Tennessee Valley Authority: Information on Lease-Leaseback and	 
Other Financing Arrangements (30-JUN-03, GAO-03-784).		 
                                                                 
Concern about the implications of the Tennessee Valley		 
Authority's (TVA) debt on its future competitiveness prompted	 
Representative Richard Baker to ask GAO to determine TVA's	 
planned and actual use of nontraditional financing arrangements  
(which, to date, has consisted primarily of lease-leaseback	 
arrangements), who is at risk under TVA's lease-leaseback	 
arrangements, and whether TVA's accounting for the		 
lease-leaseback arrangements complies with applicable standards  
and requirements.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-784 					        
    ACCNO:   A07396						        
  TITLE:     Tennessee Valley Authority: Information on 	      
Lease-Leaseback and Other Financing Arrangements		 
     DATE:   06/30/2003 
  SUBJECT:   Agency debt					 
	     Deficit financing					 
	     Financial management				 
	     Leases						 
	     Strategic planning 				 

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GAO-03-784

                                       A

Report to the Honorable Richard H. Baker, House of Representatives

June 2003 TENNESSEE VALLEY AUTHORITY Information on Lease- Leaseback and
Other Financing Arrangements

GAO- 03- 784

Letter 1 Results in Brief 2 Background 4 Objectives, Scope, and
Methodology 7 TVA*s Current and Contemplated Use of Alternative Financing

Arrangements 9 TVA Retains Legal Ownership of Assets, but Both TVA and the

Private Equity Investors Are at Financial Risk 11 Lease- Leaseback
Accounting Complies with Applicable Standards

and Requirements 24 Conclusions 26 Matter for Congressional Consideration
27 Agency Comments and Our Evaluation 27

Appendixes

Appendix I: Objectives, Scope, and Methodology 29 Description of Lease-
Leaseback Arrangements 29 Alternative Financing Options Being Considered
by TVA for Future

Capital Projects, Including the Restart of Browns Ferry Nuclear Plant Unit
1 29 Legal Ownership and Risk If the Lease- Leaseback Arrangements Do

Not Work Out as Planned 30 Classification of Lease- Leaseback Arrangements
According to

Generally Accepted Accounting Principles, OMB Guidance, and the TVA Act 30
Organizations Contacted 31

Appendix II: Analysis of TVA*s Treatment of the Fiscal Year 2002 Lease-
Leaseback Arrangement for Financial Reporting Purposes 33

Appendix III: Comments from the Tennessee Valley Authority 37

Appendix IV: GAO Contact and Staff Acknowledgments 38 GAO Contact 38
Acknowledgments 38

Tables Table 1: TVA's Use and Consideration of Alternative Forms of
Financing as of May 31, 2003 11

Table 2: Key Details of Fiscal Year 2000, 2002, and 2003 Lease- Leaseback
Arrangements 13 Table 3: Summary of Key Advantages/ Disadvantages under

Lease- Leaseback Arrangements 15 Table 4: Summary of TVA*s Early
Termination Options under the

Fiscal Year 2002 Lease- Leaseback Arrangement 19 Table 5: Summary of Risks
to TVA and Equity Investor under

Various Options Included in the Fiscal Year 2002 Lease- Leaseback
Arrangement 22 Table 6: Applicable GAAP Standards 33 Table 7: Fiscal Year
2002 Accounting Entries for the Fiscal Year

2002 Lease- Leaseback Arrangement 35 Figure Figure 1: Key Events Related
to TVA*s Fiscal Year 2002 Lease- Leaseback Arrangement 14

Abbreviations

CBO Congressional Budget Office CFO Chief Financial Officer EPAct Energy
Policy Act of 1992 FASB Financial Accounting Standards Board FIN Financial
Accounting Standards Board Interpretation FTB Financial Accounting
Standards Board Technical Bulletin GAAP generally accepted accounting
principles IG Inspector General OGC Office of General Counsel OMB Office
of Management and Budget SFAS Statement of Financial Accounting Standards
TVA Tennessee Valley Authority

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separately.

June 30, 2003 Let er t The Honorable Richard H. Baker House of
Representatives

Dear Mr. Baker: This report responds to your June 13, 2002, request that
we review the Tennessee Valley Authority*s (TVA) use of lease- leaseback
financing arrangements. 1 When the Congress gave TVA the authority to
self- finance in 1959 by amending the Tennessee Valley Authority Act of
1933 (TVA Act),

it established a limit on TVA*s ability to incur debt through the issuance
of bonds and notes (debt cap). The debt cap currently stands at $30
billion.

Recently, you and other members of the Congress have expressed concern
about the potential impact of TVA*s debt on its future competitiveness.
TVA officials have also indicated that TVA*s financial condition and
competitive prospects could be improved by reducing debt and the
corresponding financing costs. In the 5- year period from October 1, 1997,
through September 30, 2002, TVA reduced its outstanding debt 2 from $27.4
billion to $25.3 billion, or about $2.1 billion. At the same time, TVA
entered into *alternative financing* arrangements 3 (primarily lease-
leaseback arrangements) to refinance new power plants that result in long-
term obligations similar to debt, 4 but which are not counted toward this
debt limit or reported as debt on its financial statements. While not
reported as debt, these alternative financing arrangements are included as
*other liabilities* on TVA*s balance sheet. 1 In substance, lease-
leasebacks are financing arrangements under which an owner of

property raises capital by leasing the property to another party and then
simultaneously leasing the property back to retain use of it.

2 The outstanding debt balance does not include the portion of TVA*s
appropriation investment that must be repaid to the U. S. Treasury. This
portion of the appropriation investment is not technically considered
lending by the Treasury and is not counted toward TVA*s debt cap.

3 For purposes of this report, we define alternative financing as any form
of long- term financing other than funds generated from operations and the
issuance of bonds and notes. 4 The term debt refers to TVA*s issuance of
notes and bonds.

Your concern about the future implications of TVA*s debt and other
financing obligations prompted you to ask us to review TVA*s use of
leaseleaseback financing arrangements. Specifically, you asked us to
determine (1) what lease- leaseback financing arrangements have been used
by TVA to date and the extent to which these and other alternative
financing arrangements are being considered for future use, (2) who has
legal ownership of the assets financed through lease- leaseback
arrangements and who is at financial risk if the projects do not work out
as planned, and (3) whether TVA is properly accounting for the lease-
leaseback

arrangements for the purposes of financial reporting, budgetary reporting,
and debt cap compliance.

Results in Brief TVA has traditionally financed its operations with cash
generated from operations, the issuance of bonds and notes, and in the
past,

appropriations. In fiscal year 2000, TVA began to use alternative
financing arrangements and is considering expanding their use. Virtually
all of TVA*s alternative financing is in the form of lease- leaseback
arrangements, which totaled about $945 million as of May 31, 2003. TVA
entered into the leaseleaseback arrangements in fiscal years 2000, 2002,
and 2003 to refinance 24 existing power generators that were designed for
use during periods of peak demand for power. After financing the
construction of the power

generators, TVA leased them to private investors for 50 years and
simultaneously leased them back for 20 years. TVA is responsible for
making lease payments for 20 years, at the end of which it has the option
to

purchase the private investors* remaining interest in the units at the
prevailing market price. TVA has also implemented or is considering
additional alternative financing arrangements, including offering power
discounts that would allow its distributors to prepay for power in return
for a discount on future power purchases. According to TVA officials, the
key reason TVA is considering these additional alternative financing
arrangements is to finance the restart of Browns Ferry Nuclear Plant Unit
1, which is expected to cost about $1.8 billion.

Under the lease- leaseback financing arrangements, TVA retains legal title
to the assets, but transfers sufficient interest in the assets to a
private equity investor to allow the investor to claim tax benefits. As a
result of the transaction, TVA received cash from private investors who
financed their investments primarily by issuing debt in the public market
through trusts, but also invested some of their own equity capital. Based
on our analysis of the fiscal year 2002 lease- leaseback arrangement, 5
the net economic benefits of the transactions to TVA, the private
investor, and the federal

treasury depend largely on the future value of the assets. TVA is at risk
of incurring higher costs, compared with traditional debt financing, if it
purchases the equity investor*s remaining interest in the assets 6 at the
end of the 20- year leaseback period for an amount higher than its
expected savings in financing costs, or if it terminates the arrangement
prior to the end of the 20- year leaseback period. If TVA decides not to
purchase the private investor*s remaining interests in

the assets, it could lose the electricity generated by the assets and may
need to purchase electricity or build additional generating capacity. The
private equity investor is at risk of not achieving its projected rate of
return or of incurring a loss if the fair market value of the assets at
the end of the 20- year leaseback period is lower than expected. The
private equity

investor is also at risk of not achieving its projected rate of return if
TVA terminates the arrangement prior to the end of the 20- year leaseback
period under certain scenarios. The federal treasury could ultimately
experience

a net benefit or loss under the arrangement, depending on whether the
private equity investor*s tax deductions exceed its taxable income.

TVA*s lease- leaseback arrangements have been accounted for and reported
in compliance with applicable standards and requirements for financial
reporting, budgetary reporting, and debt cap compliance. For external
financial reporting purposes, the lease- leaseback arrangements are 5 To
determine who is at risk, we analyzed the fiscal year 2002 lease-
leaseback arrangement. As discussed in our Objectives, Scope, and
Methodology section, our limited review found

this arrangement to be structured similarly to the fiscal year 2000 and
December 2002 arrangements. In addition, TVA officials indicated that the
fiscal year 2000 arrangement is similar to the fiscal year 2000 and 2003
arrangements.

