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Item 7. Management’s Discussion and Analysis

2020-11-17 compared with 2019-11-15 · 556 added, 526 removed, 722 unchanged (60% of the section changed)

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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:

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• 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 the three years presented in its consolidated financial statements;

• 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;

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TVA operates the nation's largest public power system.

At September 30, 2019 , TVA provided electricity to approximately 49 large industrial customers, seven federal agency customers, and 154 local power company customers ("LPCs") that serve nearly 10 million people in parts of seven southeastern states.

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.

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• TVA is a government corporation.

The area in which TVA sells power is limited by the Tennessee Valley Authority Act of 1933 (the "TVA Act") under a provision known as the "fence";

• 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 (the "TVA Board") and are not set or reviewed by another entity, such as a public utility commission.

• 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.

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TVA's mission focuses on three key areas:

ECONOMIC DEVELOPMENT

ENERGY ENVIRONMENT ECONOMIC DEVELOPMENT

• Energy — Delivering affordable, reliable power;

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and the need to diversify its power supply and adapt to changing customer usage behaviors, new technologies, and emerging, non-traditional competition.

To continue its mission of service, TVA must realize four strategic imperatives through people performance excellence:

Rates — Maintain low rates;

Stewardship — Be responsible stewards;

Debt — Live within its means;

Asset Portfolio — Meet reliability expectations and provide a balanced portfolio;

People Performance Excellence — Continuously improve, empower, and engage employees.

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;

• 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 imperatives.

The intent of these measures is to align employees to TVA's mission by focusing its collective efforts on operational excellence, fiscal responsibility, and economic development and environmental stewardship.

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

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 2019 corporate results compared with targets for these key measures are reflected in the chart below.

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.

Corporate Measure

2020 Corporate Measure Weight Actual Threshold Target Stretch

TVA total spending ($ millions) 40% $ 4,441 $ 4,987 $ 4,847 $ 4,707

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Nuclear unit capability factor (UCF) (%) 15% 90.0 % 89.5 % 90.9 % 92.2 %

Combined cycle seasonal equivalent forced outage rate (%)

Coal seasonal equivalent forced outage rate (%)

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 net income for the years ended September 30, 2019 and 2018 , was $1.4 billion and $1.1 billion , respectively.

As is often the case for electric utilities, weather is a primary driver of TVA's sales.

TVA's service territory experienced overall milder than normal weather during 2019, despite record-setting cold weather experienced during November 2018 and record-setting heat during September 2019.

This overall milder weather drove lower energy sales.

However, revenue from sales of electricity increased $84 million for the year ended September 30, 2019 , as compared to the prior year, primarily driven by the base rate adjustment that became effective October 1, 2018.

Fuel and purchased power expense decreased $119 million for the year ended September 30, 2019 , as compared to the prior year.

This was primarily due to lower energy sales and an increase in hydroelectric generation.

Operating and maintenance expense increased $492 million for the year ended September 30, 2019 , as compared to the prior year.

This increase was primarily driven by accelerated recovery of the regulatory asset for environmental cleanup costs related to the Kingston ash spill in accordance with the TVA Board's ratemaking authority, an increase in project write-offs and materials and supplies inventory reserves and write-offs associated with the anticipated retirement of Paradise Fossil Plant ("Paradise") and Bull Run Fossil Plant ("Bull Run") , and increased outage expense driven by additional planned nuclear outage days.

TVA continues to work with local power company customers ("LPCs") to provide flexibility to meet future changing needs of consumers.

During 2019, TVA implemented a change to the structure of its wholesale electric power rates through pricing that better aligns wholesale rates with the underlying cost to serve customers.

In addition, the TVA Board approved a 20-year Partnership Agreement option that better aligns the length of LPC contracts with TVA's long-term commitments.

The TVA Board also approved a joint project with LPCs to explore options for aggregated procurement of utility-scale and mid-scale renewable generation.

Further, TVA issued a request for proposal in April 2019 for up to 200 MW of new renewable energy, in response to customer demand.

With these proactive solutions, TVA expects to provide a stable foundation that provides the flexibility to embrace new trends and to continue delivering more innovative energy options.

TVA remains committed to planning its system in a way that ensures evolving resource portfolios remain reliable and provide the most value to all customers.

TVA utilizes an Integrated Resource Plan ("IRP") to provide direction on how to best meet future electricity demand considering many views of the future to determine how TVA can continue to provide low-cost, reliable electricity, support environmental stewardship, and spur economic development in the Tennessee Valley over the next 20 years.

The 2019 IRP was approved by the TVA Board at its August 2019 meeting.

Additionally, TVA has conducted economic analyses of its generating assets, considering load outlook, economic benefits and costs, performance, and environmental and social impacts.

During 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 Board approval, TVA determined Paradise would not be restarted after January 2020 due to the plant's material condition.

During 2019, TVA completed the final phase of the extended power uprate ("EPU") project at Browns Ferry Nuclear Plant ("Browns Ferry") and is currently finalizing testing and validation.

The generating capacity is expected to increase by an estimated 465 MW after sufficient run time to validate the new capacity.

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.

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.

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Sales of Electricity

Sales of electricity accounted for nearly all of TVA's operating revenues in 2019 , 2018 , and 2017 .

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.

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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 for the years ended September 30, 2019 , 2018 , and 2017 :

The following chart compares TVA's sales of electricity by customer type for the years ended September 30, 2020 and 2019:

Sales of Electricity

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(millions of kWh)

(1) Includes approximately 429 million kilowatt hours ("kWh") of pre-commercial generation at Allen Combined Cycle Plant ("Allen CC") .

See Note 1 — Summary of Significant Accounting Policies — Pre-Commercial Plant Operations .

(2) Includes approximately 857 million kWh of pre-commercial generation at Watts Bar Nuclear Plant ("Watts Bar") Unit 2, Paradise Combined Cycle Plant ("Paradise CC"), and Allen CC.

See Note 1 — Summary of Significant Accounting Policies — Pre-Commercial Plant Operations .

The following charts show a breakdown of TVA's energy load:

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.

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Degree days measure the extent to which the TVA system 23-station average temperatures vary from 65 degrees Fahrenheit.

During 2019, TVA transitioned degree day calculation methodologies, moving from the average temperatures of the five largest cities in TVA's service area to the average temperatures of 23 stations throughout TVA's service area.

This transition provides TVA with increased geographic granularity throughout its service territory and improves modeling accuracy.

2019 Compared to 2018

Percent Variation

Percent Change

Heating Degree Days

Cooling Degree Days

Total Degree Days

(1) The prior period degree day information has been adjusted in order to incorporate a change in TVA's current calculation of this information.

Every five years this calculation is updated in order to incorporate the current 15-year period of weather history.

The most recent update, to incorporate weather history for CYs 2001-2015, occurred during the first quarter of 2019.

Sales of electricity decreased approximately one percent for the year ended September 30, 2019 , as compared to the prior year, primarily due to decreased sales volume for LPCs driven predominantly by a five percent decrease in heating degree days.

During November 2018, TVA recorded its second highest peak power demand for the month of November at 26,714 MW.

