When the association started amortizing this loss in 1937 it was charged directly to surplus; thus the expense does not appear against operation. For the operating statement to present a true picture it is only proper that the amortization of this storm damage be a charge against operations. There is an additional depreciation expense of $997 for 1938 to bring the composite rate to the necessary minimum of 4 percent. In the second part of the table are shown results if above adjustments are added to net losses given in exhibit A, part V (this statement). A study of the financial position of the association indicates that the current liabilities exceed the current assets, while the reverse should be the case to show a sound operation. Pontotoo Electric Power Association, net income adjustments based on findings of examination of association's annual reports to Tennessee Valley Authority, years 1936-38 EFFECT OF ABOVE ADJUSTMENTS IF ADDED TO ADJUSTED NET LOSS PER EXHIBIT Source: Annual reports to Tennessee Valley Authority by Pontotoc Electric Power Association for years 1936-38. PRENTISS COUNTY ELECTRIC POWER ASSOCIATION This association is operating a distribution system which was purchased by the Tennessee Valley Authority from the Mississippi Power Co. and later sold to the cooperative. The association serves approximately 1,000 customers located in several small towns and the adjacent rural area. Considerable effort has been expended by the Tennessee Valley Authority to develop the electric load of the association. In the early days of the operation, intensive sales campaigns were carried out under the guidance of the Authority's promotional experts, and largely without charge to the association. The outstanding loans of the Electric Home and Farm Authority to the association's customers amounted to $24,878 in 1936 and $19,794 in 1938. In 1936 the association owed the Tennessee Valley Authority $85,769; in 1937 the loan was $76,770; and in 1938 it was $62,455. A 10-percent surcharge on all except residential customers and an amortization charge of 1 cent per kilowatt-hour for the first 100 kilowatt-hours is added to the regular Tennessee Valley Authority "yardstick" rates. In exhibit A, part V (this statement), adjustments have been made to net income so as to reflect more truly the results of the operation for the years 1936, 1937, and 1938. This has been done by deducting from reported net income other definitely known costs that should be charged to operations and also deducting revenues not derived from "yardstick" rates. This exhibit shows the following results: 1936, a loss of $4.159 instead of a reported net income of $4,048; 1937, a loss of $3,986 instead of a reported net income of $6,372; 1938, a loss of $3,086 instead of a reported net income of $13,595. The composite rate of depreciation in 1938 was 3.73 percent. This is believed to be insufficient. The composite rate should be at least 4 percent; therefore the depreciation reported for 1938 is understated by $590. Adjustment has been made for this in the following table: Prentiss County Electric Power Association, net income adjustments based on examination of association's annual reports to Tennessee Valley Authority, years 1936-38 EFFECT OF ABOVE ADJUSTMENT IF ADDED TO ADJUSTED NET LOSS PER EXHIBIT 1 Based on balance sheet as reported by Prentiss County Electric Power Association. NOTE.-Figures in parentheses are losses. Source: Annual reports to Tennessee Valley Authority by Prentiss County Electric Power Association for years 1936-38. TISHOMINGO COUNTY ELECTRIC POWER ASSOCIATION The customers of this association had been served by the Mississippi Power Co. before the company sold its facilities in this area to the Tennessee Valley Authority. The Authority in turn immediately resold them to the association. The association serves approximately 761 customers in the town of Iuka as well as a small rural area. An amortization charge of 1 cent per kilowatt-hour for the first 100 kilowatt-hours and a 10-percent surcharge on all but residential customers is added to the regular Tennessee Valley Authority rates. The usual assistance, largely without charge, has been given the association, particularly load-building and credit extensions, both by Tennessee Valley Authority and other agencies. Electric Home and Farm Authority loan contracts held by the association for collection were as follows: 1936, $11,883, 1938, $7,928. Association's debt to Tennessee Valley Authority: 1936, $85,994; 1937, $84,502 ; 1938, $84,893. If all known costs had been charged to operation and only revenue from "yardstick" rates credited, the association would have reported as follows for the last 3 fiscal years: 1936, a loss of $757 instead of a reported net income of $4,870; 1937, a loss of $3,972 instead of a reported net income of $3,246; 1938, a loss of $9,125 instead of a reported net income of $426. For details, see exhibit A, part V (this statement). From an examination of the association's annual reports to Tennessee Valley Authority the following has been noted: In 1936 depreciation has been understated by $1,693. This is a charge to operations necessary to maintain a 4-percent composite rate of depreciation. In 1937 it was $896 and in 1938 it was $580. In 1937 there is an additional tax expense which should be charged to operation. The association did not charge all of accrued taxes to operations. An adjustment was made to surplus in 1937 for line loss to the amount of $259. This should unquestionably be charged to operation. It had previously been carried in suspense. The following table gives details of adjustments on findings of examination of the association's reports: Tishomingo County Electric Power Association, net income adjustments based on findings of examination of association's annual reports to Tennessee Valley Authority, years 1936-38 EFFECT OF ABOVE ADJUSTMENTS IF APPLIEDTO ADJUSTED NET LOSS PER EXHIBIT NOTE.