Tennessee Valley Authority 10-K

tve-20200930 Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) x ANNUAL REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2020 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 000-52313 TENNESSEE VALLEY AUTHORITY (Exact name of registrant as specified in its charter) A corporate agency of the United States created by an act of Congress (State or other jurisdiction of incorporation or organization) 62-0474417 (IRS Employer Identification No.) 400 W. Summit Hill Drive Knoxville , Tennessee (Address of principal executive offices) 37902 (Zip Code) (865) 632-2101 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered N/A N/A N/A Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer o Emerging growth company o Smaller reporting company o Non-accelerated filer x Accelerated filer o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x 1 Table of Contents Table of Contents GLOSSARY OF COMMON ACRONYMS....................................................................................................................................................................................................... 4 FORWARD-LOOKING INFORMATION......................................................................................................................................................................................................... 6 GENERAL INFORMATION............................................................................................................................................................................................................................ 7 PART I ITEM 1. BUSINESS...................................................................................................................................................................................................................................... 8 The Corporation................................................................................................................................................................................................................................. 8 Service Area....................................................................................................................................................................................................................................... 9 COVID-19 Pandemic...................................................................................................................................................................................................................... 9 Customers.......................................................................................................................................................................................................................................... 10 Rates.................................................................................................................................................................................................................................................. 11 Power Supply and Load Management Resources............................................................................................................................................................................. 12 Fuel Supply......................................................................................................................................................................................................................................... 18 Transmission...................................................................................................................................................................................................................................... 20 Weather and Seasonality.................................................................................................................................................................................................................... 20 Competition........................................................................................................................................................................................................................................ 21 Research and Development............................................................................................................................................................................................................... 21 Flood Control Activities....................................................................................................................................................................................................................... 22 Environmental Stewardship Activities................................................................................................................................................................................................. 22 Economic Development Activities...................................................................................................................................................................................................... 22 Regulation.......................................................................................................................................................................................................................................... 23 Taxation and Tax Equivalents............................................................................................................................................................................................................. 24 Environmental Matters....................................................................................................................................................................................................................... 24 Human Capital Resources.................................................................................................................................................................................................................. 30 ITEM 1A. RISK FACTORS............................................................................................................................................................................................................................ 32 ITEM 1B. UNRESOLVED STAFF COMMENTS............................................................................................................................................................................................ 45 ITEM 2. PROPERTIES.................................................................................................................................................................................................................................. 45 Generating Properties........................................................................................................................................................................................................................ 45 Transmission Properties..................................................................................................................................................................................................................... 47 Natural Resource Stewardship Properties......................................................................................................................................................................................... 47 Buildings............................................................................................................................................................................................................................................. 47 Disposal of Property........................................................................................................................................................................................................................... 47 ITEM 3. LEGAL PROCEEDINGS.................................................................................................................................................................................................................. 48 ITEM 4. MINE SAFETY DISCLOSURES...................................................................................................................................................................................................... 48 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES............ 49 ITEM 6. SELECTED FINANCIAL DATA........................................................................................................................................................................................................ 49 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................................... 50 Business and Mission......................................................................................................................................................................................................................... 50 Executive Overview............................................................................................................................................................................................................................ 52 Results of Operations......................................................................................................................................................................................................................... 53 Liquidity and Capital Resources......................................................................................................................................................................................................... 59 Off-Balance Sheet Arrangements....................................................................................................................................................................................................... 64 Key Initiatives and Challenges........................................................................................................................................................................................................... 64 Critical Accounting Policies and Estimates......................................................................................................................................................................................... 73 Fair Value Measurements................................................................................................................................................................................................................... 77 New Accounting Standards and Interpretations................................................................................................................................................................................. 79 Legislative and Regulatory Matters.................................................................................................................................................................................................... 79 Environmental Matters....................................................................................................................................................................................................................... 79 Legal Proceedings.............................................................................................................................................................................................................................. 79 Risk Management Activities............................................................................................................................................................................................................... 79 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................................................................................... 82 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................................................................................................................... 83 Consolidated Balance Sheets............................................................................................................................................................................................................ 84 Consolidated Statements of Operations............................................................................................................................................................................................. 83 Consolidated Statements of Comprehensive Income (Loss)............................................................................................................................................................. 86 Consolidated Statements of Cash Flows........................................................................................................................................................................................... 87 Consolidated Statements of Changes in Proprietary Capital............................................................................................................................................................. 88 Notes to Consolidated Financial Statements..................................................................................................................................................................................... 89 2 Table of Contents Report of Independent Registered Public Accounting Firm............................................................................................................................................................... 151 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................................... 152 ITEM 9A. CONTROLS AND PROCEDURES............................................................................................................................................................................................... 152 Disclosure Controls and Procedures.................................................................................................................................................................................................. 152 Internal Control over Financial Reporting........................................................................................................................................................................................... 152 Report of Independent Registered Public Accounting Firm................................................................................................................................................................ 153 ITEM 9B. OTHER INFORMATION................................................................................................................................................................................................................ 154 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE............................................................................................................................. 156 Directors.............................................................................................................................................................................................................................................. 156 Executive Officers............................................................................................................................................................................................................................... 157 Disclosure and Financial Code of Ethics............................................................................................................................................................................................ 158 Committees of the TVA Board............................................................................................................................................................................................................ 158 ITEM 11. EXECUTIVE COMPENSATION..................................................................................................................................................................................................... 159 Compensation Discussion and Analysis............................................................................................................................................................................................. 159 CEO Pay Ratio Disclosure................................................................................................................................................................................................................. 195 Executive Compensation Tables and Narrative Disclosures.............................................................................................................................................................. 196 Retirement and Pension Plans........................................................................................................................................................................................................... 199 Nonqualified Deferred Compensation................................................................................................................................................................................................ 201 Potential Payments on Account of Resignation, Retirement, Termination without Cause, Termination with Cause, Death, or Disability........................................... 203 Other Agreements.............................................................................................................................................................................................................................. 207 Director Compensation....................................................................................................................................................................................................................... 208 Compensation Committee Interlocks and Insider Participation.......................................................................................................................................................... 209 Compensation Committee Report...................................................................................................................................................................................................... 209 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS...................................... 209 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE......................................................................................... 209 Director Independence....................................................................................................................................................................................................................... 209 Related Party Transactions................................................................................................................................................................................................................ 209 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................................................................................................................................................................... 212 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES..................................................................................................................................................................... 213 ITEM 16. FORM 10-K SUMMARY................................................................................................................................................................................................................. 216 SIGNATURES................................................................................................................................................................................................................................................ 217 3 Table of Contents GLOSSARY OF COMMON ACRONYMS Following are definitions of some of the terms or acronyms that may be used in this Annual Report on Form 10-K for the fiscal year ended September 30, 2020 (the "Annual Report"): Term or Acronym Definition ACE Affordable Clean Energy ANI American Nuclear Insurers AOCI Accumulated other comprehensive income (loss) ARO Asset retirement obligation ART Asset Retirement Trust Bonds Bonds, notes, or other evidences of indebtedness CAA Clean Air Act CCR Coal combustion residuals CERCLA Comprehensive Environmental Response, Compensation, and Liability Act CME Chicago Mercantile Exchange CO 2 Carbon dioxide COVID-19 Coronavirus Disease 2019 COLA Cost-of-living adjustment CSAPR Cross-State Air Pollution Rule CTs Combustion turbine unit(s) CVA Credit valuation adjustment CWA Clean Water Act CY Calendar year DBOT Down-blend offering for Tritium DCP Deferred Compensation Plan DER Distributed Energy Resources DOE Department of Energy EIS Environmental Impact Statement ELGs Effluent Limitation Guidelines EMPs Electromagnetic pulses EPA Environmental Protection Agency EPRI Electric Power Research Institute ESPA Early Site Permit Application ERC Enterprise Risk Council FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission FPA Federal Power Act FTP Financial Trading Program GAAP Accounting principles generally accepted in the United States of America GHG Greenhouse gas GMDs Geomagnetic disturbances HAP Hazardous Air Pollutants IRP Integrated Resource Plan JSCCG John Sevier Combined Cycle Generation LLC KOC Knoxville Office Complex kW Kilowatts kWh Kilowatt hours LPCs Local power company customers LTA Long-Term Agreement LTDCP Long-Term Deferred Compensation Plan 4 Table of Contents MATS Mercury and Air Toxics Standards MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations MLGW Memphis Light, Gas and Water Division mmBtu Million British thermal unit(s) MtM Mark-to-market MW Megawatts NAAQS National Ambient Air Quality Standards NAV Net asset value NDT Nuclear Decommissioning Trust NEIL Nuclear Electric Insurance Limited NEPA National Environmental Policy Act NERC North American Electric Reliability Corporation NES Nashville Electric Service NO x Nitrogen oxides NPDES National Pollutant Discharge Elimination System NRC Nuclear Regulatory Commission NSR New Source Review NWP Nationwide Permit NYSE New York Stock Exchange OCI Other comprehensive income (loss) OMB Office of Management and Budget PARRS Putable Automatic Rate Reset Securities PM Particulate matter QTE Qualified technological equipment and software RCRA Resource Conservation and Recovery Act RECs Renewable Energy Certificates REIT Real Estate Investment Trust RSO Renewable Standard Offer SCCG Southaven Combined Cycle Generation LLC SCRs Selective catalytic reduction systems SEC Securities and Exchange Commission SELC Southern Environmental Law Center SERP Supplemental Executive Retirement Plan SHLLC Southaven Holdco LLC SIPs State implementation plans SMR Small modular reactor(s) SO 2 Sulfur dioxide SPC Summer Place Complex SOA Society of Actuaries SSSL Seven States Southaven, LLC TCWN Tennessee Clean Water Network TDEC Tennessee Department of Environment & Conservation TIPS Treasury Inflation-Protected Securities TVA Act The Tennessee Valley Authority Act of 1933, as amended TVARS Tennessee Valley Authority Retirement System U.S. Treasury United States Department of the Treasury USACE U.S. Army Corps of Engineers VIE Variable interest entity XBRL eXtensible Business Reporting Language 5 Table of Contents FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K ("Annual Report") contains forward-looking statements relating to future events and future performance. All statements other than those that are purely historical may be forward-looking statements. In certain cases, forward-looking statements can be identified by the use of words such as "may," "will," "should," "expect," "anticipate," "believe," "intend," "project," "plan," "predict," "assume," "forecast," "estimate," "objective," "possible," "probably," "likely," "potential," "speculate," the negative of such words, or other similar expressions. Although the Tennessee Valley Authority ("TVA") believes that the assumptions underlying any forward-looking statements are reasonable, TVA does not guarantee the accuracy of these statements. Numerous factors could cause actual results to differ materially from those in any forward-looking statements. These factors include, among other things: • The impact of the Coronavirus Disease 2019 ("COVID-19") pandemic on TVA's operating results, financial condition, and cash flows, the demand for electricity, TVA's workforce and operations, the availability of fuel and critical parts, supplies, and services, the financial markets, and the business and financial condition of TVA's customers and counterparties; • The duration and severity of the COVID-19 pandemic, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on economic and market conditions, including impacts on interest rates, commodity prices, investment performance, and foreign currency exchange rates; • New, amended, or existing laws, regulations, executive orders, or administrative orders or interpretations, including those related to environmental matters, and the costs of complying with these laws, regulations, executive orders, or administrative orders or interpretations; • The cost of complying with known, anticipated, or new emissions reduction requirements, some of which could render continued operation of many of TVA's aging coal-fired generation units not cost-effective or result in their removal from service, perhaps permanently; • Significant reductions in demand for electricity produced through non-renewable or centrally located generation sources that may result from, among other things, economic downturns, increased energy efficiency and conservation, increased utilization of distributed generation and microgrids, and improvements in alternative generation and energy storage technologies; • Changes in customer preferences for energy produced from cleaner generation sources; • Changes in technology; • Actions taken, or inaction, by the United States ("U.S.") government relating to the national or TVA debt ceiling or automatic spending cuts in government programs; • Costs or liabilities that are not anticipated in TVA's financial statements for third-party claims, natural resource damages, environmental cleanup activities, or fines or penalties associated with unexpected events such as failures of a facility or infrastructure; • Addition or loss of customers by TVA or TVA's local power company customers ("LPCs"); • Significant delays, cost increases, or cost overruns associated with the construction and maintenance of generation, transmission, navigation, flood control, or related assets; • Requirements or decisions changing the amount or timing of funding obligations associated with TVA's pension plans, other post-retirement benefit plans, or health care plans; • Increases in TVA's financial liabilities for decommissioning its nuclear facilities or retiring other assets; • Risks associated with the operation of nuclear facilities or other generation and related facilities, including coal combustion residuals ("CCR") facilities; • Physical attacks on TVA's assets; • Cyber attacks on TVA's assets or the assets of third parties upon which TVA relies; • The outcome of legal or administrative proceedings; • The failure of TVA's generation, transmission, navigation, flood control, and related assets and infrastructure, including CCR facilities and spent nuclear fuel storage facilities, to operate as anticipated, resulting in lost revenues, damages, or other costs that are not reflected in TVA's financial statements or projections; • Differences between estimates of revenues and expenses and actual revenues earned and expenses incurred; • Weather conditions; • Catastrophic events such as fires, earthquakes, explosions, solar events, electromagnetic pulses ("EMPs"), geomagnetic disturbances ("GMDs"), droughts, floods, hurricanes, tornadoes, or other casualty events or pandemics, wars, national emergencies, terrorist activities, or other similar events, especially if these events occur in or near TVA's service area; • Events at a TVA facility, which, among other things, could result in loss of life, damage to the environment, damage to or loss of the facility, and damage to the property of others; • Events or changes involving transmission lines, dams, and other facilities not operated by TVA, including those that affect the reliability of the interstate transmission grid of which TVA's transmission system is a part and those that increase flows across TVA's transmission grid; • Disruption of fuel supplies, which may result from, among other things, economic conditions, weather conditions, production or transportation difficulties, labor challenges, or environmental laws or regulations affecting TVA's fuel suppliers or transporters; • Purchased power price volatility and disruption of purchased power supplies; 6 Table of Contents • Events which affect the supply of water for TVA's generation facilities; • Changes in TVA's determinations of the appropriate mix of generation assets; • Ineffectiveness of TVA's efforts at adapting its organization to an evolving marketplace and remaining cost competitive; • Inability to use regulatory accounting or loss of regulatory accounting approval for certain costs; • Inability to obtain, or loss of, regulatory approval for the construction or operation of assets; • The requirement or decision to make additional contributions to TVA's Nuclear Decommissioning Trust ("NDT") or Asset Retirement Trust ("ART"); • Limitations on TVA's ability to borrow money which may result from, among other things, TVA's approaching or substantially reaching the limit on bonds, notes, and other evidences of indebtedness (collectively, "Bonds") specified in the Tennessee Valley Authority Act of 1933, as amended ("TVA Act"); • An increase in TVA's cost of capital that may result from, among other things, changes in the market for TVA's debt securities, changes in the credit rating of TVA or the U.S. government, or, potentially, an increased reliance by TVA on alternative financing should TVA approach its debt limit; • Changes in the economy and volatility in financial markets; • Reliability or creditworthiness of counterparties; • Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, crude oil, construction materials, reagents, electricity, or emission allowances; • Changes in the market price of equity securities, debt securities, or other investments; • Changes in interest rates, currency exchange rates, or inflation rates; • Ineffectiveness of TVA's disclosure controls and procedures or its internal control over financial reporting; • Inability to eliminate identified deficiencies in TVA's systems, standards, controls, or corporate culture; • Inability to attract or retain a skilled workforce; • Inability to respond quickly enough to current or potential customer demands or needs; • Events at a nuclear facility, whether or not operated by or licensed to TVA, which, among other things, could lead to increased regulation or restriction on the construction, ownership, operation, or decommissioning of nuclear facilities or on the storage of spent fuel, obligate TVA to pay retrospective insurance premiums, reduce the availability and affordability of insurance, increase the costs of operating TVA's existing nuclear units, or cause TVA to forego future construction at these or other facilities; • Loss of quorum of the TVA Board of Directors ("TVA Board"); • Changes in the priorities of the TVA Board or TVA senior management; or • Other unforeseeable events. See also Item 1A, Risk Factors, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. New factors emerge from time to time, and it is not possible for TVA to predict all such factors or to assess the extent to which any factor, or combination of factors, may impact TVA's business or cause results to differ materially from those contained in any forward-looking statement. TVA undertakes no obligation to update any forward-looking statement to reflect developments that occur after the statement is made. GENERAL INFORMATION Fiscal Year References to years (2020, 2019, etc.) in this Annual Report are to TVA's fiscal years ending September 30 except for references to years in the biographical information about directors and executive officers in Item 10, Directors, Executive Officers and Corporate Governance, as well as to years that are preceded by "CY," which references are to calendar years. Notes References to "Notes" are to the Notes to Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data in this Annual Report. Property TVA does not own real property and real property interests (collectively, "real property"). TVA acquires real property in the name of the United States, and such legal title in real property is entrusted to TVA as the agent of the United States to accomplish the purposes of the TVA Act. TVA acquires personal property in the name of TVA. Accordingly, unless the context indicates the reference is to TVA's personal property, any statement in this Annual Report referring to TVA property shall be read as referring to the real property of the United States that has been entrusted to TVA as its agent. Available Information TVA files annual, quarterly, and current reports with the Securities and Exchange Commission ("SEC") under Section 37 of the Securities Exchange Act of 1934. TVA's SEC filings are available to the public on the SEC's website at www.sec.gov or on TVA's website at www.tva.gov. Information contained on TVA's website shall not be deemed to be incorporated into, or to be a part of, this Annual Report. 7 Table of Contents PART I ITEM 1. BUSINESS The Corporation The Tennessee Valley Authority ("TVA") is a corporate agency and instrumentality of the United States ("U.S.") that was created in 1933 by federal legislation in response to a proposal by President Franklin D. Roosevelt. TVA was created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA's service area in the southeastern United States, and sell the electricity generated at the facilities TVA operates. Today, TVA operates the nation's largest public power system and supplies power to a population of approximately 10 million people. TVA manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity. TVA also manages the river system to provide recreational opportunities, adequate water supply, improved water quality, natural resource protection, and economic development. TVA performs these management duties in cooperation with other federal and state agencies that have jurisdiction and authority over certain aspects of the river system. In addition, the TVA Board of Directors ("TVA Board") has established two councils — the Regional Resource Stewardship Council and the Regional Energy Resource Council — to advise TVA on its stewardship activities in the Tennessee Valley and its energy resource activities. Initially, all TVA operations were funded by federal appropriations. Direct appropriations for the TVA power program ended in 1959, and appropriations for TVA's stewardship, economic development, and multipurpose activities ended in 1999. Since 1999, TVA has funded all of its operations almost entirely from the sale of electricity and power system financings. TVA's power system financings consist primarily of the sale of bonds, notes, or other evidences of indebtedness (collectively, "Bonds") and secondarily of alternative forms of financing, such as lease arrangements. As a wholly-owned government corporation, TVA is not authorized to issue equity securities. 8 Table of Contents Service Area TVA's service area, the area in which it sells power, is defined by the Tennessee Valley Authority Act of 1933, as amended ("TVA Act"). TVA supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky, and in portions of northern Georgia, western North Carolina, and southwestern Virginia. Under the TVA Act, subject to certain minor exceptions, TVA may not, without the enactment of authorizing federal legislation, enter into contracts that would have the effect of making it, or the wholesale customers that distribute TVA power ("local power company customers" or "LPCs"), a source of power supply outside the area for which TVA or its LPCs were the primary source of power supply on July 1, 1957. This provision is referred to as the "fence" because it bounds TVA's sales activities, essentially limiting TVA to power sales within a defined service area. Note See Power Supply and Load Management Resources. In addition, the Federal Power Act ("FPA") includes a provision that helps protect TVA's ability to sell power within its service area. This provision, called the "anti-cherrypicking" provision, prevents the Federal Energy Regulatory Commission ("FERC") from ordering TVA to provide access to its transmission lines to others to deliver power to customers within TVA's defined service area. As a result, the anti-cherrypicking provision reduces TVA's exposure to loss of its customers. However, there have been some efforts to circumvent the anti-cherrypicking provision, and the protection of the provision could be limited and perhaps eliminated by federal legislation at some time in the future. See Competition and Item 1A, Risk Factors — Regulatory, Legislative, and Legal Risks — TVA may lose its protected service territory . In 2020, the revenues generated from TVA's electricity sales were $10.1 billion and accounted for virtually all of TVA's revenues. See Note 17 — Revenue for details regarding revenues by state for each of the last three years. COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of the Coronavirus Disease 2019 ("COVID-19") to be a pandemic, which continues to be a serious challenge throughout the United States. TVA has implemented a company-wide 9 Table of Contents pandemic plan to address specific aspects of the COVID-19 pandemic. TVA's pandemic plan continues to evolve based on medical guidance and federal, regional, and local requirements and guidelines. TVA has put in place measures to protect its workforce, stakeholders, and critical operations, such as extending the timeframe for workforce reintegration and continuing to implement strong physical and cybersecurity measures. Generation, transmission, and distribution functions are being actively monitored, and TVA's operations and delivery of energy to customers have not been materially impacted at this time. TVA has experienced a reduction in revenue through September 30, 2020 due to a decrease in energy demand, resulting from the COVID-19 pandemic, and therefore has implemented various cost savings initiatives such as deferring and prioritizing certain capital projects and decreasing discretionary spending. TVA continues to assess potential supplier risk and through September 30, 2020, has experienced minimal impacts in this regard. The COVID-19 pandemic has also created economic uncertainty for TVA's LPCs and the communities they serve. To support LPCs and strengthen the public power response to the COVID-19 pandemic, TVA has created initiatives such as the Public Power Support and Stabilization Program, Back-to-Business Credit Program, Community Care Fund, and Pandemic Relief Credit. TVA has also provided regulatory flexibility for LPCs to halt disconnection of services. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives — Coronavirus Pandemic for an expanded discussion of the impact to TVA and related initiatives. The COVID-19 pandemic is an evolving situation, and TVA will continue to monitor and adjust its response as necessary to ensure reliable service while protecting the safety and health of its workforce. Customers TVA is primarily a wholesaler of power, selling power to LPCs that then resell power to their customers at retail rates. TVA's LPCs consist of (1) municipalities and other local government entities ("municipalities") and (2) customer-owned entities ("cooperatives"). These municipalities and cooperatives operate public power electric systems whose primary purpose is not to make a profit but to supply electricity to the general public or the cooperatives' members. TVA also sells power directly to certain end-use customers, primarily large commercial and industrial loads and federal agencies with loads larger than 5,000 kilowatts ("kW"). Whether TVA or an LPC serves a new power customer is determined by the applicable TVA-LPC wholesale power contract. Each contract contains a formula that balances the size of the LPC and the amount of any TVA infrastructure investment to determine which party is entitled to serve the new customer. In addition, power in excess of the needs of the TVA system may, where consistent with the provisions of the TVA Act, be sold under exchange power arrangements with other specific electric systems. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Revenues . See Note 17 — Revenue for details regarding operating revenues for each of the last three years. Local Power Company Customers Revenues from LPCs accounted for approximately 92 percent of TVA's total operating revenues in 2020. Following the merger in July 2020 of two LPCs, TVA had wholesale power contracts with 153 LPCs at September 30, 2020. Each of these contracts requires the LPC to purchase from TVA all of the electric power required for service to the LPC's customers; however, flexibility agreements available to LPCs that have executed long-term contracts with TVA allow LPCs to locally generate up to approximately five percent of average total hourly energy sales over the prior five years to meet their individual customers' needs. LPCs purchase power under contracts with terms of five or 20 years to terminate. TVA's two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES accounted for nine percent and eight percent, respectively, of TVA's total operating revenues in 2020. In May 2020, MLGW published a draft Integrated Resource Plan ("IRP") to guide energy choices in the future, and in July 2020, TVA made a proposal to MLGW that highlights the benefits of remaining a TVA customer. In August 2020, MLGW published a final IRP and announced their plan to issue requests for proposal to validate the cost estimates included in the IRP. In addition, certain other LPCs are evaluating options for future energy choices. TVA and LPCs continue to work together to meet the changing needs of consumers around the Tennessee Valley. In 2019, the TVA Board approved a 20-year Partnership Agreement option that better aligns the length of LPC contracts with TVA's long-term commitments. These agreements are automatically extended each year after their initial effective date, contingent upon certain circumstances, including limited rate increases going forward. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. In June 2020, TVA provided participating LPCs a flexibility option that allows them to locally generate up to approximately five percent of average total hourly energy sales over the prior five years in order to meet their individual customers' needs. As of November 16, 2020, 142 LPCs had signed the 20-year Partnership Agreement with TVA, and 64 LPCs had signed a Flexibility Agreement. The power contracts between TVA and LPCs provide for the purchase of power by LPCs at the wholesale rates established by the TVA Board. Under the TVA Act, the TVA Board is authorized to regulate LPCs to carry out the purposes of the 10 Table of Contents TVA Act through contract terms and conditions as well as through rules and regulations. TVA regulates LPCs primarily through the provisions of TVA's wholesale power contracts. All of the power contracts between TVA and the LPCs require that power purchased from TVA be sold and distributed to the ultimate consumer without discrimination among consumers of the same class and prohibit direct or indirect discriminatory rates, rebates, or other special concessions. In addition, there are a number of wholesale power contract provisions through which TVA seeks to ensure that the electric system revenues of the LPCs are used only for electric system purposes. Furthermore, almost all of these contracts specify the resale rates and charges at which the LPC must resell TVA power to its customers. These rates are revised from time to time, subject to TVA approval, to reflect changes in costs, including changes in the wholesale cost of power. TVA also regulates LPC policies for customer deposits, termination of service for non-payment, information to consumers, and billing through a service practice policy framework. TVA's regulatory framework provides for consistent regulatory policy for ratepayers across the Tennessee Valley, while recognizing local considerations. The regulatory provisions in TVA's wholesale power contracts are designed to carry out the objectives of the TVA Act, including the objective of providing for adequate supply of power at the lowest feasible rates. See Rates — Rate Methodology below. Other Customers Revenues from directly served industrial customers accounted for approximately six percent of TVA's total operating revenues in 2020. Contracts with these customers are subject to termination by the customer or TVA upon a minimum notice period that varies according to a number of factors, including the customer's contract demand and the period of time service has been provided. TVA also serves seven federal customers, ‎including U.S. Department of Energy ("DOE") facilities and military installations, which accounted for approximately one percent of TVA's total operating revenues in 2020. Other Revenue Other revenue consists primarily of wheeling and network transmission charges, sales of excess steam that is a by-product of power production, delivery point charges for interconnection points between TVA and the customer, and certain other minor items. Other revenue accounted for approximately one percent of TVA's total operating revenues in 2020. Rates Rate Authority The TVA Act gives the TVA Board sole responsibility for establishing the rates TVA charges for power. These rates are not subject to judicial review or to review or approval by any state or other federal regulatory body. Under the TVA Act, TVA is required to charge rates for power that will produce gross revenues sufficient to provide funds for: • Operation, maintenance, and administration of its power system; • Payments to states and counties in lieu of taxes ("tax equivalents"); • Debt service on outstanding indebtedness; • Payments to the U.S. Treasury in repayment of and as a return on the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment"); and • Such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of their maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's power business, having due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. See Note 18 — Proprietary Capital . TVA fulfilled its requirement to repay $1.0 billion of the Power Program Appropriation Investment in 2014; therefore, the repayment of this amount is no longer a component of rate setting. Rate Methodology TVA uses a seasonal time of use wholesale rate structure comprised of base demand and energy rates, a fuel rate, and a grid access charge ("GAC") . In setting the base rates, TVA uses a debt-service coverage ("DSC") methodology to derive annual revenue requirements in a manner similar to that used by other public power entities that also use the DSC rate methodology. Under the DSC methodology, rates are calculated so that an entity will be able to cover its operating costs and to satisfy its obligations to pay principal and interest on debt, plus an additional margin. This ratemaking approach is particularly suitable for use by entities financed primarily, if not entirely, by debt, such as TVA, and helps ensure that TVA produces gross revenues sufficient to fund requirements specified in the TVA Act listed under Rate Authority above. TVA recovers fuel costs and tax equivalent payments associated with fuel cost adjustments through a monthly rate reflecting the forecasted costs of fuel. Beginning on October 1, 2018, fuel costs are allocated to three groups of customers: Standard Service (residential and small commercial customers), large manufacturing customers with contract demands greater than 5 megawatts ("MW"), and large general service customers with contract demands greater than 5 MW. Fuel costs are 11 Table of Contents allocated to these three classes of customers in relation to their hourly loads and TVA's hourly incremental dispatch cost. Total monthly fuel costs include costs for natural gas, fuel oil, coal, purchased power, emission allowances, nuclear fuel, and other fuel-related commodities as well as realized gains and losses on derivatives purchased to hedge the costs of such commodities. In recent years, TVA, LPCs, and directly served industries have worked collaboratively to develop changes to TVA's rate structures that focus on TVA's long-term pricing efforts. These changes are improving pricing by better aligning rates with underlying cost drivers and by sending improved pricing signals, while maintaining competitive industrial rates and keeping residential rates affordable. The rate structures are also designed to reduce wholesale energy rates for Standard Service and introduce a GAC at an offsetting rate to better recover fixed costs. This approach more accurately reflects the wholesale cost of energy and recognizes the value of the grid's reliability and associated fixed costs. TVA's modernized approach to pricing provides bill stability while maintaining reliability and fairness for all TVA's customers. Power Supply and Load Management Resources General TVA seeks to balance production capabilities with power supply requirements by promoting the conservation and efficient use of electricity and, when necessary, buying, building, or leasing assets or entering into power purchase agreements. TVA also seeks to employ a diverse mix of energy generating sources and works toward obtaining greater amounts of its power supply from clean (low or zero carbon emitting) resources. Power generating facilities operated by TVA at September 30, 2020, included three nuclear sites, 17 natural gas and/or oil-fired sites, five coal-fired sites, 29 conventional hydroelectric sites, one pumped-storage hydroelectric site, one diesel generator site, and 14 solar energy sites, although a certain number of these facilities were out of service as of September 30, 2020. See Item 2, Properties — Generating Properties — Net Capability for a discussion of the units at these facilities. TVA also acquires power under power purchase agreements ("PPAs") of varying durations, including short-term contracts of less than 24-hours in duration. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Expenses . The following table shows TVA's generation and purchased power by generating source as a percentage of all electric power generated and purchased (based on kilowatt hours ("kWh")) for the periods indicated: Total Power Supply by Generating Source For the years ended September 30 Generation Resource (1) 2020 2019 2018 Nuclear 42% 39% 39% Natural gas and/or oil-fired 22% 20% 20% Coal-fired 13% 17% 19% Hydroelectric 10% 10% 9% Purchased power (non-renewable) 8% 9% 9% Purchased power (renewable) 5% 5% 4% Note (1) TVA's non-hydro renewable resources from TVA facilities are less than one percent for all periods shown, and therefore are not represented on the table above. Purchased power (renewable) contains the majority of non-hydro renewable energy supply. 12 Table of Contents Nuclear At September 30, 2020, TVA had three nuclear sites consisting of seven units in operation. The units at Browns Ferry Nuclear Plant ("Browns Ferry") are boiling water reactor units, and the units at Sequoyah Nuclear Plant ("Sequoyah") and Watts Bar Nuclear Plant ("Watts Bar") are pressurized water reactor units. Operating information for each of these units is included in the table below. TVA Nuclear Power At September 30, 2020 Nuclear Unit Summer Net Capability (MW) Net Capacity Factor for 2020 (%) Date of Expiration of Operating License Browns Ferry Unit 1 (1) 1,101 107.9 2033 Browns Ferry Unit 2 (1) 1,103 100.7 2034 Browns Ferry Unit 3 (1) 1,105 91.7 2036 Sequoyah Unit 1 1,152 82.3 2040 Sequoyah Unit 2 1,140 90.0 2041 Watts Bar Unit 1 1,157 81.6 2035 Watts Bar Unit 2 1,164 89.2 2055 Note (1) The summer net capability for Browns Ferry excludes the impact of the extended power uprate project. The generating capability is expected to increase by an estimated 465 MW after sufficient run time to validate the new capacity. Extended Power Uprate . On August 14, 2017, the Nuclear Regulatory Commission ("NRC") approved TVA's request for a 465 MW extended power uprate ("EPU") project at Browns Ferry. Physical work on all units was completed in 2019. The generating capacity is expected to increase 465 MW after sufficient run time to validate the new capacity, which is expected to occur in 2021. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Extended Power Uprate. Other Nuclear Initiatives . The NRC issued an Early Site Permit to TVA in December 2019 to license small modular reactors ("SMRs") at TVA's Clinch River Site in Oak Ridge, Tennessee. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Small Modular Reactors . Other Nuclear Matters. Operating nuclear facilities subjects TVA to waste disposal, decommissioning, and insurance requirements, as well as litigation risks. See Fuel Supply — Nuclear Fuel below for a discussion of spent nuclear fuel and low-level radioactive waste, Note 22 — Commitments and Contingencies — Contingencies for a discussion of TVA's nuclear decommissioning liabilities and the related trust and nuclear insurance, and Note 22 — Commitments and Contingencies — Legal Proceedings and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Apparent Violations of NRC Regulations for a discussion of legal and administrative proceedings related to TVA's nuclear program, which discussions are incorporated herein by reference. Natural Gas and/or Oil-Fired At September 30, 2020, TVA's natural gas and oil-fired fleet consisted of 101 combustion turbine power blocks (86 simple-cycle units, one cogeneration unit, and 14 combined-cycle power units), accounting for 12,509 MW of summer net capability. Sixty of the simple-cycle units are currently capable of quick-start response allowing full generation capability in approximately 10 minutes. The economic dispatch of natural gas-fired plants depends on both the day-to-day price of natural gas and the price of other available intermediate resources such as coal-fired plants. TVA uses simple-cycle units to meet peaking or backup power needs. TVA's 2019 IRP projects significant solar expansion over the next decade. The natural gas-fired fleet supports that expansion by providing reliability across all hours, as well as the flexibility to help manage ramping and intermittency. See Item 2, Properties — Generating Properties, Note 7 — Leases , Note 10 — Variable Interest Entities , and Note 13 — Debt and Other Obligations for a discussion of lease arrangements into which TVA has entered in connection with certain combustion turbine units. Because of TVA's strategy of portfolio diversification and reduction of air emissions, TVA may decide to make further strategic investments in natural gas-fired facilities in the future by purchase, construction, or lease. Coal-Fired At September 30, 2020, TVA had five coal-fired plants consisting of 25 active units, accounting for 6,915 MW of summer net capability. TVA considers units to be in an active state when the unit is generating, available for service, or temporarily unavailable due to equipment failures, inspections, or repairs. All other coal-fired units are considered retired. In 2018, the TVA Board approved a plan to perform assessments of Bull Run Fossil Plant ("Bull Run") and Paradise Fossil Plant 13 Table of Contents ("Paradise"). Results of these assessments were presented to the TVA Board at its February 2019 meeting, and the Board approved the retirement of Paradise Unit 3 by December 2020 and Bull Run by December 2023. Paradise Unit 3 was taken offline on February 1, 2020, effectively retiring the plant. Coal-fired plants have been subject to increasingly stringent regulatory requirements over the last few decades, including those under the Clean Air Act ("CAA"), the Clean Water Act ("CWA"), and the Resource Conservation and Recovery Act ("RCRA"). TVA has committed to a programmatic approach for the evaluation of its sites where coal combustion residuals ("CCR") are stored to meet all applicable state and federal regulations. Increasing regulatory costs have caused TVA to consider whether to make the required capital investments to continue operating its coal-fired facilities. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities. TVA is moving toward a more balanced generation plan with greater reliance on lower-cost and cleaner energy generation technologies. Since September 30, 2010, TVA has reduced its summer net capability of coal-fired units by 7,653 MW. The 2019 IRP indicated evaluation of additional coal unit retirements. Most of the remaining coal-fired plants are among the oldest in the nation still in operation, and their fit within TVA's power supply portfolio will be further tested in the future with increasing amounts of solar generation utilized by TVA. TVA's long-range plans will continue to consider the costs and benefits of significant environmental and other major capital investments at its remaining coal-fired plants. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Optimum Energy Portfolio. Hydroelectric Conventional Hydroelectric Dams . TVA maintains 29 conventional hydroelectric dams with 109 generating units throughout the Tennessee River system for the production of electricity. As of September 30, 2020, these units accounted for 3,759 MW of summer net capability. The amount of electricity that TVA is able to generate from its hydroelectric plants depends on a number of factors, including the amount of precipitation and runoff, initial water levels, generating unit availability, and the need for water for competing water management objectives. When these factors are unfavorable, TVA must increase its reliance on higher cost generation plants and purchased power. In addition, a portion of energy generated by nine U.S. Army Corps of Engineers ("USACE") dams on the Cumberland River system contributes to the TVA power system. See Weather and Seasonality below and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Dam Safety and Remediation Initiatives. Raccoon Mountain Pumped-Storage Plant . At September 30, 2020, TVA had four units at Raccoon Mountain Pumped-Storage Plant ("Raccoon Mountain") with a total net summer capability of 1,635 MW. These units are utilized to balance the transmission system as well as generate power. TVA uses electricity generated by its fleet during periods of low demand to operate pumps that fill the reservoir at Raccoon Mountain. Then, during periods of high or peak demand, the water is released and the pumps reverse to work as power generating turbines. Hiwassee Hydro Unit 2. Hiwassee Hydro Unit 2 has a unique reversible turbine/generator that acts as a pump and a turbine enhancing TVA's ability to balance baseload generation. Hiwassee Hydro Unit 2 has a summer net capability of 86 MW. Hydro Modernization Program . TVA's Hydro Modernization Program began in 1992 and focused on units with potential to increase peaking capacity and improve reliability. With the completion of Pickwick Landing Dam ("Pickwick") Unit 2 in 2020, the initial Hydro Modernization Program has concluded with modernization completed on 62 conventional hydroelectric units under the program. The modernization projects resulted in 453 MW of increased capacity from the conventional hydroelectric units, with an average efficiency gain of approximately five percent. In 2019, TVA began its transition to a new program, the Hydro Major Maintenance Program, intended to focus on addressing reliability risks that will support the preservation of TVA's hydroelectric fleet capacity. Hydroelectric generation will continue to be an important part of TVA's energy mix since it plays a vital role in carbon reduction initiatives, the ability to integrate other renewables into the power portfolio, and, ultimately, TVA's ability to meet changing customer preferences for cleaner energy sources. As such, TVA is currently evaluating the need to revitalize the Hydro Modernization Program to increase the capability, flexibility, and availability of the hydroelectric fleet to help meet these changing customer preferences. Other Renewable Energy Resources TVA's renewable energy portfolio includes both TVA-owned assets and renewable energy purchases. TVA owns 14 solar sites with a total net summer capability of approximately 1 MW. TVA currently plans to meet renewable goals through power purchases and arrangements with LPCs. See Distributed Energy Resources and Power Purchase and Other Agreements below. TVA tracks its renewable energy commitments and claims through the management of Renewable Energy Certificates ("RECs"). The RECs, which each represent 1 megawatt-hour ("MWh") of renewable energy generation, are principally associated with wind, solar, biomass, and low-impact hydroelectric. TVA continues to evaluate ways to adjust to customer preferences and requirements for cleaner and greener energy, including the acquisition of RECs from renewable purchased 14 Table of Contents power. These RECs can be sold to customers to meet their needs. Diesel Generators At September 30, 2020, TVA had one diesel generator plant consisting of five units, and this facility accounted for 9 MW of summer net capability. These units are not currently dispatched for generation. Distributed Energy Resources Consumer desire for energy choice, among other things, is driving the expectation for flexible options in the electric industry. TVA and LPCs are working together to leverage the strengths of the Tennessee Valley public power model to provide distributed energy solutions that are economical, sustainable, and flexible. TVA will focus on the safety and reliability impacts of these resources as they are interconnected to the grid and will ensure that the pricing of electricity remains as low as feasible. Additional regulatory considerations and analysis may be required as the distributed energy resources ("DER") market, technologies, and programs evolve. TVA is working to develop pricing and regulatory structures with a deliberate and thoughtful analysis of each current and future program offering. This requires strong partnerships with LPCs to give customers choices and provide end-use consumers the flexibility they desire. In 2019, the TVA Board approved new renewable power solutions, including a utility-scale option and a mid-scale option, that better equip TVA and LPCs with the flexibility to meet changing end-use customer needs. The utility-scale option, which aggregates demand through a competitive procurement process, is implemented by a renewable investment agreement through TVA's Green Invest Program. TVA may also construct its own renewable facilities to meet these needs. The mid-scale option, also known as the Flexibility Research Project, is a joint project with LPCs to enable solutions for situations where the end-use consumer needs onsite renewable or distributed generation and to enable TVA to gain market knowledge and operational insights from these research projects. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Renewable Power Solutions. Through the Home Uplift Program, TVA is partnering with LPCs, state and local governments, non-profit agencies, energy efficiency advocates, and the Tennessee Valley Public Power Association to complete home evaluations and make high-impact home energy upgrades for qualifying homeowners. In addition, TVA and LPCs conduct workshops to educate homeowners about low and no-cost energy efficiency upgrades that improve their quality of life. TVA has encouraged the development of solar, wind, biomass, and low-impact hydroelectric generation systems through various current and former program offerings, with total operating capacity of 1,705 MW and nearly 1,178 MW of additional approved capacity as of September 30, 2020. Inside the Tennessee Valley, the combined participation for all such renewable solutions is 490 MW of installed operating capacity through both TVA-owned sites and PPAs. Outside the Tennessee Valley, TVA contracts for approximately 1,215 MW of operating wind capacity through PPAs. In 2017, the TVA Board authorized up to $300 million to be spent over the next 10 years, subject to annual budget availability and necessary environmental reviews, to build an enhanced fiber optic network that will better connect TVA's operational assets. Fiber is a vital part of TVA's modern communication infrastructure. The new fiber optic lines will improve the reliability and resiliency of the generation and transmission system while enabling the system to better accommodate DER as these resources enter the market. New energy management systems and energy storage technologies present opportunities for more sophisticated and integrated operation of the entire grid. The advent of electric vehicles and small-scale renewable generation has hastened the development of energy storage technologies that have the potential to mitigate the intermittent supply issues associated with many renewable generation options. Implementation of these technologies in conjunction with two-way communication to the site creates the potential for more efficient usage of other DER on the grid. TVA's electric vehicle ("EV") strategy is a staged approach that will evolve as the local EV market matures. TVA continues to focus on utilizing more EVs and installing charging stations inside the Tennessee Valley. This approach has enabled TVA to gain insights on the value and impact to utilities of large-scale electrification. TVA has also partnered with over 30 organizations across the State of Tennessee (known as the "Drive Electric Tennessee" collaborative) to create a roadmap to outline local market needs for widespread adoption. This foundational information is crucial as more affordable, longer range EVs come to the market in the next few years. In November 2020, the TVA Board approved changes that remove market barriers facing EV adoptions, including setting supportive utility level policies such as rate options and regulatory policies. Onsite energy management technologies and the proliferation of companies interested in providing services to support and aggregate the impacts of such systems provide another DER opportunity. Such systems can afford the consumer benefits through reduced consumption, increased comfort, detailed energy use data, and savings from time-sensitive rate structures. TVA and LPCs must consider the integration of the impacts from changes in energy usage patterns resulting from the operation of such systems. 15 Table of Contents Demand response systems that take advantage of the increasing sophistication in communication to homes, businesses, and distribution system assets also afford the opportunity for more granular control of system demand. Technologies can manage individual customer systems to shift usage from peak to off-peak periods and create significant reductions in the need for peak generation output or curtail usage for short periods to balance system demand. More sophisticated distribution control systems can also lower peak demand through control of excess voltage on the grid on either a dispatchable or continuous basis. Some large industrial customers also have the capacity to respond instantaneously and can augment operational flexibility by providing ancillary services. TVA is leading an initiative to determine the value of DER for its system. Initial efforts are focused on small-scale distributed (rooftop) solar, but the efforts are general enough to allow for other distributed options. These efforts are ongoing, led by a team that includes technical support from the Electric Power Research Institute ("EPRI"), to develop a methodology to identify site preferences on the distribution systems of the LPCs. This work, along with locational analysis already completed by TVA, will help in placing utility-scale solar in furtherance of the IRP recommendations as well as distributed solar to meet the needs of LPCs. See Research and Development below. Power Purchase and Other Agreements TVA acquires power from a variety of power producers generally through long-term and short-term PPAs as well as through spot market purchases. During 2020, TVA acquired approximately 93 percent of the power that it purchased through the long-term PPAs described below, including agreements for long-term renewable generation resources, and approximately seven percent on the spot market. Renewable Power Purchase Agreements. In order to meet customer preferences and requirements for cleaner and greener energy, TVA has entered into certain PPAs with renewable resource providers. As of September 30, 2020, TVA is contracted for 2,958 MW of summer net capability under renewable PPAs. These agreements are part of progressive partnerships that align the core values of TVA and the public power model with the desire of TVA's customers for renewable energy. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Changing Customer Preferences — Renewable Power Purchase Agreements. 16 Table of Contents A portion of TVA's capability provided by power purchase agreements is provided under contracts that expire between 2023 and 2043, and the most significant of these contracts are described in the table below. Power Purchase Contracts At September 30, 2020 Type of Facility Location Summer Net Capability (MW) Contract Termination Date Lignite Mississippi 440 2032 Natural gas Alabama 790 2033 Natural gas Alabama 735 2026 Solar Alabama 75 2037 Solar (1) Alabama 227 2041 Solar (2) Alabama 150 2042 Solar Tennessee 53 2039 Solar Tennessee 5 2032 Solar (2) Tennessee 147 2042 Solar (3) Tennessee 69 2038 Solar (3) Tennessee 100 2038 Solar (3) Tennessee 70 2038 Solar (3) Tennessee 35 2038 Solar (3) Tennessee 177 2043 Solar (3) Mississippi 200 2043 Landfill gas Tennessee 6 2031 Hydroelectric Tennessee and Kentucky 402 Upon three years' notice Wind Iowa 198 2031 Wind Iowa 101 2030 Wind Kansas 201 2032 Wind Kansas 165 2033 Wind Illinois 150 2032 Wind Illinois 200 2032 Wind Illinois 200 2033 Wind Tennessee 27 2025 Diesel Tennessee 23 2029 Diesel Tennessee 20 2032 Diesel Tennessee 8 2023 Diesel Tennessee 8 2028 Diesel Mississippi 20 2023 Diesel Mississippi 26 2028 Diesel Alabama 10 2028 Battery storage (3) Mississippi 50 2043 Notes (1) Power delivery is expected to commence in 2021. Of the four solar PPAs TVA signed in 2019, one of the counterparties failed to comply with the terms of its PPA. TVA terminated this 150 MW PPA in 2020, and it is excluded from the table above. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives — Changing Customer Preferences — Renewable Power Purchase Agreements . (2) Power delivery is expected to commence in 2022. (3) Power delivery is expected to commence in 2023. Under federal law, TVA is required to purchase energy from qualifying facilities (cogenerators and small power producers) at TVA's avoided cost of either generating this energy itself or purchasing this energy from another source. TVA fulfills this requirement through the Dispersed Power Production Program. As of September 30, 2020, there were 111 generation sources, with a combined qualifying capacity of 268 MW, whose power TVA purchases under this program. 17 Table of Contents Fuel Supply General TVA's consumption of various types of fuel depends largely on the demand for electricity by TVA's customers, the availability of various generating units, and the availability and cost of fuel. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Expenses. Nuclear Fuel Current Fuel Supply . Converting uranium to nuclear fuel generally involves four stages: the mining and milling of uranium ore to produce uranium concentrates; the conversion of uranium concentrates to uranium hexafluoride gas; the enrichment of uranium hexafluoride; and the fabrication of the enriched uranium hexafluoride into fuel assemblies. For its forward four-year (2021-2024) requirements, TVA currently has 100 percent of its uranium mining and milling, conversion services, enrichment services, and fabrication services requirements either in inventory or under contract with various suppliers. TVA anticipates being able to fill its needs beyond this period by normal contracting processes as market forecasts indicate that the fuel cycle components will be readily available. The net book value of TVA's nuclear fuel was $1.5 billion at both September 30, 2020 and 2019. See Note 15 — Risk Management Activities and Derivative Transactions — Counterparty Risk . TVA, the DOE, and certain nuclear fuel contractors have entered into agreements, referred to as the Down-blend Offering for Tritium ("DBOT"), that provide for the production, processing, and storage of low-enriched uranium that is to be made using surplus DOE highly enriched uranium and other uranium. Low-enriched uranium can be fabricated into fuel for use in a nuclear power plant. Production of the low-enriched uranium began in 2019 and is contracted to continue through September 2025. Beginning October 2025, contract activity will consist of storage and flag management. Flag management ensures that the uranium is free from foreign obligations, and unencumbered by policy restrictions, so that it can be used in connection with the production of tritium. Under the terms of the interagency agreement between the DOE and TVA, the DOE will reimburse TVA for a portion of the costs of converting the highly enriched uranium to low-enriched uranium. See Note 1 — Summary of Significant Accounting Policies — Down-blend Offering for Tritium for a more detailed discussion of the DBOT project. Low-Level Radioactive Waste. Certain materials and supplies used in the normal operation of nuclear electrical generating units are potentially exposed to low levels of radiation. TVA sends shipments of low-level radioactive waste to burial facilities in Clive, Utah and Andrews, Texas. TVA is capable of storing some low-level radioactive waste at its own facilities for an extended period of time, if necessary. Spent Nuclear Fuel. All three nuclear sites have dry cask storage facilities. Sequoyah will need additional capacity by 2028. Watts Bar will need additional capacity by 2041. Browns Ferry completed a project in early 2020 to build another independent spent fuel storage installation pad. To recover the cost of providing long-term, onsite storage for spent nuclear fuel, TVA filed a breach of contract suit against the U.S. in the Court of Federal Claims in 2001. As a result of this lawsuit and related agreements, TVA has collected approximately $340 million through 2020. Tritium-Related Services. TVA and the DOE are engaged in a long-term interagency agreement under which TVA will, at the DOE's request, irradiate tritium-producing burnable absorber rods ("TPBARs") to assist the DOE in producing tritium for the Department of Defense ("DOD"). This agreement, which ends in 2035, requires the DOE to reimburse TVA for the costs that TVA incurs in connection with providing irradiation services and to pay TVA an irradiation services fee at a specified rate per TPBAR over the period when irradiation occurs. In general, TPBARs are irradiated for one operating cycle, which lasts about 18 months. At the end of the cycle, TVA removes the irradiated rods and loads them into a shipping cask. The DOE then ships them to its tritium-extraction facility. TVA loads a fresh set of TPBARs into the reactor during each refueling outage. Irradiating the TPBARs does not affect TVA's ability to safely operate the reactors to produce electricity. TVA has provided irradiation services using only Watts Bar Unit 1 since 2003. Although the interagency agreement provides for irradiation services to be performed at Watts Bar and Sequoyah, TVA expects the Watts Bar site to provide sufficient capacity to fulfill this agreement in the near term. The DOE notified TVA of future increased needs for tritium requiring the use of a second reactor. In 2019, TVA received approval from the NRC for a license amendment to authorize the irradiation of TPBARs in Watts Bar Unit 2. TVA is projecting to begin tritium production in Watts Bar Unit 2 in the fall of 2021. Natural Gas and Fuel Oil During 2020, TVA purchased a significant amount of its natural gas requirements from a variety of suppliers under contracts with terms of up to four years and purchased substantially all of its fuel oil requirements on the spot market. The net book value of TVA's natural gas inventory was $19 million and $15 million at September 30, 2020 and 2019, respectively. The net book value of TVA's fuel oil inventory was $82 million at both September 30, 2020 and 2019. At September 30, 2020, 80 of the combustion turbines that TVA operates were dual-fuel capable, and TVA has fuel oil stored on each of these sites as a backup to natural gas. 18 Table of Contents TVA purchases natural gas from multiple suppliers on a daily, monthly, seasonal, and term basis. During 2020, daily, monthly, seasonal, and term contracts accounted for 26 percent, nine percent, 16 percent, and 49 percent of purchases, respectively. TVA plans to continue using contracts of various lengths and terms to meet the projected natural gas needs of its natural gas fleet. During 2020, TVA arranged for the transportation of natural gas on eight separate pipelines, with approximately 63 percent being transported on two pipelines. During 2020, TVA maintained a total of approximately 1,485,000 million British thermal unit(s) ("mmBtu") per day of firm transportation capacity on six major pipelines, with approximately 59 percent of total firm transportation capacity being maintained on two pipelines. TVA utilizes natural gas storage services at seven facilities with a total capacity of 7.25 billion per cubic feet ("Bcf") of firm service and 4.40 Bcf of interruptible service to manage the daily balancing requirements of the eight pipelines used by TVA, with approximately 62 percent of the total storage capacity being maintained at two facilities. During 2020, storage levels were generally maintained at between 40 and 80 percent of the maximum contracted capacity at each facility. As TVA's natural gas requirements grow, it is anticipated that additional storage capacity may need to be acquired to meet the needs of the generating assets. In 2021, TVA does not expect to add a significant amount of firm capacity to its storage portfolio. Coal Coal consumption at TVA's coal-fired generating facilities during 2020 and 2019 was approximately 11 million tons and 15 million tons, respectively. At September 30, 2020 and 2019, TVA had 30 days and 33 days of system-wide coal supply at full burn rate, respectively, with net book values of $152 million and $197 million, respectively. TVA utilizes both short-term and long-term coal contracts. During 2020, long-term contracts made up 71 percent of coal purchases, and short-term contracts accounted for the remaining 29 percent. TVA plans to continue using contracts of various lengths, terms, and coal quality to meet its expected consumption and inventory requirements. During 2020 and 2019, TVA purchased coal by basin as follows: 19 Table of Contents The following charts present the proportion of each delivery method TVA utilizes for its coal supply for the periods indicated: Total system coal inventories fluctuated significantly throughout the year. TVA began 2020 with average coal inventory levels and increased to high levels due to the mild winter, demand reduction resulting from the COVID-19 pandemic, and low natural gas prices. Inventory balances were significantly reduced during the summer peak months due to higher than forecasted load, nuclear outages, and natural gas outages. Transmission The TVA transmission system is one of the largest in North America. TVA's transmission system has 69 interconnections with 13 neighboring electric systems and delivered approximately 151 billion kWh of electricity to TVA customers in 2020. In carrying out its responsibility for transmission grid reliability in the TVA service area, TVA has operated with 99.999 percent reliability since 2000 in delivering electricity to customers. See Item 2, Properties — Transmission Properties . Pursuant to its Transmission Service Guidelines, TVA offers transmission services to eligible customers to transmit wholesale power in a manner that is comparable to TVA's own use of the transmission system. TVA has also adopted and operates in accordance with its published Transmission Standards of Conduct and separates its transmission function from its power marketing function. TVA also is subject to federal reliability standards that are set forth by the North American Electric Reliability Corporation ("NERC") and approved by FERC. See Regulation . Additional transmission upgrades may be required to maintain reliability. Upgrades may include enhancements to existing lines and substations or new installations as necessary to provide adequate power transmission capacity, maintain voltage support, and ensure generating plant and transmission system stability. In 2017, the TVA Board authorized a strategic fiber optic initiative of up to $300 million to be spent over the next 10 years, subject to annual budget availability and necessary environmental reviews, that will expand TVA's fiber capacity and improve the reliability and resiliency of the generation and transmission system. The network expansion is designed to help meet the power system's growing need for bandwidth as well as accommodate the integration of new DER. As of September 30, 2020, TVA had spent $121 million on installation of the fiber optic lines and expects to spend an additional $179 million. A new system operations center has been approved for $255 million. The new secured facility is being built to accommodate a new energy management system and to adapt to new regulatory requirements. The facility is expected to be constructed by 2022 and fully operational by 2024. As of September 30, 2020, TVA had spent approximately $37 million on the project and expects to spend an additional $218 million. Weather and Seasonality Weather affects both the demand for and the market prices of electricity. TVA's power system is generally a dual-peaking system in which the demand for electricity peaks during the summer and winter months to meet cooling and heating needs. TVA uses degree days to measure the impact of weather on its power operations. Degree days measure the extent to which the TVA system 23-station average temperatures vary from 65 degrees Fahrenheit. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Sales of Electricity. 20 Table of Contents Competition TVA provides electricity in a service area that is largely free of competition from other electric power providers. This service area is defined primarily by provisions of law and long-term contracts. The region in which TVA or LPCs that distribute TVA power may provide power is limited and is often referred to as "the fence." Under the Federal Power Act ("FPA"), the anti-cherrypicking provision limits the ability of others to use the TVA transmission system for the purpose of serving customers within TVA's service area. State service territory laws limit unregulated third parties' ability to sell electricity to consumers. All TVA wholesale power contracts are all requirements contracts; however, Flexibility Agreements available to LPCs that have executed long-term contracts with TVA allow LPCs to locally generate up to approximately five percent of average total hourly energy sales over the prior five years to meet their individual customers' needs. In addition, other utilities may use their own transmission lines to serve customers within TVA's service area, and third parties are able to avoid the restrictions on serving end-use customers by selling or leasing generating assets to a customer rather than selling electricity. These threats underscore the need for TVA to design rates and strategically price its products and services to be competitive. There have also been some efforts to erode the anti-cherrypicking provision, and the protection of the provision could be limited and perhaps eliminated by federal legislation at some time in the future. TVA also faces competition in the form of emerging technologies. Improvements in energy efficiency technologies, smart technologies, and energy storage technologies may reduce the demand for centrally provided power. The growing interest by customers in generating their own power through DER has the potential to lead to a reduction in the load served by TVA as well as cause TVA to re-evaluate how it operates the overall grid system to continue to provide highly reliable power at affordable rates. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Distributed Energy Resources. Finally, TVA and other utility companies are facing an evolving marketplace of increased competition driven by customer choice and behavior. As technology develops, consumers' demands for access to diverse products and services may increase, creating opportunities for growth with new products and services resulting from emerging technologies. Research and Development Investments in TVA's research portfolio are supported through partnership and collaboration with LPCs, EPRI, the DOE, federal agencies, national labs, peer utilities, universities, and industry vendors and through participation in professional societies and other research consortiums. Annual investments made in science and technological innovation help meet future business and operational challenges. Each year, TVA's annual research portfolio is updated based on a broad range of operational and industry drivers to assess key technology gaps, performance issues, or other significant issues, addressed through research and development. Core research activities directly support optimization of TVA's generation and transmission assets, air and water quality, energy utilization, and distributed/clean energy integration. TVA also provides research and development services on behalf of LPCs by helping optimize their distribution systems and helping minimize technology gaps in energy utilization and consumer technologies. TVA's research program is also focused on enabling transformational innovation. At the forefront is deploying grid-scale battery energy storage technology to optimize the existing TVA generation assets and improve the resiliency of the transmission system. In 2020, TVA launched its first TVA-owned, grid scale, lithium-ion demonstration battery project. The system integration learnings from this project will guide future application of battery storage as part of the evolving bulk power system in the region. Additionally, TVA has joined a coalition of utilities and researchers, led by EPRI and Gas Technology Institute, whose purpose is to engage, inform, and support global low-carbon resources initiatives to develop the pathways for the advancement of carbon reducing technologies for large scale utility deployment. This is a five-year program and includes research to optimize the utilization of clean DER as part of the overall low-carbon resource mix. TVA evaluates emerging energy efficiency and load management technologies for market and program readiness. Efforts are directed towards demonstrating and validating the performance, reliability, and consumer acceptance of new efficiency technologies, as well as the value of energy efficiency and load management technologies for the consumer, LPCs, and TVA. TVA is assessing potential electrification programs that improve resource use and reduce environmental impacts (especially in the transportation sector). Assessments include a multi-stakeholder vision and roadmap effort aimed at identifying the path forward for electric vehicles in Tennessee. The approach provides for broad engagement from industry, government, and utilities that could be applied in other states in the TVA service territory. In addition, TVA is continuing its evaluation of potential electric vehicle adoption strategies through coordination of activities with EPRI and industry stakeholders related to operational fleet requirements. Additional areas of focus include LPC engagement on plug-in electric vehicle grid integration and readiness for various transportation electrification technologies. In addition, research continues in electrification applications on charging stations, impacts from charging stations to the power grid, refinement of power-system control processes, and development of smart charging strategies to maximize the potential of electricity to replace petroleum as the transportation fuel of choice. 21 Table of Contents Finally, TVA and LPCs engage in several initiatives related to grid modernization. Research includes technologies and applications advancement in intelligent transmission and distribution systems. Smart meter technology has the potential to shift usage patterns away from peak demand times which could change costs significantly. Additionally, intelligent transmission systems would give TVA the ability to nearly instantaneously diagnose problems, make corrections, and engage transmission and generation resources quickly so that power would keep flowing. This could promote reduced emissions, lower energy costs, and add greater flexibility to accommodate the new consumer-generated sources under TVA's renewable energy programs. See Power Supply and Load Management Resources — Distributed Energy Resources . Flood Control Activities The Tennessee River watershed has one of the highest annual rainfall totals of any watershed in the U.S., averaging 51 inches per year. During 2020, approximately 76 inches of rain fell in the Tennessee Valley. TVA manages the Tennessee River system in an integrated manner, balancing hydroelectric generation with navigation, flood damage reduction, water quality and supply, and recreation. TVA spills or releases excess water through its dams in order to reduce flood damage to the Tennessee Valley. TVA typically spills only when all available hydroelectric generating turbines are operating at full capacity and additional water still needs to be moved downstream. The Tennessee Valley experienced above normal rainfall during 2020, setting a new record for the wettest October through September period in TVA's history. Despite significant rainfall, runoff, and flooding during the period, TVA continued to generate low-cost hydroelectric power while meeting its river system commitments, including flood mitigation, which prevented approximately $1.0 billion in damages across the Tennessee Valley. Environmental Stewardship Activities TVA's mission includes managing the Tennessee River, its tributaries, and federal lands along the shoreline to provide, among other things, year-round navigation, flood damage reduction, affordable and reliable electricity, recreational opportunities, adequate water supply, improved water quality, and natural resource protection. There are 49 dams that comprise TVA's integrated reservoir system. Each dam may also have ancillary structures used to support or assist the main dam's function. The reservoir system provides approximately 800 miles of commercially navigable waterways and also provides significant flood reduction benefits both within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers. The reservoir system also provides a water supply for residential and industrial customers, as well as cooling water for TVA's coal-fired plants, combined cycle plants, and nuclear power plants. In May 2020, the TVA Board approved a new Environmental Policy. TVA's updated policy provides objectives for an integrated approach related to providing reliable, affordable, and increasingly clean energy; engaging in proactive stewardship of the Tennessee River system and public lands; and supporting sustainable economic growth. The Environmental Policy also provides additional direction in several environmental stewardship areas related to reducing environmental impacts on the Valley's natural resources, including reducing carbon intensity and air emissions; minimizing waste; and protecting water resources, biodiversity, and cultural resources. TVA serves the people of the TVA region through the integrated management of the Tennessee River system and public lands, which include approximately 11,000 miles of shoreline; 650,000 surface acres of reservoir water; and 293,000 acres of reservoir lands. TVA accomplishes this mission and supports the objectives of the TVA Environmental Policy through implementation of its natural resources stewardship strategy. Within this strategy, TVA confirms a desire to remain agile, balance competing demands, and be a catalyst for collaboration in order to protect and enhance biological, cultural, and water resources as well as create and sustain destinations for recreation and opportunities for learning and research. As part of the strategy, TVA intends to assist water-based community development with issuing permits, technical support, and land agreements using planning, clear regulations, meaningful guidelines, and consistent enforcement. Additional guidance for carrying out many of TVA's essential stewardship responsibilities is provided in TVA's Natural Resource Plan ("NRP") . In May 2020, the TVA Board of Directors accepted changes to TVA's NRP to support a more strategic, flexible, and comprehensive management approach to TVA's natural resource stewardship work. TVA published its Record of Decision to complete its environmental review process in July 2020. The updated plan enhances alignment with TVA's mission through economic development, energy, and environmental stewardship and guides business planning. In the newly published NRP, TVA expanded from six resource areas to ten focus areas, ensuring the NRP provides a more comprehensive view of resource stewardship efforts. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Natural Resource Plan . Economic Development Activities Economic development, along with energy production and environmental stewardship, is one of the primary statutory purposes of TVA. Economic development programs developed by TVA support all communities, including rural and economically distressed communities, across the Tennessee Valley . Through its economic development activities, TVA endeavors to recruit and retain companies in targeted business sectors, foster capital investment and job growth, and assist communities in the Tennessee Valley with economic growth opportunities. TVA seeks to achieve these goals through a combination of initiatives and partnerships with LPCs, regional, state, and local agencies, and communities by providing financial incentives, technical services, industry expertise, and site-selection 22 Table of Contents assistance to new and existing businesses in the Tennessee Valley. TVA's economic development incentive programs offer competitive incentives to new and existing power customers in certain business sectors that make multi-year commitments to invest in the Tennessee Valley. In addition to providing financial support to businesses, TVA offers communities and economic developers site selection services, technical and project development assistance, and leadership training services. In 2020, TVA's economic development efforts helped recruit or expand 188 companies into the TVA service area. These companies announced capital investments of over $8.6 billion and expect to create and/or retain approximately 67,000 jobs. Regulation TVA is required to comply with comprehensive and complex laws, regulations, and orders. The costs of complying with these laws, regulations, and orders are expected to be substantial, and costs could be significantly more than TVA anticipates. Congress TVA exists pursuant to the TVA Act as enacted by Congress and carries on its operations in accordance with this legislation. Congress can enact legislation expanding or reducing TVA's activities, change TVA's structure, and even eliminate TVA. Congress can also enact legislation requiring the sale of some or all of the assets TVA operates or reduce the U.S.'s ownership in TVA. To allow TVA to operate more flexibly than a traditional government agency, Congress exempted TVA from all or parts of certain general federal laws that govern other agencies, such as federal labor relations laws and the laws related to the hiring of federal employees, the procurement of supplies and services, and the acquisition of land. Other federal laws enacted since the creation of TVA that are applicable to other agencies have been made applicable to TVA, including those related to paying employees overtime and protecting the environment, cultural resources, and civil rights. Securities and Exchange Commission Section 37 of the Securities Exchange Act of 1934 (the "Exchange Act") requires TVA to file with the SEC such periodic, current, and supplementary information, documents, and reports as would be required pursuant to Section 13 of the Exchange Act if TVA were an issuer of a security registered pursuant to Section 12 of the Exchange Act. Section 37 of the Exchange Act exempts TVA from complying with Section 10A(m)(3) of the Exchange Act, which requires each member of a listed issuer's audit committee to be an independent member of the board of directors of the issuer. Since TVA is an agency and instrumentality of the U.S., securities issued or guaranteed by TVA are "exempted securities" under the Securities Act of 1933, as amended (the "Securities Act"), and may be offered and sold without registration under the Securities Act. In addition, securities issued or guaranteed by TVA are "exempted securities" and "government securities" under the Exchange Act. TVA is also exempt from Sections 14(a)-(d) and 14(f)-(h) of the Exchange Act (which address proxy solicitations) insofar as those sections relate to securities issued by TVA, and transactions in TVA securities are exempt from rules governing tender offers under Regulation 14E of the Exchange Act. Also, since TVA securities are exempted securities under the Securities Act, TVA is exempt from the Trust Indenture Act of 1939 insofar as it relates to securities issued by TVA, and no independent trustee is required for these securities. Federal Energy Regulatory Commission Under the FPA, TVA is not a "public utility," a term which primarily refers to investor-owned utilities. Therefore, TVA is not subject to the full jurisdiction that FERC exercises over public utilities under the FPA. TVA is, however, an "electric utility" and a "transmitting utility" as defined in the FPA and, thus, is directly subject to certain aspects of FERC's jurisdiction. Under the FPA, for example, TVA (1) must comply with certain standards designed to maintain transmission system reliability; (2) can be ordered to interconnect its transmission facilities with the electrical facilities of independent generators and of other electric utilities that meet certain requirements; (3) can be ordered to transmit wholesale power provided that the order (a) does not impair the reliability of the TVA or surrounding systems, (b) meets the applicable requirements concerning terms, conditions, and rates for service, and (c) does not implicate the anti-cherrypicking provision; (4) is subject to FERC review of the transmission rates and the terms and conditions of service that TVA provides; and (5) is prohibited from (a) reporting false information on the price of electricity sold at wholesale or the availability of transmission capacity to a federal agency with intent to fraudulently affect the data being compiled by the agency and (b) using manipulative or deceptive devices or contrivances in connection with the purchase or sale of power or transmission services subject to FERC's jurisdiction. In addition, the FPA provides FERC with authority (1) to order refunds of excessive prices on short-term sales (transactions lasting 31 days or less) by all market participants, including TVA, in price gouging situations if such sales are through an independent system operator or regional transmission organization under a FERC-approved tariff; (2) to issue regulations requiring the reporting, on a timely basis, of information about the availability and prices of wholesale power and transmission service by all market participants, including TVA; (3) to investigate electric industry practices, including TVA's operations that are subject to FERC's jurisdiction; and (4) to impose civil penalties of up to $1 million per day for each violation of the provisions of the FPA discussed in the prior paragraph that are applicable to TVA. Criminal penalties may also result from such violations. Finally, while not required to do so, TVA has elected to implement various FERC orders and regulations pertaining to 23 Table of Contents public utilities on a voluntary basis to the extent that they are consistent with TVA's obligations under the TVA Act. NERC Compliance TVA is subject to federal reliability standards that are set forth by NERC and approved by FERC. These standards are designed to maintain the reliability of the bulk electric system, including TVA's generation and transmission system, and include areas such as maintenance, training, operations, planning, modeling, critical infrastructure, physical and cyber security, vegetation management, and facility ratings. TVA recognizes that reliability standards and expectations continue to become more complex and stringent for transmission systems. Nuclear Regulatory Commission TVA operates its nuclear facilities in a highly regulated environment and is subject to the oversight of the NRC, an independent federal agency that sets the rules that users of radioactive materials must follow. The NRC has broad authority to impose requirements relating to the licensing, operation, and decommissioning of nuclear generating facilities. In addition, if TVA fails to comply with requirements promulgated by the NRC, the NRC has the authority to impose fines, shut down units, or modify, suspend, or revoke TVA's operating licenses. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources. Environmental Protection Agency TVA is subject to regulation by the EPA in a variety of areas, including air quality control, water quality control, and management and disposal of solid and hazardous wastes. See Environmental Matters below and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges. States The Supremacy Clause of the U.S. Constitution prohibits states, without federal legislative consent, from regulating the manner in which the federal government conducts its activities. As a federal agency, TVA is exempt from regulation, control, and taxation by states except in certain areas where Congress has clearly made TVA subject to state regulation. See Environmental Matters below. Other Federal Entities TVA's activities and records are also subject to review to varying degrees by other federal entities, including the Government Accountability Office and the Office of Management and Budget ("OMB"). There is also an Office of the Inspector General which reviews TVA's activities and records. Taxation and Tax Equivalents TVA is not subject to federal income taxation. In addition, neither TVA nor its property, franchises, or income is subject to taxation by states or their subdivisions. The TVA Act, however, does require TVA to make tax equivalent payments to states and counties in which TVA conducts power operations or in which TVA has acquired properties previously subject to state and local taxation. The total amount of these payments is five percent of gross revenues from the sale of power during the preceding year excluding sales or deliveries to other federal agencies and off-system sales with other utilities, with a provision for minimum payments under certain circumstances. Except for certain direct payments TVA is required to make to counties, distribution of tax equivalent payments within a state is determined by individual state legislation. Environmental Matters TVA's activities, particularly its power generation activities, are subject to comprehensive regulation under environmental laws and regulations relating to air pollution, water pollution, and management and disposal of solid and hazardous wastes, among other matters. Emissions from all TVA-owned and operated units (including small combustion turbine units of less than 25 MW) have been reduced from historic peaks. Emissions of nitrogen oxide ("NO x ") have been reduced by 96 percent below peak 1995 levels and emissions of sulfur dioxide ("SO 2 ") have been reduced by 99 percent below 1977 levels through CY 2019. For CY 2019, TVA's emission of carbon dioxide ("CO 2 ") from its sources was 47 million tons, a 55 percent reduction from 2005 levels. This amount includes 2,383 tons from units rated at less than 25 MW. To remain consistent and to align with the EPA's reporting requirements, TVA intends to continue reporting CO 2 emissions on a calendar year basis. Clean Air Act The Clean Air Act ("CAA") establishes a comprehensive program to protect and improve the nation's air quality and control sources of air pollution. The major CAA programs that affect TVA's power generation activities are described below. 24 Table of Contents National Ambient Air Quality Standards. The CAA requires the EPA to set National Ambient Air Quality Standards ("NAAQS") for certain air pollutants. The EPA has done this for ozone, particulate matter ("PM"), SO 2 , nitrogen dioxide, carbon monoxide, and lead. Over the years, the EPA has made the NAAQS more stringent. Each state must develop a plan to be approved by the EPA for achieving and maintaining NAAQS within its borders. These plans impose limits on emissions from pollution sources, including TVA fossil fuel-fired plants. Areas meeting a NAAQS are designated as attainment areas. Areas not meeting a NAAQS are designated as non-attainment areas, and more stringent requirements apply in those areas, including stricter controls on industrial facilities and more complicated permitting processes. TVA fossil fuel-fired plants can be impacted by these requirements. All TVA generating units are located in areas designated as in attainment with NAAQS. Cross-State Air Pollution Rule. The EPA issued the Cross-State Air Pollution Rule ("CSAPR") in July 2011 requiring several states in the eastern U.S. to improve air quality by reducing power plant emissions that contribute to pollution in other states. In 2016, the EPA issued an update to CSAPR to address cross-state air pollution (the "CSAPR Update Rule"). The EPA subsequently issued an additional rule to resolve any remaining cross-state air pollutant issues ("CSAPR Close-Out Rule"). The U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") has remanded a portion of the CSAPR Update Rule back to the EPA to address its failure to require upwind states to eliminate substantial contributions to downwind non-attainment areas by the statutory deadline. The D.C. Circuit also vacated the CSAPR Close-Out Rule. On October 15, 2020, the EPA proposed revisions to the CSAPR Update Rule to address the court's remand, which must be finalized by March 2021. On October 30, 2020, the EPA published the proposed rule in the Federal Register. TVA is currently analyzing the proposed rule to determine whether its provisions could affect operations. Mercury and Air Toxics Standards for Electric Utility Units . On April 16, 2020, the EPA issued a final rule which revokes the agency's earlier finding that regulation of hazardous air pollutants ("HAP") emitted from steam electric utilities is appropriate and necessary. The rule does not remove electric generating units from the source categories listed under Section 112 of the CAA nor does it rescind the Mercury and Air Toxics Standards ("MATS") requirements. Additionally, the EPA determined that further restrictions on HAP emissions are not warranted based on a residual risk and technology review for this source category. TVA does not anticipate that the final rule will change TVA's MATS compliance requirements or strategy. Certain states and environmental groups have filed petitions in the D.C. Circuit challenging the EPA's finding that regulating HAPs from electric generating units is not appropriate and necessary. TVA cannot predict the outcome of these judicial petitions at this time. Environmental Agreements. See Note 22 — Commitments and Contingencies — Legal Proceedings — Environmental Agreements for a discussion of the Environmental Agreements, which discussion is incorporated herein by reference. Acid Rain Program. The Acid Rain Program is intended to help reduce emissions of SO 2 and NO x , which are the primary pollutants implicated in the formation of acid rain. The program includes a cap-and-trade emission reduction program for SO 2 emissions from power plants. TVA continues to reduce SO 2 and NO x emissions from its coal-fired plants, and the SO 2 allowances allocated to TVA under the Acid Rain Program are sufficient to cover the operation of its coal-fired plants. In the TVA service area, the limitations imposed on SO 2 and NO x emissions by the CSAPR program are more stringent than the Acid Rain Program. Therefore, TVA does not anticipate that the Acid Rain Program will impose any additional material requirements on TVA. Regional Haze Program . The EPA issued the Clean Air Visibility Rule, which required certain older sources to install best available retrofit technology. No additional controls or lower operating limits are required for any TVA units to meet best available retrofit technology requirements. In January 2017, the EPA published the final rule that changed some of the requirements for Regional Haze State Implementation Plans ("SIPs"). Specific impacts cannot be determined until future Regional Haze SIPs are developed for the next decennial review under the visibility haze provisions of the CAA. States must submit their Regional Haze SIPs to the EPA by July 31, 2021. Opacity. Opacity, or visible emissions, measures the denseness (or color) of power plant plumes and has traditionally been used by states as a means of monitoring good maintenance and operation of particulate control equipment. Under some conditions, retrofitting a unit with additional equipment to better control SO 2 and NO x emissions can adversely affect opacity performance, and TVA and other utilities have addressed this issue. The evaluation of utilities' compliance with opacity requirements is coming under increased scrutiny, especially during periods of startup, shutdown, and malfunction. Historically, SIPs developed under the CAA typically excluded periods of startup, shutdowns, and malfunctions, but in June 2015, the EPA finalized a rule to eliminate such exclusions. The EPA rule required states to modify their implementation plans by November 2016. Kentucky, Tennessee, and Mississippi submitted implementation plans, but Alabama has not. Environmental petitioners and several states filed petitions for judicial review of the EPA final rule before the D.C. Circuit. In April 2017, the D.C. Circuit, at the request of the new EPA Administrator, ordered this litigation to be suspended pending the EPA's review to determine whether to reconsider all or part of the rule. TVA does not expect significant impacts from these rule changes. New York Petition to Address Impacts from Upwind High Emitting Sources . In March 2018, the State of New York filed a petition with the EPA under Section 126(b) of the CAA to address ozone impacts on New York from the NO x emissions from sources emitting at least 400 tons of NO x in CY 2017 from nine states including Kentucky. The New York petition requests that the EPA require daily NO x limits for utility units with selective catalytic reduction systems ("SCRs") such as Shawnee Units 1 and 4 and emission reductions from utility units without SCRs such as Shawnee Units 2, 3, and 5-9. Kentucky utility unit NO x emissions are already limited by the CSAPR Update Rule and are declining, and current EPA modeling projects no additional 25 Table of Contents requirements to reduce Kentucky NO x emissions are necessary. In September 2019, the EPA finalized its denial of New York's petition because the state did not demonstrate, and the EPA could not independently establish, that sources in the states listed in the petition contribute to exceedances of the 2008 and 2015 ozone NAAQS in New York. The State of New York filed a petition in the D.C. Circuit for judicial review of the EPA's denial of the petition. On July 14, 2020, the D.C. Circuit vacated the EPA's denial of the petition and remanded the petition to the EPA for reconsideration. Specific impacts to TVA cannot be determined until the EPA takes further action on the petition. Affordable Clean Energy Rule . In June 2019, the EPA finalized the final Affordable Clean Energy ("ACE") rule and repealed the EPA's previous regulation addressing greenhouse gas ("GHG") emissions from existing fossil fuel-fired units. The ACE rule establishes guidelines for GHG emissions from existing coal-fired units based on efficiency improvements that can be achieved at those units at reasonable cost. States are required to apply the emission guidelines to coal-fired units within their respective jurisdictions and take into account the remaining useful lives of those units. The impact of the ACE rule on TVA's coal-fired units cannot be determined until Tennessee and Kentucky submit to the EPA their SIPs implementing guidelines in the ACE rule and the EPA approves these SIPs. The ACE rule allows states three years to submit their SIPs and allows the EPA 18 months for approval. In addition, lawsuits challenging the ACE rule are pending in the D.C. Circuit, and the outcome of the litigation could change requirements under the ACE rule and modify the timeline for compliance. New Source Performance Standards . In December 2018, the EPA proposed revisions to the GHG emission standards for new, modified, and reconstructed electric utility generating units that were finalized by the EPA in October 2015. For coal-fired units, the EPA proposes to revise the current new source standards such that carbon capture and sequestration technology is no longer necessary to meet the standards of performance that reflect the best system of emission reduction. The resulting limits are less stringent than limits under the current rule and can be met by modern coal-fired units (e.g., supercritical steam generators) in combination with best operating practices, but without carbon capture and sequestration. The EPA is not proposing to revise the new source performance standard for GHG emission from gas-fired units. If finalized as proposed, the revisions are not expected to significantly impact TVA since TVA does not currently plan to construct, modify, or reconstruct any coal-fired units. Maryland Petition to Address Impacts from Upwind Electric Generating Units . In September 2017, the State of Maryland filed a lawsuit against the EPA for failing to act within 60 days on Maryland's petition under Section 126 of the CAA to address ozone impacts on Maryland from the NO x emissions of 36 electric generating units, including TVA's Paradise coal-fired Unit 3. The EPA denied the petition for electric generating units with SCR units because existing regulations already address emissions from such units. In addition, the EPA denied the petition with respect to electric generating units with non-catalytic controls because of cost. In October 2018, the State of Maryland filed a petition for judicial review with the D.C. Circuit, and on May 19, 2020, the D.C. Circuit remanded the EPA's denial of the petition back to the EPA with respect to the operation of four units with non-catalytic controls. With the retirement of Paradise Unit 3 on February 1, 2020, the partial remand of the petition to the EPA will not affect TVA. Climate Change Executive Actions. In March 2017, President Trump issued Executive Order ("EO") 13783, "Promoting Energy Independence and Economic Growth." The EO reversed or altered many actions taken by the federal government in the last four years of the Obama Administration to address climate change and mandates that federal agencies review existing regulations and actions that potentially burden energy development and use. Several EOs, policy statements, and reports that established climate change objectives were rescinded or revoked. EO 13783 did not mandate that the EPA reconsider its finding under the CAA that GHG emissions cause climate change and therefore endanger public health and the environment. Implementation of EO 13783 has resulted in the replacement of the Clean Power Plan rule for existing fossil generation units by the ACE rule and revisions to the GHG emission standards for new, modified, and reconstructed electric utility generating units. The impact of the ACE rule and the GHG emission standards are discussed above. In May 2018, EO 13834, "Efficient Federal Operations," was signed. EO 13834 emphasizes meeting statutory requirements and gives agencies greater flexibility and discretion to decide how best to improve operations in order to "optimize energy and environmental performance, reduce waste, and cut costs." It also calls on the White House Council of Environmental Quality to streamline pre-existing environmental orders by "refocusing agencies on cost-effectively meeting mandates and goals" established by law. The order seeks to consolidate requirements related to energy and water efficiency, high performance buildings, renewable energy consumption, and federal vehicle fleet management. TVA consistently seeks to improve its operations in order to optimize energy and environmental performance and does not anticipate significant changes in its planning or operations as a result of the EO. International Accords . In September 2016, the U.S. formally accepted the Paris Agreement. The agreement met the threshold of at least 55 countries that account for at least 55 percent of global GHG emissions and formally entered into force in November 2016. On November 4, 2019, the U.S. formally notified the United Nations that it would withdraw from the agreement. Under the terms of the agreement, the effective date for the withdrawal was November 4, 2020. Specific impacts to TVA cannot be determined at this time. 26 Table of Contents In response to President Trump's Paris withdrawal announcement, 25 states have formed the U.S. Climate Alliance, a bipartisan coalition of governors committed to reducing GHG emissions consistent with the goals of the Paris Agreement. North Carolina and Virginia are the only states in the TVA region that are U.S. Climate Alliance members. Among other commitments, each state commits to implement policies that advance the goals of the Paris Agreement, aiming to reduce GHG emissions by at least 26-28 percent below CY 2005 levels by CY 2025 and to accelerate new and existing policies to reduce carbon pollution and promote clean energy deployment at the state and federal level. In June 2017, U.S. states, cities, and businesses representing more than half of the U.S. economy made a pledge to meet the GHG reduction targets of the Paris Agreement, called "America's Pledge." In September 2020, America's Pledge released its second economy-wide policy analysis with recommendations of how states, cities, businesses, and other stakeholders can influence U.S. decarbonization. It is premature to determine potential impacts to TVA. Litigation . In addition to legislative activity, climate change issues have been the subject of a number of lawsuits, including lawsuits against TVA. See Note 22 — Commitments and Contingencies for additional information. Indirect Consequences of Regulation or Business Trends . Legal, technological, political, and scientific developments regarding climate change may create new opportunities and risks. The potential indirect consequences could include an increase or decrease in electricity demand, increased demand for generation from alternative energy sources, and subsequent impacts to business reputation and public opinion. See Power Supply and Load Management Resources above . Physical Impacts of Climate Change. TVA's Climate Change Adaptation Plan was last updated in July 2020. The goal of the adaptation planning process is to ensure TVA continues to achieve its mission and program goals and to operate in a secure, effective, and efficient manner in a changing climate by integrating climate change adaptation efforts in coordination with state and local partners, tribal governments, and private stakeholders. TVA manages the potential effects of climate change on its mission, programs, and operations within its environmental management processes. Actions Taken by TVA to Reduce GHG Emissions . TVA has reduced GHG emissions from both its generation stations and its operations. Recent TVA Board actions have focused on TVA's plan to balance its coal-fired generation by increasing its nuclear capacity, modernizing its hydroelectric generation system, increasing natural gas-fired generation, installing emission control equipment on certain of its coal-fired units, increasing its purchases of renewable energy, building solar facilities, and investing in energy efficiency initiatives to reduce energy use in the Tennessee Valley. Additionally, TVA has invested to increase energy efficiency in its operations. The combination of more stringent environmental regulations, lower natural gas prices, and lower demand for energy across the Tennessee Valley has reduced the utilization of coal-fired generation. These factors have resulted in lower CO 2 emissions from the TVA system, as previously discussed in this section. Renewable/Clean Energy Standards Twenty-nine states and the District of Columbia have established enforceable or mandatory requirements for electric utilities to generate a certain amount of electricity from renewable sources. One state within the TVA service area, North Carolina, has a mandatory renewable standard that, while not applying directly to TVA, does apply to TVA's LPCs serving retail customers in that state. TVA's policy is to provide compliance assistance to any distributor of TVA power, and TVA is providing assistance to the covered LPCs that sell TVA power in North Carolina. In 2020, Virginia signed into law the Clean Economy Act. The Act establishes a mandatory requirement for utilities to generate a certain amount of electricity from renewable sources. At this time, TVA is not impacted by the legislation due to the relatively small amount of electricity that TVA provides in Virginia compared to other utilities. Likewise, the Mississippi Public Service Commission adopted an energy efficiency rule applying to electric and natural gas providers in the state, and TVA is supplying information on participation in TVA's energy efficiency programs to support the covered Mississippi LPCs. Water Quality Control Developments Cooling Water Intake Structures. In May 2014, the EPA released a final rule under Section 316(b) of the Clean Water Act relating to cooling water intake structures ("CWIS") for existing power generating facilities. The rule requires changes in CWIS used to cool the vast majority of coal, gas, and nuclear steam-electric generating plants and a wide range of manufacturing and industrial facilities in the U.S. The final rule requires CWIS to reflect the best technology available for minimizing adverse environmental impacts, primarily by reducing the amount of fish and shellfish that are impinged or entrained at a cooling water intake structure. These new requirements will potentially affect a number of TVA's fossil- and nuclear-fueled facilities and will likely require capital upgrades to ensure compliance. Most TVA facilities are projected to require retrofit of CWIS with "fish-friendly" screens and fish return systems to achieve compliance with the new rule. The rule is being implemented through permits issued under the National Pollutant Discharge Elimination System ("NPDES") in Section 402 of the Clean Water Act. State agencies administer the NPDES permit program in most states including those in which TVA's facilities are located. In addition, the responsible state agencies must provide all permit applications to the U.S. Fish and Wildlife Service for a 60-day review prior to public notice and an opportunity to comment during the public notice. As a result, the permit may include requirements for additional studies of threatened and endangered species arising from U.S. Fish and Wildlife Service comments and may require additional measures be taken to protect threatened and endangered species and critical habitats directly or indirectly related to the plant cooling water intake. TVA's review of the final rule indicates that the rule offers adequate flexibility for cost-effective compliance. The required compliance timeframe is linked to plant-specific NPDES permit renewal 27 Table of Contents cycles (i.e., technology retrofits), and compliance is expected to be required in the CYs 2022-2024 timeframe. The EPA has never applied the requirements under Section 316(b) to hydroelectric facilities. However, two EPA regions that do not cover TVA's activities are proposing to include Section 316(b) requirements in NPDES permits for hydroelectric facilities in those regions that withdraw water used for cooling purposes. It is not clear whether the requirements will be adopted nationwide or, given the unique features of hydroelectric facilities and the manner in which they withdraw water for cooling purposes, how the best technology available standard would be applied to TVA's hydroelectric facilities. The specific impacts to TVA from this potential policy change cannot be determined at this time. Hydrothermal Discharges. The EPA and many states continue to focus regulatory attention on potential effects of hydrothermal discharges. Many TVA plants have variances from thermal standards under Section 316(a) of the Clean Water Act that are subject to review as NPDES permits are renewed. Specific data requirements in the future will be determined based on negotiations between TVA and state regulators. If plant thermal limits are made more stringent, TVA may have to install cooling towers at some of its plants and operate installed cooling towers more often. This could result in a substantial cost to TVA. Steam-Electric Effluent Guidelines . In 2015, the EPA revised existing steam-electric effluent limitation guidelines ("ELGs"), which regulate water discharge pollutants and require the application of certain pollutant control technologies. The 2015 ELGs established more stringent performance standards for existing and new sources and required major upgrades to wastewater treatment options at all coal-fired plants. Compliance with new requirements was originally required in the CYs 2018-2023 timeframe, but the EPA delayed the compliance dates for flue gas desulfurization ("FGD") wastewater and bottom ash transport water until CYs 2020-2023 to allow the EPA time to review and potentially revise the ELGs with regard to these waste streams. In August 2017, the EPA Administrator announced his decision to conduct a rulemaking to potentially revise the new, more stringent effluent limitations that apply to bottom ash transport water and FGD wastewater in the 2015 ELG rule. In April 2019, the U.S. Court of Appeals for the Fifth Circuit ("Fifth Circuit") remanded portions of the 2015 ELG rule because it determined that some of the standards did not comply with statutory requirements. The EPA proposed revised ELGs for bottom ash transport water and FGD wastewater on November 4, 2019, but did not address the portions of the ELG that were remanded by the Fifth Circuit. The final ELGs were published on October 13, 2020. The primary impact for TVA is on the operation of existing coal-fired generation facilities. The revised ELGs will impact long-term investment decisions relative to the long-term compliance and operability of these plants. The revisions may require TVA to install additional wastewater treatment systems for FGD wastewater and bottom ash transport water, and TVA could incur substantial costs to comply with the new rule. The revision also includes a subcategory for which the Cumberland Fossil Plant ("Cumberland") would qualify that provides TVA greater flexibility in meeting the ELGs. The revision includes two additional subcategories for low utilization units and units that cease coal combustion by the end of 2028. TVA will evaluate the applicability of those subcategories to its plants as appropriate. Litigation on the final rule is anticipated which introduces additional uncertainty in what will be required at each facility. Other Clean Water Act Requirements . As is the case in other industrial sectors, TVA and other utilities are also facing more stringent requirements related to the protection of wetlands, reductions in storm water impacts from construction activities, new water quality criteria for nutrients and other pollutants, new wastewater analytical methods, and changes in regulation of pesticide application. Recent Clean Water Act Decisions On April 23, 2020, in County of Maui v. Hawaii Wildlife Fund , the Supreme Court held that the Clean Water Act requires a permit when there is a direct discharge of pollutants from a point source to waters of the U.S. and when there is "the functional equivalent" of a direct discharge to such waters. The Court suggested seven factors for determining when such a discharge is the functional equivalent of a direct discharge and acknowledged that the new test would be somewhat difficult to apply, potentially requiring evaluation of multiple factors. The Court noted that "time and distance" of pollutant migration often will be the most important factor but that other relevant factors may include, for example, the nature of the material through which the pollutant travels and the extent to which the pollutant is diluted or chemically changed as it travels. TVA is evaluating what potential impact the decision and application of the test could have on its operations. On April 15, 2020, in Northern Plains Resource Council v. U.S. Army Corps of Engineers , the U.S. District Court for the District of Montana ("District Court of Montana") vacated the Nationwide Permit ("NWP") 12, which authorizes discharges of dredged or fill material into waters of the U.S., and enjoined the U.S. Army Corps of Engineers from authorizing projects nationwide under the permit. The District Court of Montana subsequently amended its order on May 11, 2020, to allow NWP 12 to remain in place pending appeal for non-pipeline construction projects. The Supreme Court further granted a stay of the decision on July 6, 2020, allowing NWP 12 to remain in place for all pipeline construction projects except the Keystone XL pipeline. Consequently, the District Court of Montana's decision vacating NWP 12 does not have an immediate effect on TVA; however, unless the District Court of Montana's decision is reversed on appeal, there remains a risk that NWP 12 will not be available for TVA projects in the future. On September 15, 2020, the U.S. Army Corps of Engineers published a notice of proposed rulemaking in the Federal Register for the reissuance and modification of NWPs, including NWP 12. The notice also 28 Table of Contents included a proposal to limit the applicability of NWP 12 to oil and natural gas pipelines, modify certain pre-construction notification requirements, and create new NWPs for certain utility line activities. The proposed rule is unlikely to have a material impact on TVA, but the impact cannot be evaluated until the proposed rule is finalized and any related litigation is resolved. Cleanup of Solid and Hazardous Wastes Liability for releases and cleanup of hazardous substances is imposed under the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), and other federal and parallel state statutes. In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years. TVA Sites. TVA operations at some of its facilities have resulted in releases of contaminants that TVA is addressing including at TVA's Environmental Research Center at Muscle Shoals, Alabama. At September 30, 2020, TVA's estimated liability for cleanup and similar environmental work for those sites for which sufficient information was available to develop a cost estimate is approximately $14 million and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. In addition, the Environmental Research Center has an active groundwater monitoring program as part of a permitted corrective action plan. Non-TVA Sites. TVA is aware of alleged hazardous-substance releases at certain non-TVA areas for which it may have some liability. See Note 22 — Commitments and Contingencies — Environmental Matters . Coal Combustion Residuals. The EPA published its final rule governing CCR in 2015. The rule regulates CCR as nonhazardous waste under Subtitle D of the RCRA. While states may adopt the rule's requirements into their regulatory programs, the rule does not require states to adopt the requirements. The initial version of the rule provided for self-implementation by utilities and allows enforcement through citizen suits in federal court. The Water Infrastructure Improvements for the Nation Act ("WIIN Act") subsequently allowed state or federal-based permitting to implement the CCR rule as an alternative to self-implementation and citizen suits. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities for a discussion of the impact on TVA's operations, including the cost and timing estimates of related projects. In July 2018, the EPA issued a final CCR rule which provided additional flexibility and an extension of certain deadlines. In March 2019, the D.C. Circuit granted the EPA's request to remand the final rule to allow the EPA to reconsider the amendments. The remand also allowed the EPA time to complete a new rulemaking to establish revised timelines for unlined impoundments to initiate closure and to reexamine the October 2020 deadline for closing some unlined impoundments. In August 2019, the EPA issued a proposed rule to amend portions of the CCR Rule regarding beneficial use, temporary piles, and public access to information. On November 4, 2019, the EPA announced a proposed rule that will revise portions of the CCR Rule requiring closure of unlined surface impoundments. The final Part A rule was published in the Federal Register on August 28, 2020, and became effective September 28, 2020. Among other things, the final Part A rule requires all unlined CCR surface impoundments to stop receiving CCR and non-CCR wastestreams and to initiate closure or retrofit by no later than April 11, 2021. Additionally, the final rule provides a process for a utility to seek site-specific approval from the EPA to continue to use the unlined CCR surface impoundment until October 15, 2023, and possibly longer under certain circumstances. The final rule also includes requirements that enhance the public's access to groundwater monitoring and corrective action reports. TVA does not currently anticipate the final rule will have a significant impact because TVA is already planning to close its unlined CCR surface impoundments by the regulatory deadline and already makes groundwater monitoring and corrective action reports publicly available. A prepublication copy of a separate final Part B rule was released on October 16, 2020. This rule provides an alternative liner demonstration procedure for utilities with clay lined units which are being forced to close under the Part A rule. However, TVA does not have any units which qualify for this demonstration. In August 2015, the Tennessee Department of Environment and Conservation ("TDEC") issued an order that (1) established a process for TDEC to oversee TVA's implementation of the EPA's CCR rule to ensure coordination and compliance with Tennessee laws and regulations that govern the management of CCR and (2) required TVA to investigate and assess CCR contamination risks at seven of TVA's eight coal-fired plants in Tennessee and to remediate any unacceptable risks. The TDEC order does not allege that TVA is violating any CCR regulatory requirements nor does it assess TVA penalties. The TDEC order sets out an iterative process through which TVA and TDEC will identify and evaluate any CCR contamination risks and, if necessary, respond to such risks. Currently, TVA is conducting environmental investigations of the seven sites in accordance with the TDEC-approved Environmental Investigation Plans for each site. Upon the completion of the investigations, TVA will submit an environmental assessment report for each site. Groundwater Contamination . Environmental groups and state regulatory agencies are increasing their attention on alleged groundwater contamination associated with CCR management activities. As a result, TVA may have to change how it manages CCR at some of its plants, potentially resulting in higher costs. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities and — Regulatory Compliance — Allen Groundwater Investigation and Note 12 — Asset Retirement Obligations. 