During September 2019, TVA experienced nine days with demand over 28,000 MW, breaking TVA's record for the most days in September with demand over 28,000 MW.

Further, during September 2019, TVA broke its September 30-day average peak load record with an average peak load of 26,258 MW.

Despite this record-setting weather, the TVA service territory experienced overall milder than normal weather in 2019 driven by overall lower than normal heating degree days.

Partially offsetting the decreased sales volume for LPCs, sales to industries directly served increased slightly, particularly in the polysilicon sector.

2018 Compared to 2017

Percent Variation

Percent Change

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.

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) %

Total Degree Days

(1) The prior period degree day information has been adjusted in order to incorporate a change in TVA's current calculation of this information.

Every five years this calculation is updated in order to incorporate the current 15-year period of weather history.

The most recent update, to incorporate weather history for CYs 2001-2015, occurred during the first quarter of 2019.

Sales of electricity increased approximately five percent for the year ended September 30, 2018, as compared to the prior year, primarily due to increased sales volume for LPCs driven predominantly by a 31 percent increase in total degree days.

Colder than normal weather during January 2018 led to TVA setting an all-time record for energy demand in a 24-hour period, as TVA delivered 706 million kWh of energy to the Tennessee Valley.

Also in January 2018, TVA set three of its top-12 winter peak demand records.

In addition, TVA's service territory experienced overall warmer than normal weather during the third and fourth quarters of 2018.

Partially offsetting the increased sales volume for LPCs was a slight decrease in sales to industries directly served, particularly in the pulp and paper and polysilicon sectors.

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

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Interest expense, net 1,142 1,198

(1) For the year ended September 30, 2019, TVA recorded $566 million of accelerated depreciation and $170 million of write-offs related to the anticipated retirements of Paradise and Bull Run.

See Note 6 — Plant Closures .

For the years ended September 30, 2019 and 2018, TVA recorded $266 million and $857 million of accelerated amortization of certain regulatory assets, respectively.

See Note 8 — Regulatory Assets and Liabilities .

(2) For the year ended September 30, 2017, TVA made a one-time additional discretionary $500 million contribution to TVA's pension plan.

Net income $ 1,352 $ 1,417

Operating Revenues.

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For the years ended September 30

(1) Excludes a contra-revenue amount of approximately $11 million representing revenue capitalized during pre-commercial operations at Allen CC.

See Note 1 — Pre-Commercial Plant Operations.

(2) Excludes a contra-revenue amount of approximately $22 million representing revenue capitalized during pre-commercial operations at Watts Bar Unit 2, Paradise CC, and Allen CC.

See Note 1 — Pre-Commercial Plant Operations.

TVA's current rate structure provides pricing signals intended to signal higher cost periods to serve its customers and capture a portion of TVA's fixed costs in fixed charges.

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:

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Both of these components can be significantly impacted by weather.

The GAC, which was implemented in October 2018, captures a portion of fixed costs and will be offset by a corresponding reduction to the energy rates.

The GAC will also reduce the impact of weather variability to the overall rate structure.

Recognizing the need for flexibility, 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 75 implemented the wholesale changes in October 2019.

Additionally, at its August 2019 meeting, 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 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.

As of September 30, 2019, 131 LPCs had signed the 20-year Partnership Agreement with TVA, which represents 56 percent of total operating revenues in 2019.

In addition to base revenues, the rate structure also includes a separate fuel rate that includes the costs of natural gas, fuel oil, purchased power, coal, emission allowances, nuclear fuel, and other fuel-related commodities;

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;

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The changes in revenue components are summarized below:

Variance 2019 vs 2018

Variance 2018 vs 2017

2020 2019 (2)

Energy revenue $ 4,546 $ 5,128 $ (582)

Demand revenue (1)

3,426 3,609 (183)

Grid access charge (4)

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)

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Total operating revenues $ 10,249 $ 11,318 $ (1,069)

(1) Includes the impact of revenue capitalized during pre-commercial operations of approximately $11 million for the year ended September 30, 2018, at Allen CC.

See Note 1 — Summary of Significant Accounting Policies — Pre-Commercial Plant Operations.

(2) Includes the impact of revenue capitalized during pre-commercial operations of approximately $22 million for the year ended September 30, 2017, at Watts Bar Unit 2, Paradise CC, and Allen CC.

See Note 1 — Summary of Significant Accounting Policies — Pre-Commercial Plant Operations.

(3) Includes economic development credits to promote growth in the Tennessee Valley, hydro preference credits for residential customers of LPCs, interruptible credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand, and long-term partnership agreement credits for LPC's that have committed to the 20-year contract with TVA.

(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.

2019 Compared to 2018

Operating revenues increased $85 million for the year ended September 30, 2019, as compared to the prior year, primarily due to a $227 million increase in base revenue.

The $227 million increase in base revenue was driven by an increase of $318 million attributable to higher effective rates resulting from the base rate adjustment that became effective October 1, 2018, partially offset by a $103 million decrease attributable to lower sales volume.

During November 2018, TVA recorded its second highest peak power demand for the month of November at 26,714 MW.

During September 2019, TVA experienced nine days with demand over 28,000 MW, breaking TVA's record for the most days in September with demand over 28,000 MW.

TVA also broke its September 30-day average peak load record with an average peak load of 26,258 MW.

Despite this record-setting weather, the TVA service territory experienced overall milder than normal weather in 2019 driven by overall lower than normal heating degree days.

Partially offsetting these increases was a $140 million decrease in fuel cost recovery revenues, driven by a $104 million decrease attributable to lower fuel rates and a $35 million decrease attributable to lower energy sales.

The lower fuel rates experienced were primarily driven by lower market prices for natural gas and increased hydroelectric generation.

2018 Compared to 2017

Operating revenues increased $494 million for the year ended September 30, 2018, as compared to the prior year, primarily due to a $630 million increase in base revenue.

The $630 million increase in base revenue was driven by an increase of $460 million resulting from higher sales volume during the year ended September 30, 2018, as compared to the prior year.

Colder than normal weather during January 2018 led to TVA setting an all-time record for energy demand in a 24-hour period.

Also in January 2018, TVA set three of its top-12 winter peak demand records.

In addition, TVA's service territory experienced overall warmer than normal weather during the third and fourth quarters of 2018.

Further, approximately $159 million of the increase in base revenue was attributable to higher effective rates during the year ended September 30, 2018, as compared to the prior year, resulting from the base rate adjustment that became effective October 1, 2017.

The base revenue increase was also due in part to an approximately $11 million decrease in capitalization of revenue resulting from pre-commercial generation during the year ended September 30, 2018, as compared to the prior year.

See Note 1 — Summary of Significant Accounting Policies — Pre-Commercial Plant Operations .

Partially offsetting these increases was a $142 million decrease in fuel cost recovery revenues, driven by a $305 million decrease attributable to lower fuel rates partially offset by a $163 million increase attributable to higher energy sales.

The lower fuel rates experienced were primarily driven by lower market prices for natural gas and a change in the mix of generation resources, including more nuclear, natural gas, and hydroelectric generation and less coal-fired generation.

(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.