6 TVA*s purchase price will be based on the fair market value of the
assets at the end of the 20- year leaseback term. According to TVA*s
leasing advisor, since TVA entered into the lease- leaseback arrangement,
the market for power generators has decreased. As a result, depending on
the fair market value of the assets, the equity investor may be forced to
accept a lower purchase price and realize a loss on the arrangement.

financing obligations according to generally accepted accounting
principles (GAAP). GAAP does not require the lease- leaseback arrangements
to be characterized as debt on the external financial statements, but it
does require that they be reported as liabilities, and TVA classifies them
as such in its financial statements. For budgetary reporting purposes, the
Office of Management and Budget (OMB) has concluded that the lease-
leaseback arrangements should be treated as debt, and they have been
classified as such in the federal budget just as if they had been bond
issues. For purposes of compliance with TVA*s debt cap, current law does
not clearly and unambiguously address whether the amount of the
leaseleaseback arrangements should be counted against the debt cap;
therefore, TVA*s position that they should not be counted against the debt
cap is not unreasonable. While the lease- leaseback arrangements are not
considered debt for purposes of financial reporting and debt cap
compliance, they have substantially the same economic impact on TVA*s
financial condition and future competitiveness as traditional debt
financing. Therefore, we are

including a matter for congressional consideration regarding clarifying
the TVA Act to address whether these types of alternative financing
arrangements should count against TVA*s debt cap. In written comments on a
draft of this report, TVA*s Chairman generally agreed with the report, but
expressed concern over our suggesting that the Congress may want to
consider amending the TVA Act to clarify whether the debt cap should
include alternative sources of financing such as leaseleaseback
arrangements. However, based on our analysis of the law and its
legislative history, we conclude that the current law does not clearly and
unambiguously address whether the amount of the lease- leaseback
arrangements should be counted against the debt cap. Therefore, we have
made no changes to the report in response to this comment.

Background TVA is a multipurpose, independent, wholly- owned federal
corporation established by the TVA Act. The act established TVA to improve
the quality

of life in the Tennessee River Valley by improving navigation, promoting
regional agricultural and economic development, and controlling the
floodwaters of the Tennessee River. To those ends, TVA erected dams and
hydropower facilities on the Tennessee River and its tributaries. To meet
the subsequent need for more electric power, TVA expanded beyond
hydropower, adding coal- fired power plants and nuclear generating units
to its power system.

From its inception in 1933 through fiscal year 1959, TVA received
appropriations to finance its internal cash and capital requirements.
However, in 1959, the Congress amended the TVA Act to authorize the use of
debt financing. Under this legislation, the Congress ended the
appropriations that had financed the TVA power program and required that
TVA*s power program be *self financing* through revenues from electricity
sales. 7 For its capital needs in excess of funds generated from
operations, TVA was authorized to borrow by issuing bonds and notes. TVA*s
authority

to issue bonds and notes is set by the Congress and is currently $30
billion. However, the Congress did continue to appropriate money for
certain nonpower programs (e. g., flood control and navigation) through
fiscal year 1999. Since fiscal year 1999, the Congress has not
appropriated money to pay for nonpower programs, and power revenues have
been used to pay for

them. Under the TVA Act, as amended, TVA is not subject to most of the
regulatory and oversight requirements that commercial electric utilities
must satisfy. The act vests all authority to run and operate TVA in its
threemember board of directors. Legislation also limits competition
between TVA and other utilities. The TVA Act was amended in 1959 to
establish what is commonly referred to as the TVA *fence,* which prohibits
TVA, with some exceptions, from entering into contracts to sell power
outside

the service area that TVA and its distributors were serving on July 1,
1957. In addition, the Energy Policy Act of 1992 (EPAct) provides TVA with
certain protections from competition, called the *anti- cherry picking*
provisions. Under EPAct, TVA is exempt from having to allow other
utilities to use its transmission lines to transmit (* wheel*) power to

7 The 1959 amendments to the TVA Act required TVA to begin repaying the
unpaid balance of the appropriations that TVA received from 1933 through
1959 to pay for its capital projects* hydroelectric and fossil plants,
transmission system, and other general assets of the power program. The
unpaid balance of the appropriations was $488 million as of September 30,
2002. TVA makes annual principal payments (currently $20 million) to
Treasury from net power proceeds plus a market rate of return (interest
expense) on the balance of this debt. As of September 30, 2002, TVA had
made total payments of about $3.4 billion*$ 945 million in principal and
about $2.5 billion as a return on the investment. In accordance with
statutory requirements, these payments are to continue until the debt is

paid down to $258.3 million. TVA expects to meet this goal by fiscal year
2014.

customers within TVA*s service area. This legislative framework generally
insulates TVA from direct wholesale competition. As a result, TVA remains
in a position similar to that of a regulated utility monopoly. 8

The electric utility industry in the United States is undergoing major
changes, the outcomes of which will affect consumers. The federal
government and nearly half the states have undertaken efforts to introduce
competition in the wholesale and retail electricity markets, respectively.
Federal actions have already resulted in the introduction and expansion of
regional wholesale electricity markets. Some states have also introduced
competition into retail markets, though these efforts remain in an early
stage of development. Most states have either not yet begun to introduce
planned restructuring or are not currently considering the introduction of
retail competition. Because of the ongoing restructuring efforts in the
electric utility industry, TVA management and many industry experts expect
that in the future TVA will likely lose its legislative protections from
competition. We have issued reports 9 indicating that TVA*s high debt and
related interest

expense could place it at a competitive disadvantage if it lost its
legislative protections from competition. In July 1997, TVA issued a 10-
year business plan with steps it believed were necessary to better
position itself for an era of increasing competition. Two key strategic
objectives of the plan were to (1) reduce the cost of power primarily by
reducing debt and the corresponding financing costs and (2) increase
financial flexibility by reducing fixed costs. To help meet these
objectives, the plan called for TVA to reduce its interest expense by
reducing its debt by about one- half of its 1997 level, to about $13.2
billion. To increase its financial flexibility and generate cash that
could be used to reduce debt, TVA increased its

electricity rates beginning in 1998 and planned to reduce certain expenses
and limit capital expenditures. TVA*s plan to reduce debt while it is
still

8 However, TVA is subject to some forms of indirect competition. For
example, TVA has no protection against its industrial customers relocating
or expanding outside its service area or businesses deciding not to move
to TVA*s service area for reasons related to the cost of power. In
addition, customers can decide to generate their own power.

9 U. S. General Accounting Office, Tennessee Valley Authority: Financial
Problems Raise Questions About Long- term Viability, GAO/ AIMD/ RCED- 95-
134 (Washington, D. C.: Aug. 17, 1995); Federal Electricity Activities:
The Federal Government*s Net Cost and Potential for Future Losses, Volumes
1 and 2, GAO/ AIMD- 97- 110 and 110A (Washington,

D. C.: Sept. 19, 1997); and Tennessee Valley Authority: Debt Reduction
Efforts and Potential Stranded Costs, GAO- 01- 237 (Washington, D. C.:
Feb. 28, 2001).

legislatively protected from competition was intended to help it achieve
its ultimate goal of being in a position to continue to offer
competitively priced power. However, TVA has fallen behind in meeting the
debt reduction goal in the

original 10- year plan and consequently has revised this goal downward.
Over the first 5 years of the 10- year plan (through September 30, 2002),
TVA reduced its debt by about $2.1 billion. By reducing debt, and
refinancing some debt at lower interest rates, TVA has reduced its annual
interest expense from about $2.0 billion in fiscal year 1997 (35 percent
of total expenses) to about $1.4 billion in fiscal year 2002 (22 percent
of total expenses). TVA now expects to reduce its debt by about $3.3
billion by 2007 rather than the planned $14.2 billion, which represents
about $11 billion less debt reduction than planned in 1997. The revised
debt

reduction goal is due to several factors, including increased capital
expenditures for new generating capacity and environmental controls. TVA*s
ability to reduce debt in the near term will be significantly affected by

its recent decision to restart the Browns Ferry Nuclear Plant Unit 1.
Objectives, Scope, and To determine what lease- leaseback financing
arrangements have been used Methodology

by TVA to date and the extent to which these and other alternative
financing arrangements are being considered for future use, we reviewed
several documents, including TVA*s audited financial statements, a TVA
Inspector General (IG) report on TVA*s use of lease- leaseback
arrangements, a Congressional Budget Office (CBO) report on leases and
lease- leasebacks, and the fiscal year 2003 and 2004 President*s Budgets.
We also interviewed officials from TVA, private electricity industry
officials

familiar with lease financing, and officials from OMB and CBO. To
determine who has legal ownership of the assets financed through such
arrangements and who is at financial risk if the projects do not work out
as planned, we obtained and reviewed copies of the lease- leaseback
arrangements entered into in fiscal years 2000 and 2002, and December
2002, which covered 20 power generating units. We limited our detailed
analysis to the fiscal year 2002 lease- leaseback arrangement because,
based on our limited review of the fiscal year 2000 and December 2002
lease- leaseback arrangements, we found them to be structured similarly to

the fiscal year 2002 arrangement. In addition, according to TVA officials,
the fiscal year 2000 and 2003 arrangements are structured similarly to the
fiscal year 2002 arrangement. Our detailed analysis included a review of

TVA*s and the private equity investor*s cash flows under various
alternatives

included in the fiscal year 2002 lease- leaseback arrangement to determine
who is at risk. We also interviewed officials from TVA*s Office of IG,
Chief Financial Officer Organization, and Office of General Counsel; OMB;
and CBO.

To determine whether TVA is properly accounting for the lease- leaseback
arrangements for financial reporting purposes, we reviewed authoritative
accounting literature related to accounting for leases. We also reviewed
TVA*s accounting journal entries for the fiscal year 2000 and 2002
arrangements. In addition, we interviewed officials from TVA*s Chief

Financial Officer Organization, Office of General Counsel, IG Office, and
external financial auditor. To determine whether TVA*s lease- leaseback
arrangements are being treated properly for budgetary reporting purposes,
we reviewed various budget- related documents, including the fiscal year
2003 and 2004 President*s Budgets and OMB guidance for the classification

of leases. We also discussed the budgetary treatment of the leaseleaseback
arrangements with TVA and OMB officials. To determine whether TVA*s lease-
leaseback arrangements are properly treated for the purposes of debt cap
compliance, we reviewed the TVA Act and the

legislative history related to the act, and interviewed officials from
TVA*s Office of General Counsel. Additional information on our scope and
methodology is contained in appendix I.

We conducted our work from July 2002 through May 2003 in accordance with
generally accepted government auditing standards. We requested written
comments from the chairman of TVA or his designated representative on a
draft of this report. TVA*s chairman provided written comments, which are
reproduced in appendix III. We also received written and oral comments of
a technical nature, which we incorporated as appropriate.

TVA*s Current and In fiscal year 2000, TVA began entering into alternative
financing Contemplated Use of

arrangements (primarily lease- leaseback arrangements) to fund certain
capital requirements. These arrangements increase TVA*s long- term risk
Alternative Financing

and obligations. However, in our opinion it is unclear whether the current
Arrangements

law requires that the lease- leaseback arrangements be counted toward the
$30 billion debt cap in the TVA Act. TVA has used lease- leaseback
financing arrangements to refinance 24 combustion turbine power generators
that are used during periods of peak demand for power. Through May 31,
2003, these arrangements had raised about $945 million, 10 and a customer
power discount prepayment program had raised about $47 million. In
addition, TVA is considering using a combination of

alternative financing options to fund future capital projects, including
the restart of Browns Ferry Nuclear Unit 1.

Lease- leasebacks are financing arrangements under which an owner of
property raises capital by leasing the property to another party and then
simultaneously leasing the property back to retain use of it. TVA entered
into lease- leaseback financing arrangements in fiscal years 2000, 2002,
and 2003 that involved a total of 24 combustion turbine power generators
that had been previously constructed. TVA officials told us they decided
to use this type of financing primarily because it lowered their financing
costs. According to industry officials, lease financing (i. e., sale-
leaseback and

lease- leaseback arrangements) are commonly used in the utility industry
and have been in existence since the late 1980s.

10 On May 5, 2003, TVA announced lease- leaseback arrangements for four
power generating units in Mississippi that generated about $162.5 million
in alternative financing. TVA officials told us that these lease-
leaseback arrangements are substantially the same in structure as the
preceding ones, but we did not obtain and review those contracts to verify
this.

In addition to the lease- leaseback arrangements, on October 8, 2002, TVA
began its Discounted Energy Units program. This power discount program
allows TVA*s power distributors to prepay a portion of the price of firm
power they plan to purchase from TVA in the future. In return, the
distributors receive a discount on a specific quantity of the future power
they purchase from TVA. The quantity of power varies based on an implied
interest rate associated with TVA*s estimated cost of borrowing for a
given period. As of March 24, 2003, 34 distributors had signed up to
prepay about $47 million for the future delivery of power. This program is
expected to run annually through fiscal year 2007. 11 TVA hired a
consultant to assist it in exploring other alternative financing

options, and to solicit and evaluate proposals to finance the restart 12
of Browns Ferry Nuclear Plant Unit 1, which TVA officials estimate will
cost about $1.8 billion. TVA expects to receive a final report by June 30,
2003, after which TVA*s management plans to recommend specific actions to
its board. In addition to its traditional debt financing and the newer
alternative financing options discussed above, TVA and its consultant are
considering

 a second power discount program that would allow TVA*s largest customer
to prepay for approximately one- half of its power needs for a 15- year
period in return for a discount on this power over the course of the
agreement;

 entering into lease- leaseback arrangements for its currently operating
Browns Ferry nuclear units and common plant, and the assets that will be
acquired to meet the requirements of the Clean Air Act; and

 entering into joint ventures with private sector investors. Table 1
summarizes TVA*s use and consideration of alternative forms of financing.

11 We did not analyze the risk of this program to TVA. 12 TVA has not
decided how it will finance the Browns Ferry restart, but is considering a
combination of financing options.

Tabl e 1: TVA's Use and Consideration of Alternative Forms of Financing as
of May 31, 2003

Dollars in millions

Under Description Existing consideration Tot al

Lease- leasebacks $945 0 $945 a

Customer prepayment programs 47 $1, 500 $1, 547

Undefined options for financing the 0 1,800 $1, 800

Browns Ferry restart Tot al $992 $3, 300 $4, 292 b, c

Source: GAO analysis of information from TVA. a The lease- leaseback
arrangements that TVA entered into in fiscal years 2000, 2002, and 2003
raised

$945 million. Based on lease payments made to date, the outstanding
liability balance for these arrangements was $861 million as of May 31,
2003. b According to TVA officials, the total amount of alternative
financing arrangements that TVA is

ultimately likely to enter into is significantly less than $4. 3 billion
because the proceeds from the customer prepayment programs would likely be
used to finance most of the Browns Ferry restart. c The total of the
alternative financing arrangements being used and considered by TVA ($ 4.3
billion) as of May 31, 2003, plus TVA*s outstanding debt as of December
31, 2002 ($ 25. 2 billion), was less than TVA*s debt cap of $30 billion.
TVA Retains Legal

The lease- leaseback financing arrangements allow TVA to retain legal
title Ownership of Assets,

to the assets while transferring sufficient property interest in the
assets to the private equity investors so that they may claim tax
deductions that can but Both TVA and the be used to offset the taxable
income from the lease payments and any Private Equity potential gain on
the sale of the assets. 13 Our analysis of the fiscal year

Investors Are at 2002 lease- leaseback arrangement shows that the net
economic benefits of

the transactions to TVA, the private investor, and the federal treasury
will Financial Risk

depend on the future value of the assets. The future value of the assets
largely determines whether TVA*s financing costs are higher or lower than
under traditional debt financing, whether and the extent to which the
private equity investor earns a return on its investment, and whether the
tax implications to the federal treasury are positive or negative.

13 The intent of the lease- leaseback arrangements is to enable the
private equity investor to take advantage of certain deductions for tax
purposes. Although the equity investors* total tax liability may not be
reduced as a result of the arrangements, the arrangements are attractive
because of the timing of the deductions, which are higher in the first
years, allowing the private equity investors to defer paying taxes.

Key Aspects of TVA*s LeaseLeaseback As described previously, TVA used
lease- leaseback arrangements to

Arrangements refinance 24 combustion turbine power generators in fiscal
years 2000,

2002, and 2003. Prior to entering into the lease- leaseback arrangements,
TVA initially financed the construction of the assets, which have an
expected useful life of 40 years, with a combination of cash generated
from operations and borrowings, as necessary, to manage its daily cash
flow needs. After the assets were constructed, TVA entered into the
leaseleaseback arrangements. Under these arrangements, TVA agreed to lease
the assets to the private equity investors for a 50- year period and
immediately received the full amount, approximately $945 million, due
under the 50- year leases. The equity investors agreed to lease the assets
back to TVA for a period of 20 years. Over the 20- year leaseback period,
TVA is required to make semiannual lease payments.

In order to raise the approximately $945 million in lease payments made to
TVA, the equity investors relied on a combination of their own equity and
the issuance of debt in the public market. To help issue the debt, TVA
hired a financial services company, which established trusts to sell
certificates to

the public. 14 TVA*s lease payments are used to pay the debt certificates
issued to the public. Although TVA was not a direct party to the
certificates, TVA*s lease payments are being used as security for and to
directly service the debt. TVA*s obligation to make lease payments is
unconditional throughout the term of the certificates. TVA*s legal
obligation to make lease payments takes priority over its obligation to
pay

principal and interest on its senior debt obligations, and TVA*s lease
obligation was cited by Standard & Poor*s as substantiation for assigning
a triple- A rating 15 to the trust certificates. On a present value basis,
16 over the 20- year leaseback period for the fiscal year 2002
arrangement, TVA*s lease payments will total approximately $294 million,
of which approximately

$277 million will be distributed to the certificate holders. The excess
$17 million will be distributed to the equity investor. 14 The financial
services company received nonrecourse notes from special purpose entities
set up by the equity investor and created pass- through trusts to issue
the debt certificates, which are backed by the notes and assignments of
the lease payments. 15 A triple- A rating is the highest rating given to
bonds by Standard & Poor*s.

16 We calculated all present values as of November 1, 2001, so we could
analyze payments under the fiscal year 2002 lease- leaseback arrangement
as of the time the arrangement began. The 2002 arrangement was dated
November 1, 2001, and TVA*s analysis calculated present values as of
November 1, 2001.

At the end of the 20- year leaseback period, TVA has the option of
purchasing the equity investor*s remaining interest in the assets over the
remaining 30- year period of the 50- year lease. If, after 20 years, TVA
elects to exercise the purchase option, it would pay the fair market value
of the assets, subject to certain maximum amounts set in the lease-
leaseback

arrangements. Once TVA provides notice that it intends to purchase the
equity investor*s interest in the assets, negotiations between TVA and the
equity investor will commence to determine the fair market value of the
assets. If they cannot agree on a fair market value within 90 days of
TVA*s notice, the fair market value will be determined by an independent
appraisal procedure. Table 2 shows the key details of the lease- leaseback
arrangements and the lease proceeds to TVA.

Table 2: Key Details of Fiscal Year 2000, 2002, and 2003 Lease- Leaseback
Arrangements Lease- leaseback arrangements Details FY 2000 FY 2002 FY 2003
Total

Date September 27, 2000 November 14, 2001 December 20, 2002 May 5, 2003
Combustion turbine power

Four units at Gallatin Eight units at Lagoon

Four additional units at Four units at Twenty- four generators financed
Fossil Plant and four

Creek site near Lagoon Creek site near

Kemper County, units units at Johnsonville

Brownsville, Tenn. Brownsville, Tenn.

Miss. Fossil Plant

Lease proceeds to TVA $300 million $320 million $162 million $163 million
$945 million Portion of lease proceeds

$45 million $48 million $28 million $28 million $149 million funded from
the private party*s equity

Portion of lease proceeds $255 million $272 million $134 million $135
million $796 million funded from debt issued by trusts

Maximum purchase price $243 million $260 million $126 million $126 million
$755 million Equity investors* expected $110 million $115 million $53
million $56 million $334 million purchase price Source: GAO analysis of
information from TVA and TVA*s IG.

The key events involved in the fiscal year 2002 lease- leaseback
arrangement are shown in figure 1.

Figure 1: Key Events Related to TVA*s Fiscal Year 2002 Lease- Leaseback
Arrangement

Prior to

TVA Equity investor Debt holders year 1 TVA finances construction of the
assets.

TVA leases the assets to the equity investor To facilitate the
arrangement, TVA hires a

for 50 years. Equity investor pays full 50- year assets Use of financial
services company, which purchases a

lease term up front. S

Money lessor note from the equity investor. To raise the

capital needed to purchase the note, the financial services company
establishes trusts to issue debt certificates, which are sold to the
public. Equity investor raises cash owed for

S Money 50- year lease by issuing a lessor note

Years and investing from its own equity.

1 - 20 Equity investor leases assets Use of assets

back to TVA for 20 years. TVA makes semiannual lease payments over

Money the 20- year leaseback period. The

S leaseback payments are used to reimburse debt holders. The equity
investor receives the excess portion of the lease payments not

Money owed to the debt holders.

S At the end of 20 years, TVA must decide End of

whether to purchase the equity investor's Debt holders have been paid in
full. year 20

remaining interest in the assets or allow use of Debt holders have been
paid in full.

the assets to revert to the equity investor. Use of assets

Years 21- 50

If TVA exercises the option to purchase the IfTVA chooses not to exercise
the purchase option, assets for fair market value (up to $260 million),

the equity investor will be able to (1) sell its interest in the
arrangement will end, and TVA will own all

the assets toTVA or another party, (2) operate the interest in the assets.

assets itself, or (3) designateTVA to operate the assets. If the equity
investor doesn't sell its interest in the assets, the arrangement will end
after 50 years, andTVA will own all interest in the assets. However, the
assets are expected to be obsolete at that time.

Source: GAO analysis of TVA lease- leaseback arrangement.

Under the lease- leaseback arrangements, TVA retains legal title to the
assets but relinquishes sufficient interest in the assets so that the
equity investors are entitled to certain tax benefits that are not
available to TVA. As we discuss in more detail later, these transactions
have implications for the federal treasury because they result in both tax
deductions and income.

Table 3 shows the key advantages and disadvantages for TVA and the equity
investors under the lease- leaseback arrangements. These advantages and
risks are discussed in more detail in the following sections.

Tabl e 3: Summary of Key Advantages/ Disadvantages under Lease- Leaseback
Arrangements TVA Equity investor

Advantages  Receives cash proceeds up front  Receives the tax benefits
associated with the assets  Reduces costs over first 20 years of lease by
that were not available to TVA transferring tax benefits to the equity
investor that were

 Obtains economic interest in the asset, which TVA has not available to
TVA

the option to purchase back at the end of the 20- year  Maintains
operational control and retains legal title of

leaseback period the assets

 Opportunity to earn an attractive rate of return, if the  Excludes
financing obligations from its debt cap fair market value of the asset
after 20 years is at the  Potential for lower costs over the 50- year
lease period expected amount and TVA or another party purchases depending
on cost to purchase the equity investors*

its interest interest in the assets at the end of the 20- year

 Assumes no operating responsibilities leaseback period

 Faces low risk of TVA defaulting on rental payments or  Has flexibility
to decide whether it wants to purchase

not properly maintaining assets the equity investor*s interest in the
assets at the end of the 20- year leaseback period, or to exercise one of
the early termination options

Disadvantages  Has to repurchase the equity investor*s interest in 
Risks receiving a lower return or incurring a loss if the assets at end of
20- year leaseback period in order to

fair market value of the assets is lower than expected at regain full
rights to the assets and retain generating

the end of 20 years capacity

 Assumes risk of lower return if its income in a particular  Risks
higher costs under the lease- leaseback

year is not sufficient to take full advantage of the tax arrangements with
the repurchase of assets or deductions exercise of early termination
options, compared to traditional debt financing

Source: GAO analysis of information from TVA and TVA*s IG. Note: TVA
retains legal title and is responsible for maintenance and repair costs
and any modifications to the facility that might be required by law.

Risk to TVA under Fiscal Under the fiscal year 2002 lease- leaseback
arrangement, TVA will incur

Year 2002 Lease- Leaseback lower financing costs over the 20- year
leaseback period, compared to Arrangement

traditional debt financing. TVA*s discounted payments over the 20- year
leaseback period would be approximately $28 million 17 less under the
fiscal year 2002 lease- leaseback arrangement than they would have been
under

traditional debt financing. However, TVA would not own all rights to the
assets under the lease- leaseback arrangement, as it would under
traditional debt financing. In its assessment of the benefits of entering
into the fiscal year 2002 leaseleaseback

arrangement, TVA did not consider scenarios under which it would purchase
all interest in the assets at the end of the 20- year lease period or
exercise one of the options to terminate the arrangement early. Our
analysis of the arrangement considers the full 50- year lease period,

covering the expected 40- year useful life of the assets, including a
possible decision by TVA to purchase the equity investor*s remaining
interest in the assets at the end of the 20- year leaseback period. As
this analysis suggests, there is no way of knowing with certainty whether
this arrangement will end up being more advantageous to TVA or more
lucrative to the private investors.

In large part, who will benefit from this arrangement depends on the fair
market value of these generating units at the end of the 20- year
leaseback period. Depending on the cost to TVA to repurchase the equity
investor*s remaining interest in the asset, it may be at risk of incurring
higher costs

under the lease- leaseback arrangement, compared to traditional debt
financing. For example, if TVA repurchases the equity investor*s interest
in the assets at the amount expected by the equity investor 18 *a lump sum
payment of approximately $115 million at the end of the 20- year lease
(present value of $42 million)* its discounted payments will be
approximately $14 million higher under the lease- leaseback arrangement
than they would have been under traditional debt financing. If TVA

17 TVA*s projected discounted savings of approximately $26 million did not
consider transaction costs incurred under traditional debt financing. When
these transaction costs are considered, TVA*s discounted savings
approximate $28 million, which we use in our analysis.

18 According to TVA*s leasing advisor, the equity investor involved with
the fiscal year 2002 lease- leaseback entered the arrangement expecting
the fair market value at the end of the 20- year lease term to be about 36
percent of the assets* fair market value at the inception of the lease.

repurchases the equity investor*s interest in the assets at the maximum
amount set by the terms of the fiscal year 2002 lease- leaseback
arrangement* a lump sum payment of approximately $260 million (present
value of $94 million)* its discounted payments will be approximately $66
million higher, compared to traditional debt financing. Although TVA

may elect not to repurchase the equity investor*s remaining interest in
the assets at the end of the 20- year leaseback period, TVA would lose
control over the electricity generated by the plants over the next 30-
year period and may need to purchase power plants or acquire additional
electricity to meet the needs of its customers.

According to TVA*s leasing advisor, one of the primary advantages of the
arrangement is TVA*s prerogative to decide whether to reacquire full
interest in the assets at the end of the 20- year leaseback period, which

enables TVA to assess their value at that time and determine whether it
would be economically advantageous to purchase the remaining interest in
them. TVA*s leasing advisor highlighted recent market volatility to
illustrate the importance and value of this flexibility to TVA. Due to a
favorable market for combustion turbines at the time TVA entered into the
fiscal year 2002 lease- leaseback arrangement, TVA received $320 million
in lease proceeds for assets that were initially constructed for about
$226 million. However, TVA*s leasing advisor told us that, since TVA
refinanced the assets, the market for combustion turbines has declined,
and units similar to TVA*s have traded for as much as 50 percent less than
the amount at which TVA refinanced its assets. This market volatility
makes it impossible to know at this time the net impact of the arrangement
on the respective

parties. If the market for these power generating units remains depressed
at the end of the 20- year leaseback period, TVA*s purchase price to
reacquire interest in the assets may fall to a level that would be
beneficial to TVA. TVA would realize lower financing costs under the
arrangement if its

purchase price at the end of the 20- year leaseback period were lower than
its savings in financing costs to that point* approximately $28 million
(present value).

Also, in analyzing its potential costs under the lease- leaseback
arrangement, TVA officials told us that they did not consider any of TVA*s
early termination options (see table 4 for a summary of these options)
because they do not expect to use them. They said the early termination
options were included in the arrangements for TVA*s benefit and provide
additional flexibility in case of unexpected circumstances* for example,
damage to the assets or a change in the law making it illegal for TVA to
lease the assets. TVA will assess the feasibility of the early buyout
options at the time they become available. If the assets* fair market
value at the time of the options is at an amount for which TVA concludes
that purchasing the assets at the buyout price would be advantageous, TVA
may exercise one of its early buyout options. Due to significant
termination costs, our analysis 19 shows that, if TVA exercises its 2009
early buyout option, its discounted payments will be approximately $25
million more under the lease- leaseback arrangement than they would have
been under traditional debt financing. If TVA exercises its 2017 early
buyout option, its discounted payments will be approximately $54 million
higher. The early buyout options are intended to provide flexibility to
TVA, in the event that the assets* fair market value is higher than
expected. For example, if at the time of the 2017 early buyout option
date, the fair market value of the assets is higher than expected, TVA can
purchase the equity investor*s remaining interest in the assets at a set
price established in the lease

arrangement and avoid the possibility of paying additional value for the
assets 4 years later at the end of the 20- year leaseback period.

As shown in table 4, TVA can also terminate the lease- leaseback
arrangement in the case of burdensome events, obsolescence, or loss, in
which case our analysis shows that TVA*s discounted payments will be from
approximately $7 million to $16 million higher under the lease- leaseback
arrangement than they would have been under traditional debt financing.

19 Our analysis included TVA*s total payments under the lease- leaseback
arrangement if TVA ended the arrangement early by exercising an early
buyout or termination option. We compared TVA*s payments under the lease-
leaseback arrangement to TVA*s potential

payments under traditional debt financing, assuming that TVA would
continue to make payments on its debt over the original 20- year period
and would not exercise an option to call the debt early. We believe TVA
would not choose to call its debt early due to high estimated costs it
would incur.

Table 4: Summary of TVA*s Early Termination Options under the Fiscal Year
2002 Lease- Leaseback Arrangement Present value (as of November 1, 2001)
of Early termination

TVA*s cost to TVA*s cost to options Description terminate a

terminate

Early buyout options On two specified dates (May 1, 2009, and May 1, 2017)
TVA May 1, 2009 * May 1, 2009 * has the option of terminating the leasing
agreement and $301 million

$206 million acquiring all interest in the assets.

May 1, 2017 * May 1, 2017 * $271 million $123 million

Termination due to Upon at least 30 days* notice, TVA can terminate the
lease November 1, 2020 *

November 1, 2020 * burdensome event leaseback arrangement if (1) a change
in the law or the

$112 million $42 million interpretation of the law makes it illegal for
TVA to continue the lease or make payments under the lease, and the
transactions

May 1, 2002 * May 1, 2002 * cannot be restructured to comply with the
changes in a manner

$338 million $329 million acceptable to all parties, or (2) subject to
certain exceptions, one or more events outside of TVA*s control occur that
could or would obligate TVA to make indemnity payments under the
arrangements. Termination due to

Any time after 5 years and with 6 months* notice, TVA can November 1, 2020
*

November 1, 2020 * obsolescence terminate the arrangement if TVA*s board
of directors

$112 million $42 million determines in good faith that the assets are
either economically or technologically obsolete, surplus to TVA*s needs,
or no May 1, 2007 *

November 1, 2006 * longer useful in TVA*s trade or business. $297 million

$229 million Event of loss TVA can terminate the lease- leaseback
arrangement in the

November 1, 2020 * November 1, 2020 * case of (1) loss of any unit or use
thereof due to destruction or

$112 million $42 million damage to such unit or the common facilities that
is beyond economic repair or that renders such unit permanently unfit for

May 1, 2002 * May 1, 2002 * normal use or (2) seizure, condemnation,
confiscation, or

$338 million $329 million taking of, or requisition of title to or use of,
any unit by any governmental authority following exhaustion of all
permitted appeals or TVA*s decision not to pursue such appeals. Source:
GAO analysis of information from TVA and TVA*s IG.

a Termination costs vary depending on when, within the 20- year lease
term, the arrangement was to be ended.

Risk to Private Parties As part of the fiscal year 2002 lease- leaseback
arrangement, private

under Fiscal Year 2002 investors paid $320 million to TVA; $272 million of
this payment was raised

Lease- Leaseback from debt investors, and $48 million was raised from a
private equity

Arrangement investor. The debt portion of the payment was funded through
the issuance

of certificates to the public. As discussed previously, the principal and
interest owed on the certificates are, in effect, to be satisfied through
TVA*s ongoing lease payments over the 20- year leaseback period. TVA*s
obligation to make lease payments is unconditional throughout the term of
the certificates. Based on TVA*s unconditional obligation to make lease
payments, 20 we concluded that the bondholders are at minimal risk of
losing the principal and interest payments they are owed. 21 The minimal

risk to debt holders is also reflected in the triple- A rating given to
the certificates by Standard & Poor*s.

However, the equity investor may be at risk of realizing a lower return
than expected or a loss under certain scenarios. 22 As part of the fiscal
year 2002 arrangement, the equity investor made a $48 million payment to
TVA and, in return, receives certain benefits, including (1) cash in the
amount by which TVA*s lease payments exceed the amount of principal and
interest owed on the certificates* about $17 million (on a present value
basis) over the 20-

year period, (2) the ability to sell the assets, or the power they
generate, after the 20- year leaseback period, and (3) tax benefits that
can be used to offset taxable income.

The equity investor*s expected return is based on TVA electing to buy back
interest in the assets at their fair market value at the end of the 20-
year leaseback period. If TVA chooses to do so, the equity investor is at
risk of losing money on the arrangement. The equity investor*s discounted
cash disbursements, under this scenario, would exceed its discounted cash
proceeds by approximately $25 million. However, the equity investor

20 Although TVA may terminate the arrangements before it has made all of
its rental payments, TVA would then be subject to significant termination
fees, which would be sufficient to pay off remaining principal and
interest owed on the certificates.

21 This assumes that TVA remains solvent and financially able to meet
these obligations, which are not guaranteed by the federal government. 22
We did not review the equity investor*s actual cash flows. As a result,
our analysis represents only an estimate of the equity investor*s
position, which we discussed with TVA and TVA*s leasing advisor.

would own certain interest in the assets and would be able to sell its
interest to another party or use the assets to raise revenue.

In entering into the arrangement, the equity investor projected an after-
tax rate of return of about 5.3 percent, according to TVA*s leasing
advisor. 23 The equity investor expected that the lease to TVA would go
the full term

(20 years), and, at the end of the lease term, the price paid by TVA to
reacquire interest in the assets would be about 36 percent of the fair
market value of the assets at the inception of the lease. However, if TVA
decides to purchase the equity investor*s interest in the assets and the
fair market value of the assets is lower than anticipated, the equity
investor is at risk of

not achieving its projected rate of return or of realizing a loss. If
TVA*s purchase price at the end of the leaseback period is below 36
percent of the asset*s fair market value at the inception of the lease,
the equity investor is at risk of not earning its projected rate of
return. If the purchase price is less than 30 percent, the equity investor
is also at risk of losing money on the arrangement. 24 In addition, as
discussed above, TVA has options to terminate the leaseleaseback

arrangement early. According to our analysis, if TVA exercises either of
its two early buyout options, the equity investor will earn in excess of
its projected rate of return. However, if TVA terminates the arrangement
early due to burdensome events, obsolescence, or loss, the equity investor
will be at risk of earning a return lower than its projected after- tax
rate of 5.3 percent. A summary of the risks to the equity investor and TVA
is included in table 5.

23 This return assumes that the equity investor is the owner of the assets
for tax purposes and that it continues to generate sufficient taxable
income against which it can offset the tax benefits it received from the
lease- leaseback arrangement.

24 In addition, according to TVA*s leasing advisor, the equity investor
must use leveraged lease accounting, which requires it to estimate its
income from the arrangement (based on the expected fair market value of
the assets at the end of the 20- year leaseback period) and recognize this
income over the life of the lease (20 years). Because the equity investor
has already recognized income based on the assets* estimated fair market
value at the end of the 20- year leaseback period, if the actual amount
received for the assets at the end of the 20- year leaseback period is
lower than expected, the equity investor will record a loss for financial
reporting purposes.

Tabl e 5: Summary of Risks to TVA and Equity Investor under Various
Options Included in the Fiscal Year 2002 Lease- Leaseback Arrangement Risk
to

Equity Event TVA investor Explanation

Decision point: On May 1, 2009, TVA can exercise the first early buyout
option for approximately $301 million (present value of $206 million). TVA
currently does not expect to exercise this option. TVA exercises its first
early buyout option. X  TVA*s discounted payments would be higher under
the

lease- leaseback arrangement, compared with traditional debt financing,
but TVA would own and have exclusive rights to the assets.  The equity
investor*s return would be higher than expected; there would be no risk to
the equity investor.

Decision point: On May 1, 2017, TVA can exercise the second early buyout
option for approximately $271 million (present value of $123 million). TVA
currently does not expect to exercise this option. TVA exercises its
second early buyout option. X  TVA*s discounted payments would be higher
under the

lease- leaseback arrangement, compared with traditional debt financing,
but TVA would own and have exclusive rights to the assets.  The equity
investor*s return would be higher than expected; there would be no risk to
the equity investor.

Decision point: If a burdensome event, obsolescence, or loss occurs during
the term of the lease, TVA may decide to terminate the arrangement early.
TVA currently does not expect to terminate the arrangement early.

TVA terminates the arrangement early due to X X  TVA*s discounted
payments would be higher compared to burdensome events, obsolescence, or
loss. traditional debt financing, and the equity investors* return would
be less than expected.

Decision point: On November 14, 2021, TVA must decide whether to purchase
all remaining interest in the assets from the equity investor or allow use
of the assets to revert to the equity investor. The equity investor
expects TVA to exercise this option and pay a lump sum approximating 36
percent of the private parties* original $320 million investment. TVA has
not decided whether to exercise this option. TVA does not exercise its
purchase option. X X  At the end of the 20- year leaseback, TVA*s
discounted

savings would be approximately $28 million, compared with traditional debt
financing, but TVA would lose control over the power generated by these
assets for the remaining 30- year lease period. If TVA continues to need
the generating capacity and has to pay more than $28 million to replace
it,

TVA would incur higher costs under the lease- leaseback option.  The
equity investor*s discounted cash disbursements would

exceed its cash receipts by approximately $25 million; it would have to
either sell the assets or use them to generate revenue to recuperate its
investment and earn a return.

(Continued From Previous Page)

Risk to Equity Event TVA investor Explanation

TVA exercises its purchase option for less than X  The lease- leaseback
arrangement would generate overall approximately $77 million (present
value of savings for TVA, and TVA would hold all interest in the $28
million), or less than 24 percent of the private assets. parties* original
$320 million investment.

 The equity investor would earn a lower- than- projected rate of return,
and its discounted cash disbursements could exceed its cash receipts.

TVA exercises its purchase option for approximately X X  TVA*s discounted
payments under the lease- leaseback $77 million to $115 million (present
value of arrangement would be higher, compared to traditional debt $28
million to $42 million), or 24 to 36 percent of the financing. private
parties* original $320 million investment.

 The equity investor*s discounted cash receipts would cover its
disbursements, but it would earn a lower- than- projected rate of return.

TVA exercises its purchase option for greater than X  TVA*s payments
under the lease- leaseback arrangement $115 million (present value of $42
million), or more

would be higher, compared to traditional debt financing. than 36 percent
of the private parties* original  The equity investor would achieve or
exceed its projected $320 million investment.

rate of return. Source: GAO analysis of information from TVA and TVA*s IG.

Notes: We defined risk for TVA as incurring higher costs, as compared to a
traditional debt financing. We defined risk for the equity investor as
incurring a loss or earning a lower return than expected. If TVA elects
not to exercise its purchase option, the equity investor may purchase
title to the assets for $1.

In addition, the lease- leaseback arrangements could have implications for
the federal treasury. For the equity investor, these transactions create
tax deductions that would not be available to TVA as a tax exempt entity,
but also generate income in the form of lease payments. Whether the
transactions result in a net loss or a net gain to the federal treasury
depends largely on if and when the equity investor*s rights to the assets
are sold and for what amount. For example, based on our analysis of the
fiscal year 2002 lease- leaseback arrangement, if the equity investor
sells the assets at the end of the 20- year leaseback period for an amount
that is less than 8

percent of the original cost, the equity investor*s tax deductions would
have exceeded its income and the arrangement would result in a net loss to
the federal treasury. If, on the other hand, the sales price were to
exceed 8 percent of the original cost, the equity investor*s income would
have exceeded its tax deductions and the arrangement would result in a net
gain to the federal treasury.

Lease- Leaseback TVA*s lease- leaseback arrangements are classified as
liabilities in TVA*s

Accounting Complies financial statements, as required by GAAP, and are
classified as debt for

budgetary reporting purposes, as required by OMB guidance. In addition,
with Applicable

because in our opinion the relevant statute is unclear as to whether the
Standards and

arrangements should be counted against TVA*s statutory debt cap, TVA*s
Requirements

position that they should not be counted against the cap is not
unreasonable. TVA, with concurrence from its external auditor,
appropriately recorded its lease- leaseback arrangements on its balance
sheet as an increase to cash and as a financing obligation (increase to
liabilities) while retaining the assets on its books at historical cost.
25 See appendix II for a more detailed analysis of TVA*s treatment of the
fiscal year 2002 lease- leaseback arrangement.

While GAAP does not require lease- leaseback arrangements to be classified
as debt on the financial statements, it does provide guidance for
classifying them as liabilities. Although the issuance of debt is an
integral part of the lease- leaseback arrangements, the legal structure of
the arrangements allows them to be recorded as liabilities instead of
debt. We believe this is a distinction without a meaningful economic
difference because, in this

case, debt and liabilities have very similar characteristics. Since TVA is
required to make semiannual payments for the duration of the 20- year
leaseback period, provided no early buyout or termination options are
exercised, future sacrifices of economic benefits are reasonably assured
and an obligation to render payment clearly exists. Thus, while the
leaseleaseback arrangements are not treated as debt for financial
reporting purposes, they are in essence debt because they have
substantially the same economic impact on TVA as traditional debt
financing. Moreover, officials at Standard & Poor*s and some state
regulators generally view the lease- leaseback arrangements as debt.

TVA*s lease- leaseback arrangements are treated as debt in the fiscal year
2004 President*s Budget, in accordance with OMB guidance. TVA originally
treated the fiscal year 2000 lease- leaseback arrangement as an obligation
rather than debt, but OMB questioned this treatment when TVA*s fiscal year

25 The assets included in the fiscal year 2002 lease- leaseback
arrangement have a historical cost of $226.4 million while cash proceeds
received by TVA from the lease- leaseback arrangement were $320 million.

2003 budget submission treated the 2002 lease- leaseback arrangement
similarly. Based on criteria for classifying leases established in OMB
Circular A- 11, OMB officials concluded the lease- leaseback arrangement
was equivalent to the purchase of assets financed by the issuance of
agency debt because (1) TVA retains legal ownership of the assets, (2) the
present

value of TVA*s lease payments is very high compared to the fair market
value of the assets, and (3) TVA controls use of the assets.

Under OMB*s current treatment of the lease- leaseback arrangements, the
lump- sum cash proceeds TVA receives from the private parties at the
inception of the lease- leaseback arrangements are treated as borrowing.
In addition, interest payments made to the private parties are scored as
outlays in the budget as they are made. All of TVA*s lease- leaseback

arrangements are now treated as debt in the President*s Budget. 26 While
TVA has disagreed with OMB*s position that the lease- leaseback
arrangements should be treated as debt, it recognizes OMB*s authority to
decide how the arrangements should be presented in the President*s Budget.

TVA*s decision not to treat the lease- leaseback arrangements as debt for
purposes of its statutory debt cap is not unreasonable. Section 15d( a) of
the TVA Act authorizes TVA to *issue and sell bonds, notes and other
evidences of indebtedness* in an amount not exceeding $30, 000,000, 000.*
It is TVA*s position that Section 15d of the TVA Act effectively provided
TVA with two new ways to acquire power system assets. One way is by
selling bonds (section 15d( a)) and the other way by entering into leases,
leasepurchase agreements, and power purchase agreements (section 15d( g)).
The limitation in section 15d( a) applies to bonds, notes, and other
evidences of indebtedness (collectively referred to in the statute as
bonds). In TVA*s opinion, the language, structure, and legislative history
of section 15d clearly demonstrate that lease obligations are not bonds
for the purpose of the limitation. TVA asserts that the descriptive
references of the

bonds in section 15d make sense when applied to bonds as the traditional
financial instrument but not to TVA*s obligations under the lease-
leaseback arrangements. TVA also asserts that the legislative history
demonstrates 26 Based on its conclusion that all of TVA*s lease- leaseback
arrangements are similar and

should be treated consistently, in the fiscal year 2004 President*s
Budget, OMB classified the fiscal year 2002 and 2003 lease- leaseback
arrangements as debt and reclassified the fiscal year 2000 arrangement as
debt.

that the Congress was aware that the limitation of TVA*s authority to
issue bonds did not limit TVA with respect to leases, lease- purchase
agreements, and power purchase agreements. Therefore, it is TVA*s position
that the section 15d limitation on bonds does not apply to the lease-
leaseback arrangements.

Based on our analysis of the law and its legislative history, we conclude
that the current law does not clearly and unambiguously address whether
the amount of the lease- leaseback arrangements should be counted against
the debt cap. However, there is support for the view that bonds are
treated as separate means of financing the expansion of facilities from
leases and lease- purchase agreements. There is also support for the view
that, although bonds are covered by the ceiling in section 15d( a) of the
TVA Act, leases and lease- purchase agreements are not. Finally, there is
support for

the view that lease- leaseback arrangements are sufficiently analogous to
lease and lease- purchase agreements to support the conclusion that they
are not bonds for the purpose of section 15d( a) of the TVA Act.
Therefore, TVA*s decision that its lease- leaseback arrangements should
not be treated as debt for purposes of the debt cap in section 15d( a) of
the TVA Act is not unreasonable, even though these arrangements have the
same impact on TVA*s financial condition and future competitiveness as
traditional debt.

Based on our discussions with OMB officials, they are also of the opinion
that the TVA Act is unclear regarding whether TVA*s lease- leaseback
arrangements should be counted against the $30 billion bond ceiling
established by section 15d of the TVA Act. As a result, the fiscal year
2004 President*s Budget proposes that legislation be drafted to ensure
that leaseleaseback

arrangements and other arrangements equivalent to traditional debt
financing are included under TVA*s debt cap. Conclusions TVA has entered
into substantial (about $945 million) lease- leaseback arrangements with
private investors and is considering expanding its use of

these and other nontraditional financing arrangements. While the
leaseleaseback arrangements provide TVA with a lower cost of financing
over the first 20 years, they also pose risks. The savings in financing
costs TVA achieves over the first 20 years will be lowered by (1) costs it
will incur if it purchases the remaining interest in the assets or
replaces the assets or (2) revenue it will forgo due to loss of generation
capacity. The risk that TVA*s total costs under the lease- leaseback
arrangements could be higher

than under traditional bond financing is offset by two advantages: (1) TVA
has the ability to walk away from the assets at the end of 20 years if
they

have become obsolete or their generating capacity is no longer needed and
(2) the TVA Act has been interpreted such that the arrangements do not
count against TVA*s statutory debt cap, thereby allowing TVA to maintain
ready access to capital in the debt market. However, these arrangements
essentially have the same economic impact on TVA*s financial condition as
traditional debt and therefore could negatively affect TVA*s future
competitiveness. The federal treasury could experience a net benefit or
loss, depending on whether the private equity investor*s tax deductions
exceed its taxable income, with the ultimate impact depending largely on
the future value of the assets.

Matter for The Congress may want to consider amending the TVA Act to
clarify

Congressional whether the debt cap should include alternative sources of
financing (such

as lease- leaseback arrangements) that have the same impact on TVA*s
Consideration financial condition and competitive position as traditional
debt financing. Agency Comments and

In written comments on a draft of this report, TVA*s Chairman generally
Our Evaluation

agreed with the report and characterized it as a fair and thorough
analysis on this complex subject. However, the Chairman expressed concern
over our suggesting that the Congress may want to consider amending the
TVA Act to clarify whether the debt cap should include nontraditional
sources of financing such as lease- leaseback arrangements. He pointed out
that both TVA and its outside counsel are of the view that the current
statute and legislative history are clear in the authority provided to TVA
to issue debt securities (to which the debt cap applies) and to enter into
leasing

arrangements (to which the debt cap does not apply). As stated in the
report, based on our analysis of the law and its legislative history, we
conclude that the current law does not clearly and unambiguously address
whether the amount of the lease- leaseback arrangements should be counted
against the debt cap. Therefore, we have made no changes to the report in
response to this comment. TVA*s written comments are reproduced in
appendix III.

TVA also provided us with oral comments of a technical nature, which we
have incorporated into the final report as appropriate.

As arranged with your office, unless you announce the contents of this
report earlier, we will not distribute it until 30 days from its date.
Then we will send copies of this report to appropriate House and Senate
committees, interested members of the Congress, TVA*s board of directors,
and the Director of the Office of Management and Budget. We will also make
copies available to others upon request. In addition, the report will be
available at no charge on GAO*s Web site at http:// www. gao. gov.

If you or your staff have any questions on matters discussed in this
report, please contact me at (202) 512- 9508 or calboml@ gao. gov. Major
contributors to this report are listed in appendix IV.

Sincerely yours, Linda M. Calbom Director, Financial Management and
Assurance

Appendi Appendi xes I x Objectives, Scope, and Methodology Description of
LeaseLeaseback To describe the lease- leaseback arrangement( s) used to
date, we did the following:

Arrangements  Interviewed officials from the Tennessee Valley Authority*s
(TVA) Office

of Inspector General (IG), TVA*s external auditor, and the Office of
Management and Budget (OMB).

 Reviewed TVA*s annual reports and the fiscal year 2003 and 2004
President*s Budgets.  Interviewed representatives of the investor- owned
utility members of

TVA Exchange Group, Standard & Poor*s, the Electric Power Supply
Association, and the Edison Electric Institute.

 Reviewed a sample of annual reports and financing statements of electric
utilities.

 Obtained and reviewed copies of the lease- leaseback arrangements
entered into in fiscal years 2000 and 2002, and December 2002, which
covered 20 of the 24 generating units.

 Limited our detailed analysis to the fiscal year 2002 lease- leaseback
arrangement. Based on our limited review of the fiscal year 2000 and
December 2002 lease- leaseback arrangements, we found them to be
structured similarly to the fiscal year 2002 arrangement. In addition, TVA
officials told us that the fiscal year 2000 and 2003 arrangements are
substantially the same in structure as the fiscal year 2002 arrangement.

Alternative Financing To identify proposals under consideration for
financing future capital

Options Being projects, including the restart of Browns Ferry Nuclear
Plant Unit 1, we

Considered by TVA for  interviewed officials from TVA, OMB, and the
Congressional Budget

Future Capital Office (CBO);

Projects, Including the  reviewed a TVA IG report on TVA*s use of lease-
leaseback financing;

Restart of Browns Ferry Nuclear Plant

 reviewed TVA*s proposed 2003 and 2004 federal budgets; and Unit 1

 reviewed recent press reports related to TVA.

Legal Ownership and To determine who has legal ownership of the assets
financed by leaseleaseback

Risk If the LeaseLeaseback transactions, and who is at financial risk if
the projects do not

work out as planned, we Arrangements Do Not

 obtained and reviewed copies of the fiscal years 2000 and 2002, and Work
Out as Planned

December 2002 lease- leaseback arrangements covering 20 of 24 power
generating units;

 interviewed officials of TVA*s IG, Chief Financial Officer (CFO)
Organization, and Office of General Counsel (OGC), OMB, and CBO; 
reviewed summary documents prepared by TVA*s OGC and IG that

identify and explain the responsibility of the different parties to the
agreements;

 reviewed an economic analysis of the fiscal year 2002 lease- leaseback
arrangement prepared by TVA to compare its borrowing cost under
traditional debt financing with its cost under the lease- leaseback
arrangements;

 compared TVA*s cash flow under the fiscal year 2002 arrangement to
traditional debt financing if TVA were to exercise the early buyout and
termination options in the fiscal year 2002 arrangement; and  analyzed
the equity investor*s cash flows under the fiscal year 2002

arrangement. Classification of LeaseLeaseback To determine whether TVA was
treating the lease- leaseback arrangements

according to generally accepted accounting principles in its external
financial statements, we Arrangements According to Generally

 reviewed the accounting journal entries used by TVA to record the fiscal
Accepted Accounting

year 2000 and 2002 lease leaseback transactions covering 16 of 24 power
generating units in TVA*s accounting system;

Principles, OMB Guidance, and the TVA

 interviewed officials of TVA*s IG, CFO Organization, and external
financial statement auditor; Act

 reviewed authoritative accounting literature on accounting for leases
including Statement of Financial Accounting Standards (SFAS) 13,

Accounting for Leases, SFAS 66, Accounting for Sales of Real Estate,

and SFAS 98, Accounting for Leases, to evaluate TVA*s accounting
treatment;

 obtained and reviewed annual reports for publicly traded utility
companies to identify financial reporting disclosures related to leasing
transactions; and

 obtained and reviewed copies of the fiscal years 2000 and 2002, and
December 2002 lease- leaseback arrangements covering 20 of 24 power
generating units.

To determine whether the lease- leaseback arrangements are being
classified properly in the federal budget, we  reviewed the fiscal year
2003 and 2004 President*s Budgets;  interviewed officials from TVA, OMB,
and CBO; and  reviewed OMB*s Circular A- 11 for guidance on how OMB
classifies and

scores leases for budgetary reporting purposes. To determine whether the
lease- leaseback arrangements should be counted toward the limitation on
TVA*s authority in the TVA Act to issue bonds and notes, we

 reviewed the fiscal year 2002 lease- leaseback arrangement; 
interviewed officials from OMB and TVA*s OGC;  obtained and reviewed a
memo prepared by TVA*s OGC summarizing its position;

 reviewed the fiscal year 2004 President*s Budget; and  reviewed and
interpreted language included in section 15d of the TVA

Act, and reviewed the legislative history of the act. Organizations

During the course of our work, we contacted the following organizations.
Contacted

Federal Agencies  Tennessee Valley Authority  Congressional Budget
Office  Office of Management and Budget

Bond Rating Agencies  Standard & Poor*s Customer Representative or

 American Public Power Association Trade Groups

 TVA Exchange Group  Electric Power Supply Association  Edison Electric
Institute

Electric Utilities  Entergy Corp.  Duke Energy Corp.

Other  Dexia * Global Structured Finance

Analysis of TVA*s Treatment of the Fiscal Year 2002 Lease- Leaseback
Arrangement for

Appendi I I x Financial Reporting Purposes Authoritative Accounting Table
6 lists authoritative accounting standards for leases (which include
Standards for Leases

the applicable standards for lease- leaseback arrangements) that we
reviewed to determine whether the Tennessee Valley Authority*s (TVA)
treatment of the lease- leaseback arrangements for financial reporting
purposes is in accordance with generally accepted accounting principles
(GAAP). The Financial Accounting Standards Board (FASB) issues all
Statements of Financial Accounting Standards (SFAS), Financial Accounting
Standards Board Interpretations (FIN), and Financial Accounting Standards
Board Technical Bulletins (FTB).

Table 6: Applicable GAAP Standards Standard Title

SFAS- 13 a Accounting for Leases

SFAS- 66 a Accounting for Sales of Real Estate

SFAS- 71 a Accounting for Effects of Certain Types of Regulation

SFAS- 98 a Accounting for Leases:

 Sale- leaseback transactions involving real estate  Sales- type leases
of real estate  Definition of the lease term  Initial direct costs of
direct financing leases

FIN- 23 a Leases of Certain Property Owned by a Governmental Unit or
Authority

FTB79- 10 a Fiscal Funding Clauses in Lease Agreements

FTB79- 12 a Interest Rate Used in Calculating the Present Value of Minimum
Lease Payments

FTB79- 14 Upward Adjustment of Guaranteed Residual Values

FTB79- 15 Accounting for Loss on a Sublease Not Involving the Disposal of
a Segment

FTB86- 2 Accounting for an Interest in the Residual Value of a Leased
Asset:

 Acquired by a third party  Retained by a lessor that sells the related
minimum rental payments

FTB88- 1 Issues Relating to Accounting for Leases:

 Time pattern of the physical use of the property in an operating lease 
Lease incentives in an operating lease  Applicability of leveraged lease
accounting to existing assets of the lessor

 Money- over- money lease transactions  Wrap lease transactions

Source: GAO analysis of GAAP. a We performed a detailed review of these
standards.

Summary of GAAP A lease is an agreement that conveys the right to use
property, usually for a

Accounting for Leases specified period. Leases typically involve two
parties: the owner of the

property (lessor) and the party contracting to use the property (lessee).
A key accounting issue associated with leases is the identification of
those leases that are treated appropriately as sales of the property by
lessors and as purchases of property by lessees (e. g., capital leases). A
capital lease transfers the benefits and risks inherent in the ownership
of the property to the lessee, who accounts for the lease as an
acquisition of an asset and the

incurrence of a liability. Leases that are not identified as capital
leases are called operating leases and are not treated as sales by lessors
and as purchases by lessees. If, at its inception, a lease, including
leaseleasebacks, meets one or more of four criteria, the lease is
classified as a capital lease per SFAS No. 13, Accounting for Leases,
paragraphs 6 and 7.

The four criteria are (1) ownership of the leased property is transferred
to the lessee by the end of the lease term, (2) the lease contains a
bargain purchase option, (3) the lease term is substantially (75 percent
or more) equal to the estimated useful life of the leased property, and
(4) at the inception of the lease, the present value of the minimum lease
payments, with certain adjustments, is 90 percent or more of the fair
value of the

leased property. 1 TVA*s fiscal year 2002 lease- leaseback arrangements
meet criteria 3 and 4 above and therefore were recorded on the balance
sheet in accordance with capital lease accounting criteria. According to
SFAS No. 98, Accounting for Leases, and SFAS No. 66, Accounting for Sales
of Real Estate, the way a capital lease is accounted for depends on
whether you are the lessor or the lessee. The lessor, TVA in the 50- year
lease, would account for the lease as a sale (sales- type lease) or
financing (direct financing lease), whichever is appropriate. A lease
involving real estate is not classified by the lessor as a sales- type
lease unless (1) the title to the leased property is transferred and (2)
there is not any form of continuing involvement in the daily operations.
Since TVA did not transfer legal title of the assets and continues to be
involved in the operation and maintenance of the turbine units and to
control the distribution of power produced by the facilities, TVA
accounted for the lease proceeds of $320 million as a direct financing
lease resulting in financing obligations. 1 Lessor must determine that two
additional criteria are met to account for the lease as a

capital lease: (1) collection of the minimum lease payments is reasonably
predictable and (2) no important uncertainties exist for unreimbursable
costs to be incurred by the lessor.

Table 7 below shows the fiscal year 2002 accounting entries for the fiscal
year 2002 lease- leaseback arrangement.

Tabl e 7: Fiscal Year 2002 Accounting Entries for the Fiscal Year 2002
LeaseLeaseback Arrangement

Debit: Cash $320,000,000 Credit: Financing Obligation $320,000, 000

To record the receipt of the initial cash proceeds on November 14, 2001,
and the lease financing obligation

Debit: Financing Obligation $ 23, 993,689 Debit: Operating Expense
6,642,333

Credit: Cash $30,636, 022

To record the first (and largest) semiannual payment of principal and
interest on May 1, 2002

Debit: Operating Expense $ 4,096,192 Credit: Accrued Liability $ 4,096,
192

To accrue 4 months of interest expense at the end of the fiscal year 2002

Source: TVA.

The accounting transactions for TVA*s fiscal year 2002 lease- leaseback
arrangements are presented in its financial statements as follows: 
Outstanding lease financing obligations are included in the *Current

liabilities* and *Other liabilities* line items on the Balance Sheet. 
The cash proceeds were included in the *Proceeds from combustion

turbine financing* line item on the Cash Flow Statement.  The lease costs
are included in the *Operating and maintenance* line

item on the Income Statement. In addition to the above journal entries,
TVA records the normal accounting entries related to construction,
capitalization, depreciation, and operation of the combustion turbine
units consistent with all other generating assets it owns. The fiscal year
2002 lease- leaseback transaction assets were initially constructed at a
historical cost of $226.4 million. TVA depreciates

the assets using the straight- line depreciation method over the 20- year
term of the leaseback agreement.

Comments from the Tennessee Valley

Appendi I I I x Authority

Appendi V I x GAO Contact and Staff Acknowledgments GAO Contact Robert E.
Martin, (202) 512- 6131 Acknowledgments In addition to the individual
named above, Rich Cambosos, Donald Neff,

Chanetta Reed, and Brooke Whittaker made key contributions to this report.

(190068)

a

GAO United States General Accounting Office

TVA has traditionally financed its operations with cash generated from
operations, the issuance of bonds and notes, and in the past,
appropriations. However, in fiscal year 2000, it began to use alternative
forms of financing (primarily lease- leaseback arrangements) and is
considering expanding their use. The lease- leaseback arrangements involve
the refinancing of 24 combustion turbine power generators that are used
during periods of peak demand for power. The lease- leaseback arrangements
accounted for about $945 million of the $992 million raised by alternative
financing arrangements as of May 31, 2003.

After the power generators were constructed, TVA leased them to private
investors for 50 years and simultaneously leased them back for 20 years.
Under these lease- leaseback arrangements, TVA received cash from the

private investors, which was obtained by issuing debt in the public market
and through the investors* own equity. TVA is responsible for making lease
payments for 20 years, at the end of which it has the option to purchase
the private investors* interest in the assets. TVA retains legal title to
the assets under the arrangements but relinquishes sufficient interest in
the assets so that the equity investors are entitled to certain tax
benefits. The equity investors pass on some of these benefits to TVA in
the form of more favorable financing rates. As a result, TVA is able to
lower costs over the first 20 years of the arrangement. However, to retain
use of the assets after the 20- year period, TVA would have to purchase
the equity investors*

remaining interest in the assets at the assets* fair market value at that
time. Depending on the fair market value, TVA is at risk of incurring
higher overall costs than under traditional debt financing. In large part,
the determination as to who will be the net beneficiary of these
arrangements and the implications to the federal treasury will hinge on
the future value of the assets.

TVA*s lease- leaseback arrangements have been accounted for and reported
in compliance with applicable standards and requirements for financial
reporting, budgetary reporting, and debt cap compliance. TVA*s
leaseleaseback arrangements are treated as liabilities in its financial
statements and classified as debt in the President*s Budget. However, they
are not counted against the debt cap in the TVA Act. While the lease-
leaseback arrangements are not considered debt for purposes of financial
reporting and debt cap compliance, they have substantially the same
economic impact on TVA*s financial condition and future competitiveness as
traditional debt financing. Concern about the implications of

the Tennessee Valley Authority*s (TVA) debt on its future competitiveness
prompted Representative Richard Baker to ask GAO to determine TVA*s
planned and actual use of nontraditional financing arrangements (which, to
date, has consisted primarily of leaseleaseback arrangements), who is at
risk under TVA*s lease- leaseback

arrangements, and whether TVA*s accounting for the lease- leaseback
arrangements complies with applicable standards and

requirements. GAO is not recommending any actions by TVA, but does raise a
matter for congressional

consideration. The Congress may want to consider amending the TVA Act to
clarify whether TVA*s statutory debt cap should include alternative
sources of financing that have the same impact on TVA*s financial
condition and competitive position as traditional debt financing.

TVA generally agreed with our analysis but expressed concern regarding
including alternative sources of financing in its debt cap. Because we
believe current law

does not clearly and unambiguously address whether the amount of the
lease- leaseback arrangements should be counted against the debt cap, we
continue to believe the Congress may want to consider revisiting this
matter.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 784. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Linda Calbom at (202) 512- 9508 or calboml@ gao. gov.
Highlights of GAO- 03- 784, a report to the

Honorable Richard H. Baker, House of Representatives

June 2003

TENNESSEE VALLEY AUTHORITY

Information on Lease- Leaseback and Other Financing Arrangements

Page i GAO- 03- 784 Tennessee Valley Authority

Contents

Contents

Page ii GAO- 03- 784 Tennessee Valley Authority

Page 1 GAO- 03- 784 Tennessee Valley Authority United States General
Accounting Office Washington, D. C. 20548

Page 1 GAO- 03- 784 Tennessee Valley Authority

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Appendix I

Appendix I Objectives, Scope, and Methodology

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Appendix I Objectives, Scope, and Methodology

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Appendix I Objectives, Scope, and Methodology

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Appendix II

Appendix II Analysis of TVA*s Treatment of the Fiscal Year 2002 Lease-
Leaseback Arrangement for Financial Reporting Purposes

Page 34 GAO- 03- 784 Tennessee Valley Authority

Appendix II Analysis of TVA*s Treatment of the Fiscal Year 2002 Lease-
Leaseback Arrangement for Financial Reporting Purposes

Page 35 GAO- 03- 784 Tennessee Valley Authority

Appendix II Analysis of TVA*s Treatment of the Fiscal Year 2002 Lease-
Leaseback Arrangement for Financial Reporting Purposes

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Appendix III

Page 38 GAO- 03- 784 Tennessee Valley Authority

Appendix IV

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