29 Table of Contents Environmental Investments From 1970 to 2020, TVA spent approximately $6.8 billion on controls to reduce emissions from its coal-fired power plants. In addition, TVA has reduced emissions by idling or retiring coal-fired units and relying more on cleaner energy resources including natural gas and nuclear generation. TVA currently anticipates spending significant amounts on environmental projects in the future, including investments in new clean energy generation including renewables to reduce TVA's overall environmental footprint. TVA environmental project expenditures also result from coal-fired plant decommissioning and from effective ash management modernization. Based on TVA's decisions regarding certain coal-fired units, the amount and timing of expenditures could change. See Power Supply and Load Management Resources — Coal-Fired above and Estimated Required Environmental Expenditures below. SO 2 Emissions and NO x Emissions. To reduce SO 2 emissions, TVA operates scrubbers on 19 of its coal-fired units and switched to lower-sulfur coal at 13 coal-fired units. To reduce NO x emissions, TVA operates SCRs on 19 coal-fired units, operates low-NO x burners or low-NO x combustion systems on 19 units, operates over-fire air on one cyclone unit, optimized combustion on six units, and operates NO x control equipment year round when units are operating (except during start-up, shutdown, and maintenance periods). TVA has also retired 34 of 59 coal-fired units. Except for seven units at Shawnee, the remaining coal-fired units have scrubbers and SCRs. See Power Supply and Load Management Resources — Coal-Fired above. Particulate Emissions. To reduce particulate emissions of air pollutants, TVA has equipped all of its coal-fired units with scrubbers, mechanical collectors, electrostatic precipitators, and/or bag houses. Greenhouse Gas Emissions . There could be additional material costs if further reductions of GHGs, including CO 2 , are mandated by legislative, regulatory, or judicial actions and if more stringent emission reduction requirements for conventional pollutants are established. These costs cannot reasonably be predicted at this time because of the uncertainty of these actions. The EPA may issue regulations establishing more stringent air, water, and waste requirements, and these requirements could result in significant changes in the structure of the U.S. power industry, especially in the eastern half of the country. Estimated Required Environmental Expenditures The following table contains information about TVA's current estimates on projects related to environmental laws and regulations. Estimated Potential Environmental Expenditures (1)(2) At September 30, 2020 (in millions) 2021 2022 Thereafter (3)(4) Total Coal Combustion Residual Conversion Program (5) $ 313 $ 224 $ 412 $ 949 Clean Air Act control projects (6) 28 45 83 156 Clean Water Act requirements (7) 41 78 71 190 Notes (1) These estimates are subject to change as additional information becomes available and as regulations change. (2) These estimates include $145 million, $134 million, and $121 million for 2021, 2022, and thereafter, respectively, in capital expenditures. (3) See Note 22 — Commitments and Contingencies . (4) These estimates include expenditures expected to be incurred during 2023, 2024, and 2025. (5) Includes costs associated with pond closures, conversion of wet to dry handling, and landfill activities. TVA is continuing to evaluate the rules and their impact on its operations, including the cost and timing estimates of related projects. See Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities and Note 12 — Asset Retirement Obligations. (6) Includes air quality projects that TVA is currently performing to comply with existing air quality regulations, but does not include any projects that may be required to comply with potential GHG regulations or transmission upgrades. (7) Includes projects that TVA is currently planning to comply with revised rules under the CWA regarding CWIS and ELGs for steam electric power plants. Human Capital Resources On September 30, 2020, TVA had 9,989 employees, of whom 3,287 were trades and labor employees. Neither the federal labor relations laws covering most private sector employers nor those covering most federal agencies apply to TVA. However, the TVA Board has a long-standing policy of acknowledging and working with recognized representatives of its employees, and that policy is reflected in long-term agreements to recognize the unions (or their successors) that represent TVA employees. Federal law prohibits TVA employees from engaging in strikes against TVA. TVA also had approximately 13,800 contractors providing both intermittent or full-time services. The majority of these contractors are managed by TVA suppliers who are providing services to TVA. Over the past year, TVA has worked to evolve its strategic direction to place an intentional focus on its people through a strategic priority identified as People Advantage. As part of this strategic priority, there are three key transformational elements: to accelerate the impact of inclusion with diversity within TVA and the communities it serves, to create a talent-focused 30 Table of Contents organization to amplify the energy, power, and creativity within each TVA employee, and to create a culture that lives up to its values. TVA employees share common core values and strategic objectives, and it is these values that are the fundamental beliefs that guide actions, behaviors, and decisions as a company. The TVA values include: • Safety — Committing to the safety and well-being of each TVA employee and the communities TVA serves; • Integrity — Conducting business in an honest and straightforward way; • Inclusion — Treating everyone with dignity and respect, emphasizing inclusion by welcoming each person's individuality so that full potential is reached; and • Service — Serving in the communities in which TVA employees live, work, and play. Each and every day, TVA is responsible for making life better in the Tennessee Valley. TVA is dedicated to keeping its employees inspired and empowered toward achieving this primary mission of service and invests in people areas including employee health and safety, employee benefits and development, and diversity and inclusion efforts. TVA continues to focus on safety, and as a result, TVA has seen a consistent decline in injuries for the last seven years and has achieved industry top decile performance in safety. TVA's safety program is based on the fundamentals of a safety management system, which includes management commitment, employee engagement, hazard recognition and control, worksite analysis, contractor safety management, training, review, and continuous improvement. Employee engagement is critical to the success of the program. TVA's vital safety behaviors are employee driven and developed with the collaboration of represented employees, union leadership, and management to improve safety behaviors. Audits and assessments are a key component of continuous improvement and in overseeing TVA's safety and health program and are performed regularly. As a federal agency, TVA is also required to complete regulatory compliance inspections of its facilities on an annual basis. To care for the well-being of employees and their families, TVA offers quality healthcare, insurance, and retirement benefits. Other benefits also include flexible work schedules, wellness incentives, scholarships for dependents of employees, tuition reimbursement, training and education opportunities, and employee development. TVA offers career opportunities and training for military veterans, college students, and recent graduates. Employee development involves individual learning-ability, team learning, mentoring, and career pathing including rotational development. As TVA continues to adapt to the evolving demands of the industry, it is imperative that it cultivate a work environment that fosters the attributes and capabilities of an interconnected workforce. TVA is enriched by the diversity of a talented, highly skilled workforce made up of people from all backgrounds. To achieve this, TVA endeavors to ensure that all qualified candidates receive fair consideration for open jobs at TVA and that all employees are encouraged, engaged, and empowered to contribute 100 percent of their talents, 100 percent of the time while bringing their authentic selves to work each day. Recruiting efforts also support the strategic element of inclusion with diversity and a culture that lives up to TVA's values, and TVA actively recruits employees of all races, colors, sexual orientations, ethnicities, gender identities, abilities, religions, and ages. TVA continues to work to improve the minority share and women share of the workforce and maintain its status as best in industry for the military veteran share of the workforce. In addition, TVA has Employee Resource Groups that support and empower employees based on their personal association to the diverse groups present at TVA. Through the People Advantage strategic priority, TVA strives to become the destination for difference makers, where TVA and employees believe the best in each other, give the best to each other, and expect the best from each other. Key measures of success are engagement and inclusion scores, regrettable losses, recordable injuries, and people of color and female representation, both in leadership. The 2019 and 2020 results for these key measures are reflected in the chart below, in addition to the performance goals for 2021. 2019 2020 2021 Performance Measure Actual Actual Plan People of Color Representation in Leadership (%) 9 % 9 % 10 % Female Representation in Leadership (%) 17 % 18 % 19 % Regrettable Losses (%) 1.1 % 1.0 % 0 % Engagement (100 point scale) (1) 75 80 81 Inclusion (100 point scale) (1) 72 72 74 Recordable Injuries (#) 54 38 0 Note (1) A new vendor was used to facilitate the Engagement and Inclusion Survey in 2020; therefore, weightings and results may vary when comparing 2020 to 2019. See also Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations – B usiness and Mission – TVA's Mission of Service for a discussion of TVA's mission, strategic priorities, and linking the mission to performance through corporate measures. 31 Table of Contents ITEM 1A. RISK FACTORS The risk factors described below, as well as the other information included in this Annual Report, should be carefully considered. Risks and uncertainties described in these risk factors could cause future results to differ materially from historical results as well as from the results anticipated in forward-looking statements. Although the risk factors described below are the ones that TVA considers material, additional risk factors that are not presently known to TVA or that TVA presently does not consider material may also impact TVA's business operations. See Forward Looking Information above for a description of some matters that could affect the below risks or generate new risks. The occurrence of any of the following could have a material adverse effect on TVA's cash flows, results of operations, and financial condition. For ease of reference, the risk factors are presented in nine categories: (1) COVID-19 related risks; (2) regulatory, legislative, and legal risks; (3) operational risks; (4) risks related to the environment and catastrophic events; (5) cybersecurity risks; (6) financial, economic, and market risks; (7) human capital and management risks; (8) accounting and financial reporting risks; and (9) general business risks. COVID-19 RELATED RISKS The COVID-19 pandemic has and may continue to adversely affect TVA's business, financial condition, and results of operations. The COVID-19 pandemic has and may continue to adversely affect TVA's business, financial condition, and results of operations. To date, the COVID-19 pandemic has resulted in and may continue to result in reduced revenues due to customers curtailing operations to reduce the spread of the outbreak, including quarantines, closures, or reduced operations of businesses or other institutions and the deferral of revenues under programs offered by TVA to its local power company customers to offset the impact of customers' inability to pay during the outbreak. TVA estimates base revenues were reduced by approximately $185 million for the year ended September 30, 2020. TVA expects the COVID-19 pandemic to continue impacting revenue for 2021 and has planned for reduced operating revenues. It is uncertain at this time the extent to which TVA's revenues may be impacted beyond 2021. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Revenues. TVA could be further adversely affected by the impact of the COVID-19 pandemic on the economy and financial markets, including a prolonged recession and continued volatility in interest rates, commodity prices, investment performance, and foreign currency exchange rates. TVA has experienced fluctuations related to its pension plan assets and other investment portfolios during the year ended September 30, 2020. The ultimate impact of the COVID-19 pandemic on the pension plan and other investments depends on factors beyond TVA's knowledge or control. A long-term recession could impact access to capital and have other long-term negative effects on operations. In addition, TVA's operations could be impacted by, among other things, social distancing to prevent illness from spreading within the workforce; travel restrictions; the availability of the workforce to perform essential functions; and the unavailability of fuel or critical parts, supplies, or services due to transportation restrictions and the shutdown, slowdown, or inability to meet contractual requirements of suppliers or other vendors in TVA's supply chain. In addition, the continued spread of the COVID-19 pandemic could adversely impact TVA's ability to develop, construct, and operate facilities; could delay or prevent the completion of projects; and could lead to impairments of TVA's long-lived assets and accounts and loans receivable. To address specific aspects of the COVID-19 pandemic, TVA has implemented a company-wide pandemic plan, including limiting non-essential travel and mandatory telework for those who do not have to be physically present at a TVA facility or office building; implementing strong physical and cyber-security measures; keeping certain developed recreation areas closed; actively monitoring generation, transmission, and distribution functions; and maintaining an increased cash reserve; however, it is possible that these measures will not be successful in mitigating the impact of the outbreak. At this time, operations and delivery of energy to customers have not been materially impacted. The extent to which the COVID-19 pandemic will impact TVA's business, financial condition, and results of operations is uncertain and will depend on numerous evolving factors beyond TVA's knowledge or control including, among other things, the duration and severity of the outbreak, actions taken to contain its spread and mitigate its effects, and the broader impact of the COVID-19 pandemic on the country and region's economy. However, TVA reasonably anticipates that a prolonged outbreak could have a material adverse impact on its business, financial condition, and results of operations, and could require TVA to change how it conducts certain operations, takes power under certain agreements, or dispatches its own facilities. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Coronavirus Pandemic for an expanded discussion of the impact to TVA and related initiatives. 32 Table of Contents REGULATORY, LEGISLATIVE, AND LEGAL RISKS New laws, regulations, or administrative or executive orders, or congressional actions or inactions, may negatively affect TVA's cash flows, results of operations, and financial condition, as well as the way TVA conducts its business. Because TVA is a corporate agency and instrumentality established by federal law, it may be affected by a variety of laws, regulations, and administrative or executive orders that do not affect other electric utilities. For example, federal legislation may expand or reduce TVA's activities, change its governance structure, require TVA to sell some or all of the assets that it operates, require TVA to take certain other operational or regulatory actions, reduce or eliminate the U.S.'s ownership of TVA, or even liquidate TVA. Additionally, Congress could act, or fail to take action, on various issues that may result in impacts to TVA, including but not limited to action or inaction related to the national debt ceiling or automatic spending cuts in government programs. Furthermore, administrative or executive orders could cause TVA to change the way it conducts its business. Although it is difficult to predict exactly how new laws, regulations, or administrative or executive orders or congressional action or inaction may impact TVA, some of the possible effects are described below. TVA may become subject to additional environmental regulation. New environmental laws, regulations, or orders may become applicable to TVA or the facilities it operates, and existing environmental laws or regulations may be revised or reinterpreted in a way that adversely affects TVA, including substantially increasing TVA's cost of operations or requiring significant capital expenditures. Possible areas of future laws or regulations include, but are not limited to, GHGs, CCR, ELGs, water quality, renewable energy portfolio standards, and natural gas production and transmission. See Item 1, Business – Environmental Matters – Water Quality Control Developments for a discussion of the EPA's new effluent limitation guidelines and Item 1, Business – Environmental Matters – Cleanup of Solid and Hazardous Wastes – Coal Combustion Residuals for a discussion of recent revisions to the EPA's CCR rule. Litigation may affect the timing and requirements of new regulatory proposals, and may indirectly affect TVA, even if TVA is not involved. TVA's ability to control or allocate funds could be restricted. Other federal entities may attempt to restrict TVA's ability to access or control its funds that are on deposit in TVA's account in the U.S. Treasury. For example, should the U.S. Treasury approach its debt ceiling, the U.S. Treasury might, as part of an effort to control cash disbursements, attempt to require TVA to receive approval before disbursement of funds from TVA's U.S. Treasury account. Additionally, the OMB might, in the event that automatic spending cuts go into effect, attempt to require TVA to reduce its budget by a specified percentage (although the legal applicability of such a situation to TVA would depend upon the wording of the legislation making the automatic spending cuts). Such attempts to restrict TVA's ability to control or allocate funds in those specific types of situations could adversely affect its cash flows, results of operations, and financial condition, its relationships with creditors, vendors, and counterparties, the way it conducts its business, and its reputation. TVA may lose its protected service territory. TVA's service area is defined primarily by provisions of law and long-term contracts. The fence limits the region in which TVA or LPCs which distribute TVA power may provide power. The anti-cherrypicking provision precludes FERC from ordering TVA to transmit power for others if that power would be consumed within the TVA service area. State service territory laws limit unregulated third parties' ability to sell electricity to consumers. All current wholesale power contracts between TVA and LPCs are all requirements contracts; however, Flexibility Agreements available to LPCs that have executed long-term contracts with TVA allow LPCs to locally generate up to approximately five percent of average total hourly energy sales over the prior five years to meet their individual customers' needs. In addition, other utilities may use their own transmission lines to serve customers within TVA's service area, and third parties are able to avoid the restrictions on serving end-use customers by selling or leasing generating assets to a customer rather than selling electricity. From time to time, there have been efforts to circumvent the protection of the anti-cherrypicking provision. In addition, the protections afforded by the anti-cherrypicking provision could be limited or perhaps eliminated by federal legislation at some time in the future. If FERC were to limit the application of the anti-cherrypicking provision or if federal legislation were to eliminate or limit the application of the anti-cherrypicking provision, TVA could more easily lose customers that it could not replace within its specified service area due to the fence. The loss of these customers could adversely affect TVA's cash flows, results of operations, and financial condition. 33 Table of Contents The TVA Board may lose its sole authority to set rates for electricity. Under the TVA Act, the TVA Board has the sole authority to set the rates that TVA charges for electricity, and these rates are not subject to further review. If the TVA Board loses this authority or if the rates or the ratemaking process become subject to external review, there could be material adverse effects on TVA including, but not limited to, being unable to set rates at a level sufficient to generate adequate revenues to service TVA's financial obligations, properly operate and maintain its assets, and provide for reinvestment in its power program and becoming subject to additional regulatory oversight that could impede its ability to adapt its business to changing circumstances. TVA may lose responsibility for managing the Tennessee River system. TVA's management of the Tennessee River system is important to effectively operate its power system. TVA's ability to integrate management of the Tennessee River system with power system operations increases power system reliability and reduces costs. Restrictions on how TVA manages the Tennessee River system could negatively affect its operations, change the way it conducts such operations, or increase costs. TVA may lose responsibility for managing real property currently under its control. TVA's management of real property containing power generation and transmission structures as well as certain reservoir shorelines is important for navigation, flood control, and the effective operation of the power system. Restrictions on or the loss of the authority to manage these properties could negatively affect TVA's operations, change the way it conducts such operations, or increase costs. Existing laws, regulations, and orders may negatively affect TVA's cash flows, results of operations, and financial condition, as well as the way TVA conducts its business. TVA is required to comply with comprehensive and complex laws, regulations, and orders. The costs of complying with these laws, regulations, and orders are expected to be substantial, and costs could be significantly more than TVA anticipates, especially in the environmental and nuclear areas. In addition, TVA is required to obtain numerous permits and approvals from governmental agencies that regulate its business, and TVA may be unable to obtain or maintain all required regulatory approvals. If there is a delay in obtaining required regulatory approvals or if TVA fails to obtain or maintain any approvals or to comply with any law, regulation, or order, TVA may have to change how it operates certain assets, may be unable to operate certain assets, or may have to pay fines or penalties if it continues to operate the assets. TVA is involved in various legal and administrative proceedings whose outcomes may affect TVA's finances and operations. TVA is involved in various legal and administrative proceedings and is likely to become involved in additional proceedings in the future in the ordinary course of business or as a result of, among other things, catastrophic events or environmental conditions at TVA property or areas where TVA has disposed of materials or property. The additional proceedings could involve, among other things, challenges to TVA's CCR facilities, nuisance suits involving TVA's coal-fired plants, and challenges to TVA's authority to set rates and enter into contracts. Although TVA cannot predict the outcome of the individual matters in which TVA is involved or will become involved, the resolution of these matters could require TVA to make expenditures in excess of established reserves and in amounts that could have a material adverse effect on TVA's cash flows, results of operations, and financial condition. Similarly, resolution of any such proceedings may require TVA to change its business practices or procedures, change how it operates its coal-fired units, reduce emissions to a greater extent than TVA had planned, close existing CCR facilities sooner than planned, build new CCR facilities sooner than planned, build new CCR facilities that were not planned, cease operation of some coal-fired units, adjust its rates, or terminate or modify contracts. These events could also have a material adverse effect on TVA's cash flows, results of operations, and financial condition. For a discussion of certain current material legal proceedings, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges and Note 22 — Contingencies and Legal Proceedings — Legal Proceedings . TVA is largely restricted to a defined service area. TVA's ability to expand its customer base is constrained by its inability to pursue new customers outside its service area. Accordingly, reductions in demand have to be offset by such actions as reducing TVA's internal costs or increasing rates. Any failure of such measures to fully offset the reduced demand for power may negatively affect TVA's cash flows, results of operations, and financial condition. 34 Table of Contents TVA may become subject to additional NERC requirements. TVA is subject to federal reliability standards that are set forth by NERC and approved by FERC. TVA recognizes that reliability standards and expectations continue to become more complex and stringent for transmission systems. Currently there are approximately 90 mandatory standards subject to enforcement containing approximately 1,300 requirements and sub-requirements that must be met. Complying with these or additional requirements set forth by NERC may require significant capital expenditures and may negatively affect TVA's cash flows, results of operations, and financial condition. TVA could be divested by the federal government or be required to sell some or all of its assets. From time to time, presidential administrations have suggested that the federal government should either divest TVA or require TVA to sell some or all of its assets, including its transmission system. Either event could trigger change of control provisions in certain material contracts or covenants in TVA's bond documents that concern the sale or disposal of a substantial portion of TVA's power properties. TVA may, among other things, be required to pay off debt more quickly than anticipated and be unable to access credit facilities. Additionally, the loss of the transmission system could interfere with TVA's operations and require TVA to contract for the transmission of electricity to TVA customers. These factors could negatively affect TVA's operations, change the way it conducts such operations, and increase costs. TVA's governmental status may interfere in its ability to quickly respond to the needs of its current or potential customers or to act solely in the interest of its ratepayers. As a quasi-governmental entity, TVA has certain legal requirements that prevent it from responding as quickly to potential changes in the market or requests from current or potential customers as might be desired or in comparison to other utilities. For example, TVA is required to comply with the National Environmental Policy Act ("NEPA"), which requires environmental reviews to be performed in connection with certain projects. The delay in responding to requests could damage relationships with current customers, deter potential customers from moving into TVA's service territory, or damage TVA's reputation. In addition, TVA's nature as a quasi-governmental entity imposes additional pressures that most companies do not face, such as the requirement to support economic development, manage a river system, and promote recreational opportunities. TVA must balance these obligations with the requirement to provide power at the lowest feasible rates. If TVA does not adequately communicate how it fulfills its various missions and the value it provides, its reputation may be harmed, which may result in political pressure to change its nature or operations as well as in the loss of public support. OPERATIONAL RISKS TVA may incur delays and additional costs in its major projects or may be unable to obtain necessary regulatory approval. Among other projects, TVA is improving the reliability and resiliency of its transmission system, undertaking repairs at certain hydroelectric facilities and dams, and closing some coal-fired plants and their supporting infrastructure. These activities involve risks of overruns in the cost of labor and materials as well as risks of schedule delays, which may result from, among other things, changes in laws or regulations, lack of productivity, human error, and the failure to schedule activities properly. In addition, if TVA does not or cannot obtain the necessary regulatory approvals or licenses, is otherwise unable to complete the development or construction of a facility, decides to cancel construction of a facility, incurs delays or cost overruns in connection with constructing a facility, or is required to change how it will conduct construction, repair, or closure activities, TVA's cash flows, financial condition, and results of operations could be negatively affected. Further, if projects are not completed according to specifications, TVA may suffer, among other things, delays in receiving licenses, reduced plant efficiency, reduced transmission system integrity and reliability, and higher operating costs. TVA may not be able to operate one or more of its nuclear power units. Should issues develop with TVA's nuclear power units that TVA is unable to correct, TVA might voluntarily shut down one or more units or be ordered to do so by the NRC. Returning the unit(s) to operation could be a lengthy and expensive process, or might not be possible depending on circumstances. In either case, TVA's cash flows, results of operations, financial condition, and reputation may be negatively affected. 35 Table of Contents Operating nuclear units subjects TVA to nuclear risks and may result in significant costs that adversely affect its cash flows, results of operations, and financial condition. TVA has seven operating nuclear units. Risks associated with these units include the following: Nuclear Risks . A nuclear incident at one of TVA's facilities could have significant consequences including loss of life, damage to the environment, damage to or loss of the facility, and damage to non-TVA property. Although TVA carries certain types of nuclear insurance, the amount that TVA is required to pay in connection with a nuclear incident could significantly exceed the amount of coverage provided by insurance. The licensee of each nuclear reactor has a contingent obligation to pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, regardless of proximity to the incident of fault, up to a maximum of approximately $138 million per reactor, per incident. With TVA's seven reactors, the maximum total contingent obligation per incident is $963 million. This retrospective premium is payable at a maximum rate currently set at approximately $20 million per year, per incident, per reactor. Any such nuclear incident could also negatively affect TVA by, among other things, obligating TVA to pay retrospective insurance premiums, reducing the availability and affordability of insurance, increasing the costs of operating nuclear units, or leading to increased regulation or restriction on the construction, operation, and decommissioning of nuclear facilities. Moreover, federal legislation could impose revenue-raising measures on the nuclear industry to pay claims exceeding the limit for a single incident under the Price-Anderson Act. Further, the availability or price of insurance may be impacted by TVA's acts or omissions, such as a failure to properly maintain a facility, or events outside of TVA's control, such as an equipment manufacturer's inability to meet a guideline, specification, or requirement. Decommissioning Costs . TVA maintains a Nuclear Decommissioning Trust ("NDT") for the purpose of providing funds to decommission its nuclear facilities. The NDT is invested in securities generally designed to achieve a return in line with overall equity and debt market performance. See Note 16 — Fair Value Measurements — Investment Funds for NDT balance at September 30, 2020 . TVA might have to make unplanned contributions to the NDT if, among other things: • The value of the investments in the NDT declines significantly or the investments fail to achieve the assumed real rate of return; • The decommissioning funding requirements are changed by law or regulation; • The assumed real rate of return on plan assets, which is currently five percent, is lowered by the TVA Board or is overly optimistic; • The actual costs of decommissioning are more than planned; • Changes in technology and experience related to decommissioning cause decommissioning cost estimates to increase significantly; • TVA is required to decommission a nuclear plant sooner than it anticipates; or • The NRC guidelines for calculating the minimum amount of funds necessary for decommissioning activities are significantly changed. If TVA makes additional contributions to the NDT, the contributions may negatively affect TVA's cash flows, results of operations, and financial condition. Increased Regulation . The NRC has broad authority to adopt regulations related to the licensing, operating, and decommissioning of nuclear generation facilities and may adopt regulations as a result of events that occur at nuclear facilities in the U.S. or throughout the world, such as the events that occurred at Fukushima. These regulations can result in significant restrictions or requirements on TVA. For example, supplementary NRC rulemaking has been developed to mitigate beyond-design basis flooding and seismic events. To comply with existing, new, or modified regulations, TVA may be required to make substantial capital expenditures at its nuclear plants or make substantial contributions to the NDT. In addition, if TVA fails to comply with requirements promulgated by the NRC, the NRC has the authority to impose fines, shut down units, or modify, suspend, or revoke TVA's operating licenses. Waste Disposal. TVA's nuclear operations produce various types of nuclear waste materials, including spent fuel. TVA has been storing the spent fuel in accordance with NRC regulations in anticipation that a final storage site for all such waste will be developed and put in operation by the U.S. government. If no such site is forthcoming or if no alternative disposal or reuse plan is developed, then TVA might be required to arrange for the safe and permanent disposal of the spent fuel itself. Such a requirement would cause TVA to incur substantial expense, including substantial capital expenditures, and could cause TVA to change how it operates its nuclear plants. 36 Table of Contents Availability of Components. Nuclear facilities require specialized components and access to intellectual property for operation. As the number of reliable suppliers of such components and access to intellectual property is reduced, the availability of the components and access to the intellectual property will also likely decrease. If TVA is unable to secure either the original components, intellectual property, or replacements approved for use by the NRC, TVA might have to change how it conducts its operations. TVA's management and operation of CCR facilities exposes it to additional costs and risks. TVA operates coal-fired units which produce CCR as byproducts of the power production process. The CCR is contained within dedicated facilities operated by TVA. TVA has closed some of these facilities in compliance with state and federal laws and is in the process of closing others. Many of these facilities were constructed prior to the requirement that such facilities be built with liners and thus do not contain such liners. TVA has been ordered by TDEC to undertake investigations at all CCR facilities in Tennessee. TVA has also been involved in litigation related to certain CCR facilities, and to resolve one such lawsuit, TVA agreed to remove or beneficially reuse some CCR material at Gallatin Fossil Plant ("Gallatin"). TVA could be subject to similar litigation or orders in the future and could be required to restrict or stop the use of some or all CCR facilities or relocate CCR material to lined facilities. Further, TVA has decided to move all CCR material at Allen Combined Cycle Plant ("Allen CC") rather than closing the CCR facilities in place as originally planned, which subjects TVA to additional costs and risks. TVA may change its closure plans at other facilities depending on the particular facts of each situation and the completion of any required environmental investigations or studies. TVA's facilities and operations may be damaged or interfered with by physical attacks, threats, or other interference. TVA has an extensive generation and transmission system and supporting infrastructure that includes, among other things, TVA's generation facilities and transmission infrastructure such as substations, towers, and control centers. Some of TVA's hydroelectric facilities include navigation locks which are necessary for commerce along the Tennessee River system. TVA also operates flood control dams and supporting infrastructure. Because of TVA's status as a governmental corporation and TVA's role as predominantly the sole power provider for its service territory, TVA may be targeted by individuals, groups, or nation states for physical attacks or threats of such attacks. Although TVA's operations are protected by automated monitoring systems, TVA Police and Emergency Management, TVA employees, local law enforcement, or a combination thereof, it may not be possible to effectively deter or prevent attacks. Such attacks could pose health and safety risks, significantly disable or destroy TVA assets, interfere with TVA's operations, result in additional regulatory or security requirements, and negatively affect TVA's cash flows, results of operations, and financial condition. TVA's assets or their supporting infrastructure may not operate as planned. Many of TVA's assets, including generation, transmission, navigation, and flood control assets, have been operating for several decades and have been in nearly constant service since they were completed. Additionally, certain of TVA's newer assets utilize advanced technology which could experience technical or operating issues. The failure of TVA's assets or supporting infrastructure, including information technology systems, to perform as planned may cause health, safety, or environmental problems and may even result in events such as the failure of a dam, the inability to maintain a reservoir at the normal or expected level, or an incident at a coal-fired, gas-fired, or nuclear plant or a CCR facility. If these assets or their supporting infrastructure fail to operate as planned, if necessary repairs or upgrades are delayed or cannot be completed as quickly as anticipated, or if necessary spare parts are unavailable, TVA, among other things: • May have to invest a significant amount of resources to repair or replace the assets or the supporting infrastructure; • May have to remediate collateral damage caused by a failure of the assets or the supporting infrastructure; • May not be able to maintain the integrity or reliability of the transmission system at normal levels; • May have to operate less economical sources of power; • May have to purchase replacement power on the open market at prices greater than its generation costs; • May be required to invest substantially to meet more stringent reliability standards; • May be unable to maintain insurance on affected facilities, or be required to pay higher premiums for coverage, unless necessary repairs or upgrades are made; • May be unable to operate the assets for a significant period of time; or • May not be able to meet its contractual obligations to deliver power. 37 Table of Contents Any of these potential outcomes may negatively affect TVA's cash flows, results of operations, financial condition, and reputation. TVA's safety programs may not prevent accidents that could, among other things, impact TVA's operations or financial condition. TVA's safety program, no matter how well designed and operated, may not completely prevent accidents. In addition to the potential human cost of accidents, which could include injury to employees or members of the public, significant accidents could impact TVA's ability to carry out operations, cause it to shut down facilities, subject it to additional regulatory scrutiny, expose it to litigation, damage its reputation, interfere with its ability to attract or retain a skilled workforce, or harm its financial condition. TVA's service reliability could be affected by problems at other utilities or at TVA facilities, or by the increase in intermittent sources of power. TVA's transmission facilities are directly interconnected with the transmission facilities of neighboring utilities and are thus part of the larger interstate power transmission grid. Certain of TVA's generation and transmission assets are critical to maintaining reliability of the transmission system. Additionally, TVA uses certain assets that belong to third parties to transmit power and maintain reliability. Accordingly, problems at other utilities as well as at TVA's facilities may cause interruptions in TVA's service to TVA's customers, increase congestion on the transmission grid, or reduce service reliability. In addition, the increasing contribution of intermittent sources of power, such as wind and solar, may place additional strain on TVA's system as well as on surrounding systems. If TVA suffers a service interruption, increased congestion, or reduced service reliability, TVA's cash flows, results of operations, financial condition, and reputation may be negatively affected. TVA's supplies of fuel, purchased power, or other critical items may be disrupted or obtained at a higher cost than planned. TVA purchases coal, uranium, natural gas, fuel oil, and electricity from a number of suppliers. Additionally, TVA contracts for conversion of uranium into nuclear fuel and purchases other items, such as anhydrous ammonia, liquid oxygen, or replacement parts that are critical to the operation of certain generation assets. TVA also purchases power from other power producers when the purchase of such power is appropriate due to economic opportunities or operational concerns. Disruption or price volatility in the acquisition or delivery of fuel, purchased power, contracted services, or other critical supplies may result from a variety of physical and commercial events, political developments, international trade restrictions or tariffs, legal actions, or environmental regulations affecting TVA's suppliers as well as from transportation or transmission constraints. If one of TVA's suppliers fails to perform under the terms of its contract with TVA, TVA might have to purchase replacement fuel, power, or other critical supplies, perhaps at a significantly higher price than TVA is entitled to pay under the contract. In some circumstances, TVA may not be able to recover this difference from the supplier. In addition, any disruption of TVA's supplies could require TVA to operate higher cost generation assets, thereby negatively affecting TVA's cash flows, results of operations, and financial condition. Moreover, if TVA is unable to acquire enough replacement fuel, power, or supplies, or does not have sufficient reserves to offset the loss, TVA may not be able to operate certain assets or provide enough power to meet demand, resulting in power curtailments, brownouts, or even blackouts. TVA's determination of the appropriate mix of generation assets may change. TVA has determined that its power generation assets should consist of a mix of nuclear, coal-fired, natural gas-fired, and renewable power sources, including hydroelectric. In making this determination, TVA took various factors into consideration, including the anticipated availability of its nuclear units, the availability of non-nuclear facilities, the forecasted cost of natural gas and coal, the forecasted demand for electricity, and environmental compliance including the expense of adding air pollution controls to its coal-fired units. If any of these assumptions materially change or are impacted by subsequent events, TVA's generation mix may not address its operational needs in the most efficient manner. Resolving such a situation may require capital expenditures or additional power purchases, and TVA's cash flows, results of operations, financial condition, and reputation may be negatively affected. RISKS RELATED TO THE ENVIRONMENT AND CATASTROPHIC EVENTS Weather conditions may influence TVA's ability to supply power and its customers' demands for power. Extreme temperatures may increase the demand for power and require TVA to purchase power at high prices to meet the demand from customers, while unusually mild weather may result in decreased demand for power and lead to reduced electricity sales. Also, in periods of below normal rainfall or drought, TVA's low-cost hydroelectric generation may be reduced, requiring TVA to purchase power or use more costly means of producing power. Additionally, periods of either high or low levels of rainfall may impede river traffic, impacting barge deliveries of critical items such as coal and equipment for power facilities. Furthermore, high river water temperatures in the summer may limit TVA's ability to 38 Table of Contents use water from the Tennessee or Cumberland River systems for cooling at certain of TVA's generating facilities, thereby limiting its ability to operate these generating facilities. This situation would be aggravated during periods of reduced rainfall or drought. If changes in the climate make such shifts in weather more common or extreme, TVA may be required to, among other things, change its generation mix or change how it conducts its operations, which could have a material adverse effect on TVA's cash flows, results of operations, and financial condition. Events that affect the supply or quality of water in the Tennessee River system and Cumberland River system or elsewhere may interfere with TVA's ability to generate power. An inadequate supply of water in the Tennessee River system and Cumberland River system could negatively impact TVA's cash flows, results of operations, and financial condition by reducing generation not only at TVA's hydroelectric plants but also at its coal-fired and nuclear plants, which depend on water from the river systems near which they are located for cooling and for use in boilers where water is converted into steam to drive turbines. Certain of TVA's gas-fired facilities not located near a river require alternative sources of water, such as from wells or local utility companies. Further, the water must be of a particular quality for use in TVA's equipment. If the available water is not of sufficient quality for TVA's use, then TVA must either treat the water or obtain alternate sources. An inadequate supply of quality water could result, among other things, from periods of low rainfall or drought, the withdrawal of water from the river systems by governmental entities or others, incidents affecting bodies of water not managed by TVA, supply issues which affect water providers, or intrusive aquatic plants and animals such as eel grass, algae, and mussels that block cooling water intake pipes or otherwise interfere with the operation of TVA's generation facilities. While TVA manages the Tennessee River and a large portion of its tributary system to provide much of the water necessary for the operation of its power plants, the USACE operates and manages other bodies of water upon which some of TVA's facilities rely. Events at these bodies of water or their associated hydroelectric facilities may interfere with the flow of water and may result in TVA's having insufficient water quality to meet the needs of its plants. If TVA has insufficient water supply of the quality necessary to meet the needs of its plants, TVA may be required to treat the water, reduce generation at its affected facilities to levels compatible with the available supply of water, or take additional steps that change how TVA conducts its operations or cause TVA to incur additional expense. Catastrophic events may negatively affect TVA's cash flows, results of operations, and financial condition. TVA's cash flows, results of operations, and financial condition may be adversely affected, either directly or indirectly, by catastrophic events such as fires, earthquakes, explosions, solar events, electromagnetic pulses ("EMPs"), geomagnetic disturbances, droughts, floods, hurricanes, tornadoes, or other casualty events, wars, national emergencies, terrorist activities, pandemics, or other similar destructive or disruptive events. These events, the frequency and severity of which are unpredictable, may, among other things, lead to legislative or regulatory changes that affect the construction, operation, and decommissioning of nuclear units and the storage of spent fuel; limit or disrupt TVA's ability to generate and transmit power; limit or disrupt TVA's ability to provide flood control and river management; reduce the demand for power; disrupt fuel or other supplies; require TVA to produce additional tritium; lead to an economic downturn; require TVA to make substantial capital investments for repairs, improvements, or modifications; and create instability in the financial markets. If public opposition to nuclear power makes operating nuclear plants less feasible as a result of any of these events, TVA may be forced to shut down its nuclear plants. This would make it substantially more difficult for TVA to obtain greater amounts of its power supply from low or zero carbon emitting resources and to replace its generation capacity when faced with retiring or idling certain coal-fired units. Additionally, some studies have predicted that climate change may cause catastrophic events, such as droughts and floods, to occur more frequently in the Tennessee Valley region, which could adversely impact TVA. CYBERSECURITY RISKS TVA's facilities and information infrastructure may not operate as planned due to cyber threats to TVA's assets and operations. TVA's operations are heavily computerized and include assets such as information technology and networking systems. As with all industries, the reliance on computerization and networking makes TVA a target for cyber attacks, and the risk of such attacks may increase as individual devices and equipment become accessible via the internet. TVA has been targeted by cyber attacks in the past and anticipates that it will be targeted in the future. These attacks may have been carried out, or in the future could be carried out, by individuals, groups, or nation states. Although TVA has extensive cyber safeguards and works with industry specialists and relevant governmental authorities to deter, stop, or mitigate cyber attacks, it is possible that these measures might not prevent all attacks. In such a case, a cyber attack could compromise sensitive data; significantly disrupt operations; require additional expenditures for cybersecurity; negatively affect TVA's cash flows, results of operations, financial condition, and reputation; and pose health and safety risks. Additionally, the theft, damage, or improper disclosure of sensitive data may subject TVA to penalties and claims from third parties. 