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Operating expense components as a percentage of total operating expenses for 2020 and 2019 consisted of the following:

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:

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For the years ended September 30

Fuel Expense By Source

Cost per kWh (4)

Fuel Expense By Source Cost per kWh (4)

2020 2019 2020 2019

$ 533 $ 744 2.69 2.66

Natural gas and/or oil-fired (3)

(1) Excludes effects of the fuel cost adjustment deferrals and amortization on fuel expense in the amounts of $ (18) million and $ 69 million for the years ended September 30, 2018 and 2017 , respectively.

660 783 1.96 2.47

Nuclear fuel 378 369 0.58 0.58

Total fuel $ 1,571 $ 1,896 1.33 1.54

(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 $ 25 million , $ 21 million , and $ 18 million for the years ended September 30, 2019 , 2018 , and 2017 , respectively.

(3) Fuel expense related to oil consumed for generation at natural gas and/or oil-fired facilities was $ 2 million , $ 8 million , and $ 2 million for the years ended September 30, 2019 , 2018 , and 2017 , respectively.

(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.

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:

Power Supply from TVA-Operated Generation Facilities and Purchased Power

Total Power Supply by Generating Source

For the years ended September 30

(millions of kWh)

Coal-fired 19,825 13 % 27,934 17 %

Nuclear 64,832 42 % 63,433 39 %

Hydroelectric 16,003 10 % 16,058 10 %

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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 %

(1) The nuclear generation amount for the year ended September 30, 2017 includes approximately 495 million kWh of pre-commercial generation at Watts Bar Unit 2.

See Note 1 — Summary of Significant Accounting Policies — Pre-Commercial Plant Operations .

(2) The natural gas and/or oil-fired generation amount for the years ended September 30, 2018 and 2017, includes approximately 429 million kWh and 362 million kWh, respectively, of pre-commercial generation at Allen CC and Paradise CC.

See Note 1 — Summary of Significant Accounting Policies — Pre-Commercial Plant Operations .

(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 4,181 million kWh, 4,125 million kWh, and 4,276 million kWh for the years ended September 30, 2019, 2018 , and 2017 , respectively.

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.

2019 Compared to 2018

Fuel expense decreased $153 million for the year ended September 30, 2019, as compared to the prior year.

Lower effective fuel rates contributed $136 million to the decrease resulting from lower market prices for natural gas and increased hydroelectric generation.

Lower fuel volume contributed $35 million to the decrease driven by lower sales of electricity.

Partially offsetting these decreases was an increase of $18 million driven by variances in fuel rate recovery resulting from the winter peaks experienced in 2018 compared to the overall milder than normal weather in 2019.

Purchased Power

Purchased power expense increased $34 million for the year ended September 30, 2019, as compared to the prior year.

This was primarily due to a $23 million increase in the volume of purchased power used to meet first quarter peaks during a period of lower TVA-owned generation resulting from planned outage timing and a $14 million increase in fuel rate recovery resulting from the winter peaks experienced in 2018 compared to the overall milder than normal weather in 2019.

Partially offsetting these increases was a decrease of $3 million in the price of purchased power.

Operating and Maintenance

Operating and maintenance expense increased $492 million for the year ended September 30, 2019, as compared to the prior year.

This increase was primarily driven by an increase of $266 million due to accelerated recovery of the regulatory asset for environmental cleanup costs related to the Kingston ash spill in accordance with the TVA Board's ratemaking authority and an increase of $170 million related to the announced retirements of Paradise and Bull Run, including $151 million of project write-offs and $19 million of inventory write-offs and reserves.

Additionally, an increase in planned nuclear outage days increased outage expense by $39 million.

Depreciation and Amortization

Depreciation and amortization expense decreased by $554 million for the year ended September 30, 2019, as compared to the prior year.

This decrease was primarily driven by a decrease of $1.1 billion of prior year amortization of Deferred nuclear generating units and Nuclear training costs regulatory assets due to excess revenues collected in 2018 in accordance with the TVA Board's ratemaking authority and a decrease of $59 million due to the retirements of certain units at Allen Fossil Plant and Johnsonville Fossil Plant.

Partially offsetting this decrease was an increase of recognized accelerated depreciation expense of $566 million due to the decision to accelerate the retirement of Paradise and Bull Run and $31 million from new additions to completed Plant.

Tax Equivalents

Tax equivalents expense increased $23 million for the year ended September 30, 2019, as compared to the prior year.

This change is primarily driven by an increase in TVA's overall revenue in 2018, which is used as the basis for calculating tax equivalents expense.

2018 Compared to 2017

Fuel expense decreased $120 million for the year ended September 30, 2018, as compared to the prior year.

The impact of lower effective fuel rates, driven by lower market prices for natural gas and changes in the mix of generation resources, including more nuclear, natural gas, and hydroelectric generation and less coal-fired generation, contributed $234 million to the decrease.

As an indication of the general market direction, the average Henry Hub natural gas spot price for the year ended September 30, 2018, was approximately three percent lower than the price for the prior year.

Partially offsetting this decrease was a $114 million increase in fuel expense driven by a five percent increase in generation from TVA-operated resources to meet increased sales during the period.

Purchased Power

Purchased power expense decreased $18 million for the year ended September 30, 2018, as compared to the prior year.

This was primarily due to a decrease of $42 million in the price of the purchased power and variances in fuel rate recovery.

Partially offsetting these decreases was an increase of $24 million driven by a three percent increase in power purchased to meet increased sales during the period.

Operating and Maintenance

Operating and maintenance expense decreased $6 million for the year ended September 30, 2018, as compared to the prior year.

There was a decrease in refueling outage days which reduced outage expense by $35 million, primarily from planned outages.

This decrease in operating and maintenance expense was partially offset by an increase of $28 million in inventory write-off expense, as compared to the prior year, primarily related to transitioning from a site-specific inventory management policy to a fleet-wide strategy for each generation type.

Depreciation and Amortization

Depreciation and amortization expense increased by $810 million primarily driven by $857 million of accelerated amortization of the Deferred nuclear generating units and Nuclear training costs regulatory assets due to excess revenues collected in 2018 in accordance with the TVA Board's ratemaking authority.

These items were partially offset by a decrease of $100 million in depreciation expense related to the retirement of certain units at Allen Fossil Plant, Paradise Fossil Plant, and Johnsonville Fossil Plant.

In addition, there was an increase of approximately $53 million for net additions to completed plant including the completion of Allen CC, which commenced commercial operations in April 2018, and Paradise CC, which commenced commercial operations in April 2017.

Tax Equivalents

Tax equivalents expense decreased $7 million for the year ended September 30, 2018, as

compared to the prior year.

This change is primarily driven by a decrease in the tax equivalents

collected in the fuel rate recovery.

The tax equivalents collected in the fuel rate recovery equal five

percent of the fuel revenues.

Interest Expense .

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2020 2019 Percent Change

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)

(1) Interest expense includes amortization of debt discounts, issuance, and reacquisition costs, net.

5.05 % 4.92 % 2.6 %

(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.

(4) There were no Allowance for Funds Used During Construction ("AFUDC") amounts for the periods shown above.

2019 Compared to 2018

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 $63 million due to lower average balances on long-term debt and $5 million due to lower average balances on short-term debt.

