal approprlat~oninvestment, along w ~ t ha return on fund nuclear decommtss~on~ng requlrements (see note the appropriation Investment (see note 4 ) TVA pald $20 rnlll~on 9-Decommiss~on~ngcosts). These funds are Invested In portfo- each year for 1999, 1998, and 1997 as a repayment of the appro-110s of securlt~esgenerally deslgned to earn returns in llne wlth pr~ationInvestmenr. TVA pald $37 milllon to the U S Treasury overall equity market performance In 1999 as a return on the approprlatlon investment, while pay-Ing $40 mlllion In 1998 and $41 mlll~onIn 1997 i 1 k U D e b t issue and reacquisition costs Effectlve for 1999, TVA changed ~ t method s of amortlzlng debt Risk-management activities Issue and reacqulsitlon costs Under the current polrcy, issue and TVA 1s exposed to market rlsk from changes In interest rates and reacqulsltion expenses, call premiums, and other related costs are currency exchange rates T o manage volatlllty relatlng to these

! deferred and amortlzed (accreted), on a pooled straight-l~ne basls exposures, TVA has entered Into varlous derlvatlve transactlons, over the we~ghtedaverage llfe of TVA's publlc debt portfollo. prlnclpally an lnterest mte swap agreement and fore~gncurrency Durlng 1998 and 1997, debt lssue and reacqu~slt~on costs were swap agreements TVA 1s exposed to c r e d ~ losses t In the event of separately amortlzed on a straight-llne bas~sover the term of the nonperformance by counterpartles on the rlsk-management related outstandlng secur~tlesThe effect of the change was to Instruments. TVA monltors such rlsk and does not believe that decrease 1999 expense approximately $20 mlll~on there 1s a slgnlficant rlsk of nonperformance by any of the partles TVA has Incurred prem~umsrelated to certaln advanced refund- to these Instruments Ings, and also recelved and p a ~ dpremlums In connection with the TVA may engage in hedglng actlvitles uslng forwards, futures monet~zatlonof cerraln call prov~slonsIn accordance with regula- or optlons to hedge the ~ m p a c tof market fluctuations on energy tory practices, TVA has deferred these prem~umsand IS amortlzlng commod~typrlces TVA currently accounts for these transactlons such premlums on a pooled straight-line basls over the welghted uslng the deferral method, and galns and losses are recognized In average l ~ f eof TVA's publlc debt portfollo The unamortlzed bal- the accompanying financial statements when the related hedged

NOTES TO FINANCIAL STATEMENTS transaction occurs. TVA's risk management pollcles allow the use insured for health care clalms for eliglble actlve and retlred of derivat~vefinancial instruments to manage financlal exposures employees Consulting actuaries asslst TVA In determlnlng cer-but prohlblt the use of these instruments for speculative or trad- tain l~abllitlesfor self-lnsured clams TVA malntains nuclear Ila-lng purposes. billty insurance and nuclear property, decommiss~oningand decontamination lnsurance wlth an outslde party (see note Cash and cash equivalents +Nuclear insurance)

Cash and cash equivalents Include the cash available In commer-cial bank accounts and U S Treasury accounts, as well as short- Management estimates term securitles held for the prlmary purpose of general Ilquidlty. The preparation of financ~alstatements In conformity wlth gen-Such securitles mature wlthin three months from the date of erally accepted accounting prlnclples requlres management to make estlmates and assumptions that affect the reported amounts of assets and l ~ a b ~ l ~ tand l e s d~sclosureof contingent lnsurance assets and liabil~tlesa t the date of the financlal statements and TVA IS primarily self-lnsured for property loss, workers' compen- the related amounts of revenues and expenses durlng the report-satlon, general Ilabillty, and automotive llablllty TVA is also self- lng perlod Actual results could d ~ f f e from r those estlmates

2. Nuclear power progmm The nuclear power program a t September 30, 1999, consisted of nine units-five operatlng, three deferred, and one ~noperatlve--at four locations, wlth Investments In property, plant and equipment as follows and in the status lndlcated I I

--,> - A Vperating Installed capacity Completed ~o~nstruction Fuel (dollars in tnrllions) units (megawatts) plant, net in progress Deferred investment Browns Ferry* 2 Sequoyah 2 Watts Bar 1 Bellefonte -

Raw materials Total 5

• Brouons Ftmy I , an rnoperatzzr unit, rs discussed belou:

Browns Ferry 1 was taken off-line in 1985 for modifications cycle plant utilizing natural gas or gasified coal In 1997, an and improvements and will contlnue to remaln In an inoperative Independent team of technical and financial experts completed a status until ~ t ultimate s disposition 1s determined. The undepre- feasibility study to evaluate options for the converslon of the ciated cost of Browns Ferry 1 of $66 mill~on1s included in net Bellefonte Nuclear Plant to a fossil fuel-fired plant. The feaslbll-completed plant and 1s being depreciated as part of the recover- ~ t study y concluded that one of the most economical fossll con-able cost of the plant over the remaining llcense period version strategies IS to complete Bellefonte as a natural gas-fired TVA has three unlts In deferred status In 1988, TVA sus- comb~ned-cycleplant. TVA also Issued an Env~ronmentalImpact pended construction actlvlties on Watts Bar 2, and the unlt 1s Statement (EIS) assessing the environmental Impacts of varlous currently In lay-up. Bellefonte 1 and 2 were deferred In 1988 fossll converslon options The EIS identified the natural gas-fired and 1985, respectively. Estimated 2000 expend~turesfor the combined-cycle plant alternative as the preferred option.

three deferred units are llmited to lay-up, maintenance and Bellefonte remalns In a deferred status ensurlng that optlons remaln vlable Whlle the future decls~onson TVA's deferred units wlll ultl-In December 1994, TVA determlned ~t wlll not, by itself, mately Impact the method of cost recovery, the TVA Board has complete Bellefonte 1 and 2 and Watts Bar 2 as nuclear unlts determlned that ~t wlll establish rate adjustments and operatlng TVA's integrated resource plannlng process ldentlfied as a vlable policies to ensure full recovery of the cost of these unlts and com-option the converslon of the Bellefonte faclllty to a combined- pliance wlth the requirements of the TVA Act.