39 Table of Contents Cyber attacks on third parties could interfere with or harm TVA. TVA relies on third parties for various services, including transferring funds to non-TVA entities in the ordinary course of business. As with TVA, these third parties are heavily computerized and use assets such as information technology and networking systems. If these third parties undergo cyber attacks, the services they provide TVA could be disrupted. This disruption could interfere with TVA's ability to perform its obligations to others, transfer funds, or make payments, which in turn could negatively affect TVA's financial condition and reputation. Additionally, the theft, damage, or improper disclosure of sensitive data held by these third parties may subject TVA to further harm. FINANCIAL, ECONOMIC, AND MARKET RISKS TVA may have to make significant contributions in the future to fund its qualified pension plan. At September 30, 2020, TVA's qualified pension plan had assets of approximately $8.0 billion compared to liabilities of approximately $13.7 billion. The plan is mature with approximately 24,000 retirees and beneficiaries receiving benefits of over $700 million per year. The costs of providing benefits depend upon a number of factors, including, but not limited to, provisions of the plan; changing experience and assumptions related to terminations, retirements, and mortality; rates of increase in compensation levels; rates of return on plan assets; discount rates used in determining future benefit obligations and required funding levels; optional forms of benefit payments selected; future government regulation; and levels of contributions made to the plan. Although the plan is frozen to new participants, any of these factors or any number of these factors could keep at high levels, or even increase, the costs of providing benefits and require TVA to make contributions to the plan in amounts that significantly exceed TVA's planned contributions. Unfavorable financial market conditions may result in lower expected rates of return on plan assets, loss in value of the investments, and lower discount rates used in determining future benefit obligations. These changes would negatively impact the funded status of the plan. Additional contributions to the plan and absorption of additional costs would negatively affect TVA's cash flows, results of operations, and financial condition. TVA's debt ceiling could be made more restrictive. Additionally, approaching or reaching TVA's debt ceiling could limit TVA's ability to carry out its business. The TVA Act provides that TVA can issue Bonds in an amount not to exceed $30.0 billion outstanding at any time. At September 30, 2020, TVA had $20.1 billion of Bonds outstanding (not including non-cash items of foreign currency exchange gain of $153 million, unamortized debt issue costs of $45 million, and net discount on sale of Bonds of $77 million). Approaching or reaching the debt ceiling may negatively affect TVA's business by limiting TVA's ability to access capital markets and increasing the amount of debt TVA must service. Also, federal legislation may lower TVA's debt ceiling or broaden the types of financial instruments that are covered by the ceiling. Either of these scenarios may also restrict TVA's ability to raise capital to acquire new power program assets or maintain existing ones, to carry out upgrades or improvements to existing assets or build new ones, to purchase power under long-term power purchase agreements, or to meet regulatory requirements. In addition, approaching or reaching the debt ceiling may lead to increased legislative or regulatory oversight of TVA's activities and could lead to negative rating actions by credit rating agencies. TVA may be unable to meet its current cash requirements if TVA's access to the debt markets is limited. TVA uses cash provided by operations together with proceeds from power program financings and other financing arrangements to fund its current cash requirements. It is critical that TVA continues to have access to the debt markets in order to meet its cash requirements. The importance of having access to the debt markets is underscored by the fact that TVA, unlike most utilities, relies almost entirely on debt capital since, as a governmental instrumentality, TVA cannot issue equity securities. TVA's credit ratings may be impacted by congressional actions or by a downgrade of the U.S.'s sovereign credit ratings. TVA's current credit ratings are not based solely on its underlying business or financial condition but are based to a large extent on the legislation that defines TVA's business structure. Key characteristics of TVA's business defined by legislation include (1) the TVA Board's ratemaking authority; (2) the current competitive environment, which is defined by the fence and the anti-cherrypicking provision; and (3) TVA's status as a corporate agency and instrumentality of the U.S. If Congress takes any action that effectively alters any of these characteristics, TVA's credit ratings could be downgraded. 40 Table of Contents Although TVA Bonds are not obligations of the U.S., TVA, as a corporate agency and instrumentality of the U.S., may be impacted if the sovereign credit ratings of the U.S. are downgraded. Such a downgrade of the U.S.'s sovereign credit ratings could, among other things, result in a downgrade of TVA's credit rating. Additionally, the economy could be negatively impacted resulting in reduced demand for electricity, an increase in borrowing costs, and an increase in the cost of fuels, supplies, and other materials required for TVA's operations. Additionally, the criteria used by the credit rating agencies to assign ratings could be changed at any time, which could result in changes to TVA's ratings. TVA, together with owners of TVA securities, may be impacted by downgrades of TVA's credit ratings. Downgrades of TVA's credit ratings may have material adverse effects on TVA's cash flows, results of operations, and financial condition as well as on investors in TVA securities. Among other things, a downgrade could increase TVA's interest expense by increasing the interest rates that TVA pays on new securities that it issues. Such an increase may reduce the amount of cash available for other purposes, which may result in the need to increase borrowings, to reduce other expenses or capital investments, or to increase power rates. A downgrade may also result in TVA's having to post collateral under certain physical and financial contracts that contain ratings triggers. A downgrade below a contractual threshold may prevent TVA from borrowing under four credit facilities totaling $2.7 billion or posting letters of credit as collateral under these facilities. At September 30, 2020, there were $1.5 billion of letters of credit outstanding under these facilities. If TVA were no longer able to post letters of credit as collateral, TVA would likely have to post cash as collateral, which would negatively affect TVA's liquidity. Further, a downgrade may lower the price of TVA securities in the secondary market, thereby negatively impacting investors who sell TVA securities after the downgrade and diminishing the attractiveness and marketability of TVA securities. The criteria used by credit rating agencies to assign ratings could also be changed at any time, which could result in changes to TVA's ratings. TVA's assumptions about the future may be inaccurate. TVA uses certain assumptions in order to develop its plans for the future. Such assumptions include economic forecasts, anticipated energy and commodity prices, cost estimates, construction schedules, power demand forecasts, the appropriate generation mix to meet demand, and potential regulatory environments. Should these assumptions be inaccurate, or be superseded by subsequent events, TVA's plans may not be effective in achieving the intended results, which could negatively affect cash flows, results of operations, and financial condition, as well as TVA's ability to meet electricity demand and the way TVA conducts its business. Demand for electricity may significantly decline or change, negatively affecting TVA's cash flows, results of operations, and financial condition. Some of the factors that could reduce or change the demand for electricity include, but are not limited to, the following: Economic Downturns or Recessions . Renewed economic downturns or a recession in TVA's service area or other parts of the U.S. could reduce overall demand for power and thus reduce TVA's power sales and cash flows, especially if TVA's industrial customers, which constitute a material portion of TVA's demand, reduce their operations and thus their consumption of power. Loss of Customers . TVA could lose customers, particularly LPCs, if customers choose another utility to meet some or all of their power needs where available, pursue self-generation to meet some or all of their power needs, or move their operations outside of TVA's service territory. At September 30, 2020, TVA had wholesale power contracts with 153 LPCs, and 64 LPCs had entered into Flexibility Agreements with TVA that allow the LPCs to locally generate up to approximately five percent of average total hourly energy sales over the prior five years in order to meet their individual customers' needs. A significant portion of TVA's total operating revenues are concentrated in a small number of these LPCs. In May 2020, TVA's largest LPC which accounts for nine percent of total operating revenues, MLGW, published a draft Integrated Resource Plan to guide energy choices in the future, the outcome of which is uncertain. In addition, certain other LPCs are evaluating options for future energy choices. The loss of customers could have a material adverse effect on TVA's cash flows, results of operations, or financial condition, and could result in higher rates, especially because of the difficulty in replacing customers due to the fence. A significant loss of customers could also impact investor confidence, resulting in TVA paying higher rates on its securities. Change in Demand for Electricity Generated from Renewable Sources. TVA has been adapting its generation mix to account for the growing preference for electricity generated by renewable sources, such as solar or wind. If demand by customers for power that is largely or exclusively generated from renewable sources exceeds TVA's ability to produce such power, TVA might have to change how it operates and may incur additional expense in meeting this demand. Increased Utilization of DER. As the amount of DER grows on the TVA system, the need for TVA's traditional generation resources may be reduced, and the ability of the system to reliably and economically operate in conjunction with these DER may become more challenging. If TVA is unable to compensate for the resulting 41 Table of Contents decrease in demand for TVA electricity, TVA's cash flows, results of operations, and financial condition could be negatively impacted, resulting in higher rates and changes to TVA's operations. Increased Energy Efficiency and Conservation . Increasingly efficient use of energy as well as conservation efforts have reduced the demand for power. Further reductions, if TVA is unable to compensate for them, could negatively affect TVA's cash flows, results of operations, and financial condition and could result in higher rates and changes to TVA's operations, especially if the reductions occur during an economic downturn or a period of slow economic growth. Changes in technology could require TVA to change how it conducts its operations, affect relationships with customers, or impact its financial condition. TVA's primary business is to sell power it produces, for the most part, from large facilities such as nuclear power plants, hydroelectric facilities, natural gas-fired facilities, and coal-fired units. TVA sells power to LPCs and directly served customers. Research and development activities are ongoing to improve existing and alternative technologies to produce or store electricity, including large-scale energy storage, gas or wind turbines, fuel cells, microturbines, solar cells, and distributed energy or storage resources. It is possible that advances in these or other alternative technologies could reduce the costs of such production methods to a level that will enable these technologies to compete effectively with traditional power plants such as TVA's. These technologies could be more appealing to customers and could lead them to bring pressure on TVA to modify the power contracts to allow customers to generate some of their own power requirements or purchase power from other suppliers. Other customers might also cease purchasing power from TVA altogether. To the extent that sales to such customers are reduced or eliminated, TVA's cash flows, results of operations, and financial condition could be negatively affected. TVA could also be required to modify how it operates its traditional plants or further modify its generation mix to reduce reliance on these facilities. Additionally, demand could change in terms of amount or timing as devices and equipment become more connected to the internet and it becomes possible to adjust real-time consumption of power. Such increased control over power consumption could, among other things, affect how TVA operates its facilities or dispatches power, or require TVA to change its pricing structure or rates. TVA is subject to a variety of market risks that may negatively affect TVA's cash flows, results of operations, and financial condition. TVA is subject to a variety of market risks, including, but not limited to, commodity price risk, investment price risk, interest rate risk, counterparty credit and performance risk, and currency exchange rate risk. Commodity Price Risk . TVA's rates may increase if prices of commodities critical to operations, including coal, uranium, natural gas, fuel oil, crude oil, construction materials, or emission allowances, increase. Investment Price Risk . TVA is exposed to investment price risk in its NDT, Asset Retirement Trust ("ART"), Supplemental Executive Retirement Plan ("SERP"), Deferred Compensation Plan ("DCP"), and pension plan. If the value of the investments held in the NDT or the pension fund either decreases or fails to increase in accordance with assumed rates of return, TVA may be required to make substantial contributions to these funds. In addition, although TVA is not required to make contributions to the ART, it may choose to do so, particularly if TVA's estimates of its non-nuclear asset retirement obligation liabilities increase. TVA may also choose to make contributions to the SERP and DCP from time to time. Interest Rate Risk . Changes in interest rates may increase the amount of interest that TVA pays on new Bonds that it issues, decrease the return that TVA receives on short-term investments, decrease the value of the investments in the NDT, ART, pension fund, SERP, and DCP, increase the amount of collateral that TVA is required to post in connection with certain of its derivative transactions, and increase the losses on the mark-to-market valuation of certain derivative transactions into which TVA has entered. Counterparty Credit and Performance Risk . TVA is exposed to the risk that its counterparties will not be able to perform their contractual obligations. If TVA's counterparties fail to perform their obligations, TVA's cash flows, results of operations, and financial condition may be adversely affected. In addition, the failure of a counterparty to perform may make it difficult for TVA to perform its obligations, particularly if the counterparty is a supplier of electricity or fuel. Currency Exchange Rate Risk . Over the next several years, TVA expects to spend a significant amount of capital on various projects. A portion of this amount may be spent on contracts that are denominated in one or more foreign currencies. Additionally, TVA's three issues of Bonds denominated in British pounds sterling are hedged by currency swap agreements. The value of the U.S. dollar compared with other currencies has fluctuated widely in recent years, including fluctuations in the U.S. dollar to British pound sterling exchange rate primarily driven by the "BREXIT" vote for the United Kingdom to leave the European Union. If not effectively managed, foreign currency 42 Table of Contents exposure could negatively impact TVA's counterparty risk, cash flows, results of operations, and financial condition. Changes in an interest rate benchmark may impact certain TVA swaps and other financial arrangements. TVA has four "fixed for floating" interest rate swaps related to outstanding Bonds and receives periodic payments under these swaps based on the floating London Interbank Offered Rate ("LIBOR") benchmark rate. TVA may also have additional contracts that could be impacted. LIBOR is expected to be discontinued after 2021. Various alternatives for LIBOR are being evaluated by market participants, with the Secured Overnight Financing Rate being the most widely-adopted alternative thus far. TVA may face risks related to the viability of an alternative benchmark over the remaining terms of its current contracts, or over the terms of any future contracts that rely on the benchmark rate. TVA's ability to use derivatives to hedge certain risks may be limited. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulations, TVA is subject to recordkeeping, reporting, and reconciliation requirements related to its derivative transactions. In addition, depending on how regulatory agencies interpret and implement the provisions of this act, TVA's hedging costs may increase, and TVA may have to post additional collateral and margin in connection with its derivative transactions. These occurrences may, among other things, negatively affect TVA's cash flows and cause TVA to reduce or modify its hedging activities, which could increase the risks to which TVA is exposed. The market for TVA Bonds might be limited. Although many TVA Bonds are listed on stock exchanges, there can be no assurances that any market will develop or continue to exist for any Bonds. Additionally, no assurances can be made as to the ability of the holders to sell their Bonds or as to the price at which holders will be able to sell their Bonds. Future trading prices of Bonds will depend on many factors, including prevailing interest rates, the then-current ratings assigned to the Bonds, the amount of Bonds outstanding, the time remaining until the maturity of the Bonds, the redemption features of the Bonds, the market for similar securities, and the level, direction, and volatility of interest rates generally, as well as the liquidity of the markets for those securities. If a particular series of Bonds is offered through underwriters, those underwriters may attempt to make a market in the Bonds. Dealers other than underwriters may also make a market in TVA Bonds. However, the underwriters and dealers are not obligated to make a market in any TVA Bonds and may terminate any market-making activities at any time without notice. Further, certain investors use the environmental impact or sustainability of an industry as a criteria for deciding whether to invest in that industry. TVA's use of fossil fuels or nuclear power could lead such investors to not purchase TVA Bonds. In addition, legal limitations may affect the ability of banks and others to invest in Bonds. For example, national banks may purchase TVA Bonds for their own accounts in an amount not to exceed 10 percent of unimpaired capital and surplus. Also, TVA Bonds are "obligations of a corporation which is an instrumentality of the United States" within the meaning of Section 7701(a)(19)(C)(ii) of the Internal Revenue Code for purposes of the 60 percent of assets limitation applicable to U.S. building and loan associations. Payment of principal and interest on TVA securities is not guaranteed by the U.S. Although TVA is a corporate agency and instrumentality of the U.S. government, TVA securities are not backed by the full faith and credit of the U.S. Principal and interest on TVA securities are payable solely from TVA's net power proceeds. Net power proceeds are the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein. If TVA were to experience extreme financial difficulty and were unable to make payments of principal or interest on its Bonds, the federal government would not be legally obligated to prevent TVA from defaulting on its obligations. An inability to pay some or all of the principal or interest owed on a TVA security would likely have a negative impact on TVA's financial condition, reputation, and relationship with the investment community, and could result in cross-defaults in other financial arrangements. HUMAN CAPITAL AND MANAGEMENT RISKS Failure to attract and retain an appropriately qualified workforce may negatively affect TVA's results of operations. TVA's business depends on its ability to recruit and retain key executive officers as well as skilled professional and 43 Table of Contents technical employees. The inability to attract and retain an appropriately qualified, diverse, and inclusive workforce could adversely affect TVA's ability to, among other things, operate and maintain generation and transmission facilities, complete large construction projects, and successfully implement its continuous improvement initiatives. If Congress reduces the salary of TVA's CEO or otherwise amends TVA's compensation philosophy, TVA's ability to attract and retain employees may be compromised. Loss of a quorum of the TVA Board could limit TVA's ability to adapt to meet changing business conditions. Under the TVA Act, a quorum of the TVA Board is five members. Becoming a member of the TVA Board requires confirmation by the U.S. Senate following appointment by the President. Further, the President may remove TVA Board members, and the TVA Board members may not continue in office indefinitely until a successor is appointed. As a result, a delay in the appointment or confirmation of directors, or the removal of directors by the President, can threaten the TVA Board's quorum. The TVA Board is responsible for, among other things, establishing the rates TVA charges for power as well as TVA's long-term objectives, policies, and plans. Accordingly, loss of a quorum for an extended period of time would impair TVA's ability to change rates and to modify these objectives, policies, and plans. Such an impairment would likely have a negative impact on TVA's ability to respond to significant changes in technology, the regulatory environment, or the industry overall and, in turn, negatively affect TVA's cash flows, results of operations, financial condition, and reputation. Changes in the membership of the TVA Board and TVA senior management could impact how TVA operates. The TVA Board is comprised of up to nine part-time members serving staggered, five-year terms. One to two Board members' terms typically expire each year. In addition, there is always the possibility that one or more members of TVA's senior management may retire or otherwise leave TVA. The individuals filling either the TVA Board or senior management positions may wish to change how TVA operates in whole or in part. If the changes are not successful or TVA is not able to adapt properly to such changes, TVA's financial condition, results of operations, reputation, and relationship with customers could be negatively affected. ACCOUNTING AND FINANCIAL REPORTING RISKS TVA may be unable to use regulatory accounting for some or all costs. TVA uses regulatory accounting to defer certain costs. To qualify for regulatory accounting, costs must meet certain accounting criteria and be approved for regulatory accounting treatment by the TVA Board in its capacity as TVA's regulator. If costs do not meet, or cease to meet, these criteria, or if the TVA Board disallows the treatment or ceases to be TVA's sole regulator in such areas, TVA may not be able to defer those costs. Such an inability to defer costs would likely have a substantial impact on TVA's financial condition and results of operations and could impact the timing and amounts of TVA's rate recovery. For a discussion of regulatory accounting, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates . TVA's financial control system cannot guarantee that all control issues and instances of fraud or errors will be detected. No financial control system, no matter how well designed and operated, can provide absolute assurance that the objectives of the control system are met, and no evaluation of financial controls can provide absolute assurance that all control issues and instances of fraud or errors can be detected. The design of any system of financial controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. GENERAL BUSINESS RISKS TVA may not be able to implement its business strategy successfully. TVA's financial condition and results of operations are largely dependent on the extent to which it can implement its business strategy successfully. TVA's strategy includes maintaining low rates, aligning operations and maintenance spending with revenues, being responsible stewards, living within its means, meeting reliability expectations, and providing a balanced portfolio, in light of TVA's new strategic priorities: powerful partnerships, people advantage, operational excellence, igniting innovation, and financial strength. This strategy is subject to business, economic, and competitive uncertainties and contingencies, many of which are beyond TVA's control. If TVA is unable to successfully implement its business strategy, TVA's financial condition and results of operations could be negatively affected. TVA's cost management efforts may not be successful. TVA is continuing to improve operating efficiencies to offset any potential future reductions in power demand and maintain its rates, reputation, cash flows, results of operations, and financial condition. The failure to achieve or 44 Table of Contents maintain cost reductions could adversely affect TVA's rates, reputation, cash flows, results of operations, and financial condition. TVA's organizational structure may not adequately support TVA's anticipated business needs or enable it to meet the needs of its current or potential customers. TVA has been modifying its organizational structure to better adapt to the forecasted economic environment. If TVA's assumptions about either its forecasts or the proper internal structure of the company to meet the expected environment are inaccurate or if this structure does not adequately support TVA's needs, TVA could face operational or financial challenges that could adversely affect its cash flows, results of operations, and financial condition as well as TVA's ability to attract or retain a skilled workforce and to meet the needs of its current or potential customers. TVA may have difficulty in adapting its business model to changes in the utility industry and customer preferences. The traditional business model for power production, selling power from centrally located plants, is facing pressure from a variety of sources, including the potential for self-generation by current or potential customers, new technologies such as energy storage, and increased energy efficiency. These pressures may reduce the demand for TVA power. If TVA does not or cannot adapt to this pressure by adequately changing its business model, TVA's financial condition and results of operations could be negatively affected. TVA's reputation may be negatively impacted. As with any company, TVA's reputation is a vital element of its ability to effectively conduct its business. TVA's reputation could be harmed by a variety of factors, including the failure of a generating asset or supporting infrastructure, failure to effectively manage land and other natural resources entrusted to TVA, real or perceived violations of environmental regulations, real or perceived issues with TVA's safety culture or work environment, significant delays in construction projects, acts or omissions of TVA management, acts or omissions of a contractor or other third-party working with or for TVA, the perception of such acts or omissions, measures taken to offset reductions in demand, or a significant dispute with one of TVA's customers. Any deterioration in TVA's reputation may harm TVA's relationships with its customers and stakeholders, may increase its cost of doing business, may interfere with its ability to attract and retain a skilled workforce, and may potentially lead to the enactment of new laws and regulations, or the modification of existing laws and regulations, that negatively affect the way TVA conducts its business. ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2. PROPERTIES TVA holds personal property in its own name but holds real property as agent for the U.S. TVA may acquire real property as an agent of the U.S. by negotiated purchase or by eminent domain. Generating Properties At September 30, 2020, TVA-operated generating assets consisted of seven nuclear units, 25 active coal-fired units, 86 simple-cycle units, one cogeneration unit, 14 combined-cycle power blocks, 109 conventional hydroelectric units, four pumped-storage units, five diesel generator units, and 14 solar sites. As of September 30, 2020, eight of the simple-cycle combustion turbine units and four of the combined-cycle power blocks were leased to special purpose entities ("SPEs") and leased back to TVA under long-term leases. See Note 10 — Variable Interest Entities and Note 13 — Debt and Other Obligations — Lease/Leasebacks . In addition, TVA is leasing the three Caledonia combined-cycle power blocks under a long-term lease. For a discussion of these assets, see Item 1, Business — Power Supply and Load Management Resources . 45 Table of Contents Net Capability The following table summarizes TVA's summer net capability in MW at September 30, 2020: SUMMER NET CAPABILITY (1) At September 30, 2020 Source of Capability Location Number of Units Summer Net Capability (MW) Date First Unit Placed in Service (CY) Date Last Unit Placed in Service (CY) TVA-Operated Generating Facilities Nuclear Browns Ferry (2) Alabama 3 3,309 1974 1977 Sequoyah Tennessee 2 2,292 1981 1982 Watts Bar Tennessee 2 2,321 1996 2016 Total Nuclear 7 7,922 Coal-Fired Bull Run Tennessee 1 865 1967 1967 Cumberland Tennessee 2 2,470 1973 1973 Gallatin Tennessee 4 976 1956 1959 Kingston Tennessee 9 1,398 1954 1955 Shawnee Kentucky 9 1,206 1953 1955 Total Coal-Fired 25 6,915 Natural Gas and/or Oil-Fired (3)(4) Simple-Cycle Combustion Turbine Allen Tennessee 20 456 1971 1972 Brownsville Tennessee 4 468 1999 1999 Colbert Alabama 8 392 1972 1972 Gallatin Tennessee 8 642 1975 2000 Gleason Tennessee 3 500 2000 2000 Johnsonville Tennessee 19 1,189 1975 2000 Kemper Mississippi 4 348 2002 2002 Lagoon Creek Tennessee 12 1,048 2001 2002 Marshall County Kentucky 8 608 2002 2002 Subtotal Simple-Cycle Combustion Turbine 86 5,651 Combined-Cycle Combustion Turbine Ackerman (5) Mississippi 1 713 2007 2007 Allen (6) Tennessee 1 1,106 2018 2018 Caledonia (7) Mississippi 3 765 2003 2003 John Sevier (8) Tennessee 1 871 2012 2012 Lagoon Creek (9) Tennessee 1 525 2010 2010 Magnolia Mississippi 3 918 2003 2003 Paradise (10) Kentucky 1 1,100 2017 2017 Southaven Mississippi 3 780 2003 2003 Subtotal Combined-Cycle Combustion Turbine 14 6,778 Co-Generation Johnsonville Tennessee 1 80 1975 2000 Total Natural Gas and/or Oil-Fired 101 12,509 Hydroelectric Conventional Plants Alabama 36 1,176 1925 1962 Georgia 2 35 1931 1956 Kentucky 5 223 1944 1948 North Carolina 6 492 1940 1956 Tennessee 60 1,833 1912 1972 Pumped-Storage (11) Tennessee 4 1,635 1978 1979 Total Hydroelectric 113 5,394 Diesel Generator Meridian Mississippi 5 9 1998 1998 TVA Non-hydro Renewable Resources (12) 1 Total TVA-Operated Generating Facilities 32,750 Contract Renewable Resources (13) 324 Power Purchase and Other Agreements (14) 3,863 Total Summer Net Capability 36,937 Notes (1) Net capability is defined as the ability of an electric system, generating unit, or other system component to carry or generate power for a specified time period 46 Table of Contents and does not include operational limitations such as derates. (2) The summer net capability for Browns Ferry excludes the impact of the EPU project. The generating capability is expected to increase by an estimated 465 MW after sufficient run time to validate the new capacity upon issuance of the engineering memos. (3) See Generating Properties above for a discussion of TVA-operated natural gas and/or oil-fired facilities subject to leaseback and long-term lease arrangements. (4) Peak firing of simple-cycle combustion turbine units accounts for 326 MW of short-term capability. (5) Ackerman Combined Cycle Facility is a single steam cycle unit driven by two gas turbines (2x1 configuration). (6) Allen Combined Cycle Facility is a single steam cycle unit driven by two gas turbines (2x1 configuration). (7) Caledonia Combined Cycle Plant is currently a leased facility operated by TVA. (8) John Sevier Combined Cycle Facility is a single steam cycle unit driven by three gas turbines (3x1 configuration). (9) Lagoon Creek Combined Cycle Facility is a single steam cycle unit driven by two gas turbines (2x1 configuration). (10) Paradise Combined Cycle Facility is a single steam cycle unit driven by three gas turbines (3x1 configuration). (11) See Item 1, Business — Power Supply and Load Management Resources — Hiwassee Hydro Unit 2 for a discussion of Hiwassee Hydro Unit 2. (12) TVA owns approximately 1 MW of solar installations at 14 solar sites. (13) Contract Renewable Resources include capability from various renewable energy programs established by TVA to encourage the development of solar, wind, biomass, and low-impact hydroelectric generation systems across the Tennessee Valley. (14) Power Purchase and Other Agreements includes renewable resources. See Item 1, Business — Power Supply and Load Management Resources — Power Purchase and Other Agreements for information on renewable energy power purchase contracts. Transmission Properties TVA's transmission system interconnects with systems of surrounding utilities and consisted primarily of the following assets at September 30, 2020: • Approximately 2,500 circuit miles of 500 kilovolt, 11,800 circuit miles of 161 kilovolt, 2,000 circuit miles of other voltage transmission lines, and 3,900 miles of fiber optic lines; • 517 transmission substations, power switchyards, and switching stations; and • 1,322 customer connection points (customer, generation, and interconnection). At September 30, 2020, certain qualified technological equipment and other software related to TVA's transmission system were leased to private entities and leased back to TVA under long-term leases. See Note 13 — Debt and Other Obligations — Lease/Leasebacks and Note 22 — Commitments and Contingencies — Commitments — Leasebacks . Natural Resource Stewardship Properties TVA operates and maintains 49 dams and manages the following natural resource stewardship properties: • Approximately 11,000 miles of reservoir shoreline; • Approximately 293,000 acres of reservoir land; • Approximately 650,000 surface acres of reservoir water; and • Approximately 100 public recreation areas throughout the Tennessee Valley, including campgrounds, day-use areas, and boat launching ramps. Additionally, TVA manages over 170 agreements for commercial recreation (such as campgrounds and marinas). As part of its stewardship responsibilities, TVA approval is required to be obtained before any obstruction affecting navigation, flood control, or public lands can be constructed in or along the Tennessee River and its tributaries. These public lands and waters managed by TVA provide both conservation and responsible recreation, and serve as a driver for nearly $12.0 billion dollars of annual economic activity across the Tennessee Valley each year. Buildings TVA has a variety of buildings and structures located throughout its service area including generation and transmission facilities, corporate offices, customer service centers, power service centers, warehouses, visitor centers, and crew quarters. Two significant buildings are its Knoxville Office Complex ("KOC") and the Chattanooga Office Complex in Tennessee. In 2013, TVA initiated a study of its real estate portfolio for the purpose of reducing cost, right-sizing the portfolio, and aligning its real estate with TVA's strategic direction over the next 10 to 20 years. As part of this effort, TVA completed a comprehensive assessment of its real estate holdings in the Knoxville region in 2016. For a discussion of these real estate holdings, see Disposal of Property — Knoxville Property below. Disposal of Property TVA has broad authority to dispose of personal property but only limited authority to dispose of real property. TVA's primary, but not exclusive, authority to dispose of real property is briefly described below: • TVA has authority to dispose of surplus real property at a public auction; • TVA may dispose of real property for certain specified purposes, including providing replacement lands for certain entities whose lands were flooded or destroyed by dam or reservoir construction, providing real property for recreational use, and granting easements and rights-of-way upon which are located transmission or distribution lines; 47 Table of Contents • TVA can dispose of real property in connection with the construction of generating plants or other facilities under certain circumstances; and • TVA has authority to grant easements for rights-of-way and other purposes. The Basic Tennessee Valley Authority Power Bond Resolution adopted by the TVA Board on October 6, 1960, as amended on September 28, 1976, October 17, 1989, and March 25, 1992 (the "Basic Resolution") prohibits TVA from mortgaging any part of its power properties and from disposing of all or any substantial portion of these properties unless TVA provides for a continuance of the interest, principal, and sinking fund payments due and to become due on all outstanding Bonds, or for the retirement of such Bonds. Knoxville Property. In 2016, TVA completed a comprehensive assessment of its real estate holdings in the Knoxville, Tennessee region including the KOC and adjacent Summer Place Complex ("SPC"). As a result of this study and a subsequent Environmental Assessment in 2017, TVA has consolidated its Knoxville area employees into the West Tower of the KOC and the Greenway Drive Transmission Service Center, and is completing the centralized field offices in Norris, Tennessee. As part of this consolidation effort, TVA approved the conveyance of the SPC and the East Tower of the KOC and the transaction closed in August 2020. ITEM 3. LEGAL PROCEEDINGS From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting TVA's activities, as a result of catastrophic events or otherwise. While the outcome of the Legal Proceedings to which TVA is a party cannot be predicted with certainty, any adverse outcome to a Legal Proceeding involving TVA may have a material adverse effect on TVA's cash flows, results of operations, and financial condition. For a discussion of Legal Proceedings involving TVA, see Note 22 — Commitments and Contingencies — Legal Proceedings, which discussions are incorporated by reference into this Item 3. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 48 Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Not applicable. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the years 2016 through 2020 should be read in conjunction with the audited financial statements and notes thereto (collectively, the "Consolidated Financial Statements") presented in Item 8, Financial Statements and Supplementary Data. Certain reclassifications have been made to the 2016, 2017, and 2018 financial statement presentations to conform to the 2019 and 2020 presentations. Selected Financial Data (1)(2) For the years ended, or at, September 30 (dollars in millions) 2020 2019 2018 2017 2016 Sales (millions of kWh) 151,251 158,443 160,338 152,362 155,855 Peak load (MW) (3) 28,931 29,569 32,509 29,899 29,824 Operating revenues $ 10,249 $ 11,318 $ 11,233 $ 10,739 $ 10,616 Net income $ 1,352 $ 1,417 $ 1,119 $ 685 $ 1,233 Total assets $ 52,825 $ 50,467 $ 48,667 $ 50,017 $ 50,494 Financial obligations Long-term debt, net (4) Long-term power bonds, net $ 17,956 $ 19,094 $ 20,157 $ 20,205 $ 20,901 Long-term debt of variable interest entities, net 1,048 1,089 1,127 1,164 1,199 Long-term notes payable — — 23 69 48 Total long-term debt, net $ 19,004 $ 20,183 $ 21,307 $ 21,438 $ 22,148 Current debt, net (4) Short-term debt, net $ 57 $ 922 $ 1,216 $ 1,998 $ 1,407 Current maturities of power bonds 1,787 1,030 1,032 1,728 1,555 Current maturities of long-term debt of variable interest entities 41 39 38 36 35 Current maturities of notes payable — 23 46 53 27 Total current debt, net $ 1,885 $ 2,014 $ 2,332 $ 3,815 $ 3,024 Total debt (4) $ 20,889 $ 22,197 $ 23,639 $ 25,253 $ 25,172 Finance leases (5) $ 566 $ 187 $ 182 $ 187 $ 181 Leaseback obligations $ 223 $ 263 $ 301 $ 339 $ 467 Notes (1) See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for a description of certain items in 2020, 2019, and 2018 affecting results in those years. (2) See Item 1A, Risk Factors and Note 22 — Commitments and Contingencies for a discussion of risks and contingencies that could affect TVA's future financial results. (3) TVA met an all-time summer peak demand of 33,482 megawatts ("MW") on August 16, 2007, at 102 degrees Fahrenheit and an all-time winter peak demand of 33,352 MW on January 24, 2014, at 7.3 degrees Fahrenheit. (4) See Note 10 — Variable Interest Entities and Note 13 — Debt and Other Obligations — Debt Outstanding . (5) Included in Accounts payable and accrued liabilities and Finance lease liabilities on the Consolidated Balance Sheets. 49 Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions except where noted) The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the Tennessee Valley Authority ("TVA"), its operations, and its present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, TVA's consolidated financial statements and the accompanying notes thereto contained in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K for the fiscal year ended September 30, 2020 (the "Annual Report"). See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in TVA's Annual Report on Form 10-K/A for the year ended September 30, 2019, filed with the Securities and Exchange Commission on November 15, 2019, for a discussion of variance drivers for the year ended September 30, 2019, as compared to the year ended September 30, 2018. The MD&A includes the following sections: • Business and Mission — a general description of TVA's business, objectives, strategic priorities, and core capabilities; • Executive Overview — a general overview of TVA's activities and results of operations for 2020; • Results of Operations — an analysis of TVA's consolidated results of operations for 2019 and 2020; • Liquidity and Capital Resources — an analysis of cash flows, a description of aggregate contractual obligations, and an overview of financial position; • Key Initiatives and Challenges — an overview of current and future initiatives and challenges facing TVA; • Critical Accounting Policies and Estimates — a summary of accounting policies that require critical judgments and estimates; • Fair Value Measurements — a description of TVA's investments and derivative instruments and valuation considerations; • Legislative and Regulatory Matters — a summary of laws and regulations that may impact TVA; and • Risk Management Activities — a description of TVA's risk governance and exposure to various market risks. Business and Mission Business TVA operates the nation's largest public power system. At September 30, 2020, TVA provided electricity to approximately 49 large industrial customers, seven federal agency customers, and 153 local power company customers ("LPCs") that serve approximately 10 million people in parts of seven southeastern states. TVA generates nearly all of its revenues from the sale of electricity, and in 2020 revenues from the sale of electricity totaled $10.1 billion. As a wholly-owned agency and instrumentality of the United States ("U.S."), however, TVA differs from other electric utilities in a number of ways: • TVA is a government corporation. • The area in which TVA sells power is limited by the Tennessee Valley Authority Act of 1933, as amended (the "TVA Act") under a provision known as the "fence"; however, another provision of federal law known as the "anti-cherrypicking" provision generally protects TVA from being forced to provide access to its transmission lines to others for the purpose of delivering power to customers within substantially all of TVA's defined service area. • The rates TVA charges for power are set solely by the TVA Board of Directors ("TVA Board") and are not set or reviewed by another entity, such as a public utility commission. In setting rates, however, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power be sold at rates as low as feasible. • TVA is not authorized to raise capital by issuing equity securities. TVA relies primarily on cash from operations and proceeds from power program borrowings to fund its operations and is authorized by the TVA Act to issue bonds, notes, or other evidences of indebtedness (collectively, "Bonds") in an amount not to exceed $30.0 billion outstanding at any given time. Although TVA's operations were originally funded primarily with appropriations from Congress, TVA has not received any appropriations from Congress for any activities since 1999 and, as directed by Congress, has funded essential stewardship activities primarily with power revenues. 