Partially offsetting these decreases was an increase of $7 million due to higher average rates on long-term debt and an increase of $13 million due to higher average rates on short-term debt.

2018 Compared to 2017

Total interest expense decreased $103 million for the year ended September 30, 2018, as compared to the prior year.

This was primarily driven by a decrease of $97 million due to lower average balances and rates on long-term debt, partially offset by an increase of $20 million due to higher average balances and rates on short-term debt.

The total interest expense decrease was also attributable to $8 million of lower interest on alternative financing debt and $18 million of lower interest on debt discount and reacquisition.

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 2019 , Other income (expense), net increased $12 million primarily driven by $21 million of other income related to a deposit liability received by TVA as a down payment on the sale of Bellefonte.

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.

Partially offsetting this increase was a $5 million decrease in miscellaneous income, resulting from prior year gains on the disposition of property and $2 million of unrealized losses on the Supplemental Executive Retirement Plan ("SERP") and Deferred Compensation Plan ("DCP") investments.

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

2019 Compared to 2018

Other net periodic benefit cost increased $2 million for the year ended September 30, 2019 as compared to the prior year.

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.

GAAP as pension expense differs from the amount TVA contributes to the pension plan as pension plan contributions.

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 2019, contributions exceeded U.S.

GAAP pension expense resulting in additional amounts charged to other net periodic benefit cost.

2018 Compared to 2017

Other net periodic benefit cost decreased $502 million in 2018 as compared to the prior year.

This decrease is primarily due to a decrease in pension expense for 2018, which is attributable to a one-time additional discretionary $500 million contribution to TVA’s pension plan in 2017, which was recognized as pension expense.

TVA uses regulatory accounting to recognize pension expense as a regulatory asset 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.

In 2020, U.S.

GAAP pension expense exceeded contributions resulting in additional amounts deferred as a regulatory asset as compared to the prior year.

Liquidity and Capital Resources

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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 losses from foreign currency transactions, at September 30, 2019 and 2018 , were $21.4 billion (including current maturities) and $22.7 billion (including current maturities), respectively.

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.

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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 .

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Power bonds have maturities of between one and 50 years.

At September 30, 2019 , the average maturity of long-term power bonds was 16.1 years, and the average interest rate was 4.65 percent .

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.

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In addition to power bonds and discount notes, TVA had long-term debt associated with certain VIEs outstanding at September 30, 2020.

TVA also had secured notes outstanding at September 30, 2019 , that were assumed in a prior year asset acquisition.

See Lease Financing below, Note 10 — Variable Interest Entities , and Note 13 — Debt and Other Obligations for additional information.

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Short-Term Borrowing Table

September 30, 2019

For the year ended September 30, 2019

September 30, 2018

For the year ended September 30, 2018

September 30, 2017

For the year ended September 30, 2017

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

Weighted Average Interest Rate

Discount notes

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, 2019 , with a lower balance of short-term debt than at September 30, 2018 , due primarily to higher operating cash flows.

The average balance of short-term debt was lower in 2019 than 2018 due primarily to the timing of cash flows.

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.

TVA is on track to achieve its strategic debt goal of $21.8 billion by fiscal year 2023.

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 $1.1 billion and $1.8 billion of power bonds during 2019 and 2018 , respectively.

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 .

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government addresses situations of approaching its statutory debt limit.

According to statements made by 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 begins to increase;

According to statements made by

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.

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The outlook on the ratings of the U.S.

government and TVA is currently stable with all three agencies that provide ratings on TVA Bonds.

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+.

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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 CTs, and in July 2019, these transactions were

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 $322 million at both September 30, 2019 and 2018 , and $311 million at September 30, 2017 .

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:

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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.

2019 Compared to 2018

Net cash flows provided by operating activities decreased $218 million for 2019 compared to 2018, primarily driven by timing of payments and increased cash used for fuel inventory and outage costs.

These changes were partially offset by the timing of revenue collections, increased base revenue driven by the base rate adjustment that became effective October 1, 2018, and lower interest paid.

2018 Compared to 2017

Net cash flows provided by operating activities increased $1.2 billion for 2018 compared to 2017, as a result of

increases in base revenues, lower operating and maintenance expenses, and lower interest paid.

Increases in base revenue

were attributable to increases in electricity sales primarily due to overall warmer than normal weather for much of 2018 and

record-setting low temperatures during the month of January 2018 and the base rate adjustment that became effective October

Lower operating expenses were driven by a one-time discretionary pension contribution in 2017 and decreases in

nuclear planned outage days.

Additionally, interest paid decreased in 2018 due to lower average balances and rates on long-term debt.

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.

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.

2019 Compared to 2018

Net cash flows used in investing activities decreased $26 million for 2019 compared to 2018, driven by the completion of the Browns Ferry EPU in 2019 and the completion of the Allen CC, clean air controls project at Shawnee Fossil Plant ("Shawnee"), and manufacturing of the Watts Bar steam generator in 2018.

These decreases were offset by an increase in expenditures for the Boone Dam and Pickwick South Embankment Remediation projects.

2018 Compared to 2017

Net cash flows used in investing activities decreased by $267 million for 2018 compared to 2017, driven by the completion of Paradise CC, Allen CC, and the clean air controls at Gallatin Fossil Plant ("Gallatin") and Shawnee.

With the completion of these projects, TVA does not foresee needing additional large, base-load generation units for at least the next decade.

These decreases were partially offset by increases in nuclear fuel expenditures.

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.

2019 Compared to 2018

Net cash flows used in financing activities decreased $55 million for 2020 compared to 2019.

TVA had $1.4 billion in net debt redemptions in 2019 compared to $1.6 billion in net debt redemptions in 2018.

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.

2018 Compared to 2017

Net cash flows used in financing activities increased $1.5 billion for 2018 compared to 2017.

TVA had $1.6 billion in net

debt redemptions in 2018 compared to $29 million in net debt redemptions in 2017.

The increase in redemptions is primarily due

to the $1.2 billion increase in operating cash flows, which resulted in additional debt reduction.

These increases in redemptions

were partially offset by decreases in payments on lease and leasebacks due to the 2017 acquisition of the residual interests in a

lease/leaseback arrangement.

See Note 11 — Other Long-Term Liabilities .

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

The future planned capital expenditures for property, plant, and equipment additions, including clean air projects and new generation, and nuclear fuel are estimated to be as follows:

Estimated Capital Expenditures (1)

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

(1) TVA plans to fund these expenditures with cash from operations and proceeds from power program financings.

This table shows only expenditures that are currently planned.

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.

(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.

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The following table sets forth TVA's estimates of future payments at September 30, 2020.

See 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.

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

$ 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

Notes payable

Lease obligations

Non-cancelable operating (5)

92 93 92 87 86 592 1,042

Operating (5)

66 51 39 37 34 16 243

Purchase obligations

252 229 216 196 172 1,068 2,133

1,375 682 453 429 377 1,234 4,550

236 114 65 38 28 237 718

Environmental Agreements 2 2 2 1 1 3 11

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Long-term monitoring costs - Kingston ash spill 1 1 — 1 — 9 12

Payments on other financings (9)

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

(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.