Tennessee V a l l e y A u t h o r z t y 1 35

NOTES TO FINANCIAL STATEMENTS

3. Completed pldnt-power progruvz Completed planc of the power program cons~stedof the follow~ngat September 30 1999 1998 Accumulated Accumulated (I# ?fzz//zons) Cost depreciation Net Cost depreciat~on Net Foss~lplants $ 7,983 $ 3,407 S 4,576 0 7,780 $ 3,181 S 4,599 Nuclear plants 14,705 3,142 L 1,563 14,613 2,697 11,916 Transmission 3,384 1,091 2,293 3,265 1,038 2,227 Hydro plants 1,486 5 14 972 1,424 491 933 Other 2,011 608 1,403 1,973 538 1,435 Total $ 29,569 $ 8,762 $ 20,807 $ 29,055 S 7,945 5 21.1 10

4. Appropriation investnzent-power program The TVA Act requlres TVA to make annual payments to the U S years The annual repayment amount is $20 mlll~onThe return Treasury from net power proceeds as a return on the approprla- IS based on the approprlatlon Investment as of the beg~nnlngof tlon Investment In the power system and as a repayment of chat the year and the computed average Interest rate payable by the investment The payments requ~redby the TVA Act may be U S. Treasury on ~ c total s marketable public obl~gationsas of the deferred under certaln c~rcumstancesfor not more than two same dare (6 56 percent ac September 30, 1998)

5. Debt Borrowing authority The TVA Act authorizes TVA to lssue bonds, notes, and other precedence over che payment to the U.S Treasury descr~bedIn ev~dencesof lndebcedness u p to a total of $30 b ~ l l ~ ooutscand~ng n note 4 a t any one tlme TVA must meet certaln cash flow and earnlngs tests thac are conralned In the TVA Acc and the Bas~cTVA Power Debt outstanding Bond Resolut~on Debt servlce on these obllgat~ons,whlch is Debt outstand~nga t September 30, 1999 and 1998 consisted of payable solely from TVA's net power proceeds, has the follow~ng (zn tliiffrons) 1999 1998 Short-term debt Held by the p u b l ~ c Dlscount notes (net of d~scount) J 982 0 1,75' Current maturltles of long-term debt - 8 375% 1,000 1,500-Total short-term debt 1,982 3,25' Long-term debt Held by the publlc - senlor hiaturlng In 2000 - 1,250 h i a t u r ~ n gIn 2001 - 5.00% to 6 50% 2,350 2,100 hfatur~ngIn 2002 - 6 00% 1,000 -

hfaturlng In 2003 - 6.125% 1,250 1,250 Aiaturlng In 2004 - 5 00% 400 -

hfatur~ngIn years 2005 through 2044 - 5 375% to 8 625% 18,291 14,52' Held by Federal F ~ n a n c ~ nBank-senlor g - 3,200 Held by the publlc-subord~nated hfacur~ng~n 2015 and 2046 - 7 50% to 8 00% 1,100 1,100-Total long-term debt 24,394 23,42:

Unamort~zedd~scountand other adjusrmencs (491) (4071 Net long-term debt 23,903 23.020-Total debt S 25,885 S 26,277--

NOTES TO FINANCIAL STATEMENTS Short-tenn debt after a fixed-rate period of five years, to reset the coupon rate The weighted average rates applicable to short-term debt out- downward under certaln market cond~tlons.Investors have the standing in the publlc market as of September 30, 1999 and optlon to redeem the bonds at par ~fand when the lnterest rate is 1998, were 5 30 percent and 5.54 percent, respectlvely Durlng reset. One PARRS Issue totals $575 mlllion, matures in June 1999,1998, and 1997, the maximum outstandlng balance of 2028 and has ~ t first s potential reset date In June 2003 The sec-short-term borrowings held by the public was (in mllllons) ond Issue of PARRS totals $525 mlll~on,matures in May 2029

$4,701, $2,914, and $3,962, respectlvely, and the average and has ~ t first s potentlal reset date In May 2004 amounts (and welghted average lnterest rates) of such borrow-ings were approximately ( ~ mill~ons),

n $1,945 (5.01 percent), Foreign currency transactions and interest rate swap

$2,23d4(5.58 percent), and $2,743 (5.47 percent), respectlvely Durlng 1996, TVA entered Into a currency swap contract as a hedge for a forelgn currency denomlnated debt transaction TVA Put and call options Issued DM1.5 bllllon of bonds and swapped the cash flows for Bond issues of $9.0 bllllon held by the public are redeemable In those of a U.S dollar obligation of $1 blll~on.TVA also entered whole or in part, at TVA's option, on call dates ranging from the Into a currency swap contract durlng 1999 as a hedge for a present to July 2020 at call prlces ranging from 100 percent to Sterllng denomlnated debt transaction and issued 2200 milllon 106.7 percent of the principal amount. Addltlonally, TVA has of bonds in that transaction Any gains or losses on the debt bond issues of $2.1 bill~onheld by the publlc that are redeemable Instruments due to the forelgn currency transactlons are offset by In whole or In part at the optlon of the respective bondholders losses or gains on the swap contracts. At September 30, 1999 One bond Issue totallng $500 mill~on,whlch matures In July and 1998 the currency transactlons resulted In net deferred galns 2 0 4 5 , s redeemable in 2001 by the bondholders A second Issue of $182 mllllon and $102 mllllon, respectlvely, which are totallng $121 mlllron, whlch matures in April 2036, 1s included in the account "unamortlzed dlscount and other adjust-redeemable In 2006 at the option of the bondholders, and a thlrd ments " The offsett~nglosses on the swap contracts are recorded issue totallng $1.5 billion, which matures In Aprll 2036, is as a deferred llablllty If any loss/(ga~n)were to be Incurred as a redeemable In 2006 at the option of the bondholders. Each of result of the early termlnatlon of a swap contract, any resulting these three issues 1s reported in the debt schedule w ~ t hmaturlty charge/(lncome) would be amortized over the remalnlng life of dates corresponding to the earllest redeemable dates A fourth the bond as a component of lnterest expense issue totallng $250 mill~on,whlch matures In January 2018, Addltlonally, In 1997, TVA Issued $300 mllllon of inflation-includes a provision for a rlght of redemption upon the death of a Indexed accreting principle bonds. The 10-year bonds have a beneficla1 owner In certain speclfied circumstances fixed coupon rate that 1s p a ~ don the ~nflatlon-adjustedprinc~pal Addltlonally, TVA has two Issues of Putable Automatic Rate amount TVA hedged ~ t Inflation s exposure under the securities Reset Securities (PARRS) outstandlng. The bonds permit TVA, through a 10-year fixed interest rate swap agreement

6. Fair vahe of financial instraments TVA uses the methods and assumptions descr~bedbelow to Loans and other long-term receivables estlmate the falr values of each significant class of financ~al Falr values for these homogeneous categories of loans and receiv-instrument. ables are estimated by determining the present value of future cash flows uslng a dlscount race equal to lend~ngrates for slmilar Cash and cash equivalents and short-term debt loans made to borrowers with simllar credit ratings and for the The carrying amount approximates fair value because of the same remalnlng maturltles.

short-term maturlty of these instruments.

Bonds Investment funds Fair value of long-term debt traded In the public market is At September 30, 1999, these investments were classified as determined by multlply~ngthe par value of the bonds by the tradlng securit~esand carrled at their fair value. quoted market price (asked prlce) nearest the balance sheet date.

The estimated values of TVA's financlal Instruments at September 30 are as follows :

1999 1998 (zn rnrllrons) Carrying amount Fair a d o u n t Carrying amount Fair amount i

Cash and cash equivalents $ 160 Investment funds 73 1 Loans and other long-term receivables 153 Short-term debt 982 Long-term debt, lncludlng current maturltles 25,394 The falr market value of the financlal instruments held at September 30, 1999, may not be representatwe of the actual galns or loss-es that wlll be recorded when these instruments mature or ~fthey are called or presented for early redempt~on Tennessee Valley Aurhorrty 1 37

1 NOTES TO FINANCIAL STATEMENTS

7. Benefit pians Pension plan TVA has a defined benefit plan for most full-time employees was effective for fiscal years b e g ~ n n ~ nafter g December 15, 1997 that prov~destwo benefit structures the O r ~ g ~ nBenefit al Structure and the Cash Balance Benefit Structure. The plan IS Other postretirement benefits controlled and administered by a legal entity separate from TVA, TVA has sponsored an unfunded postretrrement plan that pro-the TVA Retirement System (TVARS), whlch IS governed by ~ t s v ~ d e sfor non-vested c o n t r ~ b u t ~ o ntoward s the cost of certain I own ~ndependencboard of d~rectorsThe plan assets are prlmarl- retirees' medical coverage The plan generally has covered ly stocks and bonds TVA contr~butesto the plan such amounts employees who, at retirement, are age 60 and older (or who are as are agreed upon between the TVA and the TVARS boards of age 50 and have at least five years of serv~ce)TVA's contr~bu-d~rectors,whlch In no event 1s Less than the amount necessary on tlons are a flat dollar amount- based upon the partlclpants' age an actuarial basis to provide assets sufficient to meet obllgat~ons and years of servlce and certain payments toward the plan costs for benefits N o TVA c o n t r ~ b u t ~ oISn legally requ~redwhen the In connection w ~ t hthe penslon plan benefit amendments, plan's assets are suffic~entto meet ~ t accrued s I ~ a b ~ l ~ tas~ deter-es, TVA also effected other postretlrement benefit plan amendments mined by an Independent outs~deactuary T h ~ sltuatlon s has durlng 1998 such that certaln TVA contr~butlonsto retlree exlsted for several years. health benefits were d~scontlnued,resultlng In approxlmately The penslon benefit for a member partlclpatlng In the $120 mlll~onIn reduced other postretlrement benefit obligat~ons.

O r ~ g l n a Benefit l Scructure IS based on the member's years of The annual assumed cost trend for covered benefits I S 9 5 per-cred~tableservlce, average base pay for the h~ghestthree consec- cent In 1999, decreasing by one-half percent per year untll utlve )ears and the penslon rate for the member's age and years reach~ngS 0 percent In 2008 and held constant thereafter For of servlce, less a Social Secur~tyoffset 1998 and 1997, an annual trend rate of 10 0 percent and 10 5 The penslon benefit for a member partlclpatlng in the Cash percent, respectively, was assumed The effect of the change in Balance Benefit Structure IS based on cred~tsaccumulated In the assumptlons of the cost basis was not slgnlficant member's account and member's age A member's account Increas~ng/(reduc~ng) the assumed health-care cost trend rates by recelves cred~tseach pay per~odequal to 6 0 percent of h ~ or s her one percent would ~ncrease/(reduce)the accumulated postretlrc-s t r a ~ g h t - t ~ mearnings.

e The account also Increases at an Interest ment benefit obllgat~on(APBO) as of September 30, 1999, by rate equal to the change In the Consumer P r ~ c eIndex (CPI) plus 512 m ~ l l ~ o n / ( $mlll~on) ll and the aggregated service and Inter-3 0 percent, whlch amounted to 5 8 percent in 1998 Durlng est cost components of net p e r ~ o d ~postretlrement c benefit cost 1999, plan amendments were effected such that the rate may not for 1999 by $1 m~llion/($lm~llion) be less than 6 0 percent nor more than 10 0 percent The actual The we~ghtedaverage d~scountrate used In determlnlng the change In the CPI for 1999 was 1.6 percent, resultlng in the APBO was 7.5 percent for 1999, 7.0 percent for 1998 and 8 0 mlnrmum of 6 0 percent for 1999 percent for 1997. Any net unrecognized galn or loss resultlng D u r ~ n g1998, plan amendments were effected such that cer- from experience different from that assumed or from changes In tam penslon benefits were enhanced, resultlng In approx~mately assumptlons, and whlch IS In excess of 10 percent of the APBO,

$590 mlllion In a d d ~ t ~ o npenslonal plan benefit o b l ~ g a t ~ o n s IS amort~zedover the average remalnlng servlce perlod of a c t ~ v e Durlng 1999, TVA changed ~ t accounting s pollcy for the plan partlclpants method of determln~ngthe market-related value of penslon assets, result~ngIn a one-time galn of approx~mately$217 mll- Other postemployment benefits I~on.T h ~ gain s IS presented on the Statement of Income under Other postemployment benefits Include workers' compensation the captlon "Cumulative effect of change in accountlng prlncl- provlded to former or lnactlve employees, their beneficlanes and ple " T h ~ account~ng s change also had the effect of lncreas~ng covered dependents for the per~odafter employment but beforc 1999 pension lncome approx~mately$64 million retirement. Adopt~onof Statement of Financ~alAccounting The d~scountrate used to determine the actuarial present Standards No. 1 12, Ettzployers' Acco~~ntingfor. Poste?tzploytnent value of the projected benefit obligat~onwas 7 5 percent In Benefits (SFAS N o 1 12) In 1995 changed TVA's method of 1999, 7.0 percent In 1998 and 8 0 percent In 1997. The accountlng practice from recognizing costs as benefits are paid to assumed annual rates of Increase In future compensation levels accrulng the expected costs of providing these benefits. This for 1999, 1998 and 1997 ranged from 3 3 to 8 3 percent. The resulted In recognit~onof an or~glnaltransltlon obllgat~onof expected long-term rate of return on plan assets was 11.0 per- approx~mately$280 m~lllon Durlng 1996, TVA made adjust-cent for 1999, 1998, and 1997. ments to certaln assumptlons utlllzed In the determination of In 1998, the FASB Issued SFAS No. 132, Ett~p/oy~)s' DISC/OJIO.~Sthe obllgat~onat September 30, 1996, which resulted in an A bent Pensrons atzd Other Postl-etzretzent BenPfits Thls statement lncrease in the or~ginaltransltlon o b l ~ g a t ~ oofn approx~mately modlfies current financial statement d~sclosurerequirements $ 1 9 1 mlll~on.In connection with the adopt~onof SFAS N o from those requ~redunder SFAS Nos. 87, 8 8 and 106 SFAS No. 112, and related approval by its Board of Directors, TVA record-132 requlres a d d ~ t ~ o n lnformatlon al be disclosed regarding ed the trans~tiono b l ~ g a t ~ oasn a regulatory assec The regulatory changes in the benefit obllgat~onand falr value of plan assets, assec IS belng amortized over approx~mately15 years, whereby but does not change the exist~ngmeasurement or recogn~tlon the annual expense approximates the expense that nrould have provlslons under the aforement~onedstandards SFAS N o 132 been recorded on an as-pad bas~s.

NOTES TO FINANCIAL STATEMENTS The components of pension expense and other postretirement benefits expense for the years ended September 30 were.

Per ;ion Benefits Other Postretirement Benefits (mmilltons)  ; -

1999 1998 I t 1999 ( 1998 Change in benefit obligation Benefit obllgatlon at beglnnlng of year .$ 5,645 Servlce cost 94-Interest cost 374 Plan participants' contrlbutlons 34 Amendments, lncludlng other events . -

Actuarial (gain)lloss (853)

Net transfers to variable fund/40l(k) plan (1)

Expenses pald (3)

Benefits paid (259)

Benefit obligation at end of year S 5,031-Change in plan assets Fair value of plan assets at beglnnlng of year $ 5,968 Adjustment to reconcile to system asset value 5 Actual return on plan assets 1,098 Plan partlclpants' contributions Net transfers to variable fundl40l(k) plan Employer contributions Expenses pald Benefits pald (2 59)

Fair value of plan assets at end of year $ 6,842 Funded status $ 1,811 Unrecognized net actuarial (gain)/loss (1,540)

Unrecognized prior servlce cost 266 Prepaid (accrued) benefit cost $ 537 Pension Benefits Other Postretirement Benefits (mrnzllzons)  : ,:'1999 < A- %.

1998 Components of net periodic benefit cost 3

$ .1 Service cost $ 94 $ 67 Interest cost 374 328 Expected return on plan assets Amortlzation of prlor service cost Amortlzation of transition obllgatlon Recognized net actuarial loss Net perlodic benefit cost Other events Total benefits cosW(income)

8. Major customers One municipal customer accounts for approximately 9.1 percent These five mun~clpalcustomers purchase power from TVA under of total power sales, and four other municipal customers account long-term contracts, whlch requlre I0 years' notice to terminate for an additional aggregate 17.7 percent of total power sales Tennessee Valleg Authorzty 1 39

NOTES O N FINANCIAL STATEMENTS

9. Commitments and contingencies Leases Certa~nproperty, plant and equipment are leased under agree- I unrts. These reductlons were achleved through the ~nstallat~on ments with terms ranging from one to 3 0 years. Most of the of low-nitrogen-oxlde burners at 13 unlts TVA is In compl~ante agreements Include purchase options or renewal optlons that with all Phase I requlrements and 1s currently ~nstalllngnltrogen cover substant~allyall the econom~cllves of the properties oxide reduction equipment on remalnlng units to bring TVA Obligations under capltal lease agreements In effect at Into compllance wlth Phase I1 nltrogen o x ~ d eemlsslon require-September 30, 1999, total $36 mill~onannually through 2004, ments and an aggregate of $228 mllllon thereafter, for a total commlt- Expend~turesrelated to the Clean Air projects durlng 1999 menc of $408 m~lllon Of t h ~ amount, s $220 m~llron1s Interest. and 1998 were approx~mately$77 m~lllonand $64 mlllion, respectively TVA has already completed the actlons necessary to Fuel purchase commitments achieve Phase I compl~ancefor both sulfur dloxide and nltrogen TVA has entered Into approximately $2 4 bllllon In long-term o x ~ d eemlsslons, and TVA 1s proceed~ngto take actions to com-commitments ranging In terms of u p to S I X years for the pur- ply wlth Phase I1 requlrements that become effectwe in the year chase of coal, and approx~mately$195 rnlll~onin long-term 2000 or after.

comm~tmentsranglng In terms of up to five years for the pur- The total cost of compllance cannot reasonably be deterrnlncd chase of uranlum at t h ~ rlme s because of the uncertalntles surrounding emerglng Envlronmental Protection Agency regulations, resultant compll-Contingencies ance strategies, potential for development of new emlsslon con-NUCLEAR INSURANCE The Prlce-Anderson Act sets forth an trol technolog~esand future amendments to the legislat~on

~ndemnlficat~on and l~mltatlonof llab~lltyplan for the U S nuclear Industry All Nuclear Regulatory Commission (NRC) HAZARDOUS SUBSTANCES The release and cleanup of hazardous Itcensees, ~ncludlngTVA, maintarn nuclear llablllty lnsurance In substances are regulated under the Comprehensive the amount of $200 mlllion for each plant w ~ t han operating Envlronmental Response, Compensarlon, and Llabll~tyAct license The second level of financlal protection requlred IS the (CERCLA) In a manner sim~larto many other lndustr~esand

~ndustry'sretrospectlve assessment plan, uslng deferred premium power systems, TVA has generated or used hazardous substances charges The maxlmum amount of the deferred premlum for over the years TVA has been ~dentlfiedas a potentially responsl-each nuclear Incident IS approx~mately$ 8 8 mllllon per reactor, ble party w ~ t hrespect to five off-s~tedisposal areas TVA's liabll-but not more than $10 m~llionper reactor may be charged In ~ t aty these slces has not yet been determined In addition, TVA any one year for each lncldent n7A could be requlred to pay a IS currently investlgat~ngone other TVA-owned slce under a maxlmum of $528 r n ~ l l ~ oper n nuclear incldent on the basls of state statute slmllar to CERCLA TVA may have cleanup respon-

~ t SIX s l~censedunlts, but ~twould have to pay no more than $60 slbllltles at this slte by vlrtue of ~ t control s of the property rnlll~onper incldent in any one year TVA's potentla1 l ~ a b l l ~ t for

~ e s~ t share s of cleanup costs at all of In accordance m ~ t hN R C regulations, TVA carrles property these sltes are uncertain but are not expected to have a slgnlfi-and decontam~nat~on Insurance of $1.06 bllllon a t each llcensed cant lmpact on TVA's financlal posit~onor results of operations nuclear plant for the cost of stablllzlng or s h u t t ~ n gdown a reac-tor after an acc~dent.Some of thls Insurance may requlre the PENDING LITIGATION. TVA IS a party to varlous clvd lawsuits and payment of retrospectlve premlums of up to a maxlmum of c l a ~ m sthat have arlsen In the ord~narycourse of ~ t business s

approx~mately$2 1 mlll~on. Although the ouccome of pendlng llt~gatloncannot be predicted wlth any certainty, it 1s the oplnlon of TVA counsel that the 4

1 CLEAN AIR LEGISLATION The Clean Air Act Amendments of 1990 requlre coal-fired generation unlts to reduce thelr sulfur d~oxlde ultlmate ouccome should not have a materlal adverse effect on TVA's financ~alposltion or results of operations 4_ and nltrogen oxlde emlsslons In two phases In order to control i

3 i

acld raln The Phase I compl~anceperlod commenced January 1, DECOMMISSIONING COSTS. Provlslon for decommlsslonlng costs 1995, for sulfur dloxide and January 1, 1996, for nltrogen ox~de, of nuclear generat~ngunlts 1s based on the est~matedcost to

% i 1 whlle the Phase I1 compliance per~odcommences January 1, dismantle and decontam~natethe facllltles to meet N R C crlterla i

t 2000 Based on the level of emissions, 2 6 of TVA's 59 operating for llcense termlnatlon The F~nanclalAccounting Standards coal-fired unlts are classlfied as Phase I unlts, wlth the remaln- Board (FASB) has reached several tentative conclusions w ~ t h ing unlts being Phase I1 unlts Compliance wlth these require- respect to ~ t project s regarding the accounting for closure and ments has resulted In substantral expenditures for the reduction removal of long-l~vedassets, ~ncludlngthe decommiss~oningof of emlss~onsat TVLs coal-fired generating plants nuclear generating unlts. Effective for 1998, TVA changed ~ t s TVA's strategy for complying w ~ t hthe 1990 Amendments method of accounting for decommlss~oningcosts and related Includes the use of scrubbers at two fossll units and the use of I~abllltiesIn order to comply w ~ t hcertain of the FASB's tenta-lower-sulfur coal at other fossll unlts to reduce sulfur d ~ o x ~ d e tlve conclus~ons,as well as certam rate-settrng actions The TVA has completed all planned scrubbers and IS on schedule to FASB expects to Issue an exposure draft In the first quarter of complete the change-over to lower-sulfur coal. 2000, however, ~t 1s uncerta~nwhen a final statement will be Nitrogen oxide reductlons are required for 19 of TVA's Phase issued and what lmpact ~t may ultimately have on TVA's finan-40 1 Tennessee Valle) Arithorrlj

NOTES T O FINANCIAL STATEMENTS cia1 posit~onor results of operatlons the decommiss~on~ng trust fund investments totaled $724 mll-TVA's current accountlng pollcy recogn~zesas Incurred all l ~ o nand were invested in securit~esdeslgned to achieve a return obl~gat~ons related to closure and removal of ~ t nuclear s unlts In line wlth overall equlty market performance.

The liability for closure is measured as the present value of the Effectlve November 23, 1998 the NRC amended ~ t regula- s estimated cash flows required to satisfy the related o b l ~ g a t ~ o n tions regarding decommiss~on~ng funding The regulations and discounted at a determined r~sk-freerate of lnterest The requlred TVA to provide financial assurance for decommission~ng corresponding charge to recognize the additional o b l ~ g a t ~ o1sn fundlng through the use of certaln prescr~bedmechan~smssuch effected through the creation of a regulatory asset TVA further as the trust agreements entered Into by TVA in hlay 1997. These modlfied ~ t method s of accounting for decommiss~on~ng costs new regulations dld not have a material impact on TVA's finan-such that earnlngs from decomm~ssioningfund investments, cial posltlon or results of operatlons amortization expense of the decommissioning regulatory asset, and Interest expense on the decomm~ss~onlng liability are COST-BASED REGULATION As a regulated entlty, W A 1s subject to deferred In accordance with SFAS No. 71, Arcoz~ntrngforthe the prov~sionsof SFAS N o 71, Accountrngfor the Efferts of Cwtarn Effects of Cwtatn Types of Regulation. At September 30, 1999, the Types ofRegulation Accordingly, TVA records certain assets and

present value of the est~matedfuture decomm~ss~on~ng cost of llabllrties that result from the effects of the ratemaklng process

$882 mill~onwas Included in other llablllties The decomm~s- that would not be recorded under generally accepted accountlng sioning cost estlmates from a 1995 study are based on prompt prlnclples for non-regulated entitles. Currently, the electrlc ut111-dismantlement and removal of the plant from servlce. The actual ty Industry is predominantly regulated on a basis des~gnedto decommiss~on~ng costs may vary from the estimates because of recover the cost of providing electric power to ~ t customers. s If changes in the assumed dates of decommiss~on~ng, changes in cost-based regulat~onwere to be discont~nuedin the Industry for regulatory requirements, changes in technology and changes in any reason, profits could be reduced and utll~tiesm ~ g h be t cost of labor, materials and equipment requ~redto reduce t h e ~ asset r balances to reflect a market bas~s TVA malntalns an Investment trust fund to prov~defundlng less than cost D~scontinuanceof cost-based regulation would for the decomm~ssioningof nuclear power plants In May 1997, also requlre affected utillt~esto wrlte off thelr assoclated regula-W A sold the entire $402 mlll~onequlty index fund portfol~o tory assets Such regulatory assets for TVA total approx~mately and transferred the proceeds to trust portfol~osmanaged by lnde- $1 6 bill~onat September 30, 1999, along with approximately pendent money managers Durlng 1997, TVA recogn~zed$15 1 $6 3 bill~onof deferred nuclear plants Management cannot mlllion of lncome related to the fund, whlch Included an $81 pred~ctthe potentla1 Impact, ~fany, of the change In the regula-million galn on the sale of fund Investments and $70 mrll~onin tory envlronment on TVA's future financial positlon and results net appreclatlon and lnterest Income. As of September 30, 1999, of operations WA's nonpower programs prov~devarlous public services, power funds in the event that there were ~nsufficientappropria-lncludlng managing nav~gablerlver channels, prov~dlngflood tions or other available funds to pay for such activitles In any control and overseeing certain recreation faclllties The nonpower year. Congress d ~ not d prov~deany approprlatlons to W A to programs encompass general stewardship of land, water and fund such actlvlties in 2000 Consequently, durlng 2000, TVA wildllfe resources TVA's nonpower programs also conduct cer- wlll pay for essential stewardsh~pactivit~esprimarily with power tam research and development a c t ~ v ~ t iIn e s pollution prevention revenues, with the remainder funded wlth user fees and other and remed~at~on. forms of revenues derived In connection wlth those actlv~tiesIn Fundlng for the nonpower programs has historically been prl- additlon, administrat~vejurlsdlction over LBL was transferred to marlly provlded through Federal appropriations Certaln non- the Secretary of Agriculture effectlve October 1, 1999 TVA is power program actlvltles have also been funded by user fees and responsible for certain transltlon costs assoclated with the trans-outs~deservlces revenues. Durlng 1999, TVA received total fer of LBL, est~matedto be approx~mately$10 mill~onT h ~ lia- s Federal appropriations of approximately $50 mlll~on,of which b l l ~ t ywas recorded agalnst available nonpower fund balances at

$43 rnlllion was for essential stewardship actlvlties and $7 mll- September 30, 1999. W A retalns respons~bll~ty for management l ~ o nwas for TVA's Land Between The Lakes National Recreat~on of the remalnlng nonpower assets and settlement of nonpower Area (LBL) Durlng 1998, W A recelved total Federal appropria- obllgatlons.

tlons of approx~mately$70 mill~on,of whlch $60 mill~onwas The completed plant of the nonpower programs conslsts of for essential stewardship activitles, $7 mlll~onwas for LBL, and multipurpose dams and other plant. At September 30, 1999, the

$3 mlllion was for TVA's Environmental Research Center. As net completed plant balances for multipurpose dams and other discussed below, TVA wlll receive no Federal appropr~at~ons in plant were $692 mlll~onand $1 12 mill~on,respectlvely. At 2000 September 30, 1998, the net completed plant balances for mul-In October 1997, Congress passed legislation that directed tlpurpose dams and other plant were $698 mllllon and $1 15 TVA to fund essential stewardship activit~esrelated to ~ t man- s mlll~on,respectlvely.

agement of the Tennessee River system and TVA properties with T e n n e s s e e V a l l e ) Aurhority 1 41

AUDITOR'S AND MANAGEMENT'S REPORT To the Board of Directors of the Tennessee Valley Authority In our oplnlon, the accompanying balance sheets (power dence supporting the amounts and disclosures In the financlal progmm and all programs) and the related statements of Income statements, assessing the accountlng prlnclples used and sign~ti-

!, , (power program), changes In proprietary capital (power program cant estimates made by management, and evaluating the overall and nonpo\trer programs), net expense (nonpower programs) and financlal statement presentation \Ve belleve that our audlts pro-of cash flows (power program and all programs) presenc falrly, In vide a reasonable bass for the opin~onexpressed above all materlal respects, the financlal posltlon of the po\trer program In accordance with Government Audlting Standards, we have and all programs of the Tennessee Valley Authorlty as of also issued a report, dated October 22, 1999, on our consldera-September 30, 1999 and 1998, the results of operat~onsof the tlon of the Tennessee Valley Authority's internal controls over power program and nonpower programs and cash flows of the financlal reporting and our tests ofcompl~ancewlch certaln power progmm and all programs for each of the three years In provlslons of laws, regulations, contracts and grants.

[he perlod ended September 30, 1999, In conform~tywith gener- As discussed In note 7 to the financlal statements, TVA ally accepted accountlng prlnclples These financial statements changed ~ t method s for determ~nlngthe market-related value of are the responslbll~tyof the Tennessee Valley Auchor~ty's pension assets In 1999.

management; our respons~b~llty 1s to express an oplnlon on these financial statements based on our audlts. W e conducted our audlts of these statements In accordance wlth generally accepted audlting standards and Government Audlting Standards Issued by the Comptroller General of the Unlted States w h ~ c hrequlre Pr~ce~vaterhouseCoopers LLP thac we plan and perform the audlc to obtaln reasonable assur- Knoxville, Tennessee ance about whether the financial statements are free of materlal October 1 2 , 1999 misstatement. An audlt lncludes examining, on a test bass, evl-Management IS responsible for the preparation, Integrity and recognlzlng chat the cost of such a system should not exceed the objectlvlty of the financlal statements of the Tennessee Valley benefits derlved N o material lnternal control weaknesses have Author~tyas well as all other ~nformatloncontained In the been reported to management annual report. The financlal statements have been prepared In PrlcewacerhouseCoopers LLP was engaged to audit the conformity wlth generally accepted accountlng principles financlal statements of the Tennessee Valley Author~tyand Issue applied on a consistent basis and, in some cases, reflect amounts reports thereon Its audlts were conducted In accordance w ~ t h based on the best estimates and judgments of management, generally accepted auditlng standards Such standards requtre .L giving due cons~derat~on to materlallty Flnanclal lnformatlon review of Internal controls and an evamlnatlon of selected tram-contalned In the annual report I S cons~stencwith that In the actlons and other procedures sufficient to provlde reasonable financlal statements assurance that the financlal statements netther are mlslead~ng The Tennessee Valley Authorlty malntalns an adequate nor contaln materlal errors The Report of Independent system of Internal controls to provlde reasonable assurance that Accountants does not Ilrnlt the respons~bll~cy of management fbr transactions are executed in accordance with management's information contalned In the financlal statements and elsewhere authorlzatlon, that financlal statements are prepared In accor- In the annual report dance wlch generally accepted accountlng prlnclples, and that the assets of the corporation are properly safeguarded. The system of internal controls I S documented, evaluated, and tested on a contlnulng basis N o Internal control system can provide absolute assurance that errors and irregularlt~eswill not occur Davld N Smlth due to the lnherent llmitatlons of the effect~venessof Internal Chief Flnanclal Officer controls, however, management strives to malntaln a balance, dnd Executive Vlce President of Flnanclal Services

' lmh SOw0 ~n~tscorsmiur saniauaIn i mr pymmts for pwes bod, mcept fta mehis,PARRS, ud the 1996 k i C~gbM T\1(issues n variety of debt socuritils in U,S, dolh md other bonds, Invrstors who own QQIS~atate bonds, adPARRS curnncies tarieted to institutiwsl snd individual in- nnin quarter$ interest pegmeno, and n ivm who own Yh's around rhr world, YA'r370,000 individual and i~tieutiod 1996 Serie C global bod nreivc and interest pymm Fmand Denoflci~tioa

- 8wb B I obkEntrYFm I Deo tmMon' TYAdainnt~admatkrtsdebrinrwd.e~oiimvativeuruc-QtDB U

y mown $15 The D w ~Tnst mi,inclhg Qwtrrly Income,Debt Securitis (Qm),es18te PPRRS hDpMbryTutkqmtbn $25 bondr, Putable hutomatif Rate Rat Securities (PARRS), dii-

[omno&, and no wmt of other bonds, TVAS md bonds hnvt n Tripled raring, and interuton Rh'ssrmriria is generally mmpt fmm stptp and Iloepl i ~ m m,As of kptunber 30,1999, Vlt hid 31 1ong.wpublic drbt issues *hkrtprica dbroke! pl.ichmy repkt thu b t o r s outsundiag, totaling 126'4 billion. ply mon or h hrnpiu vdue h h e stturity, I

For Mom Infmdon Snvr H,(SIN) Cmm,Snim iCtaa,qr, ImwtaRdatia~

Visit TVA h t o r Relations on the World Wide Web at T enamValley Authoritg hnp:I/m,m.wm/fmce to view md down d l finantid md 400 Wat Summit Hl hive Knmile,Tcnarsacr 37902 imtstment informtiion,including laad nporu,qmtly Phone: 188.8024971(tol+imin rhc BS,)

~ p ~VtASf ,information statant, md ohring circulars Phone: 888$82-4967 (wll~frcrourside the U,6)

Fax:861-632.3221 + Emik itlw~&&s~rar I

(pro~p~tuses)~

I 11-YEAR COMPARATIVE DATA Stdtistical and Finafzcial Sz~l?z??zaries For the >ears ended Septe~t~bm 30 1999 1998 1997 1996 Sales (millions of kilowatt-hours)a h l u n ~ c ~ p a l ~and t ~ ecooperatives s 122,880 123,330 114,77 1 117,035 Industries directly served 22,885 18,514 17,359 16,599 Federal agencles and other 10,190 2 1,293 27,198 19,364 Total sales 155,955 163,137 159,328 153,598 Operating revenues (millions of d ~ l l a r s ) ~

Electrlc h l u n ~ c ~ p a l ~and t ~ ecooperatives s S 5,510 S 5,554 5 4,811 $4,!)80 Industries directly served 642 523 464 452 Federal agencles and other 357 556 561 430 Ocher 86 96 98 -89 Toral revenues S 6,595 56,729 3 5,933 55,')51 Electrlc revenue per k~lowatt-hour(centslb 4.17 4 07 3 66 3 82 Winter net dependable generating capacity (megawatts)

HydroC 5,492 5,491 5,384 5,798 Fossil 15,049 15,003 15,014 15,012 Nuclear u n ~ r s~n servlce 5,729 5,620 5,625 5,545 Combustion t u r b ~ n e 2,232 2,384 2,394 2,268 Total capaclty 28,502 28,498 28,417 28,123 System peak load (megawatts)-summer 28,295 27,253 26,661 25,376 System peak load (megawatts)-winter 26,388 23,204 26,670 25395 Percent gross generation by fuel source Foss~l 63% 62% 61% 65%

Hydro 7% 10% 11% 11%

Nuclear 30% 28% 28% 2 i%

Fuel cost per kilowatt-hour (cents)

Fossll 1.28 1 25 123 1 23 Nucleare .j1 71 58 56 Aggregate fuel cost per k W h nec thermal generaclon 1.05 110 1 04 1 06 Fuel data Net thermal generation ( m ~ l l ~ o of n s kilowatt-hours) 137,169 139,727 135,735 131,898 Bllllon Btu 1,403,110 1,426.1 5 1 1,381,837 1,338,157 Fuel expense ( m ~ l l ~ o of n s dollars) 1,434 1,538 1,406 1,395 Cost per rnilhon Bcu (cents) 102 21 107 81 101 73 104 22 Net heat rate, fossll only 10,229 10,207 10,180 10,145 a Sales and revenues have been adjusted to Include sales to other utll~t~es.

b Excludes settlement payment from Department of Energy of $465 m~ll~on for 1989, $311 mllllon for 1990 and $160 m~ll~on for the years 1991-1994 c Includes 405 megawatts of dependable capaclty from the Corps of Engineers projects on the Cumberland Rlver System.

d Reflects explrat~onof TAPOCO exchange agreement In 1990 -renewed In 1994 e TVA changed ~ t smethod of expensing the Interest component of nuclear fuel expense In 1995 43 1 Tennessee Valle) Authorrr)

11-YEAR COMPARATIVE DATA Tennessee Valley Authorrty 1 45

CRAVEN CROWELL, Chalrnian In seventh year of 3 nlne-year term as Chalrman of TVA's Board serves as Vlce Cha~rmanof the Board and Chairman of the

. appointed by Presldent Cl~nronIn 1993 to be TVA's 1 l t h hlembersh~p& Strategic Issues Committee of the Electr~cPower Chalrman . 15 years of servlce at TVA, lncludlng tenure as an Research Institute . serves on the board and executlve com-officer and member of the corpomt~on'stop management team mlttee of the Nuclear Energy Inst~tute . B A from Lrpscornb has promoted a return to TVA's history of operaclonal excellence U n ~ v e r s ~ In t y 1965 Llpscomb Alumnus of the Year In 19J15 and a program of financial strength and debt reduct~on. . served In the hlarlne Corps Resenre and Naval Reserve.

THE

~X~GU&!~-GQ&LMI-T_XE E IKEZERIR'GUE DAVID N. S n r l ~ r ~

Presldent C Chlef Operating Offier C h e f F~tlnanc~af Off~cer& Execrttlzve Vztr Xiore than 24 years tn the nuclear P~eszu'ertt F ~ n a t ~ r rSen~lces al lndustry . dlrected start-up and Jolned TVA as Chief Flnanclal Officer licensing of TVA's 'Watts Bar Nuclear In 1995 was named Executive VP Plant and recovery and restart of of Flnanclal Serv~cesIn 1996 . has Browns Ferry Nuclear Plant- . led refinanc~ngof $20 bllllon of debt dlrected start-up, malntenance, and with a varlety of global and retail operation of Ar~zonaPubllc Service Co 's Palo Verde U n ~ 3t bond offer~ngssince 1995 . prev~ouslyco-founded and served became TVA's Senlor VP of Nuclear Operations In 1993 . was as Executlve D~rectorof Odyssey Flnanc~al,a corporate consult-named TVA's Chlef Nuclear Officer and Execut~veVP of TVA lng firm . played key role In the reorganlzatlon of LTV Corp ,

Nuclear In 1997 . appointed In 1998 to current posltlon, enabllng ~t ro successfully emerge from one of the largest, most overseeing TVA's power product~on,transmlsslon, marketing, complex bankruptc~esIn U S h~story . VP of Corporate economlc development, and resource-management programs . Development for 10 years at Cyclops Corp . CPA certlficat~on nuclear englneerlng degree from North Carollna State Un~versity In 1969 graduate of Northwestern Unlvers~ty . AI.B.A. In

. graduated from Advanced Management Program at Harvard finance from North~vestern's Kellogg School of Buslness Buslness School TERRY BOSTON NORMZIGROSSI Execrrtlzr V I LP~eslderzt.

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C h 1 4Adrn~nrstratrwOffirer C Execrttzzr Tra~lnst/z~ss~otln/Po~i~er Sr//$fy Vrre Presldent, Brtslness Serr~rres hiore than 25 years experience wlth Jolned TVA In 1986 . served as TVA . senred as hlanager of Pr~cing TVA's first Inspector General untll In Customer Serv~ce& Riarketlng 1992 . was Presldent of TVA's named to current posltion In 1999 Resource Group from 1992-94 . oversees modlficat~onsand add~tion\to was named Chief Admlnlstratlve and malntenance of some 17,000 mlles of transm~ss~on Ilnes, Officer In 1994 and Executlve VP of Bus~nessServices In 1996 675 substations In the TVA transm~sslonsystem, and the probi-

. before j o ~ n ~ nTVA, g held a number of management and slon of transmission and related servtces to ne~ghboringutlllt~es executlve posltlons wlth the FBI, tnclud~ngthe posltlon of . registered professional engineer's l~censeIn Tennessee .

Special Agent In charge of Washington, D.C., field office . B S In engineering from Tennessee Technological Unlversity attended Loyola School of Law in New Orleans . holds a B A and hi.S In englneer~ngadm~nlstrat~on from Unlverslty of from Ohlo Wesleyan Univers~tyand an hI.S from the Un~versity Tennessee of Maryland JOSEPI* R. BYSUM Execr/trze Vrce Presrdetlnt. Foss~lP o r i ~ r Grol/p Worked In TVA eng~neerlngand pl.lnt operations positions from 1972-82 .

Plant Manager of Palo Verde Nucle.lr Generating Statlon for Ar~zonaPubllc Service from 1982-87 . named to

senlor posltion in TVA's Nuclear Power Operations in 1987 . . . Presidential Appointee, the National Recreation Lake System appointed V P of Nuclear Operations In 1989 . . served as V P Study Commlsslon In 1998, 1999 . . Dlstlngu~shedLecturer at of several TVA Fossil & Hydro organizations from 1993-98, Pr~ncetonUniversity In 1997 . Advlsor on the Carnegle lncludlng Maintenance & Testlng Serv~ces,Fuel Supply & Mellon College of Engineering Advlsory Council In 1998, 1999 Engineerlng, and Fossil Operations . . named to current posi- . . Member of the Advlsory Board for Vanderbllt Unlversity tion in 1998 . . B S In electrical engineering and M S. In . . B S in physlcs from Grove C ~ t yCollege . h i S in ~ n d u s -

nuclear englneerlng from Georgia Institute of Technology. trlal engineering management from the University of Pittsburgh

. . . M S and Ph D In englneerlng and public pollcy from Carnegle Mellon Unlverslty . postdoctoral fellowship at the EDWARDS. CIIRISTENBURY Natlonal Academy of SclenceslEnglneer~ngat the Natlonal Senior Vice President and General Counsel Research Councll ~n \Vashlngton, D C TVA's General Counsel slnce 1987 . .

adv~sesthe Board on legal matters and serves as Secretary to the corporat~on MARK0.MEDFORD

. . . oversees and coordlnates all legal Execz~tzwVice Preszdent, Custot~zerSerz~ice work for TVA . . worked a t the and Alarhetzng Nuclear Regulatory Commlsslon for Jolned TVA in 1989 as V P & Nuclear seven years before jolnlng TVA . . whlle there, served as an Technical D~rector. served In sever-Assistant General Counsel and supervised N R C attorneys repre- al TVA executive posltlons before sentlng the agency staff In nuclear-llcenslng proceedings . . was being named to current posltion in a trial attorney and superv~sorat the U.S Department of Justlce 1996 . . responsible for relatlons for 11 years . . licensed to practlce before the Supreme Court of between TVA and its customers . dlrects staffs managlng cus-the Unlted States . . undergraduate degree in busmess adminls- tomer accounts, product development and prlcing, marketing, tration and law degree from the Unlverslty of Tennessee. economlc development, and bulk-power trading . . has more than 2 4 years of publlc and prlvate utllity experlence . . before joinlng TVA, was Manager of Nuclear Regulatory Affalrs at PEYTON T. HAIRSTON JR. Southern California Edlson . . . served In U.S. Navy 1971-75 Senior Vice President, Strategic Inztiatiz,es and was assigned to the staff of Vice Admiral H G Rlckover Jolned TVA in 1993 as Manager of . . . B.S and M.S degrees from Rlce University . M B.A Strategic Plannlng & Negotiation from Callfornla State Polytechn~cUnlvers~ty. . doctorate In Support . . . previously served as executive management from Claremont Graduate School Senlor Labor Counsel at Chiquita Brands International . . has 13 years of experlence ln labor relatlons . . JOHN A. SCALICE named Senior Vice President of Labor Relatlons at TVA In 1994 Chzef Nucfear 0fjcw

. . . also named TVA's Designated Agency Safety & Health 6 Execrrtiza Vice President, TVA N d e a r Official in 1994 . . . appointed to current posltlon In 1998 . Jolned TVA in 1989 as Plant Manager coordlnates the development and implementation of TVA's a t Watts Bar Nuclear Plant . . served strategic efforts to prepare for Industry testructurlng . . oversees as Browns Ferry Plant Manager . as Stakeholder Relatlons, a cross-organizational effort deslgned to Slte V P at \Vatts Bar, played a key provide first-rate communications with TVA's constituents . . role in the successful licensing, start-bachelor's degree from North Carollna State Unlvers~tyand law u p and operation of that nuclear unlc . named to current posl-degree from Wake Forest University's School of Law. tion In 1998 . . respons~blefor all management of TVA's three operating nuclear plants . has more than 2 8 years of experlence In the nuclear Industry in areas of plant operatlons, nuclear secu-KATIIRYNJ. JACKSON rity, reactor englneerlng . Senior Reactor Operating llcense Execrttlw Vzce President, Rtzoer System . . B S In mechanical englneerlng and bf.S In nuclear engi-Operations d Enmronnzent neerlng from Polytechnlcal Institute of New York Jolned TVA in 1991 . appointed to current pos~tionIn 1999 . . . 1s TVA's Environmental Executive . . served as Executive V P of Resource Group from 1996-99 . . . oversees and coordlnates river operatlons, resource stewardship, energy research and technology appllcatlons . . responsible for environmental pollcy and strategy as well as research and development for the agency

. . . D~rectotof the Jolnt Institute for Energy & Env~ronment .

Tennessee Valley Authorrty 1 47

Thls annual report contalns forward-look~ngstatements relatlng to future events and future performance. Any statements regard~ngexpectations, bellefs, plans, project~ons, estimates, objectives, intentions or assumptlons or otherwise relat~ngto future events or performance may be forward-look~ng.Some examples Include statements regarding TVA's projections of future power and energy tequlrements, future costs related to envlronmental compl~ance,targets for TVA's future competitive posltlon, and the potential effect of the Year 2000 Issue on TVA's operations Although TVA belleves that the assumptlons underlying the fonvard-looking statements are reasonable, TVA does not guarantee the accuracy of these statements Numerous factors could cause actual results to dlffer mater~allyfrom those In fonvard-looklng statements Such fac-tors include, among ocher things, new laws and regulations, especially chose related to the restructuring of the electrlc power ~ndustry,and varlous env~ronmentalmatters, increased competit~onamong electrlc utlllt~es,legal and admln~strativeproceedings affecting TVA; the financlal environment, performance of TVA's generating facll~t ~ e s ,

fuel prlces, the demand for electrlclty, weather condltlons; changes In accounting stan-dards, the efficacy of TVA's Year 2000 remedlatlon efforts and the efforts of those entlt~esw ~ t hwhich TVA ~nterfaces,and unforeseeable events.

General Inquiries STEVENN . BENDER,Vzce President, Co~t~r/z~~nzcutzons Tennessee Valley Author~ty,400 \Vest Summlt Hill Dr~ve,Knoxv~lle,T N 37902 Phone 865-632-6263 + Fax 865-632-4760 E-mall: tr~uznfo@tt~u.got~ + TVA homepage z ~ , z l tz#a ~ u ~cotrz TVA 1s an equal opportunity and afirmatlve actlon employer TVA also ensures that the benefitsof programs recelvlng persons regardless of race cdor sex, nal~onalongln rel~g~on, N A financlal assistance are avalable to all el~g~ble da-or age Thls document can be made In an alternate format upon request ab~l~ty

Tennessee Valley Author~ty 400 West Surnrn~tH ~ l Drlve l

Knoxv~lle.Tennessee 37902 150M-11/99 Prlnted on recycled paper