50 Table of Contents TVA's Mission of Service TVA was built for the people, created by federal legislation, and charged with a unique mission - to improve the quality of life in a seven-state region through the integrated management of the region's resources. TVA's mission focuses on three key areas: ENERGY ENVIRONMENT ECONOMIC DEVELOPMENT • Energy — Delivering affordable, reliable power; • Environment — Caring for the region's natural resources; and • Economic Development — Creating sustainable economic growth. While TVA's mission has not changed since it was established in 1933, the climate in which TVA operates continues to evolve. The business and economic environment has become more challenging due to economic conditions; tougher environmental standards; and the need to diversify its power supply and adapt to changing customer usage behaviors, new technologies, and emerging, non-traditional competition. To continue to deliver its mission of service while evolving for future success, TVA must realize five strategic priorities: • Powerful Partnerships — Promoting progress through the shared success of TVA's customers and stakeholders; • People Advantage — Amplifying the energy, passion, and creativity within each TVA employee; • Operational Excellence — Building on TVA's best-in-class reputation for reliable service and competitively priced power; • Igniting Innovation — Pursuing innovative solutions for TVA and its customers and communities; and • Financial Strength — Investing in the future, while keeping energy costs as low as possible. TVA's mission sets the stage for its strategic planning process that includes strategic objectives, initiatives, and scorecards for performance designed to provide clear direction for improving TVA's core business. Linking the Mission to Performance TVA has formulated key performance measures to support its strategic priorities. The intent of these measures is to align employees to TVA's mission by focusing its collective efforts on operational excellence, fiscal responsibility, economic 51 Table of Contents development, and environmental stewardship. The measures are designed to promote teamwork, encourage high performance behaviors, and motivate TVA employees to achieve goals aligned with TVA's mission and values. The 2020 corporate results compared with targets for these key measures are reflected in the chart below, in addition to the 2021 corporate measures approved effective November 2020. See Item 11, Executive Compensation — Compensation Discussion and Analysis for information regarding how the measures are calculated. 2020 Corporate Measure Weight Actual Threshold Target Stretch TVA total spending ($ millions) 40% $ 4,441 $ 4,987 $ 4,847 $ 4,707 Load not served (system minutes) 30% 2.7 4.8 3.9 3.5 Nuclear unit capability factor (UCF) (%) 15% 90.0 % 89.5 % 90.9 % 92.2 % Combined cycle equivalent availability factor (%) 10% 84.0 % 72.6 % 77.6 % 85.4 % Coal equivalent availability factor (%) 5% 79.4 % 56.8 % 61.8 % 80.8 % 2021 Corporate Measure Weight Threshold Target Stretch TVA total spending ($ millions) 40% Budget Load not served (system minutes) 30% 4.6 3.9 3.4 Nuclear unit capability factor (UCF) (%) 15% 91.3 % 92.0 % 93.7 % Combined cycle equivalent availability factor (%) 10% 75.9 % 80.9 % 85.8 % Coal equivalent availability factor (%) 5% 59.0 % 64.0 % 82.1 % Executive Overview TVA's operating revenues were $10.2 billion and $11.3 billion for the years ended September 30, 2020 and 2019, respectively. The decrease in operating revenue was primarily due to lower sales volume as a result of milder weather for the TVA service area and impacts from the COVID-19 pandemic, as well as lower fuel cost recovery revenue from lower fuel rates. Despite record-setting heat experienced during October 2019 and record-setting cold during November 2019, TVA's service territory experienced overall milder weather during the year ended September 30, 2020, which decreased energy sales. TVA also experienced lower energy sales as a result of the COVID-19 pandemic, driven by certain commercial and industrial customers curtailing operations in response to COVID-19 pandemic social distancing standards and economic conditions. TVA estimates base revenues were reduced by approximately $185 million for the year ended September 30, 2020, due to the impacts of COVID-19. Despite the reduction in revenue due to the COVID-19 pandemic, TVA was able to meet its financial targets, which would not have been possible without the financial discipline of TVA employees. TVA expects the COVID-19 pandemic to continue impacting revenue for 2021 and has planned for $10.0 billion in operating revenue. It is uncertain at this time the extent to which TVA's revenues may be impacted beyond 2021. Fuel and purchased power expen se decreased $439 million for th e year ended September 30, 2020, as compared to the prior year. This decrease was primarily due to lower effective fuel rates and lower purchased power and fuel volume driven by decreased demand, resulting from overall milder weather and the COVID-19 pandemic. Operating and maintenance expense decreased $370 million for the year ended September 30, 2020, as compared to the prior year. This was primarily driven by prior year recovery of the regulatory asset for environmental cleanup costs related to the Kingston ash spill. Depreciation and amortization expense decreased $147 million for the year ended September 30, 2020, as compared to the same period of the prior year. This decrease was primarily due to a decrease in depreciation expense as a result of the decision in 2019 to accelerate the retirements of Bull Run Fossil Plant ("Bull Run") and Paradise Fossil Plant ("Paradise"). In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to be a serious challenge throughout the U.S. In addition to impacts to TVA, the COVID-19 pandemic has also created economic uncertainty for TVA's LPCs and the communities they serve. To support LPCs and strengthen the public power response to the COVID-19 pandemic, in March 2020, the TVA Board approved the Public Power Support and Stabilization Program, offering up to $1.0 billion of credit support to provide temporary financial relief for its LPCs in the form of deferred payments of power bills under certain circumstances. In addition, in August 2020, the TVA Board approved a $200 million Pandemic Relief Credit that will apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA's directly served customers as a 2.5 percent monthly base rate credit during 2021. TVA continues to coordinate with LPCs and partners to understand the impact of the COVID-19 pandemic to its service territory. 52 Table of Contents TVA's operations and delivery of energy to customers have not been materially impacted by the COVID-19 pandemic at this time. TVA experienced fluctuations related to its pension plan assets and other investment portfolios during the year ended September 30, 2020, which had substantially recovered as of September 30, 2020. In response to the reductions in revenue, TVA has implemented various cost savings initiatives, such as deferring and prioritizing certain capital projects and decreasing discretionary spending. Due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA increased its target balance of Cash and cash equivalents beginning in March 2020 and continued to hold higher target cash balances at September 30, 2020. TVA continues to monitor the situation and will adjust its response as necessary to ensure reliable service while protecting the safety and health of its workforce and sustaining business operations. See Key Initiatives and Challenges — Coronavirus Pandemic for an expanded discussion of the impact to TVA and related initiatives. During 2020, TVA continued to achieve 99.999 percent reliability in delivering energy to its customers. TVA's reliability and economic development efforts continued to attract and encourage the expansion of business and industries in the Tennessee Valley, with over $8.6 billion in investments and approximately 67,000 jobs created or retained during the year. Results of Operations Sales of Electricity Sales of electricity, which accounted for nearly all of TVA's operating revenues, were 151,251 and 158,443 million kilowatt hours ("kWh") in 2020 and 2019, respectively. TVA sells power at wholesale rates to LPCs who then resell the power to their customers at retail rates. TVA also sells power to directly served customers, consisting primarily of federal agencies and customers with large or nonstandard loads. In addition, power exceeding the TVA system's needs is sold under exchange power arrangements with certain other power systems. The following chart compares TVA's sales of electricity by customer type for the years ended September 30, 2020 and 2019: Sales of Electricity For the years ended September 30 (millions of kWh) 53 Table of Contents The following charts show a breakdown of TVA's energy load: Note Information included in the charts above was derived from energy usage of directly served customers and customers served by LPCs during calendar year 2019, and these graphs will continue to be updated on a calendar year basis. Weather affects both the demand for TVA power and the price for that power. TVA uses degree days to measure the impact of weather on its power operations. Degree days measure the extent to which the TVA system 23-station average temperatures vary from 65 degrees Fahrenheit. Although weather is generally a primary driver of changes in demand for TVA power, the COVID-19 pandemic has also had a significant impact on sales of electricity for the year ended September 30, 2020. Degree Days 2020 Normal Percent Variation 2019 Normal Percent Variation 2020 2019 Percent Change Heating Degree Days 3,056 3,369 (9.3) % 3,219 3,360 (4.2) % 3,056 3,219 (5.1) % Cooling Degree Days 1,688 1,691 (0.2) % 2,020 1,686 19.8 % 1,688 2,020 (16.4) % Sales of electricity decreased approximately five percent for the year ended September 30, 2020, as compared to the prior year, primarily due to overall milder weather and the COVID-19 pandemic. Despite record-setting heat experienced during October 2019 and record-setting cold during November 2019, overall milder weather across TVA's service territory accounted for approximately 60 percent of the change in sales of electricity from the prior year. The remaining decrease in sales of electricity was predominantly due to COVID-19, driven by certain commercial and industrial customers curtailing operations in response to social distancing standards and economic conditions. Financial Results The following table compares operating results for 2020 and 2019: Summary Consolidated Statements of Operations 2020 2019 Operating revenues $ 10,249 $ 11,318 Operating expenses 7,538 8,507 Operating income 2,711 2,811 Other income, net 36 62 Other net periodic benefit cost 253 258 Interest expense, net 1,142 1,198 Net income $ 1,352 $ 1,417 54 Table of Contents Operating Revenues. Operating revenues for the years ended September 30, 2020 and 2019, consisted of the following: Operating Revenues For the years ended September 30 TVA's two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES accounted for nine percent and eight percent, respectively, of TVA's total operating revenues during both the years ended September 30, 2020 and 2019. In May 2020, MLGW published a draft Integrated Resource Plan ("IRP") to guide energy choices in the future, and in July 2020, TVA made a proposal to MLGW that highlights the benefits of remaining a TVA customer. In August 2020, MLGW published a final IRP and announced their plan to issue requests for proposal ("RFPs") to validate the cost estimates included in the IRP. In addition, certain other LPCs are evaluating options for future energy choices. TVA's rate structure uses pricing signals to indicate seasons and hours of higher cost to serve its customers and to capture a portion of TVA's fixed costs in fixed charges. The structure includes three base revenue components: time of use demand charges, time of use energy charges, and a grid access charge ("GAC"). The demand charges are based upon the customer's peak monthly usage and increase as the peak increases. The energy charges are based on time differentiated kWh used by the customer. Both of these components can be significantly impacted by weather. The GAC captures a portion of fixed costs and is offset by a corresponding reduction to the energy rates. The GAC also reduces the impact of weather variability to the overall rate structure. Additionally, in 2019, the TVA Board approved a 20-year Partnership Agreement option that better aligns the length of LPC contracts with TVA's long-term commitments. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. As of November 16, 2020, 142 LPCs had signed the 20-year Partnership Agreement with TVA. In addition to base revenues, the rate structure also includes a separate fuel rate that recovers the costs of natural gas, fuel oil, purchased power, coal, emission allowances, nuclear fuel, and other fuel-related commodities; realized gains and losses on derivatives purchased to hedge the costs of such commodities; and payments to states and counties in lieu of taxes ("tax equivalents") associated with the fuel cost adjustments. See Item 1, Business — Rates — Rate Methodology . 55 Table of Contents The changes in revenue components are summarized below: 2020 2019 (2) Change Base revenue Energy revenue $ 4,546 $ 5,128 $ (582) Demand revenue (1) 3,426 3,609 (183) Grid access charge (4) 597 257 340 Long-term partnership credits for LPCs (163) (14) (149) Other charges and credits (3) (616) (624) 8 Total base revenue 7,790 8,356 (566) Fuel cost recovery 2,310 2,799 (489) Off-system sales 4 4 — Revenue from sales of electricity 10,104 11,159 (1,055) Other revenue 145 159 (14) Total operating revenues $ 10,249 $ 11,318 $ (1,069) Notes (1) Includes approximately $10 million in Back-to-Business credits in 2020 to provide relief to certain large customers affected by the COVID-19 pandemic. (2) For the year ended September 30, 2019, $14 million previously classified as Other charges and credits (a component of Base revenue), has been reclassified to Long-term partnership credits for LPCs (a component of Base revenue) to conform with current year presentation. (3) Includes economic development credits to promote growth in the Tennessee Valley, hydro preference credits for residential customers of LPCs, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. See Note 17 — Revenue. (4) All LPCs were presented with the option to implement the GAC in October 2018 or defer the implementation until October 2019. Seventy-nine LPCs elected to implement in October 2018, while the remaining LPCs implemented the wholesale changes in October 2019. Operating revenues decreased $1.1 billion for the year ended September 30, 2020, as compared to the prior year, primarily due to a $566 million decrease in base revenue and a $489 million decrease in fuel cost recovery revenue. The $566 million decrease in base revenue was driven by a decrease of $379 million attributable to lower sales volume and a decrease of $187 million attributable to lower effective rates. Lower sales volume resulted primarily from overall milder weather for the TVA service territory during year ended September 30, 2020 and from the COVID-19 pandemic. TVA estimates that the COVID-19 impact accounted for approximately $185 million of decreased base revenue. TVA expects the COVID-19 pandemic to continue impacting revenue for 2021 and has planned for $10.0 billion in operating revenue. It is uncertain at this time the extent to which TVA's revenues may be impacted beyond 2021. The $489 million decrease in fuel cost recovery revenue was driven by a $362 million decrease attributable to lower fuel rates and a $127 million decrease attributable to lower energy sales. The lower fuel rates experienced were primarily driven by lower market prices for natural gas. See Sales of Electricity above for further discussion of the change in the volume of sales of electricity and Operating Expenses below for further discussion of the change in fuel expense. Operating Expenses. Operating expense components as a percentage of total operating expenses for 2020 and 2019 consisted of the following: 56 Table of Contents Operating Expenses (in millions) 2020 2019 Change Operating expenses Fuel $ 1,584 $ 1,896 $ (312) Purchased power 880 1,007 (127) Operating and maintenance 2,720 3,090 (370) Depreciation and amortization 1,826 1,973 (147) Tax equivalents 528 541 (13) Total operating expenses $ 7,538 $ 8,507 $ (969) The following table summarizes TVA's expenses for various fuels for the years indicated: Fuel Expense for TVA-Owned Facilities (1) For the years ended September 30 Fuel Expense By Source Cost per kWh (4) 2020 2019 2020 2019 Coal (2) $ 533 $ 744 2.69 2.66 Natural gas and/or oil-fired (3) 660 783 1.96 2.47 Nuclear fuel 378 369 0.58 0.58 Total fuel $ 1,571 $ 1,896 1.33 1.54 Notes (1) Excludes effects of the fuel cost adjustment deferrals and amortization on fuel expense in the amount of $13 million for the year ended September 30, 2020. The effect on fuel expense from the fuel cost adjustment deferrals and amortization was less than $1 million for the year ended September 30, 2019, and therefore is not represented in the table above. (2) Fuel expense related to oil consumed for startup at coal-fired facilities was $17 million and $25 million for the years ended September 30, 2020 and 2019, respectively. (3) Fuel expense related to oil consumed for generation at natural gas and/or oil-fired facilities was $2 million for both the years ended September 30, 2020 and 2019. (4) Total cost per kWh is based on a weighted average. Fuel expense decreased $312 million for the year ended September 30, 2020, as compared to the prior year. This decrease was primarily due to lower effective fuel rates of $260 million resulting from lower natural gas prices. Also, the milder weather and COVID-19 pandemic reduced demand, resulting in a decrease in volume of $66 million. Partially offsetting these decreases was an increase of $14 million driven by variances in fuel rate recovery. Purchased power expense decreased $127 million for the year ended September 30, 2020, as compared to the prior year. This was primarily due to a reduction in volume of $110 million driven by decreased demand, resulting from the milder weather and COVID-19 pandemic. Lower effective rates contributed an additional $18 million to the decrease resulting from lower market prices for natural gas. Operating and maintenance expense decreased $370 million for the year ended September 30, 2020, as compared to the prior year. This was primarily driven by a decrease of $266 million of prior year recovery of the regulatory asset for environmental cleanup costs related to the Kingston ash spill. Additionally, project write-offs and materials and supplies inventory reserves and write-offs related to the retirement of Bull Run and Paradise decreased $157 million as compared to the prior year. Partially offsetting these decreases was $85 million of increased payroll and benefit costs due to labor escalation for cost of living increases and $28 million of increased contract labor related to the timing of nuclear outages, emergent work, and contract model transition. Depreciation and amortization expense decreased $147 million for the year ended September 30, 2020, as compared to the prior year. This decrease was primarily driven by a net decrease in depreciation expense of $199 million related to the decision in 2019 to accelerate the retirements of Bull Run and Paradise. Paradise was fully depreciated in the second quarter of 2020. Partially offsetting this decrease was a $25 million increase in amortization expense of non-nuclear decommissioning costs recovered in rates. The remaining variance was due to depreciation of additions to Completed plant. Tax equivalents expense decreased $13 million for the year ended September 30, 2020, as compared to the prior year. This change is primarily driven by a decrease in the tax equivalents collected in the fuel rate recovery. 57 Table of Contents The following table shows TVA's generation and purchased power by generating source as a percentage of all electrical power generated and purchased (based on kWh) for the periods indicated: Total Power Supply by Generating Source For the years ended September 30 (millions of kWh) 2020 2019 Coal-fired 19,825 13 % 27,934 17 % Nuclear 64,832 42 % 63,433 39 % Hydroelectric 16,003 10 % 16,058 10 % Natural gas and/or oil-fired 33,635 22 % 31,704 20 % Total TVA-operated generation facilities (1) 134,295 87 % 139,129 86 % Purchased power (non-renewable) (2) 11,592 8 % 14,105 9 % Purchased power (renewable) (3) 7,934 5 % 7,840 5 % Total purchased power 19,526 13 % 21,945 14 % Total power supply 153,821 100 % 161,074 100 % Notes (1) Generation from TVA-owned non-hydroelectric renewable resources is less than one percent for all periods shown and therefore is not represented in the table above. (2) Purchased power (non-renewable) includes generation from Caledonia Combined Cycle Plant ("Caledonia CC"), which is currently a leased facility operated by TVA. Generation from Caledonia CC was 4,229 million kWh and 4,181 million kWh for the years ended September 30, 2020 and 2019, respectively. (3) Purchased power (renewable) includes power purchased from the following renewable sources: hydroelectric, solar, wind, and cogeneration. Interest Expense . Interest expense and interest rates for 2020 and 2019, were as follows: Interest Expense and Rates For the years ended September 30 2020 2019 Percent Change Interest expense (1) $ 1,142 $ 1,198 (4.7) % Average blended debt balance (2) $ 21,978 $ 23,266 (5.5) % Average blended interest rate (3) 5.05 % 4.92 % 2.6 % Notes (1) Includes amortization of debt discounts, issuance, and reacquisition costs, net. (2) Includes average balances of long-term power bonds, debt of variable interest entities ("VIE"), and discount notes. (3) Includes interest on long-term power bonds, debt of VIE, and discount notes. Total interest expense decreased $56 million for the year ended September 30, 2020, as compared to the prior year. This was primarily driven by a decrease of $42 million due to lower average debt balances and $14 million due primarily to lower average short-term rates. Other Income (Expense), Net During 2020, Other income (expense), net decreased $26 million, primarily driven by $21 million of other income in 2019 related to a deposit liability received by TVA as a down payment on the sale of Bellefonte. The purchaser, Nuclear Development, LLC, failed to fulfill the requirements of the sales contract with respect to obtaining Nuclear Regulatory Commission ("NRC") approval of the transfer of required nuclear licenses and payment of the remainder of the selling price before the November 30, 2018 closing date. Additionally, Interest income decreased $7 million primarily as a result of lower interest rates. See Note 22 — Commitments and Contingencies — Legal proceedings for a discussion of the lawsuit filed by Nuclear Development, LLC. Other Net Periodic Benefit Cost Other net periodic benefit cost decreased $5 million for the year ended September 30, 2020, as compared to the prior year. Other net periodic benefit cost is subject to significant economic assumptions, such as changes in the discount rate used to measure the benefit plans, that can materially impact TVA. However, TVA uses regulatory accounting to recognize other net periodic benefit cost as a regulatory asset to the extent that the amount calculated under U.S. generally accepted accounting principles ("GAAP") as pension expense differs from the amount TVA contributes to the pension plan as pension plan contributions. See Note 21 — Benefit Plans . In 2020, U.S. GAAP pension expense exceeded contributions resulting in additional amounts deferred as a regulatory asset as compared to the prior year. 58 Table of Contents Liquidity and Capital Resources Sources of Liquidity TVA depends on various sources of liquidity to meet cash needs and contingencies. TVA's primary sources of liquidity are cash from operations and proceeds from the issuance of short-term debt in the form of discount notes, along with periodic issuances of long-term debt. TVA's balance of short-term debt typically changes frequently as TVA issues discount notes to meet short-term cash needs and pay scheduled maturities of discount notes and long-term debt. The periodic amounts of short-term debt issued are determined by near-term expectations for cash receipts, cash expenditures, and funding needs, while seeking to maintain a target range of cash and cash equivalents on hand. In addition to cash from operations and proceeds from the issuance of short-term and long-term debt, TVA's sources of liquidity include a $150 million credit facility with the United States Department of the Treasury ("U.S. Treasury"), four long-term revolving credit facilities totaling $2.7 billion, and proceeds from other financings. See Note 13 — Debt and Other Obligations — Credit Facility Agreements. Other financing arrangements may include sales of receivables, loans, or other assets. The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30.0 billion outstanding at any time. Power bonds outstanding, excluding unamortized discounts and premiums and net exchange gains from foreign currency transactions, at September 30, 2020 and 2019, were $20.1 billion (including current maturities) and $21.4 billion (including current maturities), respectively. The balance of Bonds outstanding directly affects TVA's capacity to meet operational liquidity needs and to strategically use Bonds to fund certain capital investments as management and the TVA Board may deem desirable. Other options for financing not subject to the limit on Bonds, including lease financings (see Lease Financings below and Note 10 — Variable Interest Entities ), could provide supplementary funding if needed. Currently, TVA expects to have adequate capability to fund its ongoing operational liquidity needs and make planned capital investments over the next decade. See Lease Financings below, Note 10 — Variable Interest Entities , and Note 13 — Debt and Other Obligations for additional information. TVA may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for securities, in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, TVA's liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. Due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA increased its target balance of Cash and cash equivalents beginning in March 2020. TVA continued to hold higher target cash balances at September 30, 2020, and may hold higher balances in future periods due to potential market volatility. TVA has maintained continued debt market access since the outbreak of the pandemic. TVA successfully funded the maturity of $1.0 billion of power bonds in March 2020 with cash from operations and proceeds from the issuance of discount notes. In May 2020, TVA issued $1.0 billion of power bonds to take advantage of the historically low interest rate environment and to meet its ongoing funding needs. TVA's next significant power bond maturity of $1.5 billion is in February 2021. Debt Securities . TVA's Bonds are not obligations of the U.S., and the U.S. does not guarantee the payments of principal or interest on Bonds. TVA's Bonds consist of power bonds and discount notes. Power bonds have maturities of between one and 50 years. At September 30, 2020, the average maturity of long-term power bonds was 15.3 years, and the weighted average interest rate was 4.56 percent. Discount notes have maturities of less than one year. Power bonds and discount notes have a first priority and equal claim of payment out of net power proceeds. Net power proceeds are defined as the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein. In addition to power bonds and discount notes, TVA had long-term debt associated with certain VIEs outstanding at September 30, 2020. See Lease Financing below, Note 10 — Variable Interest Entities , and Note 13 — Debt and Other Obligations for additional information. Power bonds and discount notes are both issued pursuant to Section 15d of the TVA Act and pursuant to the Basic Tennessee Valley Authority Power Bond Resolution adopted by the TVA Board on October 6, 1960, as amended on September 28, 1976, October 17, 1989, and March 25, 1992 (the "Basic Resolution"). The TVA Act and the Basic Resolution each contain two bond tests: the rate test and the bondholder protection test. Under the rate test, TVA must charge rates for power which will produce gross revenues sufficient to provide funds for: • Operation, maintenance, and administration of its power system; • Tax equivalents; • Debt service on outstanding Bonds; • Payments to the U.S. Treasury in repayment of and as a return on the Power Program Appropriation Investment; and 59 Table of Contents • Such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected wit h TVA's pow er business, having due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. See Note 18 — Proprietary Capital — Appropriation Investment . TVA fulfilled its requirement to repay $1.0 billion of the Power Program Appropriation Investment in 2014; therefore, the repayment of this amount is no longer a component of rate setting. The rate test for the one-year period ended September 30, 2020, was calculated after the end of 2020, and TVA met the test's requirements. Under the bondholder protection test, TVA must, in successive five-year periods, use an amount of net power proceeds at least equal to the sum of the depreciation accruals and other charges representing the amortization of capital expenditures and the net proceeds from any disposition of power facilities, for either the reduction of its capital obligations (including Bonds and the Power Program Appropriation Investment) or investment in power assets. The bondholder protection test for the five-year period ended September 30, 2020, was calculated after the end of 2020, and TVA met the test's requirements. TVA must next meet the bondholder protection test for the five-year period ending September 30, 2025, and expects to meet the test. TVA uses proceeds from the issuance of discount notes, in addition to other sources of liquidity, to fund short-term cash needs and scheduled maturities of long-term debt. The following table provides additional information regarding TVA's short-term borrowings. Short-Term Borrowing Table At September 30, 2020 For the year ended September 30, 2020 At September 30, 2019 For the year ended September 30, 2019 Gross Amount Outstanding (at End of Period) or Average Gross Amount Outstanding (During Period) Discount notes $ 57 $ 812 $ 922 $ 1,610 Maximum Month-End Gross Amount Outstanding (During Period) Discount notes N/A $ 1,875 N/A $ 2,390 Weighted Average Interest Rate Discount notes 0.06 % 0.77 % 2.15 % 2.32 % TVA ended the year at September 30, 2020, with a lower balance for both short-term debt and average short-term debt as compared to 2019. The decrease was primarily due to the decision to issue $1.0 billion of power bonds in 2020 and the timing of cash flows. TVA generally uses proceeds from the issuance of power bonds to refinance maturing power bonds or other financing obligations, as necessary, or for other power system purposes. The total balance of power bonds may decline in periods where redemptions of power bonds exceed issuance due to net positive cash flow from operating and investing activities. In 2020, TVA achieved and surpassed its strategic goal of reducing debt to $21.8 billion by 2023. TVA issued $1.0 billion of power bonds during 2020, and no power bonds were issued in 2019. TVA redeemed $1.5 billion and $1.1 billion of Bonds during 2020 and 2019, respectively. For additional information about TVA debt issuance activity and debt instruments issued and outstanding at September 30, 2020 and 2019, including rates, maturities, outstanding principal amounts, and redemption features, see Note 13 — Debt and Other Obligations — Debt Securities Activity and Debt Outstanding . TVA Bonds are traded in the public bond markets and are listed on the New York Stock Exchange ("NYSE") except for TVA's discount notes, the 2009 Series B power bonds, and the power bonds issued under TVA's electronotes ® program. TVA's Putable Automatic Rate Reset Securities are traded on the NYSE under the exchange symbols "TVC" and "TVE." Other bonds listed on the NYSE are assigned various symbols by the exchange, which are noted on the NYSE's website. TVA has also listed certain bonds on foreign exchanges from time to time, including the Luxembourg, Hong Kong, and Singapore Stock Exchanges. See Item 1A, Risk Factors for additional information regarding the market for TVA's Bonds. Although TVA Bonds are not obligations of the U.S., TVA, as a corporate agency and instrumentality of the U.S. government, may be impacted if the sovereign credit ratings of the U.S. are downgraded. Additionally, TVA may be impacted by how the U.S. government addresses situations of approaching its statutory debt limit. According to statements made by 60 Table of Contents nationally recognized credit rating agencies, downward pressure on the ratings of the U.S. could eventually develop if there are no changes in current policies and budget deficits and the trajectory of debt continues to increase; additionally, current ratings factor in the prospect that debates over raising the debt ceiling of the U.S. government could continue to be protracted and difficult. The outlook on the ratings of the U.S. government is currently stable with two of the three agencies that provide ratings on TVA Bonds. In July 2020, Fitch Ratings downgraded the U.S.'s credit rating outlook to negative from stable reflecting the ongoing deterioration in U.S. public finances and the absence of a credible fiscal consolidation plan, worsened by the economic challenges from the COVID-19 pandemic. In August 2020, the outlook on the credit rating of TVA was subsequently changed by Fitch to negative from stable, reflecting the actions on the U.S. The outlook on the ratings of TVA is currently stable with two of three credit rating agencies. TVA's rated senior unsecured Bonds are currently rated Aaa, AAA, and AA+. TVA's short-term discount notes are not rated. Lease Financings . TVA has entered into certain leasing transactions with special purpose entities ("SPEs") to obtain third-party financing for its facilities. These SPEs are sometimes identified as VIEs of which TVA is determined to be the primary beneficiary. TVA is required to account for these VIEs on a consolidated basis. See Note 10 — Variable Interest Entities and Note 13 — Debt and Other Obligations for information about TVA's lease financing activities. During 2017 and 2016, TVA acquired 100 percent of the equity interests in certain SPEs created for the purpose of facilitating lease financing. TVA may seek to enter into similar arrangements in the future. In March 2019, TVA made final rent payments under lease/leaseback transactions involving eight combustion turbine units ("CTs"), and in July 2019, these transactions were terminated. In May 2020, TVA made final rent payments under lease/leaseback transactions involving eight additional CTs and anticipate these transactions will be terminated in 2021. TVA will continue making rent payments under the remaining lease/leaseback transactions through 2022. Summary Cash Flows A major source of TVA's liquidity is operating cash flows resulting from the generation and sale of electricity. Cash, cash equivalents, and restricted cash were $521 million and $322 million at September 30, 2020 and 2019, respectively. A summary of cash flow components for years ended September 30 follows: Cash provided by (used in): Operating Activities . TVA's cash flows from operations are primarily driven by sales of electricity, fuel expense, and operating and maintenance expense. The timing and level of cash flows from operations can be affected by the weather, changes in working capital, commodity price fluctuations, outages, and other project expenses. Net cash flows provided by operating activities decreased $84 million for 2020 compared to 2019, due to lower revenue collections from decreased sales of electricity driven predominantly by overall milder weather and the COVID-19 pandemic, in addition to lower effective rates as a result of the long-term partnership credits for LPCs. Increases in post-employment claims, asset retirement obligation ("ARO") settlements, and other payments due to timing also contributed to the decrease in cash flows from operations. These decreases were partially offset by lower fuel and purchased power payments as a result of lower natural gas prices and decreased electricity demand, lower interest payments, and decreased discretionary spend to mitigate COVID-19 financial impacts. 61 Table of Contents Investing Activities . The majority of TVA's investing cash flows are due to investments to acquire, upgrade, or maintain generating and transmission assets, including environmental projects and the purchase of nuclear fuel. Nuclear fuel expenditures vary depending on the number of outages and the prices and timing of purchases of uranium and enrichment services. Net cash flows used in investing activities decreased $228 million for 2020 compared to 2019, primarily driven by decreases in the number of nuclear fuel outages as compared to the prior year, deferral of certain capital project spend to mitigate COVID-19 financial impacts, and a reduction in capital expenditures for capacity expansion due primarily to the completion of the Browns Ferry Nuclear Plant ("Browns Ferry") extended power uprate in the prior year and the Pickwick South Embankment remediation project nearing completion. These decreases were partially offset by an increase in expenditures for the Boone Dam Embankment Remediation capacity expansion project. Financing Activities . TVA's cash flows provided by or used in financing activities are primarily driven by the timing and level of cash flows provided by operating activities, cash flows used in investing activities, and net issuance and redemption of debt instruments to maintain a strategic balance of cash on hand. Net cash flows used in financing activities decreased $55 million for 2020 compared to 2019. TVA's financing activities continue to reflect an overall reduction in debt driven by strong financial performance and execution of long-range financial plans to reduce debt and keep TVA's electric rates competitive. Impact of COVID-19 to Liquidity As a result of certain commercial and industrial customers curtailing operations in response to the COVID-19 pandemic, TVA experienced decreases in base revenue. TVA estimates base revenues were reduced by approximately $185 million for the year ended September 30, 2020 due to the impacts of COVID-19. TVA expects the COVID-19 pandemic to continue impacting revenue for 2021. It is uncertain at this time the extent to which TVA's revenues may be impacted beyond 2021. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Revenues . Due to reductions in TVA's revenue for the year ended September 30, 2020 and expected reductions in revenue in 2021 associated with the COVID-19 pandemic, TVA has and will continue to implement various cost savings initiatives such as deferring and prioritizing certain capital projects and decreasing discretionary spending. TVA may also experience an increase in interest cost, fuel cost, and other additional operating costs. The ultimate impact of the COVID-19 pandemic on TVA's financial condition depends on factors beyond TVA's knowledge or control, including the duration and severity of this outbreak, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on the country and region's economy. The COVID-19 pandemic has also created economic uncertainty for TVA's LPCs and the communities they serve. To support LPCs and strengthen the public power response to the COVID-19 pandemic, TVA has created initiatives such as the Public Power Support and Stabilization Program, Back-to-Business Credit Program, Community Care Fund, and Pandemic Relief Credit. TVA has also provided regulatory flexibility for LPCs to halt disconnection of services. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives — Coronavirus Pandemic for an expanded discussion of these initiatives. Cash Requirements and Contractual Obligations Actual capital expenditures and future planned capital expenditures for property, plant, and equipment additions, including clean air projects and new generation, and nuclear fuel are as follows: Capital Expenditures For the year ended September 30 Actual Estimated Capital Expenditures (1) 2020 2021 2022 2023 Capacity expansion expenditures $ 224 $ 553 $ 922 $ 866 Environmental expenditures 310 145 134 74 Nuclear fuel 359 422 312 254 Transmission expenditures 404 525 510 400 Other capital expenditures (2) 761 949 903 916 Total capital expenditures $ 2,058 (3) $ 2,594 $ 2,781 $ 2,510 Notes (1) TVA plans to fund these expenditures with cash from operations and proceeds from power program financings. Estimated capital expenditures only include expenditures that are currently planned. Additional expenditures may be required, among other things, for TVA to meet growth in demand for power in its service area or to comply with new environmental laws, regulations, or orders. 62 Table of Contents (2) Other capital expenditures are primarily associated with short lead time construction projects aimed at the continued safe and reliable operation of generating assets. (3) The numbers above include construction in progress and nuclear fuel expenditures included in Accounts payable and accrued liabilities of $73 million. TVA continually reviews its capital expenditures and financing programs. The amounts shown in the table above are forward-looking amounts based on a number of assumptions and are subject to various uncertainties. Amounts may differ materially based upon a number of factors, including, but not limited to, changes in assumptions about system load growth, environmental regulation, rates of inflation, total cost of major projects, and availability and cost of external sources of capital. See Forward-Looking Information and Item 1A, Risk Factors . TVA has certain obligations and commitments to make future payments under contracts, including contracts executed in connection with certain of the planned construction expenditures. The following table sets forth TVA's estimates of future payments at September 30, 2020. See Note 7 — Leases , Note 10 — Variable Interest Entities , Note 11 — Other Long-Term Liabilities , Note 13 — Debt and Other Obligations , Note 21 — Benefit Plans , and Note 22 — Commitments and Contingencies for a further description of these obligations and commitments. Commitments and Contingencies Payments due in the year ending September 30 2021 2022 2023 2024 2025 Thereafter Total Debt (1) $ 1,917 $ 1,028 $ 29 $ 1,022 $ 1,022 $ 15,057 $ 20,075 Interest payments relating to debt (2) 1,001 950 929 928 898 13,057 17,763 Debt of VIEs (3) 41 43 40 36 37 900 1,097 Interest payments relating to debt of VIEs 50 49 47 45 47 403 641 Lease obligations Finance (4) 92 93 92 87 86 592 1,042 Operating (5) 66 51 39 37 34 16 243 Purchase obligations Power (6) 252 229 216 196 172 1,068 2,133 Fuel (7) 1,375 682 453 429 377 1,234 4,550 Other (8) 236 114 65 38 28 237 718 Environmental Agreements 2 2 2 1 1 3 11 Membership interests of VIEs subject to mandatory redemption 3 3 2 1 1 15 25 Interest payments related to membership interests of VIEs subject to mandatory redemption 2 2 1 1 1 6 13 Flood response commitment to NRC 1 26 — — — — 27 Unfunded loan commitments 1 — — — — — 1 Long-term monitoring costs - Kingston ash spill 1 1 — 1 — 9 12 Leaseback obligations (9) 207 25 — — — — 232 Retirement Plan (10) 300 300 300 300 300 3,300 4,800 Other contractual obligations 2 — — — — — 2 Total $ 5,549 $ 3,598 $ 2,215 $ 3,122 $ 3,004 $ 35,897 $ 53,385 Notes (1) Does not include non-cash items of foreign currency exchange gain of $153 million, unamortized debt issue costs of $45 million, and net discount on sale of Bonds of $77 million. (2) Includes the effects of interest rate derivatives employed to manage interest rate risk. (3) Debt of VIEs does not include the non-cash item of unamortized debt issue costs of $8 million. (4) Includes the interest component of finance leases based on the interest rates stated in the lease agreements and excludes certain related non-lease costs. (5) Excludes commitments related to non-lease costs, which are included in purchase obligations. (6) Includes commitments for energy and/or capacity under power purchase agreements from coal-fired, hydroelectric, diesel, renewable, and gas-fired facilities, as well as transmission service agreements to support purchases of power from the market. Certain power purchase agreements ("PPAs") are accounted for as leases and have lease and non-lease components. For these contracts, the lease component is included in lease obligations and the non-lease component is included in power. (7) Includes commitments to purchase nuclear fuel, coal, and natural gas, as well as related transportation and storage services. (8) Primarily includes long-term service contracts, contracts that contain minimum purchase levels for the purchase of limestone along with related storage and transportation, and contractual obligations related to load control programs. (9) In 2020, Paradise Pipeline Financing Obligation was derecognized due to a modification of a contract. See Note 11 – Other Long-Term Liabilities – Paradise Pipeline Financing Obligation . (10) Pursuant to amendments to the TVA Retirement System ("TVARS") Rules and Regulations that became effective October 1, 2016, TVA will contribute to TVARS for a period of 20 years (2017-2036) or, if earlier, through the fiscal year in which it is determined by actuarial valuation that TVARS has reached and remained at a 100 percent funded status, which is an amount not less than the greater of (a) the minimum required TVARS actuarial valuation contribution or (b) $300 million. 63 Table of Contents EnergyRight ® Program. TVA purchases certain loans receivable from its LPCs in association with the EnergyRight ® program. Depending on the nature of the energy-efficiency project, loans may have a maximum term of five years or 10 years. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loan receivable that has been in default for 180 days or more or that TVA has determined is uncollectible. As of September 30, 2020, the total carrying amount of the loans receivable, net of discount, was approximately $87 million. Such amounts are not reflected in the Commitments and Contingencies table above. The total carrying amount of the financing obligation was approximately $97 million at September 30, 2020. See Note 8 — Other Long-Term Assets and Note 11 — Other Long-Term Liabilities for additional information. Off-Balance Sheet Arrangements At September 30, 2020, TVA had no off-balance sheet arrangements. Key Initiatives and Challenges COVID-19 Pandemic In December 2019, a novel strain of coronavirus was reported in China. As this strain continued to spread across the globe, the World Health Organization declared the outbreak of the 2019 novel coronavirus a pandemic on March 11, 2020. TVA has performed risk analyses across the company to determine potential impacts and monitor performance throughout the situation and has implemented a company-wide pandemic plan to address specific aspects of the COVID-19 pandemic. TVA's pandemic plan continues to evolve based on medical guidance and federal, regional, and local requirements and guidelines. Based on ongoing monitoring, COVID-19 continues to pose a significant risk in the U.S. and in the Tennessee Valley region, and as a result TVA has extended the timeframe for workforce reintegration and continues to limit non-essential travel. Mandatory telework has been implemented for those employees who do not have to be physically present at a TVA facility or office building to provide mission-essential activities or produce safe, reliable power. TVA continues to implement strong physical and cybersecurity measures to ensure that systems remain functional to keep employees, customers, and communities safe and enable TVA to continue achieving its mission to serve the people of the Valley. In addition to measures to protect its workforce, stakeholders, and critical operations, TVA is actively monitoring generation, transmission, and distribution functions. Operations and delivery of energy to customers have not been materially impacted by the COVID-19 pandemic at this time. Certain TVA recreation areas including TVA campgrounds, day use areas, trails, and undeveloped lands have reopened since TVA had initially closed them to slow the spread of the virus. However, for public and staff safety, restrooms and pavilions remain closed. These changes will continue until it is safe to resume full operations. For the year ended September 30, 2020, TVA estimates base revenues were reduced by approximately $185 million due to the impacts of COVID-19. Certain commercial and industrial customers curtailed operations in response to COVID-19 pandemic social distancing standards and economic conditions. As a result, TVA experienced decreased energy demand from those customers in 2020. TVA expects the COVID-19 pandemic to continue impacting revenue for 2021. It is uncertain at this time the extent to which TVA's revenues may be impacted beyond 2021. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Revenues . Due to reductions in TVA's revenue for the year ended September 30, 2020 and expected reductions in revenue in 2021 associated with the COVID-19 pandemic, TVA has and will continue to implement various cost savings initiatives, such as deferring and prioritizing certain capital projects and decreasing discretionary spending. In addition, TVA may also experience increases in interest cost, fuel cost, and other additional operating costs. The ultimate impact of the COVID-19 pandemic on TVA's financial condition depends on factors beyond TVA's knowledge or control, including the duration and severity of this outbreak, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on the country and region's economy. TVA also continues to assess potential supplier performance risks, including procurement of fuel, parts, and services. If suppliers are unable to perform under TVA's existing contracts or if TVA is unable to obtain similar services from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that may impact generation, maintenance, and capital programs. At this time, TVA has experienced minimal impacts due to force majeure events, with the exception of a manufacturing delay for a major turbine component. A mitigation strategy was developed by TVA and the vendor to reduce projected delays and impacts to TVA's outage schedule. TVA will continue to monitor the supply base and remain in contact with suppliers to identify potential risks. Customer Pandemic Initiatives . The COVID-19 pandemic has created economic uncertainty for TVA's customers and the communities they serve. To support and strengthen the public power response to the COVID-19 pandemic, TVA announced the following initiatives in 2020: Regulatory Flexibility . TVA provided regulatory flexibility for LPCs to halt disconnection of services and respond to the local needs of their customers and communities. 64 Table of Contents Program Flexibility . In April 2020, TVA established flexibility provisions for certain economic development programs for participating customers impacted by the COVID-19 pandemic, as well as deferral options for EnergyRight ® program loan payments, through October 31, 2020, for customers experiencing financial hardship. See Note 8 — Other Long-Term Assets, Note 12 — Other Long-Term Liabilities , and Note 18 — Revenue . Financial Support . In March 2020, the TVA Board approved the Public Power Support and Stabilization Program. Through this program, TVA is offering up to $1.0 billion of credit support to LPCs that demonstrate the need for temporary financial relief, through the deferral of a portion of LPCs' wholesale power payments owed to TVA. The program requires LPCs to apply for the deferral, which is subject to approval by TVA. If approved, TVA will establish and approve a repayment schedule with the LPC by December 31, 2020, with a repayment term not to exceed two years. The program is available through CY 2020, and as of November 16, 2020, $1 million of credit support has been approved under the program. Back-to-Business Credit Program . TVA created the Back-to-Business Credit Program to enable TVA and LPCs the ability to provide relief to certain large customers affected by the COVID-19 pandemic by providing certain credits when returning to operations. As of September 30, 2020, TVA had provided approximately $10 million in Back-to-Business credits under this program. Community Care Fund . TVA is also partnering with LPCs through the Community Care Fund by making available over $4 million in matching funds to support local initiatives that address hardships created by the COVID-19 pandemic. Over $2 million in matching funds had been provided as of September 30, 2020. Pandemic Relief Credit . In August 2020, the TVA Board approved a $200 million Pandemic Relief Credit. The 2.5 percent base rate credit will be applied beginning in October 2020 and will remain in effect through the end of 2021. The credit will apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. These actions continue to show TVA's commitment to support the financial integrity of LPCs along with communities and customers across the Tennessee Valley during these challenging economic conditions caused by the COVID-19 pandemic. The COVID-19 pandemic is an evolving situation that may lead to extended disruption of economic activity and an adverse impact on TVA's results of operations. TVA is closely monitoring developments and will continue adjusting its response as necessary to ensure reliable service while protecting the safety and health of its workforce. Distributed Energy Resources Consumer desire for energy choice, among other things, is driving the expectation for flexible options in the electric industry. TVA and LPCs are working together to leverage the strengths of the Tennessee Valley public power model to provide distributed energy solutions that are economical, sustainable, and flexible. TVA will focus on the safety and reliability impacts of these resources as they are interconnected to the grid and will ensure that the pricing of electricity remains as low as feasible. Additional regulatory considerations and analysis may be required as the distributed energy resources ("DER") market, technologies, and programs evolve. TVA is working to develop pricing and regulatory structures with a deliberate and thoughtful analysis of each current and future program offering. This requires strong partnerships with LPCs to give customers choices and provide end-use consumers the flexibility they desire. In 2017, the TVA Board authorized up to $300 million to be spent over the next 10 years, subject to annual budget availability and necessary environmental reviews, to build an enhanced fiber optic network that will better connect TVA's operational assets. Fiber is a vital part of TVA's modern communication infrastructure. The new fiber optic lines will improve the reliability and resiliency of the generation and transmission system while enabling the system to better accommodate DER as they enter the market. As of September 30, 2020 , TVA had spent $121 million on installation of the fiber optic lines and expects to spend an additional $179 million. Changing Customer Preferences As more consumers and businesses are demanding cleaner energy, the utility industry is evolving to meet those needs. As TVA also evolves, it will see impacts to the way it does business through the pricing of products, transmission of energy, and development of new products and services for its customers in support of changing customer preferences and its economic development efforts. End-use customers are becoming more technologically sophisticated and want greater control over their energy usage. Many companies are focusing on sustainability and requiring more energy efficiency and renewable energy options. The continuing challenge for TVA and others is finding ways to meet the needs and preferences of customers while successfully developing flexible pricing models to accommodate the evolving markets. Low-Income Energy Efficiency Program. Through the Home Uplift Program, TVA is partnering with LPCs, state and local governments, non-profit agencies, energy efficiency advocates, and the Tennessee Valley Public Power Association to complete home evaluations and make high-impact home energy upgrades for qualifying homeowners. In addition, TVA and LPCs conduct workshops to educate homeowners about low and no-cost energy efficiency upgrades that improve their quality of life. 65 Table of Contents Renewable Power Purchase Agreements . In order to meet customer preferences and requirements for cleaner energy, TVA has entered into certain power purchase agreements ("PPAs") with renewable resource providers. In 2019, as a result of TVA's 2017 request for proposals for renewable energy, TVA signed four solar PPAs for 674 megawatts ("MW") of solar generation at sites in Tennessee and Alabama. One of these four solar projects is expected to come online in 2021 and two of the projects are expected to come online in 2022. In 2020, one of the counterparties failed to comply with the terms of its PPA. TVA terminated the 150 MW agreement due to the counterparty's default and is evaluating its rights under the PPA and next steps. During 2020, as a result of TVA's 2019 request for proposals for renewable energy, TVA signed six additional PPAs for a total of 661 MW of solar generation with 50 MW of battery storage expected to come online in 2023. Due to transmission issues for one of the projects, the 661 MW will be decreased to 651 MW. TVA will procure the renewable energy and sell the resulting Renewable Energy Certificates ("RECs") to specific customers, allowing TVA to increase its renewable energy portfolio without additional costs to other Tennessee Valley customers. These agreements help to align the core values of TVA and the public power model with the desire of TVA's customers for renewable energy. Further, TVA issued another request for proposal during the second quarter of 2020 for up to 200 MW of new renewable energy. The ultimate volume contracted will align to TVA customers' demand for renewable energy, allowing TVA to increase its renewable energy portfolio without additional costs to other Tennessee Valley customers. TVA anticipates making selections in CY 2020. Renewable Power Solutions. TVA encourages renewable power through various current offerings. Offerings include the Green Switch Program that allows customers to support wind, solar, and biomass renewable resources through purchasing renewable energy generated in the Tennessee Valley, sold in 200 kWh blocks. TVA also offers the Green Flex Program, which gives commercial and industrial customers the ability to meet sustainability goals and to make renewable energy claims through RECs from wind generation located outside TVA's service area. In 2019, the TVA Board approved new renewable power solutions, including a utility-scale program and a mid-scale flexibility option, that better equip TVA and LPCs with the flexibility to meet changing end-use customer needs. The utility-scale program, Green Invest, aggregates demand through a competitive procurement process and is implemented through a renewable investment agreement. The goal of the Green Invest program is to meet the long-term sustainability needs of customers at scale. TVA may also construct its own renewable facilities to meet these needs. The mid-scale option, also known as the Flexibility Research Project, is a joint project with LPCs to enable solutions for situations where the end-use consumer needs onsite renewable or distributed generation. This project will allow TVA to gain market knowledge and operational insights. Energy Exchange Market TVA and other utilities across the southeastern United States are exploring the creation of a new automated energy exchange across the region, to facilitate more immediate and short-term power exchanges. The energy exchange would be an enhancement to TVA's existing trading program, and the creation of this energy exchange platform would require approval of the Federal Energy Regulatory Commission, which regulates transmission service and power transfers by jurisdictional public utilities. These discussions demonstrate TVA's commitment to maintaining and improving reliability in the Tennessee Valley in the least-cost manner. Natural Resource Plan In May 2020, the TVA Board of Directors accepted changes to TVA's Natural Resource Plan ("NRP") to support a more strategic, flexible, and comprehensive management approach to TVA's natural resource stewardship work. TVA published its Record of Decision to complete its environmental review process in July 2020. The updated plan enhances alignment with TVA's mission through economic development, energy, and environmental stewardship, and guides business planning. In the newly published NRP, TVA expanded from six resource areas to ten focus areas, ensuring the NRP provides a more comprehensive view of resource stewardship efforts. Strategic Financial Plan In 2019, the TVA Board approved an annual budget that reflects the first year of a new Strategic Financial Plan. The Strategic Financial Plan, which extends from 2020 through 2030, is flexible in aligning customer preferences and TVA's mission while at the same time establishing a long-term forecast of financial results. Key focus areas of the Strategic Financial Plan include maintaining rates as low as feasible, establishing better alignment between the length of LPC contracts and TVA's long-term commitments, stabilizing debt, assuming 100 percent long-term partner participation, maintaining a cash balance of $300 million, and pursuing operational efficiencies. As TVA executes the plan, key assumptions and performance may change estimated debt and cash balances. For example, TVA is continuing to evaluate its long-term asset needs. In addition, due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA increased its target balance of Cash and cash equivalents beginning in March 2020. TVA continued to hold higher target cash balances at September 30, 2020, and may hold higher balances in future periods due to potential market volatility. 66 Table of Contents Generation Resources Extreme Flooding Preparedness. Updates to the TVA analytical hydrology model completed in 2009 indicated that under "probable maximum flood" conditions, some of TVA's dams might not have been capable of regulating the higher flood waters. A "probable maximum flood" is an extremely unlikely event; however, TVA has a responsibility to provide protection for its nuclear plants against such events. As a result, TVA installed a series of modifications at four dams. Since 2009, TVA has performed further hydrology modeling of portions of the TVA watershed using updated modeling tools. The revised hydrology models were reviewed and approved by the NRC for Watts Bar Nuclear Plant ("Watts Bar") Units 1 and 2. However, TVA identified an error in the modeling that will require the models for Watts Bar Units 1 and 2 to be resubmitted. TVA plans to resubmit models for Watts Bar Units 1 and 2 by the end of the first quarter of CY 2021. In addition, TVA submitted models for Sequoyah Nuclear Plant ("Sequoyah") Units 1 and 2 on January 14, 2020. TVA will subsequently address conditions at Browns Ferry as needed. As of September 30, 2020, TVA had spent $154 million on the modifications and improvements related to extreme flooding preparedness. TVA is deferring the decision on the need for additional modifications until after the modeling work is complete. NRC Seismic Assessments . In 2014, the NRC notified licensees of nuclear power reactors in the central and eastern U.S. of the results of seismic hazard screening and prioritization evaluations performed by unit owners and reviewed by the NRC staff. Because the seismic hazards for Browns Ferry, Sequoyah, and Watts Bar had increases in seismic parameters beyond the technical information available when the plants were designed and licensed, TVA must conduct seismic risk evaluations for these plants. TVA completed the risk evaluation for Watts Bar and submitted it to the NRC in 2017; the evaluation concluded that no additional actions were required. The NRC completed its review of the Watts Bar evaluation in 2018 and concluded that no further response or regulatory actions were required. The evaluation for Sequoyah was submitted on October 18, 2019, and the evaluation for Browns Ferry was submitted on December 17, 2019. The NRC completed its review of the Sequoyah and Browns Ferry evaluations in the fourth quarter of 2020 and concluded that no further response or regulatory actions were required. Mitigation of Beyond-Design-Basis Events . NRC rulemaking has been developed to codify the requirements promulgated by orders related to beyond-design-basis flooding and seismic events discussed above. The NRC Commissioners approved the final rule in 2019. TVA plans to implement requirements for Sequoyah and Watts Bar by 2022 and for Browns Ferry by 2023. A gap review of the revised rule has been performed, and no new gaps to compliance were identified. Actions to complete flood and seismic assessments are still ongoing. See Extreme Flooding Preparedness and NRC Seismic Assessments above. Work Environment at Nuclear Plants. In March 2016, the NRC issued a Chilling Effect Letter ("CEL") to TVA regarding work environment concerns identified at Watts Bar. In the mid-cycle assessment letter issued in June 2018, the NRC issued a Cross Cutting Issue in safety conscious work environment ("CCI") and outlined the closure criteria for both the CEL and CCI. In October 2019, TVA informed the NRC of its CEL and CCI closure criteria readiness, and the NRC completed its inspection, resulting in no additional findings with progress noted as documented in its December 2019 inspection report. In March 2020, the NRC issued its Annual Assessment Letter for Watts Bar noting TVA's progress in addressing the CEL and CCI while stating that the NRC continues to monitor TVA's activities as they deliberate on the appropriate time to close the CEL and CCI. Apparent Violations of NRC Regulations . On March 2, 2020, the NRC issued a letter to TVA identifying four apparent violations of NRC regulations that prohibit licensees from retaliating against employees for their having raised protected nuclear safety concerns. In June 2020, TVA participated in a pre-decisional enforcement conference before the NRC, and on August 24, 2020, the NRC issued violations to TVA and a notice of proposed imposition of civil penalties in an amount less than $1 million. TVA submitted a written response to the NRC that denies the violations and opposes the imposition of civil penalties. On October 29, 2020, the NRC issued an order imposing civil penalties in an amount less than $1 million. TVA has until November 28, 2020, to request an evidentiary hearing before the NRC's Atomic Safety and Licensing Board. On March 9, 2020, the NRC issued a letter to TVA identifying twelve apparent violations of NRC regulations: six relating to operational activities and six relating to NRC regulations governing the completeness and accuracy of information. TVA participated in a pre-decisional enforcement conference before the NRC in July 2020, and on November 6, 2020, the NRC issued five violations to TVA and a notice of proposed imposition of civil penalties in an amount less than $1 million. TVA is evaluating its options and must respond to the NRC by December 5, 2020. Tritium-Producing Burnable Absorber Rods. TVA was a cooperating agency in the 2016 Department of Energy ("DOE") Final Supplemental Environmental Impact Statement for the Production of Tritium in a Commercial Light Water Reactor. In 2017, due to an anticipated need for more tritium-producing burnable absorber rods ("TPBARs"), the DOE announced its preferred alternative for irradiation services, which included use of an additional reactor. As a result of TVA's assessment and concurrence with the DOE's alternative, TVA submitted a license amendment request to the NRC to authorize the irradiation of TPBARs in Watts Bar Unit 2. The NRC approved the request in 2019. TVA is projecting to begin tritium production in Watts Bar Unit 2 in the fall of 2021. The DOE's decision also allows for irradiation of TPBARs at Sequoyah in the future; however, TVA does not have plans to employ Sequoyah units for tritium production in the near term. 67 Table of Contents Extended Power Uprate . TVA has undertaken an extended power uprate ("EPU") project at Browns Ferry to increase the amount of electrical generation capacity of its reactors. The license for each reactor was amended to allow reactor operation at the higher power level. The Browns Ferry EPU license amendments were approved by the NRC in 2017, following a nearly two-year review. The project involved extensive engineering analyses and modification and replacement of certain existing plant components to enable the units to produce the additional power requested by the license amendments. The project's total cost will be approximately $475 million. Physical work on all units was completed in 2019. The generating capacity is expected to increase by an estimated 465 MW that must be validated through operation of all units for four seasons and completion of additional testing. TVA is currently operating and testing the units through the required period to complete the validation of the increased generating capacity and will update the official capacity upon issuance of the engineering memos. Plant Closures. Results of assessments performed at Paradise and Bull Run were presented to the TVA Board at its February 2019 meeting. The TVA Board approved the retirement of Paradise Unit 3 by December 2020 and Bull Run by December 2023. Subsequent to the TVA Board approval, TVA determined that Paradise would not be restarted after January 2020 due to the plant's material condition. Paradise Fossil Plant Unit 3 was taken offline on February 1, 2020, effectively retiring the plant. See Note 6 — Plant Closures . Optimum Energy Portfolio . TVA must continuously evaluate all generating assets to ensure an optimal energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. During 2019, the TVA Board approved the Integrated Resource Plan, which recommended an action to evaluate the engineering end-of-life of aging fossil units. These assessments consider material condition, plant performance, system flexibility needs, environmental impacts, grid support, and other factors. TVA is also considering plans for additional generating facilities to replace retiring or expiring capacity and to support a low cost, reliable, flexible, and increasingly clean power system. In addition, TVA will prepare Environmental Assessments ("EAs") pursuant to the National Environmental Policy Act ("NEPA") prior to retiring or building a plant. Coal Combustion Residuals Facilities . TVA has committed to a programmatic approach for the elimination of wet storage of coal combustion residuals ("CCR") within the TVA service area. Under this program ("CCR Conversion Program"), TVA is converting all operational coal-fired plants to dry CCR storage and closing all wet storage facilities. Dry generation and dewatering projects . Conversion of coal plant CCR wet processes to dry generation or dewatering is complete at Bull Run, Shawnee, and Kingston Fossil Plant ("Kingston"). Construction at Gallatin Fossil Plant ("Gallatin") was completed during 2020. Construction of dewatering and dry generation facilities is underway at Cumberland Fossil Plant ("Cumberland") and is scheduled for completion in the first quarter of 2021. Landfills . TVA has made strategic decisions to build and maintain lined and permitted dry storage facilities on TVA-owned property at some TVA locations, allowing these facilities to operate beyond existing dry storage capacity. Lined and permitted landfills are completed and operational at Bull Run, Kingston, and Gallatin; a lined and permitted landfill at Shawnee is currently under construction with completion scheduled for January 2021; construction of a lined and permitted landfill at Cumberland is expected to start in 2021; and TVA is designing and permitting a lateral expansion of the existing landfill at Gallatin. TVA has withdrawn its permit applications for a new lined landfill at Bull Run and has stopped construction of a permitted lined landfill expansion at Kingston until TVA can determine its need for these landfills with certainty. Construction of additional lined and dry storage facilities may occur to support future business requirements. Wet CCR impoundment closures . TVA is working to close wet CCR impoundments in accordance with federal and state requirements. Closure project schedules and costs are driven by the selected closure methodology (such as closure-in-place or closure-by-removal). Closure initiation dates are driven by environmental regulations. TVA's predominant closure methodology is closure-in-place, with exceptions at certain facilities. TVA issued an environmental impact statement ("EIS") in June 2016 that addresses the closure of CCR impoundments at TVA's coal-fired plants. TVA issued its associated Record of Decision in July 2016. Although the EIS was designed to be programmatic in order to address the mode of impoundment closures, it specifically addressed closure methods at 10 impoundments. TVA subsequently decided to close those impoundments. The method of final closure for each of these facilities will depend on various factors, including approval by appropriate state regulators. Additional site-specific NEPA studies will be conducted as other facilities are designated for closure. See Note 12 — Asset Retirement Obligations . Groundwater monitoring . Compliance with the Environmental Protection Agency's ("EPA's") CCR rule ("CCR Rule") as well as other requirements will require additional engineering and analysis as well as implementation of a comprehensive groundwater monitoring program. As further analyses are performed, including evaluation of monitoring results, there is the potential for additional costs for investigation and/or remediation. TVA expects to continue to evaluate and update these cost estimates. In compliance with the CCR Rule, TVA published the results of additional groundwater testing at TVA's CCR facilities on March 1, 2019. The results included values above groundwater protection standards for some constituents at several CCR units. Accordingly, TVA will have to cease sending CCR and non-CCR wastestreams to any impacted unlined CCR surface impoundments as soon as possible but no later than the applicable CCR Rule date. The EPA has published a final rule that 68 Table of Contents changes the deadline to cease sending CCR and non-CCR wastestreams to unlined CCR impoundments and to initiate closure or retrofit the units from October 31, 2020 to April 11, 2021. The final rule establishes a process for a utility to seek site-specific approval from the EPA to continue to use the unlined CCR impoundment based on meeting certain criteria. TVA evaluated and published Assessment of Corrective Measures reports to its CCR website in August 2019. TVA is continuing to publish periodic reports on additional groundwater testing at its CCR facilities; the latest reports were published on February 28, 2020 and August 28, 2020. Under the CCR Rule, based on the results of the assessment of corrective measures, TVA is required to select a remedy as soon as feasible. TVA continues to investigate and evaluate remedies and will continue posting semi-annual progress reports on the status of remedy selection. As of September 30, 2020, TVA had spent approximately $2.1 billion on its CCR Conversion Program. TVA expects to spend an additional $949 million on the CCR Conversion Program through 2025. These estimates may change depending on the final closure method selected for each facility. Once the CCR Conversion Program is completed, TVA will continue to undertake certain CCR projects, including building new landfill cells under existing permits and closing existing cells once they reach capacity. TVA was involved in two lawsuits concerning the CCR facilities at Gallatin. One of these cases was decided in TVA's favor by the U.S. Court of Appeals for the Sixth Circuit, and the other case was resolved by the entry of a consent order that became effective July 24, 2019. Under the consent order, TVA agreed to close the existing wet ash impoundments by removal, either to an onsite landfill or to an offsite facility. TVA may also consider options for beneficial reuse of the CCR. TVA has submitted the removal plan to the Tennessee Department of Environment and Conservation ("TDEC") and other applicable parties pursuant to the consent order. See Note 12 — Asset Retirement Obligations for additional information. In October 2019, TDEC released amendments to its regulations which govern solid waste disposal facilities, including TVA's active CCR facilities covered by a solid waste disposal permit and those which closed pursuant to a TDEC approved closure plan. Such facilities are generally subject to a 30-year post-closure care period during which the owner or operator must undertake certain activities, including monitoring and maintaining the facility. The amendments, among other things, add an additional 50-year period after the end of the post-closure care period, require TVA to submit recommendations as to what activities must be performed during this 50-year period to protect human health and the environment, and require TVA to submit revised closure plans every 10 years. Potential Liability Associated with Workers' Exposure to CCR Materials. In response to the 2008 ash spill at Kingston, TVA hired Jacobs Engineering Group, Inc. ("Jacobs") to oversee certain aspects of the cleanup. After the cleanup was completed, Jacobs was sued in the U.S. District Court for the Eastern District of Tennessee ("Eastern District") by employees of a contractor involved in the cleanup and family members of some of the employees. The plaintiffs alleged that Jacobs had failed to take or provide proper health precautions and misled workers about the health risks associated with exposure to coal fly ash, which is a CCR material. The plaintiffs alleged that exposure to the fly ash caused a variety of significant health issues and illnesses, including in some cases death. The case was split into two phases, with the first phase considering, among other issues, general causation and the second determining specific causation and damages. On November 7, 2018, a jury hearing the first phase returned a verdict in favor of the plaintiffs, including determinations that Jacobs failed to adhere to its contract with TVA or the Site Wide Safety and Health Plan; Jacobs failed to provide reasonable care to the plaintiffs; and Jacobs's failures were capable of causing a list of medical conditions, ranging from hypertension to cancer. On January 11, 2019, the Eastern District referred the parties to mediation. Mediation has concluded, but the parties did not resolve the matter. The litigation will now proceed to the second phase on the question of whether Jacobs's breaches were the specific medical cause of the plaintiffs' alleged injuries and damages. Further in 2019, an additional group of contractor employees and family members filed suit against Jacobs in the Circuit Court for Roane County, Tennessee. These plaintiffs have raised similar claims to those being litigated in the case referenced above. While TVA is not a party to either of these lawsuits, TVA may potentially have an indemnity obligation to reimburse Jacobs for some amounts that Jacobs is required to pay. TVA will continue monitoring the litigation to determine whether these or similar cases could have broader implications for the utility industry. TVA does not expect any potential liability to have a material adverse impact on its results of operations or financial condition. See Note 22 — Commitments and Contingencies — Legal Proceedings. River Management . Rainfall and runoff in the Tennessee Valley in 2020 were 150 percent and 156 percent of normal, respectively. Above normal rainfall and runoff have continued to help TVA meet its river system commitments, including managing minimum river flows for navigation, generating low-cost hydroelectric power, maintaining water quality and water supply, and providing recreational opportunities for the Tennessee Valley. In addition, having cool water available helps TVA to meet thermal compliance and support normal operation of TVA's nuclear and fossil-fueled plants, while oxygenating water helps fish species remain healthy. Small Modular Reactors . In 2015, DOE entered into an Interagency Agreement with TVA to support site characterization activities and the development of an Early Site Permit Application ("ESPA") for a generic small modular reactor ("SMR"). The ESPA is based on the potential construction and operation of two or more SMR units at TVA's Clinch River Site in 69 Table of Contents Oak Ridge, Tennessee. TVA submitted the ESPA for review by the NRC in 2016. NRC staff concluded their environmental review and issued a final EIS in April 2019, followed by the conclusion of the safety review and issuance of a final safety evaluation report in June 2019. The Commission held the statutorily required mandatory hearing for the ESPA in August 2019, and the permit was issued by the NRC in December 2019. The permit is valid through 2039 and therefore provides TVA a great deal of flexibility to make new nuclear decisions based on energy needs and economic factors. TVA is in the process of evaluating new nuclear technology options and potential deployment scenarios. To assist in the evaluation of SMRs, TVA has entered into memorandums of understanding with Oak Ridge National Laboratory and the University of Tennessee. These partnerships allow for collaboration, exploring advanced reactor designs as a next-generation nuclear technology while leveraging advanced modeling and simulation tools to assist in determining the feasibility of SMRs. Any decision to construct an SMR would require approval by the TVA Board and the NRC. As of September 30, 2020, TVA had spent $81 million on work regarding SMRs, including work to complete the ESPA for the Clinch River Site, of which the DOE reimbursed TVA $28 million. Additional expenditures will be determined based on future project development. System Operations Center . A new system operations center has been approved for $255 million. The new secured facility is being built to accommodate a new energy management system and to adapt to new regulatory requirements. The facility is expected to be constructed by 2022 and fully operational by 2024. As of September 30, 2020, TVA had spent approximately $37 million on the project and expects to spend an additional $218 million. Dam Safety and Remediation Initiatives Assurance Initiatives. TVA has an established dam safety program, which includes procedures based on the Federal Guidelines for Dam Safety, with the objective of reducing the risk of a dam safety event. The program is comprised of various engineering activities for all of TVA's dams including safety reassessments using modern industry criteria and the new probable maximum flood and site-specific seismic load cases. One aspect of the guidelines is that dam structures will be periodically assessed to assure that TVA's dams meet current design criteria. These assessments include material sampling of the dam and foundational structures and detailed engineering analysis. TVA will continue preventative and ongoing maintenance as a part of this safety program. Boone Dam Remediation . In 2015, a sinkhole was discovered near the base of the earthen embankment at Boone Dam, and a small amount of water and sediment was found seeping from the river bank below the dam. TVA identified underground pathways contributing to the seepage and prepared a plan to repair the dam, which consists of the construction of a composite seepage barrier wall in the dam's earthen embankment. TVA has completed grouting and construction of an upstream and downstream buttress. Installation of the concrete cut-off wall elements is in process. As construction of the embankment repair project continues, the estimated cost and duration continue to be refined. As of September 30, 2020, TVA had spent $251 million related to this project and expects to spend an additional $184 million through 2023. TVA expects the reservoir to return to normal operations in 2022 and is continuing to work with the community to help mitigate local impacts of the extended drawdown. Pickwick South Embankment Remediation. Reassessments of Pickwick Landing Dam ("Pickwick") found low safety factors for post-earthquake stability indicating that the dam is at significant risk for slope stability failure following a seismic event in portions of the south embankment. Slope stability failure could lead to a breach of the south embankment and loss of the reservoir, resulting in loss of life and damage to property downstream, disruption to navigation, and loss of generation and recreation. TVA is upgrading the south embankment by constructing berms on the upstream and downstream slopes. The design phase of the project began in 2017 and is now completed. Construction began in the spring of 2019, and the project is currently estimated to be completed in two years, but could take longer depending on successful construction sequencing. As of September 30, 2020, TVA had spent $118 million related to this project and expects to spend an additional $14 million through 2022. Real Estate Portfolio TVA continues to study its real estate portfolio and align its real estate holdings with TVA's strategic direction. A comprehensive assessment of its real estate portfolio has been completed. TVA will continue to develop and implement a strategy aimed at reducing cost and right-sizing its portfolio as part of the effort. Knoxville Property . In 2016, TVA completed a comprehensive assessment of its real estate holdings in the Knoxville, Tennessee region including the Knoxville Office Complex ("KOC") and adjacent Summer Place Complex ("SPC"). As a result of this study and a subsequent Environmental Assessment in 2017, TVA has consolidated its Knoxville area employees into the West Tower of the KOC and the Greenway Drive Transmission Service Center, and is completing the centralized field offices in Norris, Tennessee. As part of this consolidation effort, TVA approved the conveyance of the SPC and the East Tower of the KOC and the transaction closed in August 2020. 70 Table of Contents Regulatory Compliance Steam-Electric Effluent Guidelines . In 2015, the EPA published a final rule revising the existing steam-electric effluent limitation guidelines ("ELGs"). The ELGs update the existing technology-based water discharge limitations for power plants. Compliance with new requirements is required in the 2018-2023 timeframe and will necessitate major upgrades to wastewater treatment systems at all coal-fired plants. Dry fly ash handling is mandated by the rule. The rule also requires either dry bottom ash handling systems or "no discharge" recycle of bottom ash transport waters, and new technology-based limits on flue gas desulfurization ("FGD") (scrubber) wastewater require primary physical/chemical treatment and secondary biological treatment to meet extremely low limits for arsenic, mercury, and selenium. The EPA published a rule in 2017, postponing certain compliance/applicability dates to provide the EPA time to review and revise, as necessary, the 2015 ELGs for FGD wastewater and bottom ash transport water. The EPA delayed the compliance dates for these two waste streams from the 2018-2023 timeframe to 2020-2023. However, the 2018-2023 applicability dates and the accompanying requirements for fly ash transport water, flue gas mercury control wastewater, and gasification wastewater remain unchanged. While the EPA reconsiders the limits for FGD wastewater and bottom ash transport water, states have issued National Pollutant Discharge Elimination System ("NPDES") permits for all of TVA's active coal facilities based on the 2015 ELGs, recognizing that the permits may need to be reopened to incorporate modifications to those ELGs. The EPA proposed revised ELGs for bottom ash transport water and FGD wastewater on November 4, 2019. The final ELGs were published on October 13, 2020. The primary impact of these regulations for TVA is on the operation of existing coal-fired generation facilities. The revised ELGs could impact long-term investment decisions being made relative to the long-term compliance and operability of these plants. The revisions may require TVA to install additional wastewater treatment systems for FGD wastewater and bottom ash transport water, and TVA could incur substantial costs to comply with the new rule. TVA currently has three plants with wet scrubbers that may be subject to new scrubber-related limits, the largest being Cumberland. Bull Run is exempt from the imposition of new scrubber-related limits due to the pending retirement of the plant prior to the regulatory deadline. The revision also includes a subcategory for which Cumberland would qualify that provides TVA greater flexibility in meeting the ELGs. Litigation of the final rule is anticipated which introduces additional uncertainty in what will be required at each facility. Allen Groundwater Investigation . The CCR Rule required TVA to implement a comprehensive groundwater monitoring program at units subject to the rule. As a result of this groundwater monitoring program, TVA reported to TDEC in 2017 elevated levels of arsenic, lead, and fluoride in groundwater samples collected from two shallow-aquifer groundwater monitoring wells around the Allen East Ash Disposal Area. TVA, under the oversight of TDEC, conducted a remedial investigation into the nature and extent of the contamination. In 2018, TVA submitted a draft Remedial Investigation Report to TDEC which was revised after discussions with TDEC and additional investigation. TVA submitted the Final Updated Remedial Investigation Report to TDEC in 2019. The remedial investigation confirmed that the high arsenic, fluoride, and lead concentrations are limited to the shallow alluvial aquifer in the north and south areas of the Allen East Ash Disposal Area. These areas are not adversely impacting the Memphis aquifer, which is the source of the public drinking water supply. All samples taken from the Memphis aquifer through TVA production wells were below the EPA drinking water standards. As the result of a pumping test conducted on TVA production wells at the nearby Allen Combined Cycle Plant ("Allen CC") by the United States Geological Survey and the University of Memphis, TVA is committed to not operating these production wells until additional data supports safe use. TVA constructed water tanks on site and is purchasing cooling water from Memphis Light, Gas and Water. The use of water tanks rather than the wells may impose some operational restrictions on the Allen CC due to the lower availability of cooling water. TVA's Remedial Investigation/Interim Response Action Groundwater Monitoring Plan is reviewed and modified annually. The 2020 Remedial Investigation/Interim Response Action Groundwater Monitoring Plan was approved by TDEC on May 5, 2020. TVA has sampled the monitoring wells at the site as described by the plan quarterly. TVA prepares a memorandum after each quarterly event and prepares an annual report to evaluate the sampling results. The 2019 Remedial Investigation/Interim Response Action Groundwater Monitoring report was submitted to TDEC on July 2, 2020. The Interim Response Action Plan to remediate the groundwater will include a groundwater extraction system and a groundwater treatment system. TVA will also continue to dewater the East Ash Disposal Area and treat the water before it is discharged to the NPDES outfall. A feasibility study to evaluate remedial actions for the site was submitted to TDEC on September 4, 2020. TVA has evaluated closure options for the Allen East Ash Disposal Area, as well as the nearby West Ash Impoundment, through an EIS pursuant to NEPA. In March 2019, TVA released its public scoping report, which eliminated closure-in-place as an alternative. TVA published the final EIS on March 13, 2020 and its Record of Decision on April 14, 2020, which documents the final decision regarding the closure method for the CCR units at the Allen Fossil Plant. TVA has decided to remove CCR from the above identified areas to an existing permitted offsite landfill. Federal Contracting and Hiring Practices . On August 3, 2020, President Trump issued an "Executive Order ("EO") on Aligning Federal Contracting and Hiring Practices With the Interests of American Workers". Among other things, the EO directs 71 Table of Contents federal agencies to review contracts awarded in 2018 and 2019 to assess (i) whether temporary foreign labor was used and impacts from such use, and (ii) whether any offshoring occurred and its impacts. The EO also directs agencies to review employment policies for compliance with specific laws. TVA is conducting a review and will report a summary of its findings to the Office of Management and Budget ("OMB") by December 1, 2020. Ratemaking TVA, LPCs, and directly served industries have worked collaboratively in recent years to develop changes to rates that focus on TVA's long-term pricing efforts and the changing needs of customers in the Tennessee Valley. These changes have improved pricing by better aligning rates with underlying cost drivers and by sending improved pricing signals, while maintaining competitive industrial rates and keeping residential rates affordable. In 2019, the TVA Board approved a 20-year Partnership Agreement option that better aligns the length of LPC contracts with TVA's long-term commitments. These agreements are automatically extended each year after their initial effective date, contingent upon certain circumstances, including limited rate increases going forward. Participating LPCs will receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. In June 2020, TVA provided participating LPCs a flexibility option that allows them to locally generate up to approximately five percent of average total hourly energy sales over the prior five years in order to meet their individual customers' needs. As of November 16, 2020, 142 LPCs had signed the 20-year Partnership Agreement with TVA, and 64 LPCs had signed a Flexibility Agreement. Safeguarding Assets Physical Security — Non-Nuclear Asset Protection. TVA utilizes a variety of security technologies, security awareness activities, and security personnel to prevent sabotage, vandalism, and thefts. Any of these activities could negatively impact the ability of TVA to generate, transmit, and deliver power to its customers. TVA's Police and Emergency Management personnel are active participants with numerous professional and peer physical security organizations in both the electric industry and law enforcement communities. Physical attacks on transmission facilities across the country have heightened awareness of the need to physically protect facilities. TVA continues to work with the North American Electric Reliability Corporation ("NERC"), the SERC Reliability Corporation, the North American Transmission Forum, and other utilities to implement industry approved recommendations and standards. Nuclear Security . Nuclear security is carried out in accordance with federal regulations as set forth by the NRC. These regulations are designed for the protection of TVA's nuclear power plants, the public, and employees from the threat of radiological sabotage and other nuclear-related terrorist threats. TVA has security forces to guard against such threats. Cybersecurity. TVA operates in a highly regulated environment with respect to cybersecurity. TVA's cybersecurity program aligns or complies with the Federal Information Security Management Act, the NERC Critical Infrastructure Protection requirements, and the NRC requirements for cybersecurity, as well as industry best practices. As part of the U.S. government, TVA coordinates with and works closely with the U.S. Department of Homeland Security and the U.S. Computer Emergency Readiness Team ("US-CERT"). US-CERT functions as a liaison between the U.S. Department of Homeland Security and the public and private sectors to coordinate responses to security threats from the internet. The risk of cybersecurity events such as malicious code attacks, unauthorized access attempts, and social engineering attempts continues to intensify. While TVA and its third-party vendors and service providers have been, and will likely continue to be, subjected to such attacks and attempts to disrupt operations, to date the attacks have not impacted TVA's ability to operate as planned. See Item 1A, Risk Factors — Cybersecurity Risks — TVA's facilities and information infrastructure may not operate as planned due to cyber threats to TVA's assets and operations . Over the last few years, there has been an increase of malicious cyber activity across all industries, including the energy sector. TVA has observed a significant increase in malicious activity related to the COVID-19 pandemic including phishing campaigns and malicious websites. These types of malicious activity are occurring across the industry and have also been observed by TVA's external vendors, stakeholders, and partners. This activity has caused the need for heightened awareness and preparedness. TVA is leveraging federal and other partners to better identify, detect, protect, and respond to these potential attacks. While there have been incidents of phishing and attempted fraud against TVA and its vendors and service providers, these events have not had a significant or material impact on business or operations. Transmission Assets . In addition to physical and cybersecurity attacks, TVA's transmission assets are vulnerable to various types of electrically charged energy disruptions such as those from geomagnetic disturbances ("GMDs") and electromagnetic pulses ("EMPs"). Because the effects of GMD and EMP are similar, they are often considered together. In September 2016, the Federal Energy Regulatory Commission ("FERC") approved a new standard to address GMD events, and in March 2020, FERC approved a revision to the standard. TVA has met the requirements of the original standard and subsequent revisions, and has evaluated the effects of solar storms ranging from NERC's reference case to possible extreme 72 Table of Contents levels. TVA continues as an active participant with NERC in this field. The most serious threats from EMP are those caused by high-altitude nuclear explosions. Like others in the industry, TVA is coordinating with federal and state authorities, NERC, Electric Power Research Institute, and other grid owners and operators to address this concern. Bulk-Power System Assets . On May 1, 2020, President Trump issued EO 13920, Securing the United States Bulk-Power System . Among other things, the EO prohibits the acquisition or installation of any bulk-power system electric equipment where the transaction (1) involves any property in which any foreign country or a national thereof has any interest and (2) poses an undue risk to the bulk-power system in, or national security of, the United States. Whether a bulk-power system electric equipment acquisition or installation is prohibited will depend on determinations by the Secretary of DOE that have not yet been made. At this time, it is uncertain to what extent this EO may impact TVA's operations. Critical Accounting Policies and Estimates TVA's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which require management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change also would materially impact TVA's financial condition, results of operations, or cash flows. TVA's critical accounting policies are also discussed in Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. TVA believes that its most critical accounting policies and estimates relate to the following: • Regulatory Accounting; • AROs; and • Pension and Other Post-Retirement Benefits. Management has discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit, Risk, and Regulation Committee of the TVA Board. While TVA's estimates and assumptions are based on its knowledge of current events and actions it may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Regulatory Accounting The TVA Board is authorized by the TVA Act to set rates for power sold to customers; thus, TVA is "self-regulated." Additionally, TVA's regulated rates are designed to recover its costs of providing electricity. In view of demand for electricity and the level of competition, TVA has assumed that rates, set at levels that will recover TVA's costs, can be charged and collected. As a result of these factors, TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections of costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. The timeframe over which the regulatory assets are recovered from customers or regulatory liabilities are credited to customers is subject to annual TVA Board approval. At September 30, 2020, TVA had $10.4 billion of Regulatory assets and $164 million of Regulatory liabilities. TVA assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, potential legislation, and changes in technology. Based on these assessments, TVA believes the existing regulatory assets are probable of recovery. This determination reflects the current regulatory and political environment and is subject to change in the future. In 2017, the TVA Board authorized management to accelerate amortization of certain regulatory assets to the extent actual net income in 2018 exceeded the budgeted amount, up to the aggregate amount of those certain regulatory assets. Assets included in this Board action include: deferred nuclear generating units, environmental cleanup costs related to the Kingston ash spill, and nuclear training costs related to the refurbishing and restarting of Browns Ferry Unit 1 and the construction of Watts Bar Unit 2. TVA recorded $857 million of accelerated amortization of the Deferred nuclear generating units and Nuclear training costs regulatory assets in 2018. The TVA Board authorized TVA to use the amount included in the 2019 rate action for these two regulatory assets, to the extent needed, to accelerate amortization of the Environmental cleanup costs - Kingston ash spill regulatory asset in 2019. TVA recorded $266 million of accelerated recovery for the Kingston ash spill regulatory asset in 2019. No accelerated amortization was recorded in 2020. TVA does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to record regulatory assets and liabilities. If future recovery of regulatory assets ceases to be probable, or any of the other factors described herein cease to be applicable, TVA would be required to write off these costs and recognize them in net income or other comprehensive income. 73 Table of Contents Asset Retirement Obligations TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets. These obligations relate to TVA's generating facilities, including coal-fired, nuclear, hydroelectric, and natural gas and/or oil-fired. They also pertain to coal ash impoundments, transmission facilities, and other property-related assets. Activities involved with the retirement of these assets could include decontamination and demolition of structures, removal and disposal of wastes, and site restoration. TVA periodically reviews its estimated asset retirement obligation ("ARO") liabilities. Revisions to the ARO estimates are made whenever factors indicate that the timing or amounts of estimated cash flows have changed. Any change to an ARO liability is recognized prospectively as an equivalent increase or decrease in the carrying value of the capitalized asset. Any accretion or depreciation expense related to these liabilities and assets is charged to a regulatory asset. See Note 9 — Regulatory Assets and Liabilities — Nuclear Decommissioning Costs and Non-Nuclear Decommissioning Costs and Note 12 — Asset Retirement Obligations . Nuclear Decommissioning . Utilities that own and operate nuclear plants are required to recognize a liability for legal obligations related to nuclear decommissioning. An equivalent amount is recorded as an increase in the carrying value of the capitalized asset and allocated to a regulatory asset over the useful life of the capitalized asset. The initial obligation is measured at its estimated fair value using various judgments and assumptions. Fair value is developed using an expected present value technique that is based on assumptions of market participants and that considers estimated retirement costs in current period dollars that are inflated to the anticipated decommissioning date and then discounted back to the date the ARO was incurred. Decommissioning cost studies are updated for each of TVA's nuclear units at least every five years. Changes in assumptions and estimates included within the calculations of the value of the AROs could result in significantly different results than those identified and recorded in the financial statements. At September 30, 2020, the estimated future nuclear decommissioning cost recognized in the financial statements was $3.3 billion and was included in AROs, and the unamortized regulatory asset related to nuclear decommissioning ARO costs of $896 million was included in Regulatory assets. The following key assumptions can have a significant effect on estimates related to the nuclear decommissioning costs reported in TVA's nuclear ARO liability: Timing and Method – In projecting decommissioning costs, two assumptions must be made to estimate the timing of plant decommissioning. First, the date of the plant's retirement must be estimated. At Browns Ferry and Sequoyah, the estimated retirement date is based on the unit with the longest license period remaining. At Watts Bar, the estimated retirement date is based on each unit's license period. Second, an assumption must be made on the timing of the decommissioning. TVA has ascribed probabilities to two different decommissioning methods related to its nuclear decommissioning obligation estimate: the DECON method and the SAFSTOR method. The DECON method requires that radioactive contamination be removed from a site and safely disposed of or decontaminated to a level that permits the site to be released for unrestricted use shortly after it ceases operation. The SAFSTOR method allows nuclear facilities to be placed and maintained in a condition that allows the facilities to be safely stored and subsequently decontaminated to levels that permit release for unrestricted use. TVA bases its nuclear decommissioning estimates on site-specific cost studies, which are updated for each of TVA's nuclear units at least every five years, with the last study performed in 2017. Changes in probabilities ascribed to the assumptions or the timing of decommissioning can significantly change the present value of TVA's obligations. Cost Estimates – There is limited experience with actual decommissioning of large nuclear facilities. Changes in technology and experience as well as changes in regulations regarding nuclear decommissioning could cause cost estimates to change significantly. TVA's cost studies assume current technology and regulations. Cost Escalation Rate – TVA uses expected inflation rates over the remaining timeframe until the costs are expected to be incurred to estimate the amount of future cash flows required to satisfy TVA's decommissioning obligations. Discount Rate – TVA uses its incremental borrowing rate over a period consistent with the remaining timeframe until the costs are expected to be incurred to calculate the present value of the weighted estimated cash flows required to satisfy TVA's decommissioning obligations. The actual decommissioning costs may vary from the derived estimates because of changes in current assumptions, such as the assumed dates of decommissioning, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. A 10 percent change in TVA's ARO for nuclear decommissioning cost at September 30, 2020, would have affected the liability by approximately $328 million. Non-Nuclear Decommissioning. At September 30, 2020, the estimated future non-nuclear decommissioning cost recognized in the financial statements was $3.5 billion and was included in AROs, and the unamortized regulatory asset related to non-nuclear decommissioning ARO costs of $2.5 billion was included in Regulatory assets. This decommissioning cost estimate involves estimating the amount and timing of future expenditures and making judgments concerning whether or not such costs are considered a legal obligation. Estimating the amount and timing of future expenditures includes, among other things, making projections of the timing and duration of the asset retirement process and predicting how costs will escalate with 74 Table of Contents inflation. These costs are predominantly CCR closure, CCR post-closure care and monitoring, and plant powerhouse asbestos removal. CCR closure estimates are primarily closure-in-place except for specific ponds located at Allen and Gallatin, which are closure-by-removal. CCR post-closure care and monitoring primarily includes costs for grounds maintenance, cover system and mechanical maintenance, inspections, and groundwater monitoring costs. Asbestos removal is based on cost per square foot to remove and dispose of asbestos-containing materials. TVA revises estimates of CCR closure on a project by project basis when updated cost information becomes available that causes management's expectation of cost to change materially. CCR post-closure care and monitoring costs and asbestos removal are studied for revision at least every five years, but revised more frequently if updated cost information becomes available that causes management's expectation of cost to change materially. The following key assumptions can have a significant effect on estimates related to the non-nuclear decommissioning costs: Timing and Method – In projecting non-nuclear decommissioning costs, the date of the asset's retirement must be estimated. In instances where the retirement of a specific asset will precede the retirement of the generating plant, the anticipated retirement date of the specific asset is used. Additionally, TVA expects to incur certain ongoing costs subsequent to the initial asset retirement. TVA develops its cost estimates based on likelihood of decommissioning method where options exist in fulfilling legal obligations (e.g. closure-in-place or closure-by-removal for coal ash impoundments). The decommissioning method is determined based on several factors including available technologies, environmental studies, cost factors, resource availability, and timing requirements. As these factors are considered and decommissioning methods are determined, the detailed project schedules and estimates are adjusted. See Note 8 — Regulatory Assets and Liabilities — Non-Nuclear Decommissioning Costs . Technology and Regulation – Changes in technology and experience as well as changes in regulations regarding non-nuclear decommissioning could cause cost estimates to change significantly. TVA's cost estimates generally assume current technology and regulations. In April 2015, the EPA published its final rule governing CCR, which regulates landfill and impoundment location, design, and operations; dictates certain pond-closure conditions; and establishes groundwater monitoring and closure and post-closure standards. As a result of this ruling, in 2015 TVA made revisions to the assumptions and estimates used to calculate its CCR AROs. TVA continues to evaluate the impact of the rule on its operations, including cost and timing estimates of related projects. As a result, further adjustments to its ARO liabilities may be required as estimates are refined. Cost Escalation Rate – TVA uses expected inflation rates over the remaining timeframe until the costs are expected to be incurred to estimate the amount of future cash flows required to satisfy TVA's decommissioning obligations. Discount Rate – TVA uses its incremental borrowing rate over a period consistent with the remaining timeframe until the costs are expected to be incurred to calculate the present value of the weighted estimated cash flows required to satisfy TVA's decommissioning obligations. The actual decommissioning costs may vary from the derived estimates because of changes in current assumptions, such as the assumed dates of decommissioning, changes in the discount or escalation rates, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. A 10 percent change in TVA's ARO for non-nuclear decommissioning costs at September 30, 2020, would have affected the liability by approximately $351 million. Pension and Other Post-Retirement Benefits TVA sponsors a defined benefit pension plan that is qualified under section 401(a) of the Internal Revenue Code and covers substantially all of its full-time annual employees hired prior to July 1, 2014. TVARS, a separate legal entity governed by its own board of directors, administers the qualified defined benefit pension plan. TVA also provides a Supplemental Executive Retirement Plan ("SERP") to certain executives in critical positions, which provides supplemental pension benefits tied to compensation levels that exceed limits imposed by IRS rules applicable to the qualified defined benefit pension plan. Additionally, TVA provides post-retirement health care benefits for most of its full-time employees who reach retirement age while still working for TVA. TVA's pension and other post-retirement benefits contain uncertainties because they require management to make certain assumptions related to TVA's cost to provide these benefits. Numerous factors are considered including the provisions of the plans, changing employee demographics, various actuarial calculations, assumptions, and accounting mechanisms. Effects of the COVID-19 pandemic on the financial markets, regulations, and experience are uncertain and still evolving, creating an additional degree and complexity associated with the future occurrence or outcome of events and conditions underlying the significant accounting assumptions discussed below. Key actuarial assumptions utilized include discount rates, projected health care cost trend rates, expected long-term rate of return on plan assets, rate of increase in future compensation levels, retirement rates, expected timing and form of payments, and mortality rates. Every five years, a formal actuarial experience study that compares assumptions to the actual experience is conducted. Additional ad-hoc experience studies are performed as needed to review recent experience and validate recommended changes to the actuarial assumptions used based upon TVA's last experience study in 2018. 75 Table of Contents Expected Return on Plan Assets . The qualified defined benefit pension plan is the only plan that is funded with qualified plan assets. In determining the expected long-term rate of return on pension plan assets, TVA uses a process that incorporates actual historical asset class returns and an assessment of expected future performance and takes into consideration external actuarial advice, the current outlook on capital markets, the asset allocation policy, and the anticipated impact of active management. Based upon review of the current plan's asset target allocation mix, capital market outlooks, and the most recent studies, TVA management maintained its 6.75 percent expected long-term rate of return on plan assets assumption, which will be used to calculate the 2021 net periodic pension cost. TVA recognizes the impact of asset performance on pension expense over a three-year phase-in period through a market-related value of assets calculation. The market-related value of assets recognizes investment gains and losses over a three-year period and is used in calculating the expected return on assets and the recognized net actuarial loss components of pension net periodic benefit cost. A higher expected rate of return assumption decreases the net periodic pension benefit costs, whereas a lower expected rate of return assumption increases the net periodic pension benefit cost. The plan's actual rate of return for 2020 was 5.11 percent compared to the assumption of 6.75 percent. The difference between the expected and actual return on plan assets resulted in an actuarial loss of $91 million that is recognized as an increase in the related regulatory asset and an increase in the pension benefit obligation at September 30, 2020. Discount Rate. TVA's discount rates are derived by identifying a theoretical settlement portfolio of high quality corporate bonds of Aa quality or higher sufficient to provide for the projected benefit payments. The model matches the present value of the projected benefit payments to the market value of the theoretical settlement bond portfolio with any resulting excess funds presumed to be reinvested and used to meet successive year benefit payments. A single equivalent discount rate is determined to align the present value of the required cash flow with the value of the bond portfolio. The resulting discount rates are reflective of both the current interest rate and the distinct liability of the pension and post-retirement benefit plans. The discount rate is somewhat volatile because it is determined based upon the prevailing rate of long-term corporate bonds as of the measurement date. A higher discount rate decreases the plan obligations and correspondingly decreases the net periodic pension and net post-retirement benefit costs for those plans where actuarial losses are being amortized. Alternatively, a lower discount rate increases net periodic pension and net periodic post-retirement benefit costs. The discount rates used to determine the pension and post-retirement benefit obligations were 2.75 percent and 3.05 percent, respectively, at September 30, 2020. Health Care Cost Trends. In establishing health care cost trend rates for the post-retirement obligation, TVA reviews actual recent cost trends and projected future trends considering health care inflation, changes in health care utilization, and changes in plan benefits and premium experience. The pre-Medicare current health care cost trend rate is 6.50 percent, the ultimate trend rate is 5.00 percent, and the year to reach the ultimate rate is 2027. The post-Medicare current health care cost trend rate and ultimate health care cost trend rate remained constant at zero percent and 4.00 percent, respectively, whereas the year to reach the ultimate rate was extended to 2024 from 2023 attributable to lower than expected premium increases on the private exchange. This change in the post-Medicare health care cost trend rate assumption resulted in a $15 million decrease in the post-retirement obligation at September 30, 2020. Cost of Living Adjustments. Cost of living adjustments ("COLAs") are an increase in the benefits for eligible retirees to help maintain the purchasing power of benefits as consumer prices increase. This assumption is based on the long-term expected future rate of inflation based on the capital market outlooks, economic forecasts, and the Federal Reserve policy. See Note 21 — Benefit Plans — Plan Assumptions — Cost of Living Adjustment for further discussion on the calculation of the COLA. The actual COLA for CY 2020 was 1.54 percent. The CY 2021 COLA is assumed to be 1.00 percent, and for years thereafter is assumed to be 2.00 percent . A higher COLA increases the pension benefit obligation whereas a lower assumption decreases the obligation. The actual calendar year COLA and the long-term COLA assumption are used to determine the benefit obligation at September 30 and the net periodic benefit costs for the following fiscal year. Mortality . TVA's mortality assumptions are based upon actuarial projections in combination with actuarial studies of the actual mortality experience of TVARS's pension and post-retirement benefit plan participants taking into consideration the Society of Actuaries ("SOA") mortality table and projection scales as of September 30, 2020. TVA continues to monitor the availability of updates to mortality tables, longevity improvement scales, and mortality reviews and experience studies to consider whether these updates should be reflected in the current year mortality assumption. In determining the benefit obligations at September 30, 2020, TVA adopted a modified version of the SOA PRI-2012 mortality table and a modified version of the MP-2019 projection scale based upon an updated mortality experience study. The change in TVA's mortality assumptions resulted in a $137 million decrease in the pension obligation and a $2 million increase in the post-retirement obligation at September 30, 2020. 76 Table of Contents Sensitivity to Changes in Key Assumptions The following tables illustrate the estimated effects of changing certain of the critical actuarial assumptions discussed above, while holding all other assumptions constant and excluding any impact for unamortized actuarial gains and losses: Sensitivity to Certain Changes in Pension Assumptions At September 30, 2020 Actuarial Assumption Current Assumption Change in Assumption Impact Effect on 2020 pension expense: Discount rate 3.20 % (0.25) % $ 17 Expected return on assets 6.75 % (0.25) % 18 COLA 2.00 % 0.25 % 30 Effect on benefit obligation Discount rate 2.75 % (0.25) % 418 COLA 2.00 % 0.25 % 270 Sensitivity to Changes in Assumed Health Care Cost Trend Rates At September 30, 2020 1% Increase 1% Decrease Effect on total of service and interest cost components for the year $ 4 $ (4) Effect on end-of-year accumulated post-retirement benefit obligation 70 (68) Contributions. The minimum pension contribution for 2020 was $300 million and was paid in twelve monthly installments. TVA made contributions of $5 million to the SERP and $25 million, net of rebates and subsidies received, to the unfunded other post-retirement benefit plans. TVA expects to contribute $300 million to TVARS, $5 million to the SERP, and $28 million to the other post-retirement benefit plans in 2021. Accounting Mechanisms. In accordance with current accounting guidance, TVA utilizes a number of accounting mechanisms that reduce the volatility of reported pension expense. Differences between actuarial assumptions and actual plan results are deferred and amortized into period expense only when the accumulated differences exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If necessary, the excess is amortized over the average future expected working lifetime of participants expected to receive benefits, which is approximately 11 years for the pension plan and 12 years for the post-retirement plan. Additionally, TVA recognizes pension costs as regulatory assets to the extent that the amount calculated under U.S. GAAP as pension expense differs from the amount TVA contributes to the pension plan as pension plan contributions. As a result of recent plan design changes, future contributions are expected to exceed the expense calculated under U.S. GAAP. Accordingly, TVA will discontinue this regulatory accounting practice once all such deferred costs have been recovered, at which time it will recognize pension costs in accordance with U.S. GAAP. Furthermore, amortization of net prior service cost/(credit) resulting from a plan change is included as a component of period expense in the year first recognized and every year thereafter until it is fully amortized. The increase or decrease in the benefit obligation due to a plan change is amortized over the average remaining service period of participating employees expected to receive benefits under the plans. The pension and post-retirement plans currently have prior service costs/(credits) from plan changes made in 2009, 2010, 2016, 2018, 2019, and 2020 with remaining amortization periods of one to nine years. Fair Value Measurements Investments Investment Funds. Investments classified as trading consist of amounts held in the Nuclear Decommissioning Trust ("NDT"), Asset Retirement Trust ("ART"), SERP, and Deferred Compensation Plan ("DCP"). These assets are generally measured at fair value based on quoted market prices or other observable market data such as interest rate indices. These investments are primarily U.S. and international equities, real estate investment trusts, fixed income investments, high-yield fixed income investments, U.S. Treasury Inflation-Protected Securities, treasuries, currencies, derivative instruments, and other investments. TVA has classified all of these trading securities as either Level 1, Level 2, or Investments measured at net asset value. See Note 16 — Fair Value Measurements — Valuation Techniques for a discussion of valuation levels of the investments. Plan Investments. TVA's qualified benefit pension plan is funded with qualified plan assets. These investments are primarily global public equities, private equities, fixed income securities, public real assets, and private real assets. See Note 21 — Benefit Plans — Fair Value Measurements for disclosure of fair value measurements for investments held by TVARS that support TVA's qualified defined benefit pension plan. 77 Table of Contents Pricing. Prices provided by third-parties for the assets in investment funds and plan investments are subjected to automated tolerance checks by the investment portfolio trustee to identify and avoid, where possible, the use of inaccurate prices. Any such prices identified as outside the tolerance thresholds are reported to the vendor that provided the price. If the prices are validated, the primary pricing source is used. If not, a secondary source price that has passed the applicable tolerance check is used (or queried with the vendor if it is out of tolerance), resulting in either the use of a secondary price, where validated, or the last reported default price, as in the case of a missing price. For monthly valued accounts, where secondary price sources are available, an automated inter-source tolerance report identifies prices with an inter-vendor pricing variance of over two percent at an asset class level. For daily valued accounts, each security is assigned, where possible, an indicative major market index, against which daily price movements are automatically compared. Tolerance thresholds are established by asset class. Prices found to be outside of the applicable tolerance threshold are reported and queried with vendors as described above. For investment funds, TVA additionally performs its own analytical testing on the change in fair value measurements each period to ensure the valuations are reasonable based on changes in general market assumptions. TVA also performs pricing tests on various portfolios comprised of securities classified in Levels 1 and 2 on a quarterly basis to confirm accuracy of the values received from the investment portfolio trustee. For plan investments, TVARS reviews the trustee's Service Organization Controls report and the pricing policies of the trustee's largest pricing vendor. Derivatives TVA has historically entered into various derivative transactions, including commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures, to manage various market risks. Other than certain derivative instruments included in investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. Currency and Interest Rate Derivatives. TVA has three currency swaps and four "fixed for floating" interest rate swaps. The currency swaps protect against changes in cash flows caused by volatility in exchange rates related to outstanding Bonds denominated in British pounds sterling. TVA uses interest rate swaps to fix variable short-term debt to a fixed rate. The currency and interest rate swaps are classified as Level 2 valuations as the rate curves and interest rates affecting the fair value of the contracts are based on observable data. The application of credit valuation adjustments ("CVAs") did not materially affect the fair value of these assets and liabilities at September 30, 2020. Commodity Contracts . TVA enters into commodity contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. During the fourth quarter of 2020, TVA discontinued derivative accounting for forward coal contracts because these contracts no longer meet the criteria of net settlement. As a result, the associated net derivative liabilities and regulatory assets have been derecognized. The natural gas derivative contracts are classified as Level 2 valuations based on market approaches which utilize short-term and mid-term market-quoted prices from an external industry brokerage firm. The application of CVAs did not materially affect the fair value of these assets and liabilities at September 30, 2020. TVA maintains policies and procedures to value commodity contracts using what is believed to be the best and most relevant data available. In addition, TVA's risk management group reviews valuations and pricing data. Fair Value Considerations In determining the fair value of its financial instruments, TVA considers the source of observable market data inputs, liquidity of the instrument, credit risk, and risk of nonperformance of itself or the counterparty to the contract. The conditions and criteria used to assess these factors are described below. Sources of Market Assumptions. TVA derives its financial instrument market assumptions from market data sources (e.g., CME and Moody's Investors Service, Inc. ("Moody's")). In some cases, where market data is not readily available, TVA uses comparable market sources and empirical evidence to derive market assumptions and determine a financial instrument's fair value. Market Liquidity. Market liquidity is assessed by TVA based on criteria as to whether the financial instrument trades in an active or inactive market. A financial instrument is considered to be in an active market if the prices are fully transparent to the market participants, the prices can be measured by market bid and ask quotes, the market has a relatively high trading volume, and the market has a significant number of market participants that will allow the market to rapidly absorb the quantity of the assets traded without significantly affecting the market price. Other factors TVA considers when determining whether a market is active or inactive include the presence of government or regulatory control over pricing that could make it difficult to establish a market-based price upon entering into a transaction. Nonperformance Risk. In determining the potential impact of nonperformance risk, which includes credit risk, TVA considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements. TVA is a counterparty to derivative instruments 78 Table of Contents that subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to value the investment. Nonperformance risk for most of TVA's derivative instruments is an adjustment to the initial asset/liability fair value. TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying a CVA. TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA's or the counterparty's credit rating as obtained from Moody's. For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the company. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2019) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. All derivative instruments are analyzed individually and are subject to unique risk exposures. The application of CVAs resulted in a less than $1 million decrease in the fair value of assets and a $1 million decrease in the fair value of liabilities at September 30, 2020. Collateral . TVA's interest rate swaps and currency swaps contain contract provisions that require a party to post collateral (in a form such as cash or a letter of credit) when the party's liability balance under the agreement exceeds a certain threshold. See Note 15 — Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral for a discussion of collateral related to TVA's derivative liabilities. New Accounting Standards and Interpretations See Note 2 — Impact of New Accounting Standards and Interpretations for a discussion of recent accounting standards and pronouncements which were issued by the Financial Accounting Standards Board ("FASB"), became effective for TVA, or were adopted by TVA during the presented periods. Legislative and Regulatory Matters TVA continues to monitor how regulatory agencies are interpreting and implementing the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in July 2010. As a result, TVA has become subject to recordkeeping, reporting, and reconciliation requirements related to its derivative transactions. In addition, depending on how regulatory agencies interpret and implement the provisions, TVA's hedging costs may increase, and TVA may have to post additional collateral and margin in connection with its derivative transactions. For additional discussion on legislative and regulatory matters, including a discussion of environmental legislation and regulation, see Item 1, Business — Environmental Matters, Item 1, Business — Regulation, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Regulatory Compliance. TVA does not engage, and does not control any entity that is engaged, in any activity listed under Section 13(r) of the Securities Exchange Act of 1934 (the "Exchange Act"), which requires certain issuers to disclose certain activities relating to Iran involving the issuer and its affiliates. Based on information supplied by each such person, none of TVA's directors and executive officers are involved in any such activities. While TVA is an agency and instrumentality of the U.S., TVA does not believe its disclosure obligations, if any, under Section 13(r) extend to the activities of any other departments, divisions, or agencies of the U.S. Environmental Matters See Item 1, Business — Environmental Matters, which discussion is incorporated by reference into this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Legal Proceedings From time to time, TVA is a party to or otherwise involved in Legal Proceedings that have arisen in the ordinary course of conducting its activities, as a result of catastrophic events or otherwise. As of September 30, 2020, TVA had accrued approximately $14 million with respect to Legal Proceedings. No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected. For a discussion of certain current material Legal Proceedings, see Note 22 — Commitments and Contingencies — Legal Proceedings , which discussions are incorporated into this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations . 79 Table of Contents Risk Management Activities TVA is exposed to various market risks. These market risks include risks related to commodity prices, investment prices, interest rates, currency exchange rates, inflation, and counterparty credit and performance risk. To help manage certain of these risks, TVA has entered into various derivative transactions, including commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures. Other than certain derivative instruments in its trust investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. See Note 15 — Risk Management Activities and Derivative Transactions . Risk Governance The Enterprise Risk Council ("ERC") is responsible for the highest level of risk oversight at TVA and is also responsible for communicating enterprise-wide risks with policy implications to the TVA Board or a designated TVA Board committee. The Enterprise Risk Council is comprised of the Enterprise Leadership Team ("ELT") and the Chief Risk Officer ("CRO") who acts as Chair. ERC members may invite additional attendees to meetings as non-voting participants. The ERC has also established subordinate committees, consisting of business unit leaders, to assist in the oversight of fuel and power procurement, DER programs and products, and general risk management. TVA has a designated Enterprise Risk Management ("ERM") organization within its Financial Services organization responsible for (1) establishing enterprise risk management policies and guidelines, (2) developing an enterprise risk profile aligned with TVA's strategic objectives, (3) performing annual risk assessments across all TVA business units, (4) monitoring and reporting on identified enterprise risks and emerging risks, (5) facilitating enterprise risk discussions with the risk subject matter experts across the organization and at the ERC and TVA Board levels, and (6) developing and improving TVA's risk awareness culture. TVA has cataloged major short-term and long-term enterprise level risks across the organization. A discussion of significant risks is presented in Item 1A, Risk Factors. Commodity Price Risk TVA is exposed to effects of market fluctuations in the price of commodities that are critical to its operations, including electricity, coal, and natural gas. The magnitude of exposure to these risks is influenced by many factors including contract terms and market liquidity. TVA's commodity price risk is substantially mitigated by its cost-based rates, including its total fuel cost adjustment, and long-term fixed price commodity contracts. TVA manages risk with commodity contracts for both coal and natural gas that require physical delivery of the contracted quantity. A hypothetical 10 percent decline in the market price of coal on September 30, 2019, would have resulted in a decrease of approximately $34 million in the fair value of TVA's coal derivative instruments at this date. TVA discontinued derivative accounting for forward coal contracts during the fourth quarter of 2020; therefore, a hypothetical 10 percent decline in the market price of coal on September 30, 2020, is not presented. A hypothetical 10 percent decline in the market price of natural gas on September 30, 2020 and 2019, would have resulted in decreases of approximately $84 million and $79 million, respectively, in the fair value of TVA's natural gas derivative instruments at these dates. Investment Price Risk TVA's investment price risk relates primarily to investments in TVA's NDT, ART, pension fund, SERP, and DCP. Nuclear Decommissioning Trust. The NDT is generally designed to achieve a return in line with overall equity and debt market performance. The assets of the trust are invested in debt and equity securities, private partnerships, and certain derivative instruments including forwards, futures, options, and swaps, and through these investments the trust has exposure to U.S. equities, international equities, real estate investment trusts, natural resource equities, high-yield debt, domestic debt, U.S. Treasury Inflation-Protected Securities ("TIPS"), treasuries, private real assets, private equity, and private credit strategies. At September 30, 2020 and 2019, an immediate 10 percent decrease in the price of the investments in the trust would have reduced the value of the trust by $223 million and $211 million, respectively. Asset Retirement Trust. The ART is presently invested to achieve a return in line with overall equity and debt market performance. The assets of the trust are invested in debt and equity securities, private partnerships, and certain derivative instruments including options, and through these investments the trust has exposure to U.S. equities, real estate investment trusts, natural resource equities, high-yield debt, domestic debt, TIPS, treasuries, private real assets, private equity, and private credit strategies. At September 30, 2020 and 2019, an immediate 10 percent decrease in the price of the investments in the trust would have reduced the value of the trust by $87 million and $77 million, respectively. Due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA has experienced fluctuations related to its ART and NDT investment portfolio during 2020. The losses experienced dur