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(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 capital leases based on the interest rates stated in the lease agreements and excludes certain related executory costs.

Minimum commitments related to executory costs are included in purchase obligations.

(5) Does not include purchased power agreements of $139 million that are accounted for as operating leases and included in power purchase obligations.

(6) Includes commitments for energy and/or capacity under power purchase agreements from coal-fired, hydroelectric, diesel, and gas-fired facilities, as well as transmission service agreements to support purchases of power from the market.

(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) Includes leasebacks of $50 million , $207 million , and $25 million for 2020, 2021, and 2022, respectively.

(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.

In addition to the commitments above, TVA had contractual obligations in the form of revenue discounts related to energy prepayments.

TVA recognized $ 10 million of prepayment obligations and related interest payments of $ 4 million in revenue during 2019.

The arrangement ceased in 2019.

See Note 1 — Summary of Significant Accounting Policies — Energy Prepayment Obligations and Note 17 — Revenue .

EnergyRight ® Solutions Program.

TVA purchases certain loans receivable from its LPCs in association with the EnergyRight ® Solutions program.

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.

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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.

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.

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

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This requires strong partnerships with LPCs to give customers choices and provide end-use consumers the flexibility they desire.

In May 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 by adding up to 3,500 additional miles that will better connect its operational assets.

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, 2019 , TVA had installed 483 miles of lines.

As of September 30, 2019 , TVA had spent $79 million on installation of the fiber optic lines and expects to spend an additional $221 million to complete the project.

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 and greener energy, the utility industry is evolving to meet those needs.

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 more on sustainability and requiring more energy efficiency as well as cleaner, greener, more renewable energy options.

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.

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Renewable Power Purchase Agreements .

In order to meet customer preferences and requirements for cleaner and greener energy, TVA has entered into certain power purchase agreements ("PPAs") with renewable resource providers during 2019.

These agreements are the latest to stem from TVA's 2017 request for proposals for renewable energy.

During the first quarter of 2019, TVA signed four solar PPAs for 674 MW of solar generation at sites in Tennessee and Alabama.

These four solar projects are expected to come online in 2021.

TVA will procure the renewable energy and sell the resulting Renewable Energy Certificates to specific customers, allowing TVA to increase its renewable energy portfolio without additional costs to other Valley customers.

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.

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.

During its February 2019 meeting, 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, referenced at the February 2019 TVA Board meeting as the Flexibility Renewable Option, is implemented by a Renewable Investment Agreement, which aggregates demand through a competitive procurement process.

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 for TVA to gain market knowledge and operational insights from these research projects.

In addition, TVA issued a request for proposal in April 2019 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 Valley customers.

TVA accepted proposals through mid-May 2019 and anticipates making selections during the first quarter of 2020.

Integrated Resource Planning

During 2018 and 2019, TVA conducted a study of its energy resources in order to update and replace the IRP that was accepted by the TVA Board in 2015.

The IRP is a comprehensive study that provides direction on how to best meet future power demand by identifying the need for generating capacity, determining the best mix of resources, and evaluating the evolving role of DER.

The IRP considers many views of the future to determine how TVA can continue to provide low-cost, reliable electricity, support environmental stewardship, and spur economic development in the Tennessee Valley over the next 20 years.

To inform TVA's next long-term financial plan and proactively address the changing utility marketplace, TVA began this work sooner than originally planned.

To ensure TVA best meets projected future needs, TVA will continue its tradition of innovation in each IRP.

The 2011 IRP focused on diversifying and modernizing its generation portfolio, part of which included adding cost-effective renewables.

The 2015 IRP identified DER as a growing trend in the utility industry and designed a mechanism where energy efficiency could be chosen as a resource.

The 2019 IRP explored various DER scenarios, considering the speed and amount of DER penetration, and improved TVA's understanding of the impact and benefit of system flexibility with increasing renewable and distributed resources.

During the IRP process, TVA - with significant input from stakeholders and the public - considered a wide range of future scenarios, various business strategies, and a diverse mix of power-generation resources to build on TVA's existing asset portfolio.

IRP study results show:

There is a need for new capacity in all scenarios to replace expiring or retiring capacity.

Solar expansion plays a substantial role in all future scenarios.

Gas, energy storage, and demand response additions provide reliability and/or flexibility to TVA's system.

No baseload resources (designed to operate continuously) are added, highlighting the need for operational flexibility in the resource portfolio.

Additional coal retirements occur in certain futures.

Energy efficiency levels depend on market depth and cost-competitiveness.

Wind could play a role if it becomes cost-competitive.

In all cases, TVA will continue to provide for economic growth in the Tennessee Valley.

The IRP was developed with input from the public and contributions from a working group of stakeholders from LPCs, environmental organizations, and other public and private entities with a vested interest, including an extensive public outreach that included a series of open meetings around the Tennessee Valley.

The final 2019 IRP was approved by the TVA Board at its August 2019 meeting.

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.

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

TVA is updating its Natural Resource Plan ("NRP") , which was completed in 2011 to guide TVA's management of the public lands and waters within its seven-state service area.

TVA remains committed to a balanced management approach and is considering changes to the NRP that include objectives and programs for each focus area and a flexible approach for long-term planning.

These changes align with TVA's mission and will help TVA be better equipped to prioritize funding plans and create efficiencies in business planning and stewardship project implementation.

During 2019, TVA hosted public meetings around the Valley and released the draft NRP and the associated Supplemental Environmental Impact Statement ("SEIS") for public review and comment.

TVA is currently drafting the final SEIS and 2020 NRP, which are expected to be published in the second quarter of 2020.

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.

Generation Resources

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A "probable maximum flood" is an extremely unlikely event;

however, TVA is obligated to provide protection for its nuclear plants against such events.

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 Units 1 and 2.

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 during the first quarter of 2020.

In addition, TVA plans to submit models for Sequoyah Nuclear Plant ("Sequoyah") Units 1 and 2 during the first quarter of 2020.

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.

As of September 30, 2019 , TVA had spent $153 million on the modifications and improvements related to extreme flooding preparedness and expects to spend up to an additional $27 million to complete the modifications.

NRC Seismic Assessments .

On May 9, 2014, the NRC notified licensees of nuclear power reactors in the central and eastern U.S.

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 on June 30, 2017;

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 July 2018 and concluded that no further response or regulatory actions were required.

The evaluations for Browns Ferry and Sequoyah are due by December 31, 2019.

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 September 2019.

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.

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See Extreme Flooding Preparedness and NRC Seismic Assessments above.

Baffle-Former Bolt Degradation .

In July 2016, Westinghouse Electric Co., LLC ("Westinghouse") issued a Nuclear Safety Advisory Letter ("NSAL") 16-01 that addressed recently identified degradation of baffle-former bolts in some U.S.

pressurized water reactors ("PWRs") .

Baffle-former bolts help hold together a structure inside certain reactor vessels.

Sequoyah Units 1 and 2, both PWRs, are referenced in the NSAL.

Visual inspections of baffle-former bolts in Sequoyah Units 1 and 2 during 2017 refueling outages showed no degradation of baffle-former bolts.