-Figures in parentheses are losses. $1,605 $13 $1,414 1-1.1 1.2-1 1-1 Source: Annual reports to Tennessee Valley Authority by Tishomingo County Electric Power Association for years 1936-38. TOMBIGBEE ELECTRIO POWER ASSOCIATION This association serves only rural customers, there being no towns of any size in its area of operations. Much of the distribution system was purchased from the Mississippi Power Co. by the Tennessee Valley Authority and sold them to the association, along with additional lines which the Authority had constructed. At the present time the association serves approximately 2,600 customers. They are billed for service at the regular Tennessee Valley Authority "yardstick" rates plus a surcharge of 10 percent on all customers except residential, and an amortization charge on all customers. The Tennessee Valley Authority has given considerable assistance to this association both financially and through contributed services. In 1936 the association owed the Authority $336,570, in 1937 the loan was $358,367, and in 1938 it was $390,936. Outstanding loans by Electric Home and Farm Authority to customers of the association remain at about $40,000. If only the definitely known operating costs that the "yardstick" rates should support are charged to operation, and only revenue from such rates included, the reports for the last three fiscal years would indicate the following (details of which are given in exhibit A, page 34 of part V): 1936, a loss of $16,312 instead of a reported loss of $4,685; 1937, a loss of $18,150 instead of a reported loss of $1,683; 1938, a loss of $23,151 instead of a reported net income of $1,551. The table following shows net income adjustments for 1936, 1937, and 1938. On June 30, 1936, a loss of $4,678 resulting from storm damage was set up as a deferred charge. This deferred charge was to be amortized over a period of 52 years. The association has recorded this annual amortization as a charge against the surplus account. Such amortization is an expense properly chargeable to the current operations. Therefore, the amounts of $466 in 1937 and $936 in 1938 have been added to operating expenses. In 1938 the composite rate for depreciation was 3.55 percent. To maintain this at 4 percent it is necessary to charge additional depreciation of $2,307 to the year's operating expenses. The second part of this table shows result of adjustments referred to above are added to losses shown in exhibit A, page 34 of part V. Tombigbee Electric Power Association-Net income adjustments based on findings of examination of association's annual reports to Tennessee Valley Authority, years 1936-38 Net loss or net income as reported by Tombigbee... Amortization of deferred loss from storm damage. This expense has Remainder.. Additional depreciation expense (necessary if a minimum composite rate of 4 percent is to be maintained) i Adjusted net loss...... 1 Also a possible adjustment here for 1936 and 1937, but from information available the amount of these adjustments cannot be determined. EFFECT OF ABOVE ADJUSTMENTS IF APPLIED TO ADJUSTED NET LOSS PER Source: Annual reports by Tombigbee Electric Power Association to Tennessee Valley Authority for years 1936-38. PART IV. POWER OPERATIONS OF THE UNIFIED SEVEN-DAM SYSTEM THE "INITIAL STAGE" The most significant test of the earning capacity of the Authority's power operations under existing wholesale rate schedules is that which looks ahead to the point when the "initial stage" of development and construction is over and the seven-dam system, with adequate transmission facilities, is functioning. The present expectation is that the point will have been reached at the latest by the beginning of the fiscal year 1942. At that point the 8-year period of construction and development (incidentally, rather a long period in which to wait for profits or a conclusive demonstration of inability to earn) will be completed. The T. V. A. power operations should by that time be a going concern, capable of operating on a basis which will cover all applicable charges. If the adjusted allocated investment figures should be accepted, the potential deficit in 1942, assuming maximum revenues, will be not less than that shown by the following table: Potential operating statement for fiscal year ending June 30, 1942, showing the results of operation on the basis of selling the entire available output of electricity from the seven-dam system Operating revenues'. Operating expenses' Fixed charges: Taxes (5 percent of revenue). Depreciation Amortization development deficit. Total operating expenses and other charges Deficit resulting from operations--- 1 See revenue schedule following. 2 See operating estimate following. $9,919,209 2,256, 974 495, 960 5,841, 754 4, 103, 509 377, 864 13, 076, 061 3, 156, 852 Computed at 3 percent on the investment; also 3% percent of 40 percent of a $1,000,000 working capital. Computed at 2 percent of adjusted allocated investment in hydroelectric facilities, $127,839,057, and 4 percent of investment in transmission facilities, $38,668,212. Annual charge necessary to amortize, over a period of 25 years, the development deficit accumulated to June 30, 1938. INVESTMENT 1. Power facilities of seven dams on allocated basis.-The report of the financial policy committee confines its allocation to only three dams-Wilson, Norris, and Wheeler. It is reasonable to assume, however, that had the committee been endeavoring to assign the estimated investment in the four dams under construction, when completed, similar methods would have been used and similar results obtained. Of the total recorded cost of Wilson, Norris, and Wheeler Dams acknowledged by the committee the amount assigned to power was 52 percent. With this as a guide the allocated power investment in the estimated completed cost of the four dams under construction may be found as shown in the following tabulation. The cost of river channel improvements is deducted before the application of the indicated percentage. The entire cost of transmission facilities at the dams is assigned to power. Adjustments are made for interest during construction and cost of organizing, financing, etc. The estimated cost of transmission facilities added is explained later. The estimated cost of the two additional generating units to be installed at Wheeler Dam, when the "initial stage" has been reached, $3,390,000, with interest and general overhead added, is included in the amount assigned to power. 2. Transmission facilities for seven-dam system. The investment in transmission and distribution facilities, including work in progress, has been increasing at the rate of approximately $5,000,000 per year for the last 3 years, and the estimate for 1939 is $5,760,000. It appears, therefore, that the total investment in transmission facilities completed and in process (exclusive of |