TVA completed ultrasonic testing for Unit 1 in the third quarter of 2018 and Unit 2 in the first quarter of 2019.

Results for both units were within acceptable standards.

Retesting will not be required until 2028.

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 June 2018, the NRC conducted a follow-up inspection at Watts Bar and noted some improvement.

In the mid-cycle assessment letter issued in June 2018, the NRC issued a Cross Cutting Issue ("CCI") in safety conscious work environment and outlined the closure criteria for both the CEL and the CCI.

In August 2018, the NRC documented a chilled work environment in an additional department.

TVA is working to implement actions to address the issues in the additional department and closure criteria for the CEL and CCI.

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 February 2016 Department of Energy ("DOE") Final SEIS for the Production of Tritium in a Commercial Light Water Reactor.

On April 5, 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 in December 2017 to authorize the irradiation of TPBARs in Watts Bar Unit 2.

The NRC approved the request on May 22, 2019.

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.

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Extended Power Uprate .

TVA has undertaken an EPU project at Browns Ferry to increase the amount of electrical generation capacity of its reactors.

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 on August 14, 2017, following a nearly two-year review.

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 is estimated to cost approximately $475 million.

As of September 30, 2019, physical work on all units was complete and the generating capacity is expected to increase by an estimated 465 MW after sufficient run time to validate the new capacity.

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.

During its August 2018 meeting, the TVA Board approved a plan to perform assessments of Bull Run and Paradise.

These assessments included resiliency studies for fuel and transmission, financial considerations, and Environmental Assessments pursuant to the National Environmental Policy Act ("NEPA").

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.

Subsequent to the Board approval, TVA determined Paradise would not be restarted after January 2020 due to the plant's material condition.

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 .

Coal Combustion Residual Facilities .

TVA has committed to a programmatic approach for the elimination of wet storage of CCRs within the TVA service area.

Under this program (the "CCR Conversion Program"), TVA is converting all operational coal-fired plants to dry CCR storage and closing all wet storage facilities.

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 is underway at Gallatin and is scheduled for completion by December 2019.

Construction is also underway at Cumberland Fossil Plant ("Cumberland") and is

scheduled for completion in late 2020.

Fly ash and gypsum conversion projects at Paradise were complete during the third quarter of 2019.

TVA has made strategic decisions to build and maintain lined and permitted dry storage facilities on TVA-owned property at several TVA locations, allowing these facilities to operate beyond existing dry storage capacity.

Currently, lined and permitted dry storage facilities are completed and operational at Bull Run, Kingston, and Gallatin, and a lined dry storage facility at Paradise has been constructed but is not yet operational.

A lined dry storage facility at Shawnee is currently under construction with completion scheduled for September 2020.

Construction of a lined dry storage facility at Cumberland is expected to start in 2021.

Kingston's permitted lined dry storage expansion is scheduled for completion in 2021.

TVA is designing and permitting a lateral expansion of the existing landfill at Gallatin.

Additionally, TVA is initiating the design and permitting process for a new lined landfill at Bull Run, but no decision to construct the facility has been made at this time.

Construction of additional lined facilities may occur to support future business requirements.

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.

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 .

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TVA subsequently decided to close those impoundments.

The method of final closure for each of these facilities will depend on various factors, including the results of studies conducted pursuant to NEPA and approval by appropriate state regulators.

Additional NEPA studies will be conducted as other facilities are designated for closure.

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 EPA's CCR rule (the "CCR Rule") as well as other requirements will require additional engineering and analysis as well as implementation of a comprehensive groundwater monitoring program.

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.

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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 waste streams to any impacted unlined CCR surface impoundments no later than October 31, 2020 (and potentially earlier due to location demonstration results) and initiate additional corrective actions for groundwater.

TVA is developing these corrective actions and published Assessment of Corrective Measures reports to its CCR website in August 2019.

Due to location demonstration results, TVA has already ceased sending waste streams to one impoundment at Allen and three impoundments at Gallatin.

As required by the CCR Rule, TVA will continue to publish reports in the second quarter of each year on annual groundwater monitoring and corrective actions at its active CCR facilities.

TVA has been involved in two lawsuits concerning the CCR facilities at Gallatin.

One of these cases was resolved by the entry of a consent order that became effective July 31, 2019.

TVA agreed to close the existing wet ash impoundments by removal, either to an onsite landfill or to an offsite facility.

TVA may also submit a plan that allows for beneficial reuse.

TVA is currently conducting additional studies and environmental reviews to support its determination of the specific removal plans.

See Note 12 — Asset Retirement Obligations and Note 22 — Commitments and Contingencies — Legal Proceedings — Lawsuit Brought by TDEC Involving Gallatin Fossil Plant CCR Facilities and Lawsuit Brought by TSRA and TCWN Involving Gallatin Fossil Plant CCR Facilities 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 will, among other things, substantially increase the post-closure care period, require resubmittal of closure plans every 10 years, and require TVA to submit recommendations as to what activities must be performed during the extended closure period to protect human health and the environment.

TVA is currently evaluating the amendments to determine their potential impact on TVA and anticipates that the costs of complying with the amendments could be material.

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

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 $1.2 billion on the CCR Conversion Program through 2024.

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.

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("Jacobs") to oversee certain aspects of the cleanup.

After the cleanup was completed, Jacobs was sued in the United States District Court for the Eastern District of Tennessee by employees of a

contractor involved in the cleanup and family members of some of the employees.

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.

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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 in place;

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 district court referred the parties to mediation.

Depending on the outcome of mediation, the litigation will proceed to the second phase on the question of whether Jacobs's failures did in fact cause the plaintiffs' alleged injuries and damages.

On May 13, 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 litigated in the case referenced above.

While TVA is not a party to either of these lawsuits, TVA could be contractually obligated to reimburse Jacobs for some amounts that Jacobs is required to pay.

Further, TVA will continue monitoring the litigation to determine whether this or similar cases could have broader implications for the utility industry.

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 .

The Tennessee Valley experienced above normal rainfall and runoff for the first three quarters of 2019 and below normal rainfall and runoff during the fourth quarter of 2019.

Despite the below normal rainfall and runoff in the fourth quarter of 2019, adequate reservoir storage accumulated during the preceding three quarters of 2019 helped 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.

Rainfall and runoff in the Tennessee Valley in 2020 were 150 percent and 156 percent of normal, respectively.

Significant flooding occurred in portions of the Tennessee Valley in February 2019.

During this time, the Tennessee Valley received 11.6 inches of rainfall, which was 269 percent of normal.

Although many locations along the Tennessee River reached or exceeded flood stage, TVA's efforts, including storing water in large tributary reservoirs, accounted for approximately $1.6 billion in avoided damages in areas such as Chattanooga, Tennessee.

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.

Small Modular Reactors .

TVA submitted an Early Site Permit Application ("ESPA") for review by the NRC in May 2016.

NRC staff concluded their environmental review and issued a Final EIS in April 2019.

NRC staff concluded their safety review and issued a Final Safety Evaluation Report in June 2019.

The Commission held the statutorily required Mandatory Hearing on August 14, 2019, and a vote on permit issuance is expected by December 31, 2019.

The ESPA is based on the potential construction and operation of two or more small modular reactors ("SMRs") units at TVA's Clinch River site in Oak Ridge, Roane County, Tennessee.

As of September 30, 2019 , TVA had spent $74 million on this project.

Since June 2015, the DOE has funded 50 percent of TVA's work on the ESPA through an interagency agreement.

Additional spend will be determined based on future project development.

TVA is developing the Clinch River site at a pace consistent with progress being made by developers on the engineering and licensing of SMR designs.

The project has a great deal of flexibility at this early stage and by working to reduce licensing risk, TVA expects to be in a position to build an SMR if and when additional power sources are needed.

Any decision to construct an SMR would require approval by the TVA Board.

Seismic Activity .

The TVA service area experienced several earthquakes during the first nine months of 2019.

Inspections were completed and no impacts to the TVA generating facilities or dams were identified.

TVA's generating system continued to operate safely.

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

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

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Boone Dam Remediation .

In October 2014, 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.

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 design and construction plans are finalized, the estimated cost and duration continue to be refined.

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.

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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 planning to upgrade the south embankment by constructing berms on the upstream and downstream slopes.

The design phase of the project began during the first quarter of 2017 and is now completed.

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, 2019 , TVA had spent $71 million related to this project and expects to spend an additional $77 million.

Surplus Property

TVA continues to study its real estate portfolio for the purpose of aligning its real estate holdings with TVA's strategic direction.

A comprehensive assessment of its real estate holdings has been completed, and TVA is implementing a strategy aimed at reducing cost and right-sizing its portfolio as part of the effort.

Bellefonte Nuclear Plant .

On November 14, 2016, following a public auction, TVA entered into a contract to sell substantially all of the Bellefonte site to Nuclear Development, LLC, for $111 million.

Nuclear Development, LLC, paid TVA $22 million on November 14, 2016, with the remaining $89 million due at closing.

Nuclear Development, LLC, had up to two years from November 14, 2016, to close on the property, and TVA agreed to maintain the site until closing.

Nuclear Development, LLC, requested and was granted an extension of the initial closing date to November 30, 2018.

Nuclear Development, LLC, failed to obtain NRC approval of the transfer of the Bellefonte nuclear licenses.

TVA determined that the Atomic Energy Act required that this approval be obtained before closing.

TVA declined to provide a second extension of the purchase agreement.

On November 30, 2018, Nuclear Development, LLC, filed suit against TVA in the United States District Court for the Northern District of Alabama.

See Note 22 — Commitments and Contingencies — Legal Proceedings for a discussion of the lawsuit filed by Nuclear Development, LLC.

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 is in the process of consolidating its Knoxville area employees into the West Tower of the KOC or a centralized field office in Norris, Tennessee.

As part of this consolidation effort, TVA may convey the SPC and the majority of the East Tower of the KOC.

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.

Regulatory Compliance

Steam-Electric Effluent Guidelines .

In November 2015, the EPA published a final rule revising the existing

steam-electric effluent limitation guidelines ("ELGs") .

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.

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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 September 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 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.

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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.

TVA currently has four plants with wet scrubbers that may be subject to new scrubber-related limits, the largest being Cumberland.

With the recent Board approval of accelerated retirement for Bull Run and Paradise, these plants may be exempted from the imposition of new scrubber-related limits, either as a result of the rule reconsideration currently underway or

due to the retirement of the units prior to the regulatory deadline.

TVA is working to address future compliance with the ELGs at Cumberland given its unique "once-through" scrubber design.

Compliance with the current rule at Cumberland without modification to address the unique design could cause TVA to incur disproportionately high costs at Cumberland or experience other operational outcomes which TVA cannot predict at this time.

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 the Tennessee Department of Environment and Conservation ("TDEC") in May 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.

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 March 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 on May 31, 2019.

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.

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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 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.

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.

On March 14, 2019, TDEC approved TVA's interim groundwater monitoring plan.

TVA will sample the monitoring wells around the Allen East Ash Disposal Area quarterly throughout CY 2019.

TVA will prepare a memorandum following each sampling event, and an annual report will be issued.

The groundwater monitoring plan will be reviewed and modified as required to support the project needs.

TVA is currently in the process of finalizing and initiating the interim response action for a groundwater extraction system to control and begin treating the shallow groundwater that contains elevated concentrations of arsenic.

TVA began dewatering the Allen East Impoundment in September 2019.

TVA is evaluating closure options for the Allen East Ash Disposal Area, as well as the nearby West Ash Impoundment, through an EIS pursuant to NEPA.

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.

On October 4, 2019, the draft EIS was published for a 45-day public comment period.

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

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.

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.

At its May 10, 2018 meeting, the TVA Board approved a rate change that reduced wholesale energy rates for Standard Service (residential and small commercial customers) and introduced a GAC at an offsetting rate to better recover fixed costs.

Recognizing the need for flexibility, all LPCs were presented with the option to implement the wholesale changes in October 2018 or defer the implementation of the GAC until October 2019.

Seventy-nine LPCs elected to implement the wholesale changes in October 2018, while the remaining 75 LPCs implemented the wholesale changes in October 2019.

At its May 9, 2019 meeting, the TVA Board approved a change to the wholesale power rate schedules to provide a mechanism to adjust the GAC for large changes in LPC load.

This change helps ensure the equitable administration of the GAC.

At its August 22, 2019 meeting, 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.

Participating LPCs will receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment to the Valley, which enables TVA to recover its long-term financial commitments over a commensurate period.

As of September 30, 2019, 131 LPCs had signed the 20-year Partnership Agreement with TVA, which represents 56 percent of total operating revenues in 2019.

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.

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

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As part of the U.S.

government, TVA coordinates with and works closely with the Department of Homeland Security and the United States Computer Emergency Readiness Team ("US-CERT") .

US-CERT functions as a liaison between the Department of Homeland Security and the public and private sectors to coordinate responses to security threats from the internet.

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 — Operational Risks — TVA's facilities and information infrastructure may not operate as planned due to cyber threats to TVA's assets and operations .

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.

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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 ("EMP") .

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 November 2018, FERC approved a revision to the standard.

TVA has met the requirements of the original standard and most of the requirements of the revised standard, and has evaluated the effects of solar storms ranging from NERC's reference case to possible extreme levels.

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

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 ("EPRI") , and other grid owners and operators to address this concern.

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

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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 of the Notes to Consolidated Financial Statements.

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:

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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.

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.

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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.

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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.

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.

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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 inflation.

These costs are predominantly CCR and asbestos removal.

CCR removal is primarily closure-in-place except for specific ponds located at Allen and Gallatin.

Asbestos removal is based on cost per square foot.

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:

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As these factors are considered and decommissioning methods are determined, the detailed project schedules and estimates are adjusted.

During 2016, TVA management updated its non-nuclear plant closure method assumption from a maintain-in-place method to a plant demolition method.

See Note 8 — Regulatory Assets and Liabilities — Non-Nuclear Decommissioning Costs .

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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.

Gallatin Coal Combustion Residuals.

As of September 30, 2018, the estimated cost of the potential Gallatin CCR project was $900 million.

The current and long-term portions of the resulting obligation were reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets.

As of September 30, 2018, related liabilities of $30 million were recorded in Accounts payable and accrued liabilities.

As a result of the subsequent decision in TVA's favor by the Sixth Circuit, as well as the June 2019 consent order filed in the case brought by TDEC, Gallatin CCR project costs are now recorded in Asset retirement obligations.

See Note 12 — Asset Retirement Obligations .

Pension and Other Post-Retirement Benefits

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Numerous factors are considered including the provisions of the plans, changing employee demographics, various actuarial calculations, assumptions, and accounting mechanisms.

The most significant of these factors are discussed below.

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.

Expected Return on Plan Assets .

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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 expected return on plan assets and net gain or loss for pension cost determination.

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.

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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 as of the measurement date.

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.

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Health Care Cost Trends.

TVA reviews actual recent cost trends and projected future trends in establishing health care cost trend rates.

In 2019, TVA changed both the pre-Medicare and post-Medicare health care cost trend rate assumptions adopted in 2017.

The pre-Medicare initial health care trend rate was reset to 6.75 percent, the ultimate trend rate remained constant at 5.00 percent, and the year to reach the ultimate rate was extended to 2027 from 2024.

The post-Medicare initial health care 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 2023 from 2021 attributable to lower than expected premium increases on the private exchange.

This reset of the health cost trend rate assumptions resulted in a $24 million net decrease in the post-retirement obligation at September 30, 2019.

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.

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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.

Note 21 — Benefit Plans — Plan Assumptions — Cost of Living Adjustment for further discussion on the calculation of the COLA.

The actual COLA for CY 2019 was 2.21 percent, and the COLA assumption for CY 2020 and thereafter is 2.00 percent.

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.

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.

Sensitivity to Changes in Key Assumptions

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At September 30, 2020

Actuarial Assumption

Current Assumption

Change in Assumption

Actuarial Assumption Current Assumption Change in Assumption Impact

Effect on 2020 pension expense:

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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)

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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-relative value of plan assets.

If necessary, the excess is amortized over the

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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, and 2019 with remaining amortization periods of one to 10 years.

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

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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.

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Commodity Contracts .

TVA enters into commodity derivatives for coal and natural gas that require physical delivery of the contracted quantity of the commodity.

The fair values of these derivative contracts are determined using internal models based on income approaches.

TVA develops an overall coal forecast based on widely-used short-term and mid-range market data from an external pricing specialist in addition to long-term internal estimates.

To value the volume option component of applicable coal contracts, TVA uses a Black-Scholes pricing model which includes inputs from the overall coal price forecast, contract-specific terms, and other market inputs.

Based on the use of certain significant unobservable inputs, these valuations are classified as Level 3 valuations.

Additionally, any settlement fees related to early termination of coal supply contracts are included at the contractual amount.

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.

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In addition, TVA's risk management group reviews valuations and pricing data.

TVA retains independent pricing vendors to assist in valuing certain instruments without market liquidity.

Commodity Derivatives under the Financial Trading Program.

TVA established a Financial Trading Program ("FTP") under which it could purchase and sell futures, swaps, options, and similar derivative instruments to hedge its exposure to

changes in prices of natural gas, fuel oil, coal, and other commodities.

TVA has suspended its FTP and no longer uses financial instruments to hedge risks related to commodity prices;

however, TVA plans to continue to manage fuel price volatility through other methods and to periodically reevaluate its suspended FTP program for future use of financial instruments.

Fair Value Considerations

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Sources of Market Assumptions.

TVA derives its financial instrument market assumptions from market data sources ( e.g.

, CME and Moody's Investors Service, Inc.

TVA derives its financial instrument market assumptions from market data sources (e.g., CME and Moody's Investors Service, Inc.

("Moody's")).

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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 that subject TVA to nonperformance risk.

TVA is a counterparty to derivative instruments

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.

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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 a discussion of environmental legislation and regulation, see Item 1, Business — Environmental Matters.

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.

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.

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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 ERC is comprised of the Enterprise Leadership Team ("ELT") and the Chief Risk Officer ("CRO") who acts as Chair.

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.

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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 contract derivatives 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 and 2018 , would have resulted in decreases of approximately $34 million and $63 million, respectively, in the fair value of TVA's coal derivative instruments at these dates.

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.

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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 during the three months ended March 31, 2020, have been recovered.

For the year ended September 30, 2020, the NDT increased in value $123 million compared to the year ending September 30, 2019.

Despite this volatility, TVA's NDT funding as of September 30, 2020, continues to be fully funded per the NRC funding requirements.

Qualified Pension Plan .

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Deferred Compensation Plan.

The DCP is designed to provide participants with the ability to defer compensation until employment with TVA ends.

The DCP is designed to provide participants with the ability to defer compensation to future periods.

The plan assists in the recruitment of top executive talent for TVA.

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At September 30, 2020, TVA had $500 million of cash and cash equivalents, and the average balance of cash and cash equivalents for 2020 was $637 million.

The average interest rate that TVA received on its short-term investments during 2019 was 2.40 percent.

If the rates of interest that TVA received on its short-term investments during 2019 were 1.40 percent, TVA would have received approximately $3 million less in interest from its short-term investments.

The average interest rate that TVA received on its short-term investments during 2020 was less than one percent.

If the rates of interest that TVA received on its short-term investments during 2020 were zero percent, TVA would have received approximately $4 million less in interest from its short-term investments.

At September 30, 2019, TVA had $299 million of cash and cash equivalents, and the average balance of cash and cash equivalents for 2019 was $336 million.

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If the rates that TVA received on its short-term investments during 2019 were 1.40 percent, TVA would have received approximately $3 million less in interest from its short-term investments.

In addition to affecting the amount of interest that TVA receives from

its short-term investments, changes in interest rates could affect the value the investments in its pension plan, ART, NDT, SERP, and DCP.

In addition to affecting the amount of interest that TVA receives from its short-term investments, changes in interest rates could affect the value the investments in its pension plan, ART, NDT, SERP, and DCP.

See Risk Management Activities — Investment Price Risk above.

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Based on TVA's interest rate exposure at September 30, 2020, an immediate one percentage point increase in interest rates would have resulted in an increase of $19 million in TVA's short-term interest expense.

At September 30, 2018 , TVA's short-term borrowings were $1.2 billion, and the current maturities of long-term debt were $1.1 billion.

At September 30, 2019, TVA's short-term borrowings were $922 million, and the current maturities of long-term debt were $1.1 billion.

Based on TVA's interest rate exposure at September 30, 2019, an immediate one percentage point increase in interest rates would have resulted in an increase of $20 million in TVA's short-term interest expense.

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At September 30, 2020 and 2019, the average life of TVA's debt portfolio was 15.3 years and 16.1 years, respectively.

A schedule of TVA's debt maturities is contained in Note 13 — Debt and Other Obligations — Debt Outstanding.

At September 30, 2020 and 2019, the average interest rate of TVA's debt portfolio was 4.56 percent and 4.65 percent, respectively.

See Note 13 — Debt and Other Obligations — Debt Outstanding for a schedule of TVA's debt maturities.

Interest Rate Derivatives.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis