What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2020-11-17 compared with 2019-11-15 · 844 added, 767 removed, 1754 unchanged (48% of the section changed)

4 unchanged sentences

(in millions)

2020 2019 2018

Operating revenues

3 unchanged sentences

Operating expenses

Fuel 1,584 1,896 2,049

Purchased power 880 1,007 973

7 unchanged sentences

Interest expense

Interest expense 1,142 1,198 1,243

Net income (loss) $ 1,352 $ 1,417 $ 1,119

The accompanying notes are an integral part of these consolidated financial statements.

TENNESSEE VALLEY AUTHORITY

14 unchanged sentences

Construction in progress 2,139 1,893

Capital leases

Nuclear fuel 1,504 1,534

Finance leases 516 146

Total property, plant, and equipment, net 35,579 35,133

2 unchanged sentences

Regulatory assets 10,245 8,763

Operating lease assets, net of amortization 232 —

Other long-term assets 325 325

Total regulatory and other long-term assets 10,802 9,088

Total assets $ 52,825 $ 50,467

The accompanying notes are an integral part of these consolidated financial statements.

7 unchanged sentences

Accrued interest 298 296

Asset retirement obligations 345 163

Current portion of leaseback obligations 198 40

Current portion of energy prepayment obligations

Regulatory liabilities 141 150

7 unchanged sentences

Asset retirement obligations 6,440 5,453

Finance lease liabilities 525 182

Other long-term liabilities 2,548 2,308

5 unchanged sentences

Long-term debt of variable interest entities, net 1,048 1,089

Long-term notes payable

Total long-term debt, net 19,004 20,183

14 unchanged sentences

(in millions)

2020 2019 2018

Net income (loss) $ 1,352 $ 1,417 $ 1,119

1 unchanged sentence

Net unrealized gain (loss) on cash flow hedges ( 1 ) ( 114 ) 10

Reclassification to earnings from cash flow hedges

Net unrealized (gain) loss reclassified to earnings from cash flow hedges ( 38 ) 45 26

Total other comprehensive income (loss) $ ( 39 ) $ ( 69 ) $ 36

5 unchanged sentences

(in millions)

2020 2019 2018

Cash flows from operating activities

2 unchanged sentences

Depreciation and amortization (1)

1,848 1,993 2,554

Amortization of nuclear fuel cost 388 379 382

9 unchanged sentences

Settlements of asset retirement obligations ( 114 ) ( 89 ) ( 106 )

Other, net ( 44 ) 52 ( 37 )

Net cash provided by operating activities 3,636 3,720 3,938

4 unchanged sentences

Loans and other receivables

Advances ( 8 ) ( 10 ) ( 12 )

Repayments 7 11 4

Other, net 20 ( 22 ) 4

Net cash used in investing activities ( 2,015 ) ( 2,243 ) ( 2,269 )

8 unchanged sentences

Financing costs, net ( 4 ) — ( 3 )

Other, net ( 6 ) ( 21 ) ( 9 )

Net cash (used in) provided by financing activities ( 1,422 ) ( 1,477 ) ( 1,658 )

Net change in cash and cash equivalents

Net change in cash, cash equivalents, and restricted cash 199 — 11

Cash, cash equivalents, and restricted cash at beginning of year 322 322 311

Cash, cash equivalents, and restricted cash at end of year $ 521 $ 322 $ 322

The accompanying notes are an integral part of these consolidated financial statements.

(1) Including amortization of debt issuance costs and premiums/discounts.

The accompanying notes are an integral part of these consolidated financial statements.

TENNESSEE VALLEY AUTHORITY

3 unchanged sentences

Power Program Appropriation Investment

Power Program Retained Earnings

Nonpower Programs Appropriation Investment, Net

Accumulated Other Comprehensive Income (Loss)

Power Program Retained Earnings Nonpower Programs Appropriation Investment, Net Accumulated Other Comprehensive Income (Loss)

Balance at September 30, 2017 $ 258 $ 8,282 $ 572 $ 21 $ 9,133

14 unchanged sentences

(Dollars in millions except where noted)

Note Page No.

1 Summary of Significant Accounting Policies 89

6 unchanged sentences

9 Regulatory Assets and Liabilities 104

Asset Acquisitions

10 Variable Interest Entities 106

5 unchanged sentences

16 Fair Value Measurements 121

17 Revenue 125

18 Proprietary Capital 129

5 unchanged sentences

24 Unaudited Quarterly Financial Information 150

Subsequent Events

Summary of Significant Accounting Policies

1 unchanged sentence

TVA was created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA's service area in the southeastern U.S., and sell the electricity generated at the facilities TVA operates.

Today, TVA operates the nation's largest public power system and supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of northern Georgia, western North Carolina, and southwestern Virginia to a population of nearly 10 million people.

TVA also manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity.

10 unchanged sentences

Accordingly, these assets and properties are included as part of the power program, TVA's only operating segment.

Power rates are established by the TVA Board of Directors (the "TVA Board") as authorized by the Tennessee Valley Authority Act of 1933 (the "TVA Act") .

Power rates are established by the TVA Board of Directors (the "TVA Board") as authorized by the Tennessee Valley Authority Act of 1933, as amended (the "TVA Act").

The TVA Act requires TVA to charge rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system;

3 unchanged sentences

Treasury in repayment of and as a return on the Power Program Appropriation Investment;

and such additional margin as the TVA Board may consider desirable for investment in system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's business.

and such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's power business.

TVA fulfilled its requirement to repay $ 1.0 billion of the Power Program Appropriation Investment with the 2014 payment;

18 unchanged sentences

The accompanying consolidated financial statements, which have been prepared in accordance with GAAP, include the accounts of TVA, wholly-owned direct subsidiaries, and variable interest entities ("VIE") of which TVA is the primary beneficiary.

See Note 9 — Asset Acquisitions and Note 10 — Variable Interest Entities .

See Note 10 — Variable Interest Entities .

Intercompany balances and transactions have been eliminated in consolidation.

1 unchanged sentence

The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the consolidated financial statements.

Although the consolidated financial statements are prepared in conformity with GAAP, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period.

Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results.

2 unchanged sentences

Certain historical amounts have been reclassified in the accompanying consolidated financial statements to the current presentation.

TVA reclassified $ 256 million and $ 758 million of net periodic benefit costs from Operating and maintenance expense to Other net periodic benefit cost in the Consolidated Statements of Operations for the years ending September 30, 2018 and 2017 , respectively, as a result of the retrospective presentation of financing costs due to the implementation of the new

accounting standard for defined benefit plan costs effective for TVA October 1, 2018.

TVA also reclassified $13 million from Restricted cash and cash equivalents to Other long-term assets on the Consolidated Balance Sheet at September 30, 2018.

In the September 30, 2018 , Consolidated Statements of Cash Flows, amounts previously reported as $(30) million Fuel cost adjustment deferral, $(7) million Fuel cost tax equivalents, and $39 million Other, net were consolidated and presented as $2 million Other regulatory amortization and deferrals.

Additionally, $(22) million in cash flows from operating activities previously recorded as $(9) million Accounts payable and accrued liabilities and $(13) million Regulatory asset costs were reclassified to Other, net.

In cash flows from financing activities, $(5) million previously recorded as Payments to U.S.

Treasury was reclassified to Other, net.

In the September 30, 2017 , Consolidated Statements of Cash Flows, amounts previously reported as $98 million Fuel cost adjustment deferral, $5 million Fuel cost tax equivalents, and $40 million Other, net were consolidated and presented as $143 million Other regulatory amortization and deferrals.

Additionally, $(60) million in cash flows from operating activities previously recorded as $(10) million Accounts payable and accrued liabilities and $(50) million Regulatory asset costs were reclassified to Other, net.

In cash flows from financing activities, $(5) million previously recorded as Payments to U.S.

Treasury was reclassified to Other, net.

Additionally, as a result of the implementation of the new accounting standard for Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, $(29) million and $(9) million were reclassified from Short-term debt issues (redemptions), net in cash flows from financing to Other, net in cash flows from operating activities in 2018 and 2017, respectively.

In the Consolidated Balance Sheet at September 30, 2019, TVA reclassified $ 163 million from Accounts payable and accrued liabilities to Asset retirement obligations in Current liabilities.

In addition, as a result of the adoption of the new lease accounting standard effective for TVA October 1, 2019, TVA reclassified $ 182 million from Other long-term liabilities to Finance lease liabilities in the Consolidated Balance Sheet at September 30, 2019.

Cash, Cash Equivalents, and Restricted Cash

10 unchanged sentences

Total Cash, cash equivalents, and restricted cash $ 521 $ 322

On the September 30, 2018 and 2017, Consolidated Statements of Cash Flows, transfers between cash and restricted cash were previously reported as $12 million and $1 million , respectively, as Other, net in cash flows from operating activities.

Due to the implementation of the new accounting standard for restricted cash in 2019, these amounts are not reported as cash flow activities on the Consolidated Statement of Cash Flows.

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.

Allowance for Uncollectible Accounts

The allowance for uncollectible accounts reflects TVA's estimate of probable losses inherent in its accounts and loans receivable balances excluding the EnergyRight ® loans receivable.

TVA determines the allowance based on known accounts, historical experience, and other currently available information including events such as customer bankruptcy and/or customers failing to fulfill payment arrangements after 90 days .

TVA determines the allowance based on known accounts, historical experience, and other currently available information including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements after 90 days .

It also reflects TVA's corporate credit department's assessment of the financial condition of customers and the credit quality of the receivables.

TVA continues to monitor the impact of the COVID-19 pandemic on accounts and loans receivable balances to evaluate the allowance for uncollectible accounts.

The allowance for uncollectible accounts was less than $ 1 million at both September 30, 2020 and 2019, for accounts receivable.

1 unchanged sentence

TVA recognizes revenue from contracts with customers to depict the transfer of goods or services to customers in an amount to which the entity expects to be entitled in exchange for those goods or services.

For the generation and transmission

of electricity, this is generally at the time the power is delivered to a metered customer delivery point for the customer's consumption or distribution.

For the generation and transmission of electricity, this is generally at the time the power is delivered to a metered customer delivery point for the customer's consumption or distribution.

As a result, revenues from power sales are recorded as electricity is delivered to customers.

10 unchanged sentences

TVA estimates revenue from such pre-commercial generation based on the guidance provided by Federal Energy Regulatory Commission ("FERC") regulations.

Watts Bar Nuclear Plant ("Watts Bar") Unit 2 commenced pre-commercial plant operations in June 2016, and commercial operations began in October 2016.

In addition, the Paradise Combined Cycle Plant ("Paradise CC") commenced pre-commercial plant operations in October 2016, and commercial operations began in April 2017.

The Allen Combined Cycle Plant ("Allen CC") began pre-commercial plant operations in September 2017, and began commercial operations in April 2018.

Cogeneration capability at Johnsonville Combustion Turbine Unit 20 commenced pre-commercial plant operations in September 2017, and was placed in service during December 2017.

Estimated revenue of $ 11 million related to these projects was capitalized to offset project costs for the year ended September 30, 2018 .

Estimated revenue of $ 11 million related to Allen CC was capitalized to offset project costs for the year ended September 30, 2018.

TVA also capitalized related fuel costs for these construction projects of approximately $ 19 million during the year ended September 30, 2018.

No such amounts were capitalized during 2019 .

No such amounts were capitalized during 2019 or 2020.

Certain Fuel, Materials, and Supplies .

31 unchanged sentences

Depreciation rates are determined based on the external depreciation studies.

These studies will be updated at least every five years.

These studies will be updated approximately every five years.

Depreciation expense for the years ended September 30, 2020, 2019, and 2018 was $ 1.6 billion, $ 1.8 billion, and $ 1.3 billion, respectively.

Depreciation expense expressed as a percentage of the

average annual depreciable completed plant was 3.09 percent for 2019 , 2.45 percent for 2018 , and 2.49 percent for 2017 .

Depreciation expense expressed as a percentage of the average annual depreciable completed plant was 2.74 percent for 2020, 3.09 percent for 2019, and 2.45 percent for 2018.

Average depreciation rates by asset class are as follows:

1 unchanged sentence

At September 30

2020 2019 2018

Nuclear 2.38 2.38 2.64

Coal-fired (1)

3.62 4.96 2.32

Hydroelectric 1.60 1.61 1.57

Gas and oil-fired 3.04 3.00 2.93

(1) The rate for 2019 includes the acceleration of depreciation related to retiring certain coal-fired units.

Transmission 1.34 1.34 1.32

Other 7.26 7.16 5.90

(1) The rates include the acceleration of depreciation related to retiring certain coal-fired units.

As a result of TVA's decision to idle or retire certain units since the previous depreciation study, TVA recognized $ 387 million, $ 566 million, and $ 48 million in accelerated depreciation expense related to the units during the years ended September 30, 2020, 2019, and 2018, respectively.

Accelerated depreciation is based on the remaining useful life of the asset at the time the decision is made to idle or retire a unit.

Capital Lease Agreements.

Assets recorded under capital lease agreements are included in property, plant, and equipment.

These primarily consist of a natural gas lateral pipeline, power production facilities, water treatment assets, certain office equipment, and land of $ 146 million and $ 149 million at September 30, 2019 and 2018 , respectively.

Amortization expense related to capital leases is included in Depreciation and amortization in TVA's statement of operations, excluding leases and other financing obligations where regulatory accounting is applied.

See Note 8 — Regulatory Assets and Liabilities — Other Non-Current Regulatory Assets — Deferred Capital Leases and Other Financing Obligations.

Reacquired Rights .

Property, plant, and equipment includes intangible reacquired rights, net of amortization, of $200 million and $208 million as of September 30, 2019 and 2018 , respectively, related to the purchase of residual interests from lease/leaseback agreements of certain combustion turbine units.

Amortization expense was $8 million , $8 million , and $4 million for 2019 , 2018 , and 2017 , respectively.

See Note 9 — Asset Acquisitions .

Property, plant, and equipment includes intangible reacquired rights, net of amortization, of $ 192 million and $ 200 million as of September 30, 2020 and 2019, respectively, related to the purchase of residual interests from

lease/leaseback agreements of certain combustion turbine units ("CTs").

Reacquired rights are amortized over the estimated useful life of the underlying CTs.

Amortization expense was $ 8 million for all years 2020, 2019, and 2018.

Software Costs.

12 unchanged sentences

See Note 6 — Plant Closures .

TVA recognizes a lease asset and lease liability for leases with terms of greater than 12 months.

Lease assets represent TVA's right to use an underlying asset for the lease term, and lease liabilities represent TVA's obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date.

TVA has certain lease agreements that include variable lease payments that are based on energy production levels.

These variable lease payments are not included in the measurement of the lease assets or lease liabilities but are recognized in the period in which the expenses are incurred.

While not specifically structured as leases, certain power purchase agreements ("PPAs") are deemed to contain a lease of the underlying generating units when the terms convey the right to control the use of the assets.

Amounts recorded for these leases are generally based on the amount of the scheduled capacity payments due over the remaining terms of the power purchase agreements, the terms of which vary.

The total lease obligation included in Accounts payable and accrued liabilities and lease liabilities related to these agreements were $ 500 million and $ 174 million for finance and operating leases, respectively, at September 30, 2020.

TVA has agreements with lease and non-lease components and has elected to account for the components separately.

Consideration is allocated to lease and non-lease components generally based on relative standalone selling prices.

TVA has lease agreements which include options for renewal and early termination.

The intent to renew a lease varies depending on the lease type and asset.

Renewal options that are reasonably certain to be exercised are included in the lease measurements.

The decision to terminate a lease early is dependent on various economic factors.

No termination options have been included in TVA's lease measurements.

Leases with an initial term of 12 months or less, which do not include an option to extend the initial term of the lease to greater than 12 months that TVA is reasonably certain to exercise, are not recorded on the Consolidated Balance Sheets at September 30, 2020.

Operating leases are recognized on a straight-line basis over the term of the lease agreement.

Rent expense associated with short-term leases and variable leases is recorded in Operating and maintenance expense, Fuel expense, or Purchased power expense on the Consolidated Statements of Operations.

Expenses associated with finance leases result in the separate presentation of interest expense on the lease liability and amortization expense of the related lease asset on the Consolidated Statements of Operations.

Decommissioning Costs

6 unchanged sentences

Regulatory Assets and Liabilities — Nuclear Decommissioning Costs and Non-Nuclear Decommissioning Costs and Note 12 — Asset Retirement Obligations.

Blended Low-Enriched Uranium Program

Under the blended low-enriched uranium ("BLEU") program, TVA, the U.S.

Department of Energy ("DOE") , and certain nuclear fuel contractors have entered into agreements providing for the DOE's surplus of enriched uranium to be blended with other uranium down to a level that allows the blended uranium to be fabricated into fuel that can be used in nuclear power plants.

Under the terms of an interagency agreement between TVA and the DOE, in exchange for supplying highly enriched uranium materials to the appropriate third-party fuel processors for processing into usable BLEU fuel for TVA, the DOE participates to a degree in the savings generated by TVA's use of this blended nuclear fuel.

TVA accrues an obligation with each BLEU reload batch related to the portion of the ultimate future payments estimated to be attributable to the BLEU fuel currently in use.

TVA estimated DOE's portion of the cost savings from the program to be $ 166 million since 2006.

The last reload of BLEU material is currently underway at Browns Ferry Nuclear Plant ("Browns Ferry") .

Since 2011, total payments to the DOE amounted to approximately $ 165 million for this program.

No payments were made during the year ended September 30, 2019 , and the remaining obligation recorded was $ 1 million at September 30, 2019 .

Down-blend Offering for Tritium

TVA, the DOE, and certain nuclear fuel contractors have entered into agreements, referred to as the Down-blend offering for Tritium, that provide for the production, processing, and storage of low-enriched uranium that is to be made using surplus DOE highly enriched uranium and other uranium.

TVA, the Department of Energy ("DOE"), and certain nuclear fuel contractors have entered into agreements, referred to as the Down-blend Offering for Tritium, that provide for the production, processing, and storage of low-enriched uranium that is to be made using surplus DOE highly enriched uranium and other uranium.

Low-enriched uranium can be fabricated into fuel for use in a nuclear power plant.

Production of the low-enriched uranium began in the summer of 2019 and is contracted to continue through October 2027.

Production of the low-enriched uranium began in 2019 and is contracted to continue through October 2027.

Beginning October 2027, contract activity will consist of storage and flag management.

2 unchanged sentences

Under the terms of the interagency agreement between the DOE and TVA, the DOE will reimburse TVA for a portion of the costs of converting the highly enriched uranium to low-enriched uranium.

During the year ended September 30, 2019 , TVA received $23 million in reimbursements from the DOE.

Since 2019, TVA has received $ 89 million in reimbursements from the DOE.

At September 30, 2020, TVA recorded $ 6 million in Accounts receivable, net related to this agreement.

Investment Funds

Investment funds consist primarily of trust funds designated to fund decommissioning requirements (see Note 22 — Commitments and Contingencies — Decommissioning Costs ), the Supplemental Executive Retirement Plan ("SERP") (see Note 21 — Overview of Plans and Benefits — Supplemental Executive Retirement Plan ), and the Deferred Compensation Plan ("DCP") .

Investment funds consist primarily of trust funds designated to fund decommissioning requirements (see Note 22 — Commitments and Contingencies — Decommissioning Costs ), the Supplemental Executive Retirement Plan ("SERP") (see Note 21 — Benefit Plans — Overview of Plans and Benefits — Supplemental Executive Retirement Plan ), and the Deferred Compensation Plan ("DCP").

The Nuclear Decommissioning Trust ("NDT") holds funds primarily for the ultimate decommissioning of TVA's nuclear power plants.

4 unchanged sentences

In 2004, TVA and its largest customer, Memphis Light, Gas and Water Division ("MLGW"), entered into an energy prepayment agreement under which MLGW prepaid TVA $ 1.5 billion for the future costs of electricity to be delivered by TVA to MLGW over a period of 180 months .

TVA accounted for the prepayment as unearned revenue and reported the obligation to deliver power under this arrangement as Energy prepayment obligations and Current portion of energy prepayment obligations on the September 30, 2018 Consolidated Balance Sheet.

TVA accounted for the prepayment as unearned revenue and reported the obligation to deliver power under this arrangement as Energy prepayment obligations.

The arrangement ceased in 2019.

32 unchanged sentences

The following are accounting standard updates issued by the Financial Accounting Standards Board ("FASB") that TVA adopted during 2020:

Defined Benefit Costs

This guidance changes how information about defined benefit costs for pension plans and other post-retirement benefit plans is presented in employer financial statements.

The guidance requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in operating expenses (together with other employee compensation costs).

The other components of net benefit cost, including amortization of prior service cost/credit and settlement and curtailment effects, are to be included in non-operating expenses.

Additionally, the guidance stipulates that only the service cost component of net benefit cost is eligible for capitalization in assets.

The guidance requires retrospective presentation of the service and non-service cost components in the Consolidated Statements of Operations.

Effective Date for TVA

October 1, 2018

Effect on the Financial Statements or Other Significant Matters

TVA adopted this standard on a retrospective basis for the prior periods presented resulting in a reclassification of net periodic benefit costs from Operating and maintenance expense to Other net periodic benefit cost in the Consolidated Statements of Operations of $256 million and $758 million during 2018 and 2017, respectively.

There was no impact on the Consolidated Balance Sheets because TVA has historically capitalized only the service cost component, which is consistent with the new guidance.

See Note 1 — Summary of Significant Accounting Policies — Reclassifications for additional details.

Financial Instruments

This guidance applies to the recognition and measurement of financial assets and liabilities.

The standard requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee).

The standard also amends presentation requirements related to certain changes in the fair value of a liability and eliminates certain disclosure requirements of significant assumptions for financial instruments measured at amortized cost on the balance sheet.

Public entities must apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.

Effective Date for TVA

October 1, 2018

Effect on the Financial Statements or Other Significant Matters

TVA currently measures all of its equity investments (other than those that result in the consolidation of the investee) at fair value, with changes in the fair value recognized through net income, unless regulatory accounting is applied.

The TVA Board has authorized the use of regulatory accounting for changes in fair value of certain equity investments, and as a result, those changes in fair value are deferred as regulatory assets or liabilities.

TVA currently discloses significant assumptions around its estimates of fair value for financial instruments carried at amortized cost on its consolidated balance sheet.

The adoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows because changes in fair value accounting are recognized through regulatory accounting.

Revenue from Contracts with Customers

This guidance, including subsequent amendments, replaces the existing accounting standard and industry specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers.

The underlying principle of the guidance is to recognize revenue related to the transfer of goods or services to customers at the amount expected to be collected.

The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within and across industries.

The new standard also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and the related cash flows arising from contracts with customers.

Effective Date for TVA

October 1, 2018

Effect on the Financial Statements or Other Significant Matters

TVA adopted this standard using the modified retrospective method with no material changes to the amount or timing of revenue recognition.

In accordance with the modified retrospective method, TVA's previously issued financial statements have not been restated to comply with the new accounting standard.

TVA recognizes revenue when it satisfies a performance obligation by transferring control to the customer.

For the generation and transmission of electricity, this is generally at the time the power is delivered to a metered customer delivery point for a customer's consumption or distribution.

As a result, revenues from power sales are recorded as electricity is delivered to customers.

TVA utilized certain practical expedients including applying the guidance to open contracts at the date of adoption, applying the guidance to a portfolio of contracts with similar characteristics, and recognizing revenue in the amount for which it has the right to invoice.

As a result of adoption of the standard, TVA did not have a cumulative-effect adjustment to proprietary capital.

Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments

This standard adds or clarifies guidance on the classification of certain cash receipts and payments on the statement of cash flows as follows:

debt prepayment or extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and bank-owned life insurance policies, distributions received from equity method investees, beneficial interest in securitization transactions, and the application of the predominance principle to separately identifiable cash flows.

Effective Date for TVA

October 1, 2018

Effect on the Financial Statements or Other Significant Matters

TVA adopted this standard on a retrospective basis for the prior periods presented.

The adoption of this standard resulted in a reclassification of certain cash payments of $29 million and $9 million from financing activities to operating activities shown on the Consolidated Statements of Cash Flows for 2018 and 2017, respectively.

The changes did not have a material impact on TVA's financial condition and results of operations.

See Note 1 — Summary of Significant Accounting Policies — Reclassifications for additional details.

Statement of Cash Flows - Restricted Cash

This guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.

Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

This guidance does not provide a definition of restricted cash or restricted cash equivalents.

Effective Date for TVA

October 1, 2018

Effect on the Financial Statements or Other Significant Matters

Adoption of this standard resulted in a change to the beginning-of-period and end-of-period cash and cash equivalents and restricted cash amounts presented on the Consolidated Statements of Cash Flows.

Amounts previously reported as Other, net in cash flows from operating activities of transfers from cash and restricted cash are not reported as cash flow activities.

See Note 1 — Summary of Significant Accounting Policies — Cash, Cash Equivalents, and Restricted Cash for additional details.

TVA applied this standard on a retrospective basis for the prior periods presented.

The following accounting standards have been issued but as of September 30, 2019 , were not effective and had not been adopted by TVA:

Lease Accounting

This guidance changes the provisions of recognition in both the lessee and lessor accounting models.

Description This guidance changes the provisions of recognition in both the lessee and lessor accounting models.

The standard requires entities that lease assets ("lessees") to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months, while also refining the definition of a lease.

2 unchanged sentences

The standard requires both types of leases to be recognized on the balance sheet.

Operating leases will result in straight-line expense, while finance leases will result in recognition of interest expense on the lease liability separate from amortization expense.

Operating leases will result in straight-line expense, while finance leases will result in recognition of interest on the lease liability separate from amortization expense.

The accounting rules for the owner of assets leased by the lessee ("lessor accounting") remain relatively unchanged.

1 unchanged sentence

The standard is to be applied using a modified retrospective transition.

Effective Date for TVA

The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2019.

Effect on the Financial Statements or Other Significant Matters

TVA has completed its evaluation of the impact of adopting this guidance and the changes on its consolidated financial statements and related disclosures.

The standard is expected to impact financial position as adoption will increase the amount of assets and liabilities recognized on TVA's Consolidated Balance Sheets approximately $200 million each.

The standard is not expected to have a material impact on results of operations or cash flows as expense recognition is intended to be substantially the same as the existing standard.

Effective Date for TVA October 1, 2019

Effect on the Financial Statements or Other Significant Matters TVA elected the modified retrospective method of adoption effective October 1, 2019.

Under the modified retrospective method of adoption, prior year reported results are not restated.

TVA recorded $ 205 million and $ 210 million of lease assets and lease liabilities, respectively, for operating leases in effect at the adoption date.

The accounting for finance leases remained substantially unchanged.

Adoption of the standard did not materially impact results of operations or cash flows.

TVA has elected to apply the following practical expedients:

Practical Expedient

Practical Expedient Description

Package of transition practical expedients (for leases commenced prior to adoption date;

expedients must be adopted as a package)

Do not need to 1) reassess whether any expired or existing contracts are leases or contain leases, 2) reassess the lease classification for any expired or existing leases, and 3) reassess initial direct costs for any existing leases.

Short-term lease expedient (elect by class of underlying asset)

Elect as an accounting policy to not apply the recognition requirements to short-term leases by asset class.

Existing and expired land easements not previously accounted for as leases

Elect to not evaluate existing or expired easements under the new guidance and carry forward current accounting treatment.

Comparative reporting requirements for initial adoption

Elect to apply transition requirements at adoption date, recognize cumulative effect adjustment to retained earnings in period of adoption, and not apply the new requirements to comparative periods, including disclosures.

expedients must be adopted as a package) Do not need to (1) reassess whether any expired or existing contracts are leases or contain leases, (2) reassess the lease classification for any expired or existing leases, or (3) reassess initial direct costs for any existing leases.

Short-term lease expedient (elect by class of underlying asset) Elect as an accounting policy to not apply the recognition requirements to short-term leases by asset class.

Existing and expired land easements not previously accounted for as leases Elect to not evaluate existing or expired easements under the new guidance and carry forward current accounting treatment.

Comparative reporting requirements for initial adoption Elect to (1) apply transition requirements at adoption date, (2) recognize cumulative effect adjustment to retained earnings in period of adoption, and (3) not apply the new requirements to comparative periods, including disclosures.

Derivatives and Hedging - Improvements to Accounting for Hedging Activities

This guidance better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.

Description This guidance better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.

To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.

Effective Date for TVA

The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2019.

Effect on the Financial Statements or Other Significant Matters

TVA does not expect the adoption of this standard to have a material impact on TVA's financial condition, results of operations, or cash flows.

Effective Date for TVA October 1, 2019

Effect on the Financial Statements or Other Significant Matters TVA has adopted the standard on a prospective basis.

The adoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows.

TVA only uses hedge accounting under its foreign currency swap arrangements, and the adoption of this standard had no impact on those arrangements.

Customer's Accounting for Implementation Costs in a Cloud Arrangement That Is a Service Contract

This guidance relates to the accounting for a customer's implementation costs in a hosting arrangement that is a service contract.

Description This guidance relates to the accounting for a customer's implementation costs in a hosting arrangement that is a service contract.

The amendments align the requirements for capitalizing those implementation costs with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license.

1 unchanged sentence

Entities are required to apply the amendments either retrospectively or prospectively to all implementation costs incurred after the adoption date.

Effective Date for TVA

The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2020.

Early adoption is permitted, and TVA plans to adopt this standard October 1, 2019, on a prospective basis.

Effect on the Financial Statements or Other Significant Matters

TVA does not expect any material impact on TVA's financial condition, results of operations, or cash flows after the adoption of this standard.

Effective Date for TVA October 1, 2019

Effect on the Financial Statements or Other Significant Matters TVA has adopted the standard on a prospective basis.

Adoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows.

TVA records qualified implementation costs in a cloud arrangement that is a service contract as a prepaid asset and amortizes the prepaid asset to Operating and maintenance expense based on the term of the contract.

The following accounting standards have been issued but as of September 30, 2020, were not effective and had not been adopted by TVA:

Financial Instruments - Credit Losses

This guidance eliminates the probable initial recognition threshold in current GAAP and, instead, requires an allowance to be recorded for all expected credit losses for certain financial assets that are not measured at fair value.

Description This guidance eliminates the probable initial recognition threshold in current GAAP and, instead, requires an allowance to be recorded for all expected credit losses for certain financial assets that are not measured at fair value.

The allowance for credit losses is based on historical information, current conditions, and reasonable and supportable forecasts.

1 unchanged sentence

Disclosures of credit quality indicators in relation to the amortized cost of financing receivables are further disaggregated by year of origination.

The standard also provides a transition relief that is optional for all entities.

It provides entities an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments.

Effective Date for TVA

The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2020.

While early adoption is permitted, TVA does not plan to adopt the standard early.

Effect on the Financial Statements or Other Significant Matters

TVA is evaluating the potential impact of these changes on its consolidated financial statements and related disclosures.

Effective Date for TVA The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2020.

Effect on the Financial Statements or Other Significant Matters TVA adopted this standard using the modified retrospective method through a cumulative-effect adjustment to retained earnings on October 1, 2020.

TVA will recognize an allowance that reflects the current estimate of credit losses expected to be incurred over the life of the financial assets based on historical experience, current conditions, and reasonable and supportable forecasts.

This standard will primarily impact TVA's long-term loans receivable.

Adoption of this standard is not expected to have a material impact on TVA's financial condition, results of operations, or cash flows.

Fair Value Measurement Disclosure

The guidance changes certain disclosure requirements for fair value measurements.

Description The guidance changes certain disclosure requirements for fair value measurements.

It removes certain disclosure requirements, such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy;

2 unchanged sentences

Some disclosure requirements are added, such as the change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

Effective Date for TVA

The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2020.

While early adoption is permitted, TVA does not plan to adopt the standard early.

Effect on the Financial Statements or Other Significant Matters

TVA does not expect the adoption of this standard to have a material impact on TVA's financial condition, results of operations or cash flows.

TVA is evaluating the potential impact on related disclosures.

Defined Benefit Plans - Disclosure Requirements

This guidance applies to all employers that sponsor defined benefit pension or other post-retirement plans and modifies or clarifies the disclosure requirements for those plans.

The amendments in this update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant.

Entities are required to apply the amendments retrospectively.

Effective Date for TVA

The new standard is effective for TVA's annual reporting periods beginning October 1, 2021.

While early adoption is permitted, TVA does not plan to adopt the standard early.

Effect on the Financial Statements or Other Significant Matters

TVA is evaluating the potential impact of these changes on its consolidated financial statements and related disclosures.

Effective Date for TVA The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2020.

Effect on the Financial Statements or Other Significant Matters TVA does not expect the adoption of this standard to have a material impact on TVA's financial condition, results of operations, or cash flows.

Reference Rate Reform

Description The guidance provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rates.

Effective Date for TVA The new standard is effective for adoption at any time between March 12, 2020, and December 31, 2022.

TVA currently plans to adopt the standard by December 31, 2022.

Effect on the Financial Statements or Other Significant Matters TVA continues to review this standard and evaluate the impact of using an alternative reference rate instead of LIBOR in its interest rate swap contracts.

TVA expects the adoption of the standard will simplify the accounting for any modifications to its interest rate swap contracts.

Accounts Receivable, Net

6 unchanged sentences

Accounts receivable, net (1)

$ 1,529 $ 1,739

(1) Allowance for uncollectible accounts was less than $ 1 million at September 30, 2020 and 2019, and therefore is not represented in the table above.

In response to the COVID-19 pandemic, the TVA Board approved the Public Power Support and Stabilization program in March 2020, which includes alternative wholesale payment arrangements for LPCs.

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.

Inventories, Net

4 unchanged sentences

Fuel inventory 253 294

RECs/Emission allowance inventory, net

RECs inventory, net 15 16

Allowance for inventory obsolescence ( 35 ) ( 53 )

4 unchanged sentences

At September 30

Accumulated Depreciation

Cost Accumulated Depreciation

Net Cost Accumulated Depreciation Net

Coal-fired (1)(2)

$ 18,613 $ 13,944 $ 4,669 $ 17,400 $ 12,538 $ 4,862

Gas and oil-fired 6,010 1,696 4,314 6,054 1,562 4,492

Nuclear 25,741 12,141 13,600 25,543 11,656 13,887

Transmission 8,283 3,140 5,143 7,932 3,083 4,849

Hydroelectric 3,410 1,090 2,320 3,163 1,051 2,112

3 unchanged sentences

Other stewardship 29 10 19 29 10 19

Total $ 64,970 $ 33,550 $ 31,420 $ 62,944 $ 31,384 $ 31,560

(1) TVA recognized accelerated depreciation as a result of the decision to idle or retire certain units.

See Note 6 — Plant Closures .

(2) In 2020, TVA recorded approximately $ 1.1 billion in upward revisions to asset retirement costs for coal-fired assets.

See Note 12 — Asset Retirement Obligations .

Plant Closures

TVA must continuously evaluate all generating assets to ensure an optimum energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley.

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

These assessments included resiliency studies for fuel and transmission and financial considerations.

TVA also prepared Environmental Assessments ("EAs") 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 that Paradise would not be restarted after January 2020 due to the plant's material condition.

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.

Based on results of assessments presented to the TVA Board in 2019, the retirement of Paradise Fossil Plant ("Paradise") Unit 3 by December 2020 and Bull Run Fossil Plant ("Bull Run") by December 2023 was approved.

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 Unit 3 was taken offline on February 1, 2020, effectively retiring the plant.

Financial Impact

As a result of TVA's decision to accelerate the retirements of Paradise and Bull Run, certain construction projects at these locations were identified as probable of abandonment or were no longer expected to be in service for greater than one year prior to the plants' retirement dates.

The write-off of these projects resulted in $151 million of Operating and maintenance expense during the year ended September 30, 2019 .

TVA also recognized losses of $19 million in Operating and maintenance expense related to additional materials and supplies inventory reserves and write-offs identified at Paradise during the year ended September 30, 2019 .

The write-off of these projects resulted in $ 11 million and $ 151 million of Operating and maintenance expense during the years ended September 30, 2020 and 2019, respectively.

TVA also recognized losses of $ 2 million and $ 19 million in Operating and maintenance expense related to additional materials and supplies inventory reserves and write-offs identified at Paradise during the years ended September 30, 2020 and 2019, respectively.

TVA's policy is to adjust depreciation rates to reflect the most current assumptions, ensuring units will be fully depreciated by the applicable retirement dates.

As a result of TVA's decision to accelerate the retirement of Paradise and Bull Run, TVA recognized an additional $566 million of accelerated depreciation for the year ended September 30, 2019 .

As a result of TVA's decision to accelerate the retirement of Paradise and Bull Run, TVA recognized an additional $ 387 million and $ 566 million of accelerated depreciation for the years ended September 30, 2020 and 2019, respectively.

As described in Note 2 — Impact of New Accounting Standards and Interpretations , TVA elected the modified retrospective method of adoption for the new lease accounting standard effective October 1, 2019.

Under the modified retrospective method of adoption, prior year reported results are not restated.

TVA recorded $ 205 million and $ 210 million of lease assets and lease liabilities, respectively, for operating leases in effect at the adoption date.

The accounting for finance leases remained substantially unchanged.

Adoption of the standard did not materially impact results of operations or cash flows.

The following table provides additional information regarding the presentation of leases on the Consolidated Balance Sheets at September 30, 2020 :

Amounts Recognized on TVA's Consolidated Balance Sheets

At September 30, 2020

Operating Operating lease assets, net of amortization $ 232

Finance Finance leases 516

Total lease assets $ 748

Operating Accounts payable and accrued liabilities $ 63

Finance Accounts payable and accrued liabilities 41

Operating Other long-term liabilities 171

Finance Finance lease liabilities 525

Total lease liabilities $ 800

TVA's leases consist primarily of railcars, equipment, real estate/land, power generating facilities, and gas pipelines.

TVA's leases have various terms and expiration dates remaining from less than one year to 26 years.

The components of lease costs for the year September 30, 2020, were as follows:

For the year ended September 30, 2020

Operating lease costs (1)

Variable lease costs (1)

Short-term lease costs (1)

Finance lease costs

Amortization of lease assets (2)

Interest on lease liabilities (3)(4)

Total finance lease costs 48

Total lease costs $ 214

(1) Costs are included in Operating and maintenance expense, Fuel expense, Purchased power expense, and Tax equivalents expense on the Consolidated Statements of Operations.

TVA's rental expense for operating leases was approximately $ 97 million and $ 92 million for the years ended September 30, 2019 and 2018, respectively.

(2) Expense is included in Depreciation and amortization expense on the Consolidated Statements of Operations.

(3) Expense is included in Interest expense on the Consolidated Statements of Operations.

(4) Certain finance leases receive regulatory accounting treatment and are reclassified to Fuel expense and Purchased power expense.

TVA's variable lease costs are primarily related to renewable energy purchase agreements that require TVA to purchase all output from the underlying facility.

Payments under those agreements are solely based on the actual output over the lease term.

Certain TVA lease agreements contain renewal options.

Those renewal options that are reasonably certain to be exercised are included in the lease measurements.

The following table contains additional information with respect to cash and non-cash activities related to leases:

Amounts Recognized on TVA's Consolidated Statements of Cash Flows

For the Year Ended September 30, 2020

Operating cash flows for operating leases $ 85

Operating cash flows for finance leases 33

Financing cash flows for finance leases 15

Lease assets obtained in exchange for lease obligations (non-cash)

Operating leases (1)

Finance leases 394

(1) Amount excludes operating lease assets recorded as a result of the adoption of the new lease standard.

TVA has certain finance leases under PPAs under which the present value of the minimum lease payments exceeds the fair value of the related lease asset at the date of measurement.

This resulted in an interest rate that was higher than TVA's incremental borrowing rate.

At September 30, 2020 , the weighted average remaining lease term in years and the weighted average discount rate for TVA's operating and financing leases were as follows:

Weighted Averages

At September 30, 2020

Weighted average remaining lease terms

Operating leases 5 years

Finance leases 12 years

Weighted average discount rate (1)

Operating leases 1.6 %

Finance leases 21.8 %

(1) The discount rate is calculated using the rate implicit in a lease if it is readily determinable.

If the rate used by the lessor is not readily determinable, TVA uses its incremental borrowing rate as permitted by accounting guidance.

The incremental borrowing rate is influenced by TVA's credit rating and lease term and as such may differ for individual leases, embedded leases, or portfolios of leased assets.

The following table presents maturities of lease liabilities and a reconciliation of the undiscounted cash flows to lease liabilities at September 30, 2020 :

Future Minimum Lease Payments

Minimum Payments Due at September 30, 2020

Operating leases

Thereafter 16

Minimum annual payments 243

present value discount ( 9 )

Operating present value of net minimum lease payments $ 234

Finance leases

Thereafter 592

Minimum annual payments 1,042

amount representing interest ( 476 )

Finance present value of net minimum lease payments $ 566

The following table presents the future minimum lease payments under operating leases and the finance lease maturities as reported under the previous lease standard at September 30, 2019:

Future Minimum Lease Payments

Minimum Payments Due at September 30, 2019

Operating leases

Minimum annual payments 228

present value discount —

Operating present value of net minimum lease payments $ 228

Finance leases

Thereafter 418

Minimum annual payments 683

amount representing interest ( 495 )

Finance present value of net minimum lease payments $ 188

TVA entered into a PPA with a renewable resource provider for solar generation and rights to charge and discharge a battery energy storage system.

The system is considered a lease component in this agreement.

This lease has a term of 20 years, and is expected to commence on October 1, 2022.

Payments made over the term of this lease are expected to total approximately $ 89 million.

Other Long-Term Assets

2 unchanged sentences

At September 30

EnergyRight ® loans receivable

2020 2019 (1)

Loans and other long-term receivables, net $ 100 $ 125

EnergyRight ® receivables

Prepaid long-term service agreements 42 22

Commodity contract derivative assets 23 —

2 unchanged sentences

Total other long-term assets $ 325 $ 325

(1) At September 30, 2018, $13 million and $10 million previously classified as Restricted cash and cash equivalents and Loans and other long-term receivables, net (a component of Other long-term assets), respectively, have been reclassified to Restricted cash and cash equivalents (a component of Other long-term assets).

(2) In 2019, these assets are less than $1 million , and therefore are not represented in the table above.

In association with the EnergyRight ® Solutions program, LPCs offer financing to end-use customers for the purchase of energy-efficient equipment.

(1) At September 30, 2019, $ 22 million previously classified as Other (a component of Other long-term assets) has been reclassified to Prepaid long-term service agreements (a component of Other long-term assets) to conform with current year presentation.

EnergyRight ® Receivables .

In association with the EnergyRight ® program, TVA's local power company customers ("LPCs") offer financing to end-use customers for the purchase of energy-efficient equipment.

Depending on the nature of the energy-efficiency project, loans may have a maximum term of five years or 10 years.

TVA purchases the resulting loans receivable from its LPCs.

The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loans receivable that has been in default for 180 days or more or that TVA has determined is uncollectible.

The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in

full any loans receivable that have been in default for 180 days or more or that TVA has determined are uncollectible.

Given this continuing involvement, TVA accounts for the transfer of the loans receivable as secured borrowings.

2 unchanged sentences

See Note 11 — Other Long-Term Liabilities for information regarding the associated financing obligation.

In response to the COVID-19 pandemic, customers experiencing financial hardship can request a deferral of EnergyRight ® loan payments for a period of up to six months.

This deferral option began April 20, 2020, and is available through October 31, 2020.

Deferred loans will not accrue interest during the deferral months.

These deferred loans have resulted in a less than $ 1 million impact to TVA.

Prepaid Long-Term Service Agreements.

TVA has entered into various long-term service agreements for major

maintenance activities at certain of its combined cycle plants.

TVA uses the direct expense method of accounting for these

arrangements.

TVA accrues for parts when it takes ownership and for contractor services when they are rendered.

certain of these agreements, payments made exceed the value of parts received and services rendered.

The current and long-term portions of the resulting prepayments are reported in Other current assets and Other long-term assets, respectively, on

TVA's Consolidated Balance Sheets.

At September 30, 2020 and 2019, prepayments of $ 3 million and $ 5 million,

respectively, were recorded in Other current assets.

Regulatory Assets and Liabilities

4 unchanged sentences

At September 30

2020 2019 (1)

Current regulatory assets

1 unchanged sentence

Unrealized losses on commodity derivatives 4 39

Environmental agreements

Gallatin coal combustion residual facilities

Environmental cleanup costs - Kingston ash spill

Fuel cost adjustment receivable 12 28

6 unchanged sentences

Unrealized losses on commodity derivatives — 15

Environmental agreements

Gallatin coal combustion residual facilities

Other non-current regulatory assets 138 142

6 unchanged sentences

Non-current regulatory liabilities

Deferred other post-retirement benefits cost

Unrealized gains on commodity derivatives 23 —

1 unchanged sentence

Total regulatory liabilities $ 164 $ 150

(1) At September 30, 2019, $ 12 million previously classified as Environmental agreements (a component of Regulatory assets) has been reclassified to Other non-current regulatory assets (a component of Regulatory assets) to conform with current year presentation.

In 2017, the TVA Board authorized management to accelerate amortization of certain regulatory assets to the extent actual net income in 2018 exceeded the budgeted amount, up to the aggregate amount of those certain regulatory assets.

Assets included in this TVA Board action include:

deferred nuclear generating units, environmental cleanup costs related to the Kingston ash spill, and nuclear training costs related to the refurbishing and restarting of Browns Ferry Unit 1 and the construction of Watts Bar Unit 2.

TVA recorded $ 857 million of accelerated amortization of the Deferred nuclear generating units and Nuclear training costs regulatory assets in 2018.

1 unchanged sentence

TVA recorded $ 266 million of accelerated recovery for the Kingston ash spill regulatory asset in 2019.

No accelerated amortization was recorded in 2020.

Deferred Pension Costs and Other Post-retirement Benefit Costs .

1 unchanged sentence

The funded status is measured as the difference between the fair value of plan assets and the benefit obligations at the measurement date for each plan.

The changes in funded status are actuarial gains and losses that are recognized on TVA's Consolidated Balance Sheets by adjusting the recognized

pension and OPEB liabilities, with the offset deferred as a regulatory asset or a regulatory liability.

In an unregulated environment, these deferred costs would be recognized as an increase or decrease to accumulated other comprehensive income (loss) ("AOCI").

The changes in funded status are actuarial gains and losses that are recognized on TVA's Consolidated Balance Sheets by adjusting the recognized pension and OPEB liabilities, with the offset deferred as a regulatory asset or a regulatory liability.

In an unregulated

environment, these deferred costs would be recognized as an increase or decrease to accumulated other comprehensive income (loss) ("AOCI").

"Incurred cost" is a cost arising from cash paid out or an obligation to pay for an acquired asset or service, and a loss from any cause that has been sustained and for which payment has been or must be made.

24 unchanged sentences

The unrealized losses on these interest rate derivatives are recorded on TVA's Consolidated Balance Sheets as current and non-current regulatory assets, and the related realized gains or losses, if any, are recorded on TVA's Consolidated Statements of Operations when the contracts settle.

A portion of certain unrealized gains will be amortized into earnings over the remaining lives of the contracts.

A portion of certain unrealized gains and losses will be amortized into earnings over the remaining lives of the contracts.

Gains and losses on interest rate derivatives that are expected to be realized within the next year are included as a current regulatory asset or liability on TVA's Consolidated Balance Sheet.

Due to changing interest rates in the financial markets associated with the COVID-19 pandemic, TVA has experienced unrealized losses related to its derivative instruments for the year ended September 30, 2020.

TVA does not recognize unrealized gains and losses from the investment portfolios and derivative instruments within earnings but rather defers all such gains and losses within a regulatory liability or asset in accordance with its accounting policy.

See Note 15 — Risk Management Activities and Derivative Transactions and Note 16 — Fair Value Measurements.

Nuclear Decommissioning Costs.

1 unchanged sentence

(1) certain deferred charges related to the future closure and decommissioning of TVA's nuclear generating units under the Nuclear Regulatory Commission ("NRC") requirements, (2) recognition of changes in the liability, (3) recognition of changes in the value of TVA's NDT, and (4) certain other deferred charges under the accounting rules for AROs.

These future costs will be funded through a combination of the NDT, future earnings on the NDT, and, if necessary, additional TVA cash contributions to the NDT and future earnings thereon.

These future costs can be funded through a combination of investment funds set aside in the NDT and ART, future earnings on the investment funds, and future earnings thereon.

Deferred charges will be recovered in rates based on the analysis of expected expenditures, contributions, and investment earnings required to recover the decommissioning costs.

See Note 1 — Summary of Significant Accounting Policies — Investment Funds.

2 unchanged sentences

Unrealized Gains (Losses) on Commodity Derivatives.

Unrealized gains (losses) on coal and natural gas purchase contracts, included as part of unrealized gains (losses) on commodity derivatives, relate to the mark-to-market ("MtM") valuation of coal and natural gas purchase contracts.

These contracts qualify as derivative contracts but do not qualify for cash flow hedge accounting treatment.

Unrealized gains (losses) on natural gas purchase contracts, included as part of unrealized gains (losses) on commodity derivatives, relate to the mark-to-market ("MtM") valuation of natural

gas purchase contracts.

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 regulatory assets have been derecognized.

The natural gas purchase contracts qualify as derivative contracts but do not qualify for cash flow hedge accounting treatment.

As a result, TVA recognizes the changes in the market value of these derivative contracts as a regulatory liability or asset.

2 unchanged sentences

These contracts expire at various times through 2024.

Unrealized gains and losses on contracts with a maturity of less than one year are included as a current

regulatory asset or liability on TVA's Consolidated Balance Sheets.

Unrealized gains and losses on contracts with a maturity of less than one year are included as a current regulatory asset or liability on TVA's Consolidated Balance Sheets.

See Note 15 — Risk Management Activities and Derivative Transactions .

Environmental Agreements.

In conjunction with the Environmental Agreements, TVA recorded certain liabilities totaling $ 360 million ($ 290 million investment in energy efficiency projects, demand response projects, renewable energy projects, and other TVA projects;

$ 60 million to be provided to Alabama, Kentucky, North Carolina, and Tennessee to fund environmental projects with preference for projects in the Tennessee River watershed;

and $ 10 million in civil penalties).

The TVA Board determined that these costs would be collected in customer rates in the future, and, accordingly, the amounts were deferred as a regulatory asset.

Through the end of 2019 , $ 279 million has been paid with respect to environmental projects, $ 60 million has been paid to Alabama, Kentucky, North Carolina, and Tennessee, and $ 10 million has been paid with respect to civil penalties.

The remaining deferred amounts will be charged to expense and recovered in rates over future periods as payments are made through 2027.

Gallatin Coal Combustion Residuals.

Based on the August 2017 Order and the assumptions that a new lined facility would be permitted and constructed on the Gallatin site and all existing CCR materials at Gallatin would be moved to this site, TVA estimated the costs of the project to be approximately $ 900 million , which reflected the expected costs of inflation over the duration of the project but was not discounted to a present value amount given the nature of the obligation.

At September 30, 2018, $861 million and $38 million were recorded as long-term and short-term regulatory assets, respectively.

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 for additional details.

Environmental Cleanup Costs – Kingston Ash Spill .

TVA used regulatory accounting treatment to defer all actual costs incurred and expected future costs related to the Kingston Fossil Plant ("Kingston") Ash Spill.

The TVA Board approved a plan to amortize these costs over 15 years beginning on October 1, 2009.

Insurance proceeds have been recorded as reductions to the regulatory asset and have reduced amounts collected in future rates.

Amounts included as a current regulatory asset on TVA's Consolidated Balance Sheets represent the amount to be amortized in the next 12 months .

The TVA Board authorized TVA to use the amount included in the 2019 rate action for the Deferred nuclear generating units and Nuclear training costs regulatory assets, to the extent needed, to accelerate amortization of the Environmental cleanup costs - Kingston ash spill regulatory asset in 2019.

The remaining balance at September 30, 2018 was recorded as a current asset, and TVA recorded $266 million of accelerated recovery for the Kingston ash spill regulatory asset in 2019.

Fuel Cost Adjustment Receivable.

The fuel cost adjustment provides a mechanism to alter rates monthly to reflect changing fuel and purchased power costs, including realized gains and losses relating to transactions under TVA's Financial Trading Program ("FTP") .

The fuel cost adjustment provides a mechanism to alter rates monthly to reflect changing fuel and purchased power costs.

There is typically a lag between the occurrence of a change in fuel and purchased power costs and the reflection of the change in fuel rates.

3 unchanged sentences

Deferred Capital Leases and Other Financing Obligations .

Deferred capital lease and other financing asset costs represent the difference between the FERC's Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act ("Uniform System of Accounts") model balances and the balances under GAAP guidance.

Under the Uniform System of Accounts, TVA recognizes the initial capital lease and other financing asset and liability at inception of the lease or other obligation;

however, the annual expense under the Uniform System of Accounts is equal to the annual lease or other financing obligation payments, which differs from GAAP treatment.

This practice results in TVA's asset balances being higher than they otherwise would have been under GAAP, with the difference representing a regulatory asset related to each capital lease or other financing obligation.

These costs will be amortized over the respective lease or other financing obligation terms as lease or other financing obligation payments are made.

For certain leases that were determined prior to TVA's adoption of the new lease accounting standard effective October 1, 2019, TVA recognized the initial capital lease liability and asset at inception.

However, the annual expense recognized in rates is equal to the annual lease payments, which differs from GAAP treatment.

This practice results in TVA's asset balances being higher than they otherwise would have been under GAAP, with the difference representing a regulatory asset related to each capital lease.

These costs will be amortized over the respective lease as lease payments are made.

As the costs associated with this regulatory asset are not currently being considered in rates and the asset is expected to increase over the next year, the regulatory asset has been classified as long-term.

4 unchanged sentences

Retirement removal costs, net of salvage, that are not legally required are recognized as a regulatory asset.

Prior to 2017, net removal costs were amortized over a recovery period consistent with the depreciable lives of related assets under the most recent depreciation study.

In 2017 and thereafter, net removal costs are amortized over a one-year period subsequent to completion of the removal activities.

Net removal costs are amortized over a one-year period subsequent to completion of the removal activities.

TVA treats this regulatory asset as long-term in its entirety primarily because it relates to assets that are long-term in nature.

2 unchanged sentences

As TVA records the fuel cost adjustment, five percent of the calculation that relates to a future asset or liability for tax equivalent payments is recorded as a current regulatory liability and paid or refunded in the following year.

Asset Acquisitions

On September 20, 2017, TVA acquired 100 percent of the equity interests in two special purpose entities ("SPEs") designed to administer rent payments TVA makes under certain of its lease/leaseback arrangements.

Each entity holds residual interests in four of TVA's peaking combustion turbine units ("CTs") .

TVA acquired these entities in order to reacquire the residual interests in eight CTs it had previously granted in the lease/leaseback arrangements.

TVA acquired the entities for total cash consideration of $36 million .

The fair value of the assets acquired consisted of $110 million of reacquired rights, and the fair value of liabilities assumed consisted of $74 million in notes payable.

Reacquired rights are an intangible asset included in TVA's Completed plant balance and are amortized over the estimated useful life of the underlying CTs.

Notes payable assumed in the transaction are included in TVA's Short-term debt and require TVA to make semi-annual payments through May 2020.

TVA recognized less than $1 million of amortization expense, related to reacquired rights, within TVA's consolidated statements of operations.

Transaction costs were not material.

TVA determined that its lease/leaseback obligations were preexisting relationships that were effectively settled in the asset acquisitions.

TVA settled the preexisting relationships separately from the asset acquisitions, resulting in a loss on extinguishment of the obligations of $3 million .

The carrying value of lease/leaseback obligations effectively settled was $71 million , including accrued interest, and the reacquisition price was $74 million , paid in cash, at the acquisition date.

Variable Interest Entities

66 unchanged sentences

Interest rate swap liabilities $ 1,927 $ 1,676

Gallatin coal combustion residual facilities liability

Capital lease obligations

Operating lease liabilities 171 —

Currency swap liabilities 123 193

2 unchanged sentences

Accrued long-term service agreements 56 66

Other 193 203

Total other long-term liabilities $ 2,548 $ 2,308

(1) Certain amounts have been reclassified to conform with current year presentation.

(1) Due to the implementation of the new lease accounting standard effective October 1, 2019, TVA reclassified $ 182 million of finance leases from Other long-term liabilities to Finance lease liabilities in the Consolidated Balance Sheet for the year ending September 30, 2019.

Interest Rate Swap Liabilities .

TVA uses interest rate swaps to fix variable short-term debt to a fixed rate.

The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets.

As of September 30, 2019 and 2018 , the carrying amount of the interest rate swap liabilities reported in Accounts payable and accrued liabilities was approximately $88 million and $77 million , respectively.

The values of these derivatives are included in Accounts payable and accrued liabilities, Accrued interest, and Other long-term liabilities on the Consolidated Balance Sheets.

As of September 30, 2020 and 2019, the carrying amount of the interest rate swap liabilities reported in Accounts payable and accrued liabilities and Accrued interest was approximately $ 114 million and $ 88 million, respectively.

See Note 15 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivative s for information regarding the interest rate swap liabilities.

As of September 30, 2019 , Interest rate swap liabilities increased $ 554 million as compared to September 30, 2018, primarily due to significant decreases in market interest rates used to discount future expected net cash flows in mark-to-market valuations.

Gallatin Coal Combustion Residual Facilities Liability.

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.

As of September 30, 2020, Interest rate swap liabilities increased $ 277 million as compared to September 30, 2019, primarily due to a decrease in interest rates resulting in higher mark-to-market values on future expected net cash flows.

EnergyRight ® Financing Obligation .

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

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

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

1 unchanged sentence

See Note 8 — Other Long-Term Assets for information regarding the associated loans receivable.

In response to the COVID-19 pandemic, customers experiencing financial hardship can request a deferral of EnergyRight ® loan payments for a period of up to six months.

This deferral option began April 20, 2020, and is available through October 31, 2020.

Deferred loans will not accrue interest during the deferral months.

These deferred loans have resulted in a less than $ 1 million impact to TVA.

Paradise Pipeline Financing Obligation.

TVA reserves firm pipeline capacity on an approximately 19-mile pipeline

owned by Texas Gas, which serves TVA's Paradise CC.

The capacity contract contains a lease component

due to TVA's exclusive right to use the pipeline.

TVA accounts for this lease component as a financing transaction.

and long-term portions of the resulting financing obligation are reported in Accounts payable and accrued liabilities and Other

long-term liabilities, respectively, on TVA's Consolidated Balance Sheets.

As of both September 30, 2019 and 2018 ,

related liabilities of less than $1 million were recorded in Accounts payable and accrued liabilities.

owned by Texas Gas, which serves TVA's Paradise Combined Cycle Facility.

TVA had been accounting for the contract covering this arrangement as a financing transaction due to failed sale-leaseback treatment.

The contract was revised during the fourth quarter of 2020 and is no longer deemed to contain a lease component.

Accordingly, amounts related to the pipeline asset and financing obligation recorded in connection with this transaction were derecognized as of September 30, 2020.

The current and long-term portions of less than $ 1 million and $ 80 million, respectively, of the financing obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheet at September 30, 2019.

Accrued Long-Term Service Agreement.

10 unchanged sentences

Asset Retirement Obligations

During the year ended September 30, 2019, TVA's total ARO liability increased $ 837 million .

During the year ended September 30, 2020, TVA's total ARO liability increased $ 1.2 billion.

To estimate its decommissioning obligation related to its nuclear generating stations, TVA uses a probability-weighted, discounted cash flow model which, on a unit-by-unit basis, considers multiple outcome scenarios that include significant estimations and assumptions.

Those assumptions include (1) estimates of the cost of decommissioning, (2) the method of decommissioning and the timing of the related cash flows, (3) the license period of the nuclear plant, considering the probability of license extensions, (4) cost escalation factors, and (5) the credit adjusted risk free rate to measure the obligation at the present value of the future estimated costs.

Those assumptions include (1) estimates of the cost of decommissioning;

(2) the method of decommissioning and the timing of the related cash flows;

(3) the license period of the nuclear plant, considering the probability of license extensions;

(4) cost escalation factors;

and (5) the credit adjusted risk free rate to measure the obligation at the present value of the future estimated costs.

TVA has ascribed probabilities to two different decommissioning methods related to its nuclear decommissioning obligation estimate:

10 unchanged sentences

TVA bases its decommissioning estimates for each asset on its identified preferred closure method.

During 2020, the revisions in non-nuclear es timates increased $ 1.1 billion for the year ended September 30, 2020.

In November 2019, the Tennessee Department of Environment and Conservation ("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.

This regulatory revision resulted in an increase of $ 129 million, of which $ 38 million was related to operating CCR facilities and $ 91 million was related to inactive or closed CCR facilities.

In June 2020, based on recent project cost data and estimates, TVA revised its AROs for closure-by-removal of certain CCR facilities at Allen Fossil Plant, resulting in an increase to AROs of $ 273 million.

In September 2020, TVA completed an engineering review of its cost estimates to close the ash pond complex at Gallatin Fossil Plant, resulting in an increase of $ 173 million due to expected cost increases for excavation, disposal, and other activities required in a closure-by-removal project.

Also in September 2020, TVA completed a study of its plant decommissioning obligations and CCR post-closure care and monitoring obligations.

TVA increased its plant decommissioning obligations by $ 19 million, primarily due to asbestos and hazardous material abatement costs.

TVA increased its CCR post-closure care and monitoring AROs primarily as a result of expected cost increases to monitor groundwater and maintain CCR areas after closure as well as increases in expected acreage to maintain after closure, totaling $ 460 million.

During 2019, the revisions in non-nuclear estimates increased $ 50 million for the year ended September 30, 2019.

As a result of recent experience in completing settlements at certain facilities, costs for asbestos abatement activities across TVA's fossil fleet increased $ 114 million.

TVA changed the preferred closure method for the Allen West Impoundment from closure-in-place to closure-by-removal, which resulted in a cost increase of $ 33 million .

TVA changed the preferred closure method for Allen West Impoundment from closure-in-place to closure-by-removal, which resulted in a cost increase of $ 33 million.

Partially offsetting these increases was a $ 57 million decrease in costs for Paradise closure projects, and a $ 44 million decrease in costs for the Allen East Impoundment closure project.

1 unchanged sentence

The obligation is based upon the assumptions outlined in the consent order, including a new lined facility will be permitted and constructed on the Gallatin site and existing CCR materials in the existing wet ash disposal impoundments at Gallatin will be moved to this new facility over a 20-year period.

See 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.

Additionally, during the years ended September 30, 2020 and 2019, both the nuclear and non-nuclear liabilities were increased by periodic accretion, partially offset by settlement projects that were conducted during these periods.

The nuclear and non-nuclear accretion amounts were deferred as regulatory assets.

During 2019 , 2018 , and 2017 , $144 million per year of the related regulatory assets were amortized into expense as these amounts were collected in rates.

During 2020, 2019, and 2018, $ 169 million, $ 144 million, and $ 144 million, respectively, of the related regulatory assets were amortized into expense as these amounts were collected in rates.

See Note 9 — Regulatory Assets and Liabilities .

2 unchanged sentences

Asset Retirement Obligation Activity

Nuclear Non-Nuclear Total

Balance at September 30, 2018 $ 2,989 $ 1,790 $ 4,779

Settlements ( 7 ) ( 82 ) ( 89 )

Revisions in estimate — 50 50

Additional obligations 18 — 18

Accretion (recorded to regulatory asset)

Asset disposition

Gallatin CCR — 672 672

Accretion (recorded as regulatory asset) 136 50 186

Balance at September 30, 2019 3,136 2,480 5,616 (1)

Settlements ( 1 ) ( 113 ) ( 114 )

Revisions in estimate — 1,077 1,077

Additional obligations

Accretion (recorded to regulatory asset)

Accretion (recorded as regulatory asset) 143 63 206

Balance at September 30, 2020 $ 3,278 $ 3,507 $ 6,785 (1)

(1) The current portions of the ARO liability in the amounts of $ 163 million a nd $ 115 million at September 30, 2019 and 2018 , respectively, are included in Accounts payable and accrued liabilities.

(1) Includes $ 345 million a nd $ 163 million at September 30, 2020 and 2019, respectively, in Current liabilities.

Debt and Other Obligations

10 unchanged sentences

Once net power proceeds have been applied to payments on power bonds and discount notes as well as any other Bonds that TVA may issue in the future that rank on parity with or subordinate to power bonds and discount notes, Section 2.3 of the Basic Resolution provides that the remaining net power proceeds shall be used only for (1) minimum payments into the U.S.

Treasury required by the TVA Act as repayment of, and as a return on, the Power Program Appropriation Investment, (2) investment in power assets, (3) additional reductions of TVA's capital obligations, and (4) other lawful purposes related to TVA's power program.

Treasury required by the TVA Act as repayment of, and as a return on, the Power Program Appropriation Investment;

(2) investment in power system assets;

(3) additional reductions of TVA's capital obligations;

and (4) other lawful purposes related to TVA's power business.

The TVA Act and the Basic Resolution each contain two bond tests:

18 unchanged sentences

TVA used the proceeds from the transaction to meet its requirements under the TVA Act.

Secured debt of VIEs, including current maturities, outstanding at September 30, 2019 and 2018 totaled approximately $1.1 billion and $ 1.2 billion , respectively.

Secured debt of VIEs, including current maturities, outstanding at both September 30, 2020 and 2019 totaled $ 1.1 billion.

Secured Notes

2 unchanged sentences

In 2016, TVA assumed these secured notes in the acquisition at a fair value of $ 78 million.

The secured notes of the entities, including current maturities, outstanding at September 30, 2018 , totaled approximately $20 million , and are included in Notes payable on TVA's Consolidated Balance Sheet.

No such amounts were outstanding at September 30, 2019 .

The secured notes of the entities were paid in full in 2019.

On September 20, 2017, TVA acquired two entities, in an asset acquisition, designed to administer rent payments TVA makes under certain of its lease/leaseback arrangements.

2 unchanged sentences

The secured notes of the entities, including current maturities, outstanding at September 30, 2019, totaled approximately $ 23 million, and are included in Notes payable on TVA's Consolidated Balance Sheet.

See Note 9 — Asset Acquisitions .

The secured notes of the entities were paid in full in 2020.

Short-Term Debt

2 unchanged sentences

At September 30

2020 2019 2018

Gross amount outstanding - discount notes $ 57 $ 922 $ 1,217

1 unchanged sentence

Put and Call Options

Bond issues of $ 357 million held by the public are redeemable in whole or in part, at TVA's option, on call dates through 2020 and at call prices of 100 percent of the principal amount.

Nine Bond issues totaling $ 217 million , with maturity dates ranging from 2025 to 2043 , include a "survivor's option," which allows for right of redemption upon the death of a beneficial owner in certain specified circumstances.

These Bonds were classified as long-term as of September 30, 2019 .

TVA subsequently announced in October 2019 that $217 million of callable bonds will be redeemed at par on November 15, 2019.

See Note 25 — Subsequent Events.

At September 30, 2019, bond issues of $ 357 million held by the public were redeemable in whole or in part, at TVA's option, on call dates through 2020 and at call prices of 100 percent of the principal amount.

Nine of these bond issues totaling $ 217 million, with maturity dates ranging from 2025 to 2043, included a "survivor's option," which allowed for right of redemption upon the death of a beneficial owner in certain specified circumstances.

These bonds were classified as long-term at September 30, 2019.

TVA subsequently announced in October 2019 that $ 217 million of callable bonds were redeemed at par on November 15, 2019.

Additionally, TVA has two issues of Putable Automatic Rate Reset Securities ("PARRS") outstanding.

5 unchanged sentences

The coupon rate on the 1999 Series A PARRS may be reset on May 1 (annually) if the sum of the five-day average of the 30-Year CMT rate for the week ending the last Friday in March, plus 84 basis points, is below the then-current coupon rate.

The coupon rates may only

be reset downward, but investors may request to redeem their Bonds at par value in conjunction with a coupon rate reset for a limited period of time prior to the reset dates under certain circumstances.

The coupon rate for the 1998 Series D PARRS, which mature in June 2028, has been reset seven times, from an initial rate of 6.750 percent to the current rate of 3.550 percent.

The coupon rates may only be reset downward, but investors may request to redeem their Bonds at par value in conjunction with a coupon rate reset for a limited period of time prior to the reset dates under certain circumstances.

The coupon rate for the 1998 Series D PARRS, which mature in June 2028, has been reset eight times, from an initial rate of 6.750 percent to the current rate of 2.134 percent.

In connection with these resets, $ 318 million of the Bonds have been redeemed;

therefore, $ 256 million of the Bonds were outstanding at September 30, 2020.

The coupon rate for the 1999 Series A PARRS, which mature in May 2029, has been reset six times, from an initial rate of 6.50 percent to the current rate of 3.360 percent.

The coupon rate for the 1999 Series A PARRS, which mature in May 2029, has been reset seven times, from an initial rate of 6.50 percent to the current rate of 2.216 percent.

In connection with these resets, $ 316 million of the Bonds have been redeemed;

9 unchanged sentences

Discount on debt issues ( 3 ) —

Total $ 997 $ —

Redemptions/Maturities (2)

Variable interest entities

Notes payable

electronotes ®

1 unchanged sentence

2009 Series B 28 30

1997 Series E

2018 Series A 1,000 —

1999 Series A PARRS (TVE) 23 —

1998 Series D PARRS (TVC) 17 —

1995 Series B 140 —

Total redemptions/maturities of power bonds 1,427 1,035

Notes payable 23 46

Variable interest entities 39 38

Total $ 1,489 $ 1,119

(1) The 2020 Series A Bonds were issued at 99.7 percent of par.

6 unchanged sentences

Call/(Put) Date

Coupon Rate 2020 2019

Short-term debt, net of discounts $ 57 $ 922

2 unchanged sentences

Current maturities of power bonds issued at par

12/15/2019 3.770 % — 1

880591EF5 6/15/2020 3.770 % — 27

880591EF5 12/15/2020 3.770 % 1 —

880591EF5 6/15/2021 3.770 % 28 —

88059TEL1 11/15/2019 2.650 % — 1

88059TEL1 5/15/2020 2.650 % — 1

880591EV0 3/15/2020 2.250 % — 1,000

880591EL2 2/15/2021 3.875 % 1,500 —

880591DC3 6/7/2021 5.805 % 258 (1)

Total current maturities of power bonds issued at par 1,787 1,030

Total current debt outstanding, net $ 1,885 $ 2,014

(1) Includes net exchange gain from currency transactions of $ 73 million at September 30, 2020.

Long-Term Debt

1 unchanged sentence

CUSIP or Other Identifier

Effective Call Date

Stock Exchange Listings

Rate Effective Call Date 2020 Par 2019 Par Stock Exchange Listings

electronotes ®(2)

5/15/2020 - 2/15/2043 2.375% - 3.625% 2/15/2015 - 2/15/2018 (5)

2.375% - 3.625%

2/15/2015 - 2/15/2018 (5)

$ — $ 217 None

880591EL2 2/15/2021 3.875 % — 1,500 New York

880591DC3 6/7/2021 5.805 % (3)

New York, Luxembourg

New York, Hong Kong, Luxembourg, Singapore

880591EN8 8/15/2022 1.875 % 1,000 1,000 New York

880591ER9 9/15/2024 2.875 % 1,000 1,000 New York

880591EW8 5/15/2025 0.750 % 1,000 — New York

880591CJ9 11/1/2025 6.750 % 1,350 1,350 New York, Hong Kong, Luxembourg, Singapore

880591EU2 2/1/2027 2.875 % 1,000 1,000 New York

880591300 (4)

6/1/2028 2.134 % 256 273 New York

880591409 (4)

New York, Luxembourg

5/1/2029 2.216 % 208 232 New York

880591DM1 5/1/2030 7.125 % 1,000 1,000 New York, Luxembourg

880591DP4 6/7/2032 6.587 % (3)

New York, Luxembourg

880591DV1 7/15/2033 4.700 % 472 472 New York, Luxembourg

880591EF5 6/15/2034 3.770 % 218 246 None

880591DX7 6/15/2035 4.650 % 436 436 New York

880591CK6 4/1/2036 5.980 % 121 121 New York

880591CS9 4/1/2036 5.880 % 1,500 1,500 New York

880591CP5 1/15/2038 6.150 % 1,000 1,000 New York

880591ED0 6/15/2038 5.500 % 500 500 New York

880591EH1 9/15/2039 5.250 % 2,000 2,000 New York

880591EP3 12/15/2042 3.500 % 1,000 1,000 New York

880591DU3 6/7/2043 4.962 % (3)

New York, Luxembourg

880591CF7 7/15/2045 6.235 % 7/15/2020 — 140 New York

880591EB4 1/15/2048 4.875 % 500 500 New York, Luxembourg

880591DZ2 4/1/2056 5.375 % 1,000 1,000 New York

880591EJ7 9/15/2060 4.625 % 1,000 1,000 New York

880591ES7 9/15/2065 4.250 % 1,000 1,000 New York

Subtotal 18,078 19,225

Unamortized discounts, premiums, issue costs, and other ( 122 ) ( 131 )

1 unchanged sentence

Long-term debt of VIEs, net 1,048 1,089

Long-term notes payable

Total long-term debt, net $ 19,004 $ 20,183

4 unchanged sentences

See Put and Call Options above.

(5) The bonds are callable on or after the dates shown.

(5) The bonds were callable on or after the dates shown.

Maturities Due in the Year Ending September 30

2021 2022 2023 2024 2025 Thereafter Total

Long-term power bonds, long-term debt of VIEs, and notes payable including current maturities (1)

$ 1,901 $ 1,071 $ 69 $ 1,058 $ 1,059 $ 15,957 $ 21,115

Short-term debt, net of discounts 57 — — — — — 57

2 unchanged sentences

Credit Facility Agreements

TVA has funding available under four long-term revolving credit facilities totaling $ 2.7 billion:

a $ 150 million credit facility that matures on December 11, 2021, a $ 1.0 billion credit facility that matures on June 13, 2023, a $ 1.0 billion credit facility that matures on September 28, 2023, and a $ 500 million credit facility that matures on February 1, 2025.

The interest rate on any borrowing under these facilities varies based on market factors and the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt.

TVA is required to pay an unused facility fee on the portion of the total $ 2.7 billion that TVA has not borrowed or committed under letters of credit.

This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt.

At September 30, 2020 and 2019, there were $ 1.5 billion and $ 1.3 billion, respectively, of letters of credit outstanding under these facilities, and there were no borrowings outstanding.

See Note 15 — Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral .

The following table provides additional information regarding TVA's funding available under the four long-term revolving credit facilities:

Summary of Long-Term Credit Facilities

At September 30, 2020

Maturity Date Facility Limit Letters of Credit Outstanding Cash Borrowings Availability

December 2021 $ 150 $ 38 $ — $ 112

June 2023 1,000 432 — 568

September 2023 1,000 487 — 513

February 2025 500 500 — —

Total $ 2,650 $ 1,457 $ — $ 1,193

TVA and the U.S.

12 unchanged sentences

government addresses the possibility of approaching its debt limit.

TVA also has funding available under the four long-term revolving credit facilities totaling $2.7 billion :

a $150 million credit facility that matures on December 11, 2021, a $500 million credit facility that matures on February 1, 2022, a $1.0 billion credit facility that matures on June 13, 2023, and a $1.0 billion credit facility that matures on September 28, 2023.

The interest rate on any borrowing under these facilities varies based on market factors and the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt.

TVA is required to pay an unused facility fee on the portion of the total $2.7 billion that TVA has not borrowed or committed under letters of credit.

This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt.

At September 30, 2019 and 2018, there were $1.3 billion and $921 million , respectively, of letters of credit outstanding under the facilities, and there were no borrowings outstanding.

See Note 15 — Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral .

The following table provides additional information regarding TVA's funding available under the four long-term revolving credit facilities:

Summary of Long-Term Credit Facilities

At September 30, 2019

Maturity Date

Facility Limit

Letters of Credit Outstanding

Cash Borrowings

December 2021

February 2022

September 2023

Lease/Leasebacks

TVA previously entered into leasing transactions to obtain third-party financing for 24 peaking combustion turbine units

("CTs") as well as certain qualified technological equipment and software ("QTE") .

TVA previously entered into leasing transactions to obtain third-party financing for 24 peaking CTs as well as certain qualified technological equipment and software ("QTE").

Due to TVA's continuing involvement with the combustion turbine facilities and the QTE during the leaseback term, TVA accounted for the lease proceeds as financing obligations.

2 unchanged sentences

These transactions were terminated in July 2019.

Final rent payments are scheduled to be made under the remaining CT lease/leaseback transactions on various dates from May 2020 to January 2022.

TVA has already acquired the equity interests related to transactions involving eight of these CTs and will have the option to acquire the equity interests related to transactions involving the remaining eight CTs for additional amounts.

In May 2020, TVA made final rent payments under lease/leaseback transactions involving eight additional CTs, and TVA had previously acquired the equity interest related to these transactions.

Rent payments under the remaining CT lease/leaseback transactions are scheduled to be made through January 2022.

TVA does have the option to acquire the equity interests related to transactions involving the remaining eight CTs for additional amounts.

In addition, on October 30, 2019, TVA provided notice of its intent to purchase the ownership interest in certain QTE.

Repurchase payments are expected to be paid through a series of installments in 2021 and 2022, after which the associated leases will be terminated.

Accumulated Other Comprehensive Income (Loss)

3 unchanged sentences

TVA then reclassifies an amount out of AOCI into net income, offsetting the exchange gain/loss recorded on the debt.

For the years ended September 30, 2019 and 2018 , TVA reclassified $45 million and $ 26 million of losses, respectively, related to its cash flow hedges from AOCI to Interest expense.

For the years ended September 30, 2020 and 2019, TVA reclassified $ 38 million of gains and $ 45 million of losses, respectively, related to its cash flow hedges from AOCI to Interest expense.

See Note 15 — Risk Management Activities and Derivative Transactions .

6 unchanged sentences

Risk Management Activities and Derivative Transactions

TVA is exposed to various risks.

These include risks related to commodity prices, investment prices, interest rates, currency exchange rates, and inflation as well as counterparty credit and performance risks.

TVA is exposed to various risks related to commodity prices, investment prices, interest rates, currency exchange rates, and inflation as well as counterparty credit and performance risks.

To help manage certain of these risks, TVA has historically entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures.

Other than certain derivative instruments in its trust investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes.

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.

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 $ 10 million net derivative liabilities have been derecognized.

TVA suspended its FTP in 2014 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 is currently reevaluating its suspended FTP program for future use of financial instruments.

Overview of Accounting Treatment

5 unchanged sentences

For the years ended September 30

Derivatives in Cash Flow Hedging Relationship

Objective of Hedge Transaction

Accounting for Derivative

Derivatives in Cash Flow Hedging Relationship Objective of Hedge Transaction Accounting for Derivative

Hedging Instrument 2020 2019

Currency swaps

To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)

Unrealized gains and losses are recorded in AOCI and reclassified to interest expense to the extent they are offset by gains and losses on the hedged transaction

Currency swaps To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk) Unrealized gains and losses are recorded in AOCI and reclassified to Interest expense to the extent they are offset by gains and losses on the hedged transaction $ ( 1 ) $ ( 114 )

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2) (1)

3 unchanged sentences

Currency swaps $ 38 $ ( 45 )

(1) There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented.

(1) There were no amounts excluded from effectiveness testing for any of the periods presented.

Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $ 27 million of gains from AOCI to Interest expense within the next 12 months to offset amounts anticipated to be recorded in Interest expense related to exchange gain on the debt.

2 unchanged sentences

For the years ended September 30

Derivative Type

Objective of Derivative

Derivative Type Objective of Derivative (2)

Accounting for Derivative Instrument 2020 2019

Interest rate swaps

To fix short-term debt variable rate to a fixed rate (interest rate risk)

Mark-to-Market gains and losses are recorded as regulatory assets or liabilities

Realized gains and losses are recognized in interest expense when incurred during the settlement period

Commodity derivatives

To protect against fluctuations in market prices of purchased commodities (price risk)

Mark-to-Market gains and losses are recorded as regulatory assets or liabilities

Realized gains and losses are recognized in fuel expense or purchased power expense when the related commodity is used in production

Interest rate swaps To fix short-term debt variable rate to a fixed rate (interest rate risk) Mark-to-market gains and losses are recorded as regulatory assets or liabilities

Realized gains and losses are recognized in Interest expense when incurred during the settlement period and are presented in operating cash flow $ ( 97 ) $ ( 79 )

Commodity contract derivatives To protect against fluctuations in market prices of purchased coal or natural gas (price risk) Mark-to-market gains and losses are recorded as regulatory assets or liabilities

Realized gains and losses due to contract settlements are recognized in Fuel expense as incurred ( 1 ) —

(1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory assets and liabilities.

As such, there were no related gains (losses) recognized in income for these unrealized gains (losses) for the years ended September 30, 2020 and 2019.

(2) During the fourth quarter of 2020, TVA discontinued derivative accounting for forward coal contracts.

Fair Values of TVA Derivatives

1 unchanged sentence

Derivatives That Receive Hedge Accounting Treatment:

Balance Sheet Presentation

Balance Balance Sheet Presentation Balance Balance Sheet Presentation

Currency swaps

£200 million Sterling

Accounts payable and accrued liabilities $(6);

Other long-term liabilities $(84)

Accounts payable and accrued liabilities $(5);

$ ( 78 ) Accounts payable and accrued liabilities $(78) $ ( 90 ) Accounts payable and accrued liabilities $(6);

Other long-term liabilities $(84)

1 unchanged sentence

( 63 ) Accounts payable and accrued liabilities $(5);

Other long-term liabilities $(56)

Accounts payable and accrued liabilities $(5);

Other long-term liabilities $(58) ( 61 ) Accounts payable and accrued liabilities $(5);

Other long-term liabilities $(56)

1 unchanged sentence

( 68 ) Accounts payable and accrued liabilities $(3);

Other long-term liabilities $(53)

Accounts payable and accrued liabilities $(3);

Other long-term liabilities $(65) ( 57 ) Accounts payable and accrued liabilities $(4);

Other long-term liabilities $(53)

Derivatives That Do Not Receive Hedge Accounting Treatment:

Balance Sheet Presentation

Balance Balance Sheet Presentation Balance Balance Sheet Presentation

Interest rate swaps

1 unchanged sentence

$ ( 1,449 ) Accounts payable and accrued liabilities $(43);

Other long-term liabilities $(1,199)

Accounts payable and

Accrued interest $(37);

Other long-term liabilities $(1,369) $ ( 1,261 ) Accounts payable and

accrued liabilities $(29);

Accrued interest $(33);

Other long-term liabilities

1 unchanged sentence

( 588 ) Accounts payable and accrued liabilities $(22);

Other long-term liabilities $(474)

Accounts payable and

Accrued interest $(10);

Other long-term liabilities $(556) ( 498 ) Accounts payable and

accrued liabilities $(15);

Other long-term liabilities

$42 million notional

Accounts payable and accrued liabilities $(2);

Accrued interest $(9);

Other long-term liabilities

Accounts payable and

$42 million notional ( 4 ) Accounts payable and accrued liabilities $(2);

Other long-term liabilities $(2) ( 5 ) Accounts payable and

accrued liabilities $(1);

Other long-term liabilities $(3)

Commodity contract derivatives

Other current assets $12;

Accrued interest $(1);

Other long-term liabilities $(3)

Accounts payable and accrued liabilities $(37)

Other current assets $41;

Commodity contract derivatives 46 Other current assets $26;

Other long-term assets $23;

Accounts payable and accrued liabilities $(3) ( 41 ) Other current assets $12;

Other long-term liabilities $(16);

4 unchanged sentences

Currency Swaps Outstanding

At September 30, 2019

Effective Date of Currency Swap Contract

Associated TVA Bond Issues Currency Exposure

Expiration Date of Swap

Overall Effective

September 30, 2020

Effective Date of Currency Swap Contract Associated TVA Bond Issues Currency Exposure Expiration Date of Swap Overall Effective

1999 £ 200 million 2021 5.81 %

2001 £ 250 million 2032 6.59 %

2003 £ 150 million 2043 4.96 %

When the dollar strengthens against the British pound sterling, the exchange gain on the Bond liability and related accrued interest is offset by an equal amount of loss on the swap contract that is reclassified out of AOCI.

8 unchanged sentences

The net deferred unrealized gains and losses are classified as regulatory assets or liabilities on TVA's Consolidated Balance Sheets and are included in the ratemaking formula when gains or losses are realized.

The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets, and realized gains and losses, if any, are included in TVA's Consolidated Statements of Operations.

For the years ended September 30, 2019 and 2018 , the changes in fair market value of the interest rate swaps resulted in the deferral of unrealized losses of $ 565 million and unrealized gains of $ 310 million , respectively.

The values of these derivatives are included in Accounts payable and accrued liabilities, Accrued interest, and Other long-term liabilities on the Consolidated Balance Sheets, and realized gains and losses, if any, are included in TVA's Consolidated Statements of Operations.

For the years ended September 30, 2020 and 2019, the changes in fair market value of the interest rate swaps resulted in the deferral of unrealized losses of $ 272 million and $ 565 million, respectively.

TVA may hold short-term debt balances lower than the notional amount of the interest rate swaps from time to time due to changes in business conditions and other factors.

While actual balances vary, TVA generally plans to maintain average balances of short-term debt equal to or in excess of the combined notional amount of the interest rate swaps.

Commodity Derivatives .

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

TVA marks to market all such contracts and defers the fair market values as regulatory assets or liabilities on a gross basis.

At September 30, 2019 , TVA's coal and natural gas contract derivatives both had terms of up to three years.

TVA enters into certain 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.

TVA marks to market natural gas contracts and defers the fair market values as regulatory assets or liabilities on a gross basis.

At September 30, 2020, TVA's natural gas contract derivatives had terms of up to four years.

Commodity Contract Derivatives

1 unchanged sentence

Number of Contracts

Notional Amount

Fair Value (MtM)

Number of Contracts

Notional Amount

Fair Value ( MtM )

Coal contract derivatives

9 million tons

20 million tons

Natural gas contract derivatives

330 million mmBtu

359 million mmBtu

Derivatives Under FTP.

TVA has suspended its FTP and no longer uses financial instruments to he dge risks related to commodity prices.

Prior to the suspension of the FTP, TVA deferred all FTP unrealized gains (losses) as regulatory liabilities (assets) and recorded only realized gains or losses to match the delivery period of the underlying commodity.

TVA did not experience any unrealized gains and losses related to the FTP at September 30, 2019 or September 30, 2018 .

TVA experienced the following realized losses related to the FTP during the periods set forth in the table below:

Financial Trading Program Realized Gains (Losses)

For the years ended September 30

Decrease (increase) in fuel expense

Decrease (increase) in purchased power expense

Notional Amount Fair Value (MtM) Number of Contracts Notional Amount Fair Value ( MtM )

Coal contract derivatives — — million tons $ — 8 9 million tons $ ( 4 )

Natural gas contract derivatives 42 302 million mmBtu $ 46 65 330 million mmBtu $ ( 37 )

Offsetting of Derivative Assets and Liabilities

1 unchanged sentence

Derivative Assets and Liabilities (1)

(in millions)

At September 30, 2020

Gross Amounts of Recognized Assets/Liabilities

Gross Amounts Offset in the Balance Sheet (1)

Net Amounts of Assets/Liabilities Presented in the Balance Sheet (2)

Commodity derivatives not subject to master netting or similar arrangement

Currency swaps (3)

Interest rate swaps (3)

Total derivatives subject to master netting or similar arrangement

Commodity derivatives not subject to master netting or similar arrangement

Total liabilities

At September 30, 2019

Gross Amounts of Recognized Assets/Liabilities

Gross Amounts Offset in the Balance Sheet (1)

Net Amounts of Assets/Liabilities Presented in the Balance Sheet (2)

Commodity derivatives not subject to master netting or similar arrangement $ 49 $ 12

4 unchanged sentences

Total liabilities $ 2,253 $ 2,025

(1) Amounts primarily include counterparty netting of derivative contracts, margin account deposits for futures commission merchants transactions, and cash collateral received or paid in accordance with the accounting guidance for derivatives and hedging transactions.

(2) There are no derivative contracts subject to a master netting arrangement or similar agreement that are not offset on the Consolidated Balance Sheets.

(3) Letters of credit of approximately $1.3 billion and $ 921 million were posted as collateral at September 30, 2019 and 2018 , respectively, to partially secure the liability positions of one of the currency swaps and one of the interest rate swaps in accordance with the collateral requirements for these derivatives.

(1) Offsetting a mounts primarily include counterparty netting of derivative contracts, margin account deposits for futures commission merchants transactions, and cash collateral received or paid in accordance with the accounting guidance for derivatives and hedging transactions.

There were no offsetting amounts on TVA's Consolidated Balance Sheets at either September 30, 2020 or 2019.

(2) Letters of credit of approximately $ 1.5 billion and $ 1.3 billion were posted as collateral at September 30, 2020 and 2019, respectively, to partially secure the liability positions of one of the currency swaps and one of the interest rate swaps in accordance with the collateral requirements for these derivatives.

Other Derivative Instruments

1 unchanged sentence

Investment funds consist primarily of funds held in the NDT, ART, SERP, and DCP.

See Note 16 — Fair Value Measurements — Investments Funds for a discussion of the trusts, plans, and types of investments.

See Note 16 — Fair Value Measurements — Investment Funds for a discussion of the trusts, plans, and types of investments.

The NDT and ART may invest in derivative instruments which may include swaps, futures, options, forwards, and other instruments.

15 unchanged sentences

These risks may be related to credit, operational, or nonperformance matters.

To mitigate certain counterparty risk, TVA analyzes the counterparty's financial condition prior to entering into an agreement, establishes credit limits, monitors the appropriateness of those limits, as well as any changes in the creditworthiness of the counterparty, on an ongoing basis, and when required, employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements, to mitigate credit risk.

TVA is exposed to counterparty credit risk associated with trade accounts receivable from delivered power sales to LPCs, and from industries and federal agencies directly served, all located in the Tennessee Valley region.

Of the $1.6 billion of receivables from power sales outstanding at both September 30, 2019 and 2018 , nearly all counterparties were rated investment grade.

TVA is also exposed to risk from exchange power arrangements with a small number of investor-owned regional utilities related to either delivered power or the replacement of open positions of longer-term purchased power or fuel agreements.

Of the $ 1.4 billion and $ 1.6 billion of receivables from power sales outstanding at September 30, 2020 and 2019, respectively, nearly all counterparties were rated investment grade.

The obligations of customers that are not investment grade are secured by collateral.

TVA is also exposed to risk from exchange power arrangements with a small number of investor-owned regional

utilities related to either delivered power or the replacement of open positions of longer-term purchased power or fuel agreements.

TVA believes its policies and procedures for counterparty performance risk reviews have generally protected TVA against significant exposure related to market and economic conditions.

See Note 1 — Summary of Significant Accounting Policies — Allowance for Uncollectible Accounts and Note 3 — Accounts Receivable, Net .

TVA had revenue from two LPCs that accounted for 17 percent of total operating revenue for the years ended both September 30, 2019 and September 30, 2018 .

If one of TVA's fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might lose the mone y that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract.

TVA had revenue from two LPCs that collectively accounted for 17 percent of total operating revenue for the years ended both September 30, 2020 and September 30, 2019.

TVA assesses 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.

If one of TVA's fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract.

In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power.

Nuclear fuel requirements, including uranium mining and milling, conversion services, enrichment services, and fabrication services, are met from various suppliers, depending on the type of service.

TVA purchases the majority of its natural gas requirements from a variety of suppliers under short-term contracts.

Natural Gas .

TVA purchases the majority of its natural gas requirements from a variety of suppliers under primarily short-term contracts.

In the event of nonperformance by these suppliers, TVA believes that it can obtain replacement natural gas.

To help ensure a reliable supply of coal, TVA had coal contracts with multiple suppliers at September 30, 2020.

The contracted su pply of coal is sourced from multiple geographic regions of the United States and is to be delivered via various transportation methods (e.g., barge, rail, and truck).

The contracted supply of coal is sourced from multiple geographic regions of the United States and is to be delivered via various transportation methods (e.g., barge, rail, and truck).

Emerging technologies, environmental regulations, and low natural gas prices have contributed to weak demand for coal.

As a result, coal suppliers are facing increased financial pressure, which has led to relatively poor credit ratings and bankruptcies.

Continued difficulties by coal suppliers could result in consolidations, additional bankruptcies, restructurings, contract renegotiations, or other scenarios.

Under these scenarios and TVA's potential available responses, TVA does not anticipate a significant financial impact in obtaining continued fuel supply for its coal-fired generation.

Continued difficulties by coal suppliers, including impacts from the COVID-19 pandemic, could result in consolidations, additional bankruptcies, restructuring, contract renegotiations, or other scenarios.

Nuclear Fuel .

Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services.

1 unchanged sentence

Supply market conditions may make procurement contracts subject to credit risk related to the potential nonperformance of counterparties.

In the event of nonperformance by these or other suppliers, TVA believes that replacement uranium concentrate can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements.

In the event of nonperformance by these or other suppliers, TVA believes that replacement uranium concentrate and nuclear fuel services can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements.

Purchased Power .

TVA has a power purchase agreement that expires on March 31, 2032, with a supplier of electricity for 440 megawatts ("MW") of summer net capability from a lignite-fired generating plant.

1 unchanged sentence

therefore, the supplier has provided credit assurance to TVA under the terms of the agreement.

Other Suppliers .

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.

Derivative Counterparties .

1 unchanged sentence

If a counterparty to one of the physical or financial derivative transactions defaults, TVA might incur substantial costs in connection with entering into a replacement transaction.

If a counterparty to the derivative contracts into which the NDT, ART, and qualified pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless.

TVA has concentrations of credit risk from the banking, coal, and gas industries because multiple

companies in these industries serve as counterparties to TVA in various derivative transactions.

If a counterparty to the derivative contracts into which the NDT, the ART, and the qualified pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless.

TVA has concentrations of credit risk from the banking, coal, and gas industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions.

At September 30, 2020, all of TVA's currency swaps and interest rate swaps as well as all of the derivatives in the NDT and ART were with banking counterparties whose Moody's credit ratings were A3 or higher.

TVA classifies qualified forward coal and natural gas contracts as derivatives.

TVA classifies qualified forward natural gas contracts as derivatives.

See Derivatives Not Receiving Hedge Accounting Treatment above.

At September 30, 2019 , the coal contracts were with counterparties whose Moody's credit rating, or TVA's internal analysis when such information was unavailable, ranged from D to Ba3 .

At September 30, 2019 , the natural gas contracts were with counterparties whose ratings ranged from B1 to A2 .

See Suppliers above for discussion of challenges facing the coal industry.

At September 30, 2020, the natural gas contracts were with counterparties whose ratings ranged from Caa2 to A2.

TVA recognizes the slowdown in demand and the impacts on the oil and gas industry as a result of the COVID-19 pandemic.

TVA will continue to monitor the impacts and affected credit ratings and enforce contract performance assurance provisions when applicable.

Fair Value Measurements

17 unchanged sentences

Investment Funds

At September 30, 2019 , Investment funds were composed of $3.0 billion of equity securities and debt securities classified as trading measured at fair value.

At September 30, 2020, Investment funds were comprised of $ 3.2 billion of equity securities and debt securities classified as trading measured at fair value.

Equity and trading debt securities are held in the NDT, ART, SERP, and DCP.

3 unchanged sentences

TVA established a SERP to provide benefits to selected employees of TVA which are comparable to those provided by competing organizations.

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 NDT, ART, SERP, and DCP funds are invested in portfolios of securities generally designed to achieve a return in line with overall equity and debt market performance.

1 unchanged sentence

and international equities, U.S.

Treasury inflation-protected securities, real estate

investment trust securities, and cash securities and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations.

Treasury inflation-protected securities, real estate investment trust securities, and cash securities and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations.

Fixed-income investments, high-yield fixed-income investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations.

3 unchanged sentences

The investment period is generally, at a minimum, 10 years or longer.

The NDT had unfunded commitments related to private equity limited partnerships of $191 million , unfunded commitments related to private real assets of $33 million , and unfunded commitments related to private credit of $22 million at September 30, 2019 .

The ART had unfunded commitments related to private equity limited partnerships of $96 million , unfunded commitments related to private real assets of $19 million , and unfunded commitments related to private credit of $11 million at September 30, 2019 .

The NDT had unfunded commitments related to limited partnerships in private equity of $ 218 million, private real assets of $ 67 million, and private credit of $ 33 million at September 30,

The ART had unfunded commitments related to limited partnerships in private equity of $ 133 million, private real assets of $ 54 million, and private credit of $ 16 million at September 30, 2020.

These investments have no redemption or limited redemption options and may also impose restrictions on the NDT's and ART's ability to liquidate their investments.

3 unchanged sentences

TVA's private equity limited partnerships, private real asset investments, and private credit investments are valued at net asset values ("NAV") as a practical expedient for fair value.

TVA classifies its interest in these types of investments as investments measured at net asset value in the fair value hierarchy.

TVA classifies its interest in these types of investments as investments measured at NAV in the fair value hierarchy.

Commingled funds represent investment funds comprising multiple individual financial instruments.

9 unchanged sentences

At or for the years ended September 30

Financial Statement Presentation

Regulatory asset

Other income (expense)

Fund Financial Statement Presentation 2020 2019

NDT Regulatory asset $ 37 $ ( 112 )

ART Regulatory asset 32 ( 70 )

SERP Other income (expense) 3 —

DCP Other income (expense) 2 ( 2 )

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 ended 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.

Currency and Interest Rate Derivatives

2 unchanged sentences

Commodity Contract Derivatives

Most of these contracts are valued based on market approaches which utilize short- and mid-term market-quoted prices from an external industry brokerage service.

A small number of these contracts are valued based on a pricing model using long-term price estimates from TVA's coal price forecast.

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

These contracts are classified as Level 3 valuations.

See Note 15 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment.

Most of these contracts are valued based on market approaches which utilize short-term and mid-term market-quoted prices from an external industry brokerage service.

Nonperformance Risk

1 unchanged sentence

TVA is a counterparty to currency swaps, interest rate swaps, commodity contracts, and other derivatives which 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 mark the investment to market.

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 mark the investment to market.

Nonperformance risk for most of TVA's derivative instruments is an adjustment to the initial asset/liability fair value.

2 unchanged sentences

For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the counterparty.

TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2018) for companies with a similar credit rating over a time period consistent with the remaining term of the contract.

TVA discounts each

financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2019) for companies with a similar credit rating over a time period consistent with the remaining term of the contract.

The application of CVAs resulted in a less than $ 1 million decrease in the fair value of assets and a $ 1 million decrease in the fair value of liabilities at September 30, 2020.

7 unchanged sentences

Identical Assets

Significant Other

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant

(Level 3) Total

Equity securities $ 500 $ — $ — $ 500

10 unchanged sentences

Commodity contract derivatives — 49 — 49

Total $ 1,173 $ 485 $ — $ 3,247

Quoted Prices in Active Markets for Identical Liabilities

Significant Other

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant

(Level 3) Total

Currency swaps (4)

$ — $ 209 $ — $ 209

Interest rate swaps — 2,041 — 2,041

Commodity contract derivatives — 3 — 3

Total $ — $ 2,253 $ — $ 2,253

(1) Includes government-sponsored entities.

(2) Includes both U.S.

and foreign debt.

(3) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.

6 unchanged sentences

Identical Assets

Significant Other

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant

(Level 3) Total

Equity securities $ 464 $ — $ — $ 464

6 unchanged sentences

Private real asset funds measured at net asset value (1)

Private credit measured at net asset value (1)

Commingled funds measured at net asset value (1)

1 unchanged sentence

Commodity contract derivatives — 7 5 12

Total $ 993 $ 543 $ 5 $ 2,980

Quoted Prices in Active Markets for Identical Liabilities

Significant Other

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant

(Level 3) Total

Currency swaps (2)

$ — $ 208 $ — $ 208

Interest rate swaps — 1,764 — 1,764

Commodity contract derivatives — 44 9 53

Total $ — $ 2,016 $ 9 $ 2,025

(1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.

2 unchanged sentences

See Note 15 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities .

TVA uses internal valuation specialists for the calculation of its commodity contract derivatives fair value measurements classified as Level 3.

Analytical testing is performed on the change in fair value measurements each period to ensure the valuation is reasonable based on changes in general market assumptions.

During the fourth quarter of 2020, TVA discontinued derivative accounting for forward coal contracts.

TVA previously used internal valuation specialists for the calculation of its commodity contract derivatives fair value measurements classified as Level 3.

Analytical testing was performed on the change in fair value measurements each period to ensure the valuation is reasonable based on changes in general market assumptions.

Significant changes to the estimated data used for unobservable inputs, in isolation or combination, may result in significant variations to the fair value measurement reported.

5 unchanged sentences

Balance at September 30, 2019 ( 4 )

Settlements ( 1 )

Change in net unrealized gains (losses) deferred as regulatory assets and liabilities 5

3 unchanged sentences

Fair Value at September 30, 2019

Valuation Technique(s)

Unobservable Inputs

Commodity contract derivatives

Pricing model

Coal supply and demand

0.4 - 0.8 billion tons/year

Long-term market prices

$12.10 - $94.51/ton

Commodity contract derivatives

Pricing model

Coal supply and demand

0.4 - 0.8 billion tons/year

Long-term market prices

$12.10 - $94.51/ton

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at September 30, 2018

Valuation Technique(s)

Unobservable Inputs

Commodity contract derivatives

Pricing model

Coal supply and demand

0.7 - 0.8 billion tons/year

Long-term market prices

$12.25 - $112.24/ton

Commodity contract derivatives

Pricing model

Coal supply and demand

0.7 - 0.8 billion tons/year

Long-term market prices

$12.25 - $112.24/ton

Valuation Technique(s) Unobservable Inputs Range

Commodity contract derivatives $ 5 Pricing model Coal supply and demand 0.4 - 0.8 billion tons/year

Long-term market prices $12.10 - $94.51/ton

Commodity contract derivatives $ 9 Pricing model Coal supply and demand 0.4 - 0.8 billion tons/year

Long-term market prices $12.10 - $94.51/ton

Other Financial Instruments Not Recorded at Fair Value

TVA uses the methods and assumptions described below to estimate the fair value of each significant class of financial instrument.

TVA uses the methods and assumptions described below to estimate the fair value of each significant class of financial instruments.

The fair value of the financial instruments held at September 30, 2020 and 2019, may not be representative of the actual gains or losses that will be recorded when these instruments mature or are called or presented for early redemption.

1 unchanged sentence

Estimated Values of Financial Instruments Not Recorded at Fair Value

At September 30, 2019

At September 30, 2018

Valuation Classification

At September 30, 2020 At September 30, 2019

Valuation Classification Carrying

Value Carrying

EnergyRight ® receivables (including current portion)

Loans and other long-term receivables, net (including current portion)

EnergyRight ® financing obligation (including current portion)

Unfunded loan commitments

Membership interests of VIEs subject to mandatory redemption (including current portion)

Long-term outstanding power bonds (including current maturities), net

Long-term debt of VIEs (including current maturities), net

Long-term notes payable (including current maturities)

Level 2 $ 87 $ 86 $ 101 $ 100

Loans and other long-term receivables, net (including current portion) Level 2 $ 105 $ 93 $ 131 $ 120

EnergyRight ® financing obligations (including current portion)

Level 2 $ 97 $ 108 $ 113 $ 126

Unfunded loan commitments Level 2 $ — $ 2 $ — $ 10

Membership interests of VIEs subject to mandatory redemption (including current portion) Level 2 $ 26 $ 35 $ 28 $ 37

Long-term outstanding power bonds (including current maturities), net Level 2 $ 19,743 $ 26,630 $ 20,124 $ 26,059

Long-term debt of VIEs (including current maturities), net Level 2 $ 1,089 $ 1,419 $ 1,128 $ 1,371

Long-term notes payable (including current maturities) Level 2 $ — $ — $ 23 $ 23

The carrying value of Cash and cash equivalents, Restricted cash and cash equivalents, and Short-term debt, net approximate their fair values.

1 unchanged sentence

The fair value of long-term debt and membership interests of VIEs subject to mandatory redemption is estimated by determining the present value of future cash flows using current market rates for similar obligations, giving effect to credit ratings and remaining maturities.

As described in Note 2 — Impact of New Accounting Standards and Interpretations , TVA adopted Revenue from Contracts with Customers effective October 1, 2018, using the modified retrospective method of adoption, which does not require restatement of prior year reported results.

TVA adopted Revenue from Contracts with Customers effective October 1, 2018, using the modified retrospective method of adoption, which does not require restatement of prior year reported results.

As a result of the adoption of this standard, no cumulative effect adjustment was recorded.

Additionally, comparative disclosures for 2018 operating results with the previous revenue recognition rules are not applicable as TVA's revenue recognition has not materially changed as a result of the new standard.

Additionally, comparative disclosures for 2018 operating results with

the previous revenue recognition rules are not applicable as TVA's revenue recognition has not materially changed as a result of the new standard.

Revenue from Sales of Electricity

2 unchanged sentences

In addition, TVA sells electricity to directly served industrial companies, federal agencies, and others.

Approximately 93 percent of TVA's revenue from sales of electricity is to LPCs, which then distribute the power to their customers using their own distribution systems.

LPC sales Approximately 93 percent of TVA's revenue from sales of electricity is to LPCs, which then distribute the power to their customers using their own distribution systems.

Power is delivered to each LPC at delivery points within the LPC's service territory.

7 unchanged sentences

The net transaction price is offset by certain credits available to customers that are known at the time of billing.

Credits are designed to achieve objectives of the TVA Act and include items such as hydro preference credits for residential customers of LPCs, economic development credits to promote growth in the Tennessee Valley, wholesale bill credits to maintain long-term partnerships with LPCs, and interruptible credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand.

Credits are designed to achieve objectives of the TVA Act and include items such as hydro preference credits for residential customers of LPCs, economic development credits to promote growth in the Tennessee Valley, wholesale bill credits to maintain long-term partnerships with LPCs, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand.

Payments are typically due within approximately one month of invoice issuance.

Directly served customers

Directly served customers, including industrial customers, federal agencies, and other customers, take power for their own consumption.

Directly served customers Directly served customers, including industrial customers, federal agencies, and other customers, take power for their own consumption.

Similar to LPCs, power is delivered to a delivery point, at which time the customer takes possession and TVA recognizes revenue.

6 unchanged sentences

The net transaction price is offset by certain credits available to customers that are known at the time of billing.

Examples of credits include items such as economic development credits to promote growth in the Tennessee Valley and interruptible credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand.

Examples of credits include items such as economic development credits to promote growth in the Tennessee Valley and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand.

Payments are typically due within approximately one month of invoice issuance.

7 unchanged sentences

(in millions)

2020 2019 2018

$ 1,439 $ 1,593 $ 1,600

941 1,063 1,052

North Carolina

6,740 7,419 7,350

Subtotal 10,100 11,155 11,079

Off-system sales 4 4 7

1 unchanged sentence

Revenue from sales of electricity 10,104 11,159 11,075

Other revenues

Other revenue 145 159 158

Total operating revenues $ 10,249 $ 11,318 $ 11,233

(1) Represents revenue capitalized during pre-commercial operations of $11 million at Allen CC in 2018 and $22 million at Watts Bar Unit 2, Paradise CC, and Allen CC in 2017.

(1) Represents revenue capitalized during pre-commercial operations of $ 11 million at Allen CC in 2018.

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

TVA's revenues by customer type for each of the last three years are detailed in the table below:

TVA's operating revenues by customer type for each of the last three years are detailed in the table below:

Operating Revenues by Customer Type

1 unchanged sentence

(in millions)

2020 2019 2018

Revenue from sales of electricity

Local power companies (1)

$ 9,406 $ 10,351 $ 10,262

Industries directly served 588 686 695

2 unchanged sentences

Revenue from sales of electricity 10,104 11,159 11,075

Other revenues

Other revenue 145 159 158

Total operating revenues $ 10,249 $ 11,318 $ 11,233

(1) Represents revenue capitalized during pre-commercial operations of $11 million at Allen CC in 2018 and $22 million at Watts Bar Unit 2, Paradise CC, and Allen CC in 2017.

(1) The amount for the years ended September 30, 2020 and 2019, is net of $ 163 million and $ 14 million, respectively, of wholesale bill credits to LPCs participating in the long-term Partnership Agreement.

There were no such credits in 2018.

(2) Represents revenue capitalized during pre-commercial operations of $ 11 million at Allen CC in 2018.

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

TVA and LPCs continue to work together to meet the changing needs of consumers around the Tennessee Valley.

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.

These agreements are automatically extended each year after their initial effective date.

In 2019, the TVA Board approved a 20-year Partnership Agreement option that better aligns the length of LPC contracts with TVA's long-term commitments.

These agreements are automatically extended each year after their initial effective date, contingent upon certain circumstances, including limited rate increases going forward.

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

As of September 30, 2019, 131 LPCs had signed the 20-year Partnership Agreement with TVA.

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.

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 local power company customers, their large commercial and industrial customers, and TVA directly served customers.

The number of LPCs with the contract arrangements described below, the revenues derived from such arrangements during 2020, and the percentage of TVA's total operating revenues during 2020 represented by these revenues are summarized in the tables below:

2 unchanged sentences

Contract Arrangements (1)

Number of LPCs

Revenue from Sales of Electricity to LPCs

(in millions)

Percentage of Total Operating Revenues

20-year termination notice

Number of LPCs Revenue from Sales of Electricity to LPCs

(in millions) Percentage of Total Operating Revenues

20-year termination notice 142 $ 7,666 74.8 %

5-year termination notice 11 1,740 17.0 %

153 $ 9,406 91.8 %

(1) Ordinarily, the LPCs and TVA have the same termination notice period;

however, in contracts with three of the LPCs with five-year termination notices, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority).

Two of the LPCs have five-year termination notices or a shorter period if any act of Congress, court decision, or regulatory change requires or permits that election.

TVA's two largest LPCs — MLGW and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively.

however, in contracts with two of the LPCs with five-year termination notices, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority).

Certain LPCs have five-year termination notices or a shorter period if any act of Congress, court decision, or regulatory change requires or permits that election.

(2) TVA wholesale power contracts decreased to 153 in 2020 due to a merger between two LPCs in July 2020.

TVA's two largest LPCs — MLGW and NES — have contracts with a five-year and a 20-year termination notice period, respectively.

Sales to MLGW and NES accounted for nine percent and eight percent, respectively, of TVA's total operating revenues in 2020.

In May 2020, MLGW published a draft 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 its plan to issue requests for proposal to validate the cost estimates included in the IRP.

In addition, certain other LPCs are evaluating options for future energy choices.

Contract Balances

5 unchanged sentences

In 2004, TVA and its largest customer, MLGW, entered into an energy prepayment agreement under which MLGW prepaid TVA $ 1.5 billion for the future costs of electricity to be delivered by TVA to MLGW over a period of 15 years.

TVA accounted for the prepayment as unearned revenue and reported the obligation to deliver power under this arrangement as Energy prepayment obligations.

The arrangement ceased in 2019.

4 unchanged sentences

Economic Development Incentives.

Under certain economic development programs, TVA offers incentives to existing and potential power customers in certain business sectors that make multi-year commitments to invest in the Tennessee Valley.

Under certain economic development programs TVA offers incentives to existing and potential power customers in targeted business sectors that make multi-year commitments to invest in the Tennessee Valley.

TVA records those incentives as reductions of revenue.

Incentives recorded as a reduction to revenue were $310 million and $276 million during 2019 and 2018 , respectively.

In 2020 and 2019, TVA recorded a total of $ 318 million and $ 310 million, respectively, in incentives as a reduction of revenue.

Incentives that have been approved but have not been paid are recorded in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets.

At September 30, 2020 and 2019, the outstanding unpaid incentives were $ 172 million and $ 157 million, respectively.

These incentives may be subject to clawback provisions if the customers fail to meet certain program requirements.

Incentives that have been paid out may be subject to claw back if the customer fails to meet certain program requirements.

Additionally, in May 2020, TVA established flexibility provisions to support the continued operations and recovery of participating customers experiencing financial and operational hardships as a result of the COVID-19 pandemic and corresponding economic downturn.

These provisions have not had a material impact to TVA.

Proprietary Capital

12 unchanged sentences

At or for the years ended September 30

Power Program

Power Program Nonpower

Programs Power Program Nonpower

Appropriation Investment $ 258 $ 4,351 $ 258 $ 4,351

Retained Earnings

Proprietary Capital

Balance at beginning of year 10,823 ( 3,795 ) 9,404 ( 3,787 )

14 unchanged sentences

TVA recognized unrealized gains (losses) of $( 1 ) million and $( 114 ) million in 2020 and 2019, respectively, into AOCI on the mark-to-market of currency swaps.

TVA then reclassifies an amount out of AOCI into net income, offsetting the gain/loss from recording the exchange gain/loss on the debt and related accrued interest.

TVA then reclassified an amount out of AOCI into net income, offsetting the gain/loss from recording the exchange gain/loss on the debt and related accrued interest.

The amounts reclassified from OCI into net income resulted in increases (decreases) to net income of $ 38 million, $( 45 ) million, and $( 26 ) million in 2020, 2019, and 2018, respectively.

5 unchanged sentences

For the years ended September 30

2020 2019 2018

Bellefonte deposit $ — $ 21 $ —

4 unchanged sentences

Total other income (expense), net $ 36 $ 62 $ 50

During 2019 , Other income (expense), net increased $12 million primarily driven by other income related to a $21 million 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 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 decrease of $5 million resulting from gains on the disposition of prior year property and $2 million of unrealized losses on the SERP and 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.

Supplemental Cash Flow Information

Interest paid was $ 1.2 billion for both 2019 and 2018 and $1.3 billion for 2017 .

These amounts differ from interest expense in certain years due to the timing of payments and interest capitalized for major capital expenditures.

Interest paid was $ 1.1 billion for 2020 and $ 1.2 billion for both 2019 and 2018.

These amounts differ from interest expense in certain years due to the timing of payments.

There was no interest capitalized in 2020, 2019, or 2018.

Construction in progress and Nuclear fuel expenditures included in Accounts payable and accrued liabilities at September 30, 2020, 2019, and 2018 were $ 398 million, $ 324 million, and $ 372 million, respectively, and are excluded from the Statements of Consolidated Cash Flows for the years ended September 30, 2020, 2019, and 2018 as non-cash investing activities.

Excluded from the Statements of Consolidated Cash Flows for the years ended September 30, 2019 and 2017 as non-cash financing activities were capital lease obligations incurred related to $10 million of leased equipment in 2019 and $10 million of purchase power assets in 2017.

Excluded from the Statements of Consolidated Cash Flows for the years ended September 30, 2020 and 2019, as non-cash financing activities were $ 394 million related to lease obligations incurred primarily in connection with a PPA and $ 10 million related to lease obligations incurred for leased equipment, respectively.

There were no capital leases incurred during 2018.

Also excluded from the Statement of Consolidated Cash Flows for the year ended September 30, 2017 was $74 million of notes payable related to TVA's acquisition of equity interests in certain SPEs.

See Note 9 — Asset Acquisitions .

See Note 7 — Leases for further information regarding TVA's finance leases.

Also excluded from the Statement of Consolidated Cash Flows for the year ended September 30, 2020, were $ 80 million and $ 73 million as non-cash financing and investing activities, respectively, due to derecognition of the Paradise pipeline financing obligation and asset.

Cash flows from swap contracts that are accounted for as hedges are classified in the same category as the item being hedged or on a basis consistent with the nature of the instrument.

Benefit Plans

TVA sponsors a qualified defined benefit plan ("pension plan") that covers most of its full-time employees hired prior to July 1, 2014, a qualified defined contribution plan ("401(k) plan") that covers most of its full-time employees, two unfunded post-retirement health care plans that provide for non-vested contributions toward the cost of eligible retirees' medical coverage, other postemployment benefits such as workers' compensation, and the SERP.

TVA sponsors a qualified defined benefit plan ("pension plan") that covers most of its full-time employees hired prior to July 1, 2014, a qualified defined contribution plan ("401(k) plan") that covers most of its full-time employees, two unfunded post-retirement health care plans that provide for non-vested contributions toward the cost of eligible retirees' medical coverage, other post-employment benefits such as workers' compensation, and the SERP.

The pension plan and the 401(k) plan are administered by a separate legal entity, the TVA Retirement System ("TVARS"), which is governed by its own board of directors (the "TVARS Board").

8 unchanged sentences

Employees first hired on or after July 1, 2014, are participants in the 401(k) plan only and receive both non-elective and matching contributions to their accounts in the 401(k) plan.

On May 23, 2018, the TVARS Board approved amendments to the pension plan and 401(k) plan.

These amendments allowed employees who are continuing to accrue cash balance benefits in the pension plan to voluntarily elect to switch future participation to the 401(k) plan only, and employees with cash balance accounts in the pension plan who have a 401(k) only benefit the additional option to waive their rights to benefits under the pension plan and transfer their cash balance accounts (and fixed and variable accounts, if any) to the 401(k) plan.

TVARS presented these amendments to TVA for its review and consideration, and the amendments became effective July 8, 2018.

Under the plan amendments, the voluntary election options were offered to eligible TVA employees during a two-month window from July 1, 2018, to August 31, 2018, with changes and transfers becoming effective on October 1, 2018.

As a result, there were $23 million of one-time transfers to the 401(k) plan based upon employee elections.

These amendments did not trigger curtailment or settlement accounting.

401(k) Plan .

Under the 401(k) plan, the non-elective and matching contributions TVA makes to participant accounts are based on the participant's employment hire date and years of service.

Under the 401(k) plan, the non-elective and matching contributions TVA makes to participant accounts depends on the employee's hire date, years of service, and individual elections.

Non-elective employer contributions for eligible participants range from three percent to six percent and matching employer contributions range from 1.5 percent to six percent.

TVA recognized $ 84 million in 401(k) plan contribution costs in 2019 .

TVA recognized $ 80 million in 401(k) plan contribution costs in both 2018 and 2017 .

TVA recognized 401(k) contribution costs of $ 88 million, $ 84 million, and $ 80 million during 2020, 2019, and 2018, respectively.

The 2021 plan contribution costs are estimated to be approximately $ 92 million.

5 unchanged sentences

The second plan is designed to place a limit on the out-of-pocket amount certain eligible retirees pay for medical coverage and provides a credit based on years of TVA service and monthly base pension amount, reduced by any TVARS supplemental pension benefits or any TVA contribution from the first plan, described above.

Effective January 2017, all Medicare-eligible retirees and spouses were provided Medicare coverage through a private exchange.

Effective January 2017, all Medicare-eligible retirees and spouses were provided Medicare supplement coverage through a private exchange.

Transition to the exchange does not affect any TVARS supplemental benefits for eligible retirees, and the credit will continue to be calculated in the same manner as before.

17 unchanged sentences

Differences between actuarial assumptions and actual plan results are deferred and amortized into periodic cost only when the accumulated differences exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets.

If necessary, the excess is amortized over the average remaining service period of participating employees expected to receive

If necessary, the excess is amortized over the average remaining service period of participating employees expected to receive benefits.

The current projected amortization periods of unrecognized net gain or loss is approximately 11 years for the pension plan and 12 years for the post-retirement plan.

2 unchanged sentences

The increase or decrease in the benefit obligation due to the plan change is amortized over the average remaining service period of participating employees expected to receive benefits under the plan.

The pension and post-retirement plans have prior service costs/(credits) related to plan changes made in 2009, 2010, 2016, 2018, and 2019 with remaining amortization periods ranging from one to 10 years.

The pension and post-retirement plans have prior service costs/(credits) related to plan changes made in 2009, 2010, 2016, 2018, 2019, and 2020 with remaining amortization periods ranging from one to nine years.

However, when a plan change reduces the benefit obligation, existing positive prior service costs are reduced or eliminated starting with the earliest established before a new prior service credit base is established.

5 unchanged sentences

Obligations and Funded Status

The actuarial results provided reflect data and assumptions appropriate for the purpose of the measurement of plan obligations and funded status for the year ended.

Effects of COVID-19 on the financial markets, regulations, and experience are uncertain and still evolving.

The ultimate impact of the COVID-19 pandemic on the pension plan and other post-retirement plans 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.

Therefore, TVA cannot estimate the potential impact to the pension plan and other post-retirement plans at this time.

The changes in plan obligations, assets, and funded status for the years ended September 30, 2020 and 2019, were as follows:

1 unchanged sentence

For the years ended September 30

Pension Benefits

Other Post-Retirement Benefits

795,900,000 Pension Benefits Other Post-Retirement Benefits

2020 2019 2020 2019

Change in benefit obligation

Benefit obligation at beginning of year $ 13,312 $ 11,725 $ 499 $ 428

Service cost 55 44 16 11

Interest cost 415 499 16 18

2 unchanged sentences

Actuarial (gain) loss 614 1,756 39 78

Plan change 2 7 — —

Net transfers (to) from variable fund/401(k) plan 2 1 — —

14 unchanged sentences

(1) Collections include retiree contributions as well as provider discounts and rebates.

(2) Includes one-time transfers to the 401(k) of $23 million related to the 2018 plan amendment.

The pension actuarial loss for 2019 primarily reflects the impact of the decrease in the discount rate from 4.35 percent to 3.20 percent , which increased the liability by $1.6 billion .

In addition, TVA recognized actuarial losses of $88 million resulting from the difference between the expected and actual return on plan assets and $59 million of experience losses.

For 2020, the $ 614 million pension benefit obligation actuarial loss is primarily due to the decrease in the discount rate from 3.20 percent to 2.75 percent, which increased the liability by $ 714 million.

In addition, TVA recognized $ 74 million of actuarial losses due to demographic and plan experience, and an actuarial loss of $ 32 million due to the assumption change of elections for lump sum payments based upon an updated actuarial study.

These actuarial losses were partially offset by a $ 137 million gain due to mortality assumption changes and $ 69 million gain due to a lower COLA than previously assumed.

2020 plan change of $ 2 million was due to the plan change in the interest rate and mortality basis used to determine SERP retirement payments.

For 2019, the $ 1.8 billion pension benefit obligation actuarial loss is primarily due to the decrease in the discount rate from 4.35 percent to 3.20 percent, which increased the liability by $ 1.6 billion.

In addition, TVA recognized actuarial losses of $ 147 million due to demographic and plan experience.

These actuarial losses were partially offset by a $ 14 million gain due to mortality assumption changes.

The 2019 pension plan change of $ 7 million was a result of two new participants entering the SERP plan during 2019.

The pension actuarial gain for 2018 primarily reflects the impact of the increase in the discount rate from 3.85 percent to 4.35 percent , which decreased the liability by $676 million .

Based on the results obtained from the most recent experience study performed in 2018, TVA had gains of $138 million due to mortality assumption changes offset by losses of $46 million due to the revision of other demographic and experience based assumptions.

In addition, TVA recognized losses related to the change in the assumptions on lump sum elections and annuity benefits as a result of the 2016 plan amendments, which increased the liability by $110 million .

The other post-retirement actuarial loss for 2020 increased the benefit obligation by $ 39 million.

TVA recognized a $ 30 million loss due to the updated plan assumptions related to the election rate for pre-Medicare retirees, assumed per capita claims costs, and expected retiree contributions to reflect observed and anticipated plan experience.

In addition, TVA recognized a $ 20 million loss due to the decrease in the discount rate from 3.30 percent to 3.05 percent, and a $ 4 million loss due to actual experience different from assumed.

These losses were partially offset by a gain of $ 15 million due to the updated post-Medicare trend rate assumption attributable to lower than expected premium increases on the private exchange.

The other post-retirement actuarial loss for 2019 was primarily due to the decrease in the discount rate from 4.40 percent to 3.30 percent , which increased the liability by $ 71 million.

1 unchanged sentence

These losses were partially offset by a net gain of $ 24 million due to the change in health care trend rate assumptions.

The other post-retirement benefit actuarial gain for 2018 was primarily due to an increase in the discount rate from 3.95 percent to 4.40 percent , which decreased the liability by $28 million .

Based on the results obtained from the recent experience study performed during 2018, TVA recognized gains of $6 million due to mortality assumption changes and $23 million of additional gains in other experience related assumptions.

These gains were partially offset by losses of $8 million related to per capita claim costs and retiree contributions assumptions and $3 million in actuarial losses related to actual experience different from assumed.

For CY 2019, TVA made plan changes to the other post-retirement benefit plan resulting in a decrease in the liability of $17 million for 2018.

This decrease is primarily related to the use of a new national preferred formulary and utilization manager program.

Amounts related to these benefit plans recognized on TVA's Consolidated Balance Sheets consist of regulatory assets and liabilities that have not been recognized as components of net periodic benefit cost at September 30, 2020 and 2019, and the funded status of TVA's benefit plans, which are included in Accounts payable and accrued liabilities and Post-retirement and post-employment benefit obligations:

1 unchanged sentence

At September 30

Pension Benefits

Other Post-Retirement Benefits

Pension Benefits Other Post-Retirement Benefits

2020 2019 2020 2019

Regulatory assets (liabilities) $ 5,115 $ 4,731 $ 78 $ 25

1 unchanged sentence

Pension and post-retirement benefit obligations (1)

( 5,711 ) ( 5,327 ) ( 516 ) ( 471 )

(1) The table above excludes $ 390 million and $ 383 million of post-employment benefit costs that are recorded in Post-retirement and post-employment benefit obligations on the Consolidated Balance Sheets at September 30, 2020 and 2019, respectively.

2 unchanged sentences

At September 30

Pension Benefits

Other Post-Retirement Benefits

Pension Benefits Other Post-Retirement Benefits

2020 2019 2020 2019

Unrecognized prior service credit $ ( 615 ) $ ( 714 ) $ ( 112 ) $ ( 135 )

11 unchanged sentences

For the years ended September 30

Pension Benefits

Other Post-Retirement Benefits

Pension Benefits Other Post-Retirement Benefits

2020 2019 2018 2020 2019 2018

Service cost $ 55 $ 44 $ 53 $ 16 $ 11 $ 14

Interest cost 415 499 473 16 18 19

8 unchanged sentences

At September 30, 2020

Pension Benefits

Other Post-Retirement Benefits

Pension Benefits Other Post-Retirement Benefits

2020 2019 2020 2019

Discount rate 2.75 % 3.20 % 3.05 % 3.30 %

Rate of compensation increase

Rate of compensation increase 3.43 % 3.50 % N/A N/A

Cost of living adjustment (COLA) (1)

2.00 % 2.00 % 2.00 % 2.00 %

Pre-Medicare eligible

Initial health care cost trend rate

Ultimate health care cost trend rate

Year ultimate trend rate is reached

Current health care cost trend rate (2)

N/A N/A 6.50 % 6.75 %

Ultimate health care cost trend rate N/A N/A 5.00 % 5.00 %

Year ultimate trend rate is reached N/A N/A 2027 2027

Post-Medicare eligible

Initial health care cost trend rate

Ultimate health care cost trend rate

Year ultimate trend rate is reached

(1) The COLA rate is the ultimate long-term rate.

Current health care cost trend rate N/A N/A — % — %

Ultimate health care cost trend rate N/A N/A 4.00 % 4.00 %

Year ultimate trend rate is reached N/A N/A 2024 2023

(1) The COLA assumption is the ultimate long-term rate.

The calendar year rate for 2021 is assumed to be one percent, and for years thereafter the ultimate is used.

(2) In 2019, TVA reset the pre-Medicare health care cost trend rates assumption with an initial rate of 6.75 percent, declining 0.25 percent per year until it reaches the ultimate rate of 5.00 percent in 2027.

For 2020, TVA maintained this trend assumption for pre-Medicare per capita claims cost with a current health care cost rate of 6.50 percent.

However, to account for cumulative delayed medical care due to the COVID-19 pandemic and the expected spending as the demand for care returns, the pre-Medicare per capita retiree contributions current health care cost trend rate is 11.93 percent, and in 2022 assumed to return to 6.25 percent in line with the health care cost trend rates assumption.

Actuarial Assumptions Utilized to Determine Net Periodic Benefit Cost for the Years Ended September 30 (1)

Pension Benefits

Other Post-Retirement Benefits

Pension Benefits Other Post-Retirement Benefits

2020 2019 2018 2020 2019 2018

Discount rate 3.20 % 4.35 % 3.85 % 3.30 % 4.40 % 3.95 %

Expected return on plan assets (2)

6.75 % 6.75 % 6.75 % N/A N/A N/A

Cost of living adjustment (COLA) (3)

Rate of compensation increase

2.00 % 2.00 % 2.00 % 2.00 % 2.00 % 2.00 %

Rate of compensation increase 3.43 % 3.50 % 5.34 % N/A N/A N/A

Pre-Medicare eligible

Initial health care cost trend rate

Ultimate health care cost trend rate

Year ultimate trend rate is reached

Current health care cost trend rate N/A N/A N/A 6.75 % 6.25 % 6.50 %

Ultimate health care cost trend rate N/A N/A N/A 5.00 % 5.00 % 5.00 %

Year ultimate trend rate is reached N/A N/A N/A 2027 2024 2024

Post-Medicare eligible

Initial health care cost trend rate

Ultimate health care cost trend rate

Year ultimate trend rate is reached

(1) The actuarial assumptions used to determine the benefit obligations at September 30 of each year are subsequently used to determine net periodic benefit cost for the following year except the rate of compensation increase assumption.

Current health care cost trend rate N/A N/A N/A — % — % — %

Ultimate health care cost trend rate N/A N/A N/A 4.00 % 4.00 % 4.00 %

Year ultimate trend rate is reached N/A N/A N/A 2023 2021 2021

(1) The actuarial assumptions used to determine the benefit obligations at September 30 of each year are subsequently used to determine net periodic benefit cost

for the following year except the rate of compensation increase assumption.

(2) The actual return on assets for 2020, 2019, and 2018 were 5.11%, 4.99%, and 5.84%, respectively.

(3) The COLA assumption is the ultimate rate.

1 unchanged sentence

Discount Rate.

In selecting the assumed discount rate, TVA reviews market yields on high-quality corporate debt and long-term obligations of the U.S.

Treasury and endeavors to match, through the use of a hypothetical bond portfolio, instrument maturities with the maturities of its pension obligations in accordance with the prevailing accounting standards.

In selecting the assumed discount rate, TVA reviews market yields on high-quality corporate debt and endeavors to match, through the use of a hypothetical bond portfolio, instrument maturities with the maturities of its pension obligations in accordance with the prevailing accounting standards.

The selected bond portfolio is derived from a universe of high quality corporate bonds of Aa-rated quality or higher.

2 unchanged sentences

The qualified defined benefit pension plan is the only plan that is funded with qualified plan assets.

In determining the expected long-term rate of return on pension plan assets, TVA uses a process that incorporates actual historical asset class returns and an assessment of expected future performance and takes into consideration external actuarial advice, the current outlook on capital markets, the asset allocation policy, and the anticipated impact of active management.

The expected rate of return is based on annual studies performed by third-party professional investment consultants.

Asset allocations are periodically updated using the pension plan asset/liability studies and are part of the determination of the estimates of long-term rates of return.

The TVARS asset allocation policy diversifies plan assets across multiple asset classes so as to minimize the risk of large losses.

The asset allocation policy is designed to be dynamic in nature and responsive to changes in the funded status of TVARS.

Changes in the expected return rates are based on annual studies performed by third

party professional investment consultants.

Taking into account changes in the plan's asset target allocation mix, capital market outlooks, and the most recent studies, TVA management adopted a 6.75 percent expected long-term rate of return on plan assets in 2017 to calculate the 2018 net periodic pension cost.

There were no changes to the assumption in 2019 or 2018.

The 6.75 percent expected long-term return on plan assets will be used to calculate the 2020 net periodic pension cost.

The asset allocation policy is designed to be responsive to changes in the funded status of TVARS.

Compensation Increases .

Assumptions related to compensation increases are based on the results obtained from an actual company experience study performed during the most recent five years for plan participants.

TVA obtained an updated study in 2018 and determined that future compensation would likely increase at rates between 2.50 percent and 14.00 percent per year, depending upon the employee's age.

The average assumed compensation increase used to determine benefit obligations is based upon the current active participants.

Assumptions related to compensation increases are based upon the latest TVA compensation experience study performed in 2018.

Future compensation is assumed to likely increase at rates between 2.50 percent and 14.00 percent per year, depending upon the employee's age.

The average assumed compensation increased used to determine benefit obligations and net periodic benefit cost is based upon the current active participants.

The mortality assumption is comprised of a base table that represents the current future life expectancy adjusted by an improvement scale to project future improvements in life expectancy.

TVA's mortality assumptions are based upon actuarial projections in combination with studies of the actual mortality experience of TVA's pension and post-retirement benefit plan participants while taking into consideration the published Society of Actuaries ("SOA") mortality table and projection scale at September 30.

Based upon the recent 2018 experience study, TVA adjusted its version of the SOA RP-2014 mortality table to reflect increases in female mortality.

In 2019, TVA adopted a modified version of the SOA MP-2018 improvement scale published by the SOA.

In 2020, based upon the most recent mortality experience study, TVA adopted a modified version of the SOA PRI-2012 table and a modified version of the SOA MP-2019 improvement scale.

The following mortality assumptions were used to determine the benefit obligations for the pension and other post-retirement benefit plans at September 30, 2020, 2019, and 2018.

2 unchanged sentences

At September 30

Mortality table

RP-2014 table (adjusted)

Improvement scale

MP-2018 (modified)

MP-2017 (modified)

RP-2016 (modified)

2020 2019 2018

Mortality table PRI-2012 table (adjusted) RP-2014 table (adjusted) RP-2014 table (adjusted)

Improvement scale MP-2019 (modified) MP-2018 (modified) RP-2017 (modified)

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 2023.

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.

The health care cost trend rates are assumptions about the annual rate of changes in the cost of health care benefits currently provided by the post-retirement benefit plan.

In establishing health care cost trend rates, 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.

Cost of Living Adjustment.

10 unchanged sentences

Actuarial Assumption

Change in Assumption

Impact on 2019 Pension Cost

Change in Assumption Impact on 2020 Pension Cost

Impact on 2020 Projected Benefit Obligation

Discount rate ( 0.25 ) % $ 17 $ 418

Rate of return on plan assets

Rate of return on plan assets ( 0.25 ) % 18 N/A

Cost of living adjustments 0.25 % 30 270

3 unchanged sentences

At September 30, 2020

1% Increase 1% Decrease

Effect on total of service and interest cost components for the year $ 4 $ ( 4 )

6 unchanged sentences

As set forth above, the qualified pension plan assets are invested across global public equity, private equity, safety oriented fixed income, opportunistic fixed income, public real assets, and private real assets.

The TVARS asset allocation policy includes permissible deviations from target allocations, and action can be taken, as appropriate, to rebalance the plan's assets consistent with the asset allocation policy.

At September 30, 2020 and 2019, the asset holdings of TVARS included the following:

2 unchanged sentences

Plan Assets at September 30

Asset Category

Target Allocation

Asset Category Target Allocation 2020 2019

Global public equity 32 % 36 % 37 %

4 unchanged sentences

Private real assets 10 % 8 % 8 %

Total 100 % 100 % 100 %

Fair Value Measurements

4 unchanged sentences

Assets/Liabilities

Significant Other

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant

Equity securities $ 1,624 $ 1,621 $ — $ 3

4 unchanged sentences

Debt securities issued by U.S.

Treasury 701 701 — —

Debt securities issued by foreign governments

3 unchanged sentences

Commingled funds measured at net asset value (3)

Equity 931 — — —

Debt 203 — — —

Blended 102 — — —

Institutional mutual funds 277 277 — —

Cash equivalents and other short-term investments 338 77 261 —

Certificates of deposit

Private credit measured at net asset value (3)

Private equity measured at net asset value (3)

Private real estate measured at net asset value (3)

Private real assets measured at net asset value (3)

Securities lending collateral 167 — 167 —

Swaps 10 — 10 —

Options 2 — 2 —

Foreign currency forward receivable 2 — 2 —

Total assets $ 8,368 $ 2,679 $ 2,561 $ 94

Futures $ 1 $ 1 $ — $ —

Foreign currency forward payable 3 — 3 —

Swaps 6 — 6 —

Options 2 — 2 —

Securities sold under agreements to repurchase 123 — 123 —

8 unchanged sentences

Assets/Liabilities

Significant Other

(Level 1) Significant Other

Observable Inputs

(Level 2) Significant

Equity securities $ 1,766 $ 1,762 $ — $ 4

4 unchanged sentences

Debt securities issued by U.S.

Treasury 807 807 — —

Debt securities issued by foreign governments 210 — 209 1

3 unchanged sentences

Commingled funds measured at net asset value (3)

Equity 795 — — —

Debt 308 — — —

Commodities 217 — — —

Blended 125 — — —

Institutional mutual funds 97 97 — —

3 unchanged sentences

Private equity measured at net asset value (3)

Private real estate measured at net asset value (3)

Private real assets measured at net asset value (3)

Securities lending collateral 224 — 224 —

Options 1 — 1 —

Foreign currency forward receivable 1 — 1 —

Total assets $ 8,472 $ 2,670 $ 2,800 $ 42

Futures $ 4 $ 4 $ — $ —

Foreign currency forward payable 1 — 1 —

Swaps 12 — 12 —

Options 1 — 1 —

Securities sold under agreements to repurchase 118 — 118 —

16 unchanged sentences

The following descriptions of the valuation methods and assumptions used by the pension plan to estimate the fair value of investments apply to investments held directly by the pension plan.

Third-party pricing vendors provide valuations for investments held by the pension plan in most instances, except for commingled, private credit, private equity, and private real estate funds which are priced at net asset values established by the investment managers.

Third-party pricing vendors provide valuations for investments held by the pension plan in most instances, except for commingled, private credit, private equity, and private real asset funds which are priced at net asset values established by the investment managers.

In instances where pricing is determined to be based on unobservable inputs, a Level 3 classification has been assigned.

38 unchanged sentences

The equity index funds seek to track the performance of a particular index by replicating its capitalization and characteristics.

Passive fund benchmark indices include the Russell 1000 index, S&P 500 index, MSCI ACWI ex-U.S.

index, MSCI ACWI ex-U.S.

Small-Cap index, and Dow Jones U.S.

Select REIT index.

Passive fund benchmark indices include the Russell 1000 index and MSCI ACWI ex-U.S.

The actively managed equity funds seek to outperform certain equity benchmarks through a combination of fundamental and technical analysis.

32 unchanged sentences

These funds have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015.

The private credit limited partnerships generally focus on direct lending investments of senior secured first-lien loans to lower-middle market companies and seek to obtain financial returns through high income potential and occasional equity upside.

The limited partnerships generally have a term life of five to 10 years and are diversified by sector and industry.

The private credit limited partnerships invest across direct lending, opportunistic credit, and distressed debt strategies.

The limited partnerships generally make investments of senior secured first-lien loans, second-lien secured loans, asset-based

loans, unitranche loans, and distressed debt opportunities to middle market private companies.

The limited partnerships generally seek to obtain financial returns through high income potential and occasional equity upside.

The limited partnerships generally have a term life of five to eight years and are diversified by sector and industry.

Private Equity Funds.

9 unchanged sentences

Restructuring or distressed debt partnerships purchase opportunities generated by overleveraged or poorly managed companies.

Energy infrastructure partnerships acquire essential, long-lived real assets in three main groups.

Upstream assets include oil and gas exploration, drilling, and acquisition.

Midstream assets include storage, pipelines, gathering, processing, and transportation of energy commodities.

Downstream assets include generation, distribution, and transmission facilities.

Special situation partnerships include organizations with a specific industry focus not covered by the other private equity subclasses or unique opportunities that fall outside the regular subclasses.

3 unchanged sentences

Partnerships can generally be dissolved by an 80 percent vote in interest by all limited partners, with some funds requiring the occurrence of a specific event.

Private Real Estate Investments.

The pension plan's ownership in private real estate investments consists of a pro rata share and not a direct ownership of the underlying investments.

The fair values of the pension plan's private real estate investments are estimated utilizing net asset values provided by the investment managers.

Private Real Asset Investments.

The pension plan's ownership in private real asset investments consists of a pro rata share and not a direct ownership of the underlying investments.

The fair values of the pension plan's private real asset investments are estimated utilizing net asset values provided by the investment managers.

These investments have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015.

6 unchanged sentences

Investments are diversified by property type and geographic location.

The pension plan is invested in a commingled fund which invests across multiple asset classes that can be categorized as blended.

The fund seeks to achieve capital appreciation while targeting a specific risk profile.

The fund invests in securities across equity, fixed income, currency, and commodities.

The portfolio employs fundamental, quantitative, and technical analysis.

The pension plan is invested in a commingled fund that develops, renovates, and re-leases real estate properties to create value.

Investments are predominantly in top tier real estate markets that offer deep liquidity.

Property types include residential, office, industrial, hotel, retail, and land.

Properties are diversified by geographic region within the U.S.

domestic market.

The plan is invested in a second commingled fund that invests primarily in core, well-leased, operating real estate properties with a focus on income generation.

Investments are diversified by property type with a focus on office, industrial, apartment, and retail.

Properties are diversified within the U.S.

with an overweight to major market and coastal regions.

Fair value estimates of the underlying investments in these limited partnerships and commingled fund investments are primarily based upon property appraisal reports prepared by independent real estate appraisers within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter.

2 unchanged sentences

Pricing for certain investments in mortgage-backed and asset-backed securities is typically based on models that incorporate observable inputs.

The pension plan is invested in a private real estate investment trust formed to make direct or indirect investments in commercial timberland properties.

The pension plan is invested in energy infrastructure partnerships which acquire essential, long-lived real assets in three main groupings.

Upstream assets include oil and gas exploration, drilling, and acquisition.

Midstream assets include storage, pipelines, gathering, processing, and transportation of energy commodities.

Downstream assets include generation, distribution, and transmission facilities.

Additionally, the pension plan is invested in infrastructure partnerships that target mid-sized operating infrastructure companies and/or assets with limited development and construction risk primarily in the energy, transportation and logistics, environmental, telecommunications, and social industries.

The partnerships use one or more valuation techniques (e.g., the market approach, the income approach, or the cost approach) for which sufficient and reliable data is available.

The use of the market approach generally consists of using comparable market transactions, while the use of the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market, and/or other risk factors.

The pension plan is invested in a private real asset investment trust formed to make direct or indirect investments in commercial timberland properties.

Pricing for these types of investments is based on comprehensive appraisals that are conducted shortly after initial purchase of properties and at three-year intervals thereafter.

34 unchanged sentences

Reclassification .

In the September 30, 2018 fair value measurements table, $(108) million of cash equivalents and other short-term investments were reclassified to securities sold under agreements to repurchase.

In the September 30, 2019 fair value measurements table, $ 113 million and $ 546 million of private equity and private real estate have been reclassified to private real assets to conform with current year presentation.

Estimated Future Benefit Payments.

3 unchanged sentences

Other Post-Retirement Benefits

2021 $ 777 $ 28

2026 - 2030 3,741 117

(1) Participants are assumed to receive the Fixed Fund in a lump sum in lieu of available annuity options allowed for certain grandfathered participants resulting in higher estimated pension benefits payments.

8 unchanged sentences

TVA utilizes a discount rate determined by reference to the U.S.

Treasury Constant Maturities corresponding to calculated average durations of TVA's future estimated post-employment claims payments.

The use of a 1.68 percent discount rate resulted in the recognition of approximately $ 59 million in expenses in 2019 and an unpaid benefit obligation of $419 million at September 30, 2019 .

Treasury Constant Maturities corresponding to the calculated average durations of TVA's future estimated post-employment claims payments.

The use of a 0.69 percent discount rate resulted in the recognition of $ 45 million in expenses in 2020 and an unpaid benefit obligation of $ 390 million at September 30, 2020.

The use of a 1.68 percent discount rate resulted in the recognition of approximately $ 59 million in expenses in 2019 and an unpaid benefit obligation of $ 419 million at September 30, 2019.

The use of a 3.05 percent discount rate resulted in the recognition of approximately $( 6 ) million in expenses in 2018 and an unpaid benefit obligation of $ 339 million at September 30, 2018.

The decrease in the unpaid obligation at September 30, 2020 compared to the prior year is due to the timing of the payment of workers compensation claims to the U.S, Department of Labor ("DOL") in September 2020 compared to the prior year claims paid in October 2019.

TVA paid $ 74 million in claims during 2020 compared to $ 39 million in 2019.

TVA estimated losses for 2021 are $ 32 million and due in October 2021.

Overall, the decrease in the discount rate from 1.68 percent in 2019 to 0.69 percent in 2020 increased the long-term portion of the unpaid benefit obligation.

This increase was offset by a decrease in loss experience and fewer claims partially attributable to delayed medical treatments as a result of the COVID-19 pandemic.

The ultimate impact of the COVID-19 pandemic on post-employment benefit costs and claims experience 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 increase in the unpaid benefit obligation when comparing 2019 to 2018 was due primarily to the decrease of the discount rate from 3.05 percent in 2018 to 1.68 percent in 2019.

The decrease in the unpaid benefit obligation when comparing 2018 to 2017 was due primarily to the increase in the discount rate from 2.33 percent in 2017 to 3.05 percent in 2018 .

Additional reduction in the obligation was due to a decrease in loss experience and fewer claims.

Amounts related to other post-employment benefit obligations are recognized on TVA's Consolidated Balance Sheets.

The current portion which represents unpaid losses and administrative fees due are in Accounts payable and accrued liabilities.

7 unchanged sentences

TVA has contracted with various independent power producers and LPCs for additional capacity to be made available to TVA.

Several of these agreements have contractual minimum payments and are accounted for as either capital or operating leases.

Several of these agreements have contractual minimum payments and are accounted for as either finance or operating leases.

In total, these agreements provide 2,384 MW of summer net capability.

2 unchanged sentences

The remaining terms of these agreements range up to four years.

TVA incurred $ 195 million , $ 188 million , and $ 178 million of expense under these power purchase and transmission service agreements during 2019 , 2018 , and 2017 , respectively.

Lease-related costs under TVA's power purchase agreements not accounted for as capital leases, as well as certain leases that are accounted for as capital leases, are included in TVA's consolidated statements of operations as purchased power expense and are expensed as incurred.

Excluding lease-related costs, TVA incurred $ 202 million, $ 195 million, and $ 188 million of expense under these power purchase and transmission service agreements during 2020, 2019, and 2018, respectively.

Under federal law, TVA is obligated to purchase power from qualifying facilities (cogenerators and small power producers).

4 unchanged sentences

At September 30, 2020, the mandatory redemptions for each of the next five years are shown below:

2021 2022 2023 2024 2025

Membership interests of variable interest entity subject to mandatory redemption $ 3 $ 3 $ 2 $ 1 $ 1

TVA leases certain property, plant, and equipment under agreements with terms ranging from one to 38 years.

TVA's rental expense for operating leases, including power purchase agreement operating leases, was $ 97 million , $ 92 million , and $ 90 million in 2019 , 2018 , and 2017 , respectively.

At September 30, 2019 , the future minimum lease payments under operating leases, including purchased power agreements that are accounted for as operating leases, are shown below.

Operating Leases

Minimum payments due in years ending September 30

At September 30, 2019 , the future minimum lease payments under capital leases shown below were included in Capital leases and Other long-term liabilities on TVA's Consolidated Balance Sheet.

Capital Leases

Minimum payments due in years ending September 30

Minimum annual payments

amount representing interest

At September 30, 2020 and 2019, the outstanding leaseback obligations related to CTs and QTE were $ 223 million and $ 263 million, respectively.

3 unchanged sentences

Minimum payments due in years ending September 30

TVA also has obligations to make lease payments related to finance and operating leases.

See Note 7 — Leases for additional information.

Unfunded Loan Commitments .

11 unchanged sentences

If this amount is not sufficient to cover claims arising from a nuclear incident, the second level, Secondary Financial Protection, applies.

Within the Secondary Financial Protection level, the licensee of each nuclear reactor has a contingent obligation to pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, regardless of proximity to the incident of fault, up to a maximum of approximately $138 million per reactor per incident.

• Within the Secondary Financial Protection level, the licensee of each nuclear reactor has a contingent obligation to pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, regardless

of proximity to the incident of fault, up to a maximum of approximately $ 138 million per reactor per incident.

With TVA's seven reactors, the maximum total contingent obligation per incident is $ 963 million.

3 unchanged sentences

Federal law requires that each NRC power reactor licensee obtain property insurance from private sources to cover the cost of stabilizing and decontaminating a reactor and its station site after an accident.

TVA carries property, decommissioning liability, and decontamination liability insurance from Nuclear Electric Insurance Limited ("NEIL") with limits up to $2.1 billion available for a loss at any one of TVA's three sites.

TVA carries property, decommissioning liability, and decontamination liability insurance from Nuclear Electric Insurance Limited ("NEIL").

The limits for each site vary depending on the site and range from up to $ 2.1 billion to $ 2.8 billion available for a loss at TVA's three sites.

Some of this insurance may require the payment of retrospective premiums up to a maximum of approximately $ 145 million.

TVA purchases accidental outage (business interruption) insurance for TVA's nuclear sites from NEIL.

In the event that an accident covered by this policy takes a nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA, after a waiting period, an indemnity (up to a set dollar amount per week) with maximum limits of $ 490 million per unit.

In the event that an accident covered by this policy takes a nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA, after a waiting period, an indemnity (a set dollar amount per week) with a maximum indemnity of $ 490 million per unit.

This insurance policy may require the payment of retrospective premiums up to a maximum of approximately $ 43 million, but only to the extent the retrospective premium is deemed necessary by the NEIL Board of Directors to pay losses unable to be covered by NEIL's surplus.

8 unchanged sentences

The two sets of procedures produce different estimates for the costs of decommissioning primarily because of differences in the underlying assumptions.

Decommissioning costs studies are updated for each of TVA's nuclear units at least every five years.

TVA maintains a NDT to provide funding for the ultimate decommissioning of its nuclear power plants.

See Note 16 — Fair Value Measurements .

See Note 16 — Fair Value Measurements — Investment Funds .

TVA monitors the value of its NDT and believes that, over the long term and before cessation of nuclear plant operations and commencement of decommissioning activities, adequate funds from investments and additional contributions, if necessary, will be available to support decommissioning.

TVA's operating nuclear power units are licensed through 2033 - 2055, depending on the unit.

TVA's operating nuclear power units are licensed through various dates between 2033 - 2055, depending on the unit.

It may be possible to extend the operating life of some of the units with approval from the NRC.

6 unchanged sentences

TVA maintains an ART to help fund the ultimate decommissioning of its non-nuclear power assets.

See Note 16 — Fair Value Measurements .

See Note 16 — Fair Value Measurements — Investment Funds .

Estimates involved in determining if additional funding will be made to the ART include inflation rate, rate of return projections on the fund investments, and the planned use of other sources to fund decommissioning costs.

2 unchanged sentences

TVA's power generation activities, like those across the utility industry and in other industrial sectors, are subject to federal, state, and local environmental laws and regulations.

Major areas of regulation affecting TVA's activities include air quality control, water quality control, and management and disposal of solid and hazardous wastes.

Major areas of regulation affecting TVA's activities include air quality control, GHG emissions, water quality control, and management and disposal of solid and hazardous wastes.

In the future, regulations in all of these areas are expected to become more stringent.

Regulations are also expected to apply to new emissions and sources, with a particular emphasis on climate change, renewable generation, and energy efficiency.

TVA has incurred, and expects to continue to incur, substantial capital and operating and maintenance costs to comply with evolving environmental requirements primarily associated with, but not limited to, the operation of TVA's coal-fired generating units.

Regulations are also expected to have a particular emphasis on climate change, renewable generation, and energy efficiency.

Environmental requirements placed on the operation of TVA's coal-fired and other generating units will likely continue to become more restrictive over time.

Litigation over emissions or discharges from coal-fired generating units is also occurring.

Litigation over the regulation of emissions or discharges from coal-fired generating units is also occurring.

Failure to comply with environmental and safety laws can result in TVA being subject to enforcement actions, which can lead to the imposition of significant civil liability, including fines and penalties, criminal sanctions, and/or the shutting down of non-compliant facilities .

1 unchanged sentence

TVA estimates that compliance with existing and future Clean Air Act ("CAA") requirements (excluding greenhouse gas ("GHG") requirements) could lead to costs of $ 156 million from 2021 to 2025, which include existing controls capital projects and air operations and maintenance projects.

TVA also estimates additional expenditures of approximately $1.2 billion from 2020 to 2024 relating to TVA's CCR conversion program, not including costs related to the Gallatin lawsuits, as well as expenditures of approximately $ 278 million from 2020 to 2024 relating to compliance with Clean Water Act requirements.

TVA also estimates additional expenditures of approximately $ 949 million from 2021 to 2025 relating to TVA's CCR Conversion Program as well as expenditures of approximately $ 190 million from 2021 to 2025 relating to compliance with Clean Water Act requirements.

Future costs could differ from these estimates if new environmental laws or regulations become applicable to TVA or the facilities it operates, or if existing environmental laws or regulations are revised or reinterpreted.

There could also be costs that cannot reasonably be predicted at this time, due to uncertainty of actions, that could increase these estimates.

Liability for releases and cleanup of hazardous substances is primarily regulated by the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") , and other federal and parallel state statutes.

In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years.

TVA operations at some facilities have resulted in contamination that TVA is addressing.

TVA operations at some facilities have resulted in releases of contaminants that TVA is addressing consistent with state and federal requirements.

At September 30, 2020 and 2019, TVA's estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate was approximately $ 14 million and $ 15 million, respectively, on a non-discounted basis, and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets.

2 unchanged sentences

("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 ("Eastern District") 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.

1 unchanged sentence

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 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.

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 these or similar cases could have broader implications for the utility industry.

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.

Legal Proceedings

From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting TVA's activities, as a result of a catastrophic event or otherwise.

At September 30, 2019 , TVA had accrued $ 14 million with respect to Legal Proceedings.

At September 30, 2020, TVA had accrued $ 14 million of probable losses with respect to Legal Proceedings.

Of the accrued amount, $ 12 million is included in Other long-term liabilities and $ 2 million is included in Accounts payable and accrued liabilities.

3 unchanged sentences

In April 2011, TVA entered into two substantively similar agreements, one with the EPA and the other with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups:

the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental

Agreements").

They became effective in June 2011.

Under the Environmental Agreements, TVA committed to (1) retire on a phased schedule 18 coal-fired units with a combined summer net dependable capability of 2,200 MW, (2) control, convert, or retire additional coal-fired units with a combined summer net dependable capability of 3,500 MW, (3) comply with annual, declining emission caps for SO 2 and NO x , (4) invest $ 290 million in certain TVA environmental projects (of which TVA had spent approximately $ 279 million as of September 30, 2019 ), (5) provide $ 60 million to Alabama, Kentucky, North Carolina, and Tennessee to fund environmental projects, and (6) pay civil penalties of $ 10 million .

the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental Agreements").

Under the Environmental Agreements, TVA committed to, among other things, take actions regarding coal units that have been completed.

TVA also agreed to invest $ 290 million in certain TVA environmental projects of which TVA had spent approximately $ 280 million as of September 30, 2020.

Additionally, TVA holds restricted cash in an interest earning trust to fund the remaining project commitments.

Under the Environmental Agreements, any interest earned through the trust must also be re-invested to agreed upon environmental projects.

The total remaining committed spend, including interest earned on the trust, is approximately $ 11 million as of September 30, 2020.

In exchange for these commitments, most past claims against TVA based on alleged New Source Review ("NSR") and associated violations were waived and cannot be brought against TVA.

Future claims, including those for sulfuric acid mist and GHG emissions, can still be brought against TVA, and claims for increases in particulates can also be pursued at many of TVA's coal-fired units.

Additionally, the Environmental Agreements do not address compliance with new laws and regulations or the cost associated with such compliance.

The liabilities related to the Environmental Agreements are included in Accounts payable and accrued liabilities and Other long-term liabilities on the September 30, 2019 Consolidated Balance Sheet.

In conjunction with the approval of the Environmental Agreements, the TVA Board determined that it was appropriate to record TVA's obligations under the Environmental Agreements as regulatory assets, and they are included as such on the September 30, 2019 Consolidated Balance Sheet and will be recovered in rates in future periods.

TVA has substantially completed the requirements in the Environmental Agreements related to retiring coal-fired units or installing controls on such units.

Future claims, including those for sulfuric acid mist and GHG emissions, can still be brought against TVA.

The liabilities related to the Environmental Agreements are included in Accounts payable and accrued liabilities and Other long-term liabilities on the September 30, 2020, Consolidated Balance Sheets.

In conjunction with the approval of the Environmental Agreements, the TVA Board determined that it was appropriate to record TVA's obligations under the Environmental Agreements as regulatory assets, and they are included as such on the September 30, 2020, Consolidated Balance Sheets and will be recovered in rates in future periods.

Case Involving Kingston Fossil Plant .

On May 7, 2019, Roane County and the Cities of Kingston and Harriman ("local governments") filed a lawsuit in the Circuit Court for Roane County, Tennessee, against TVA and Jacobs for monetary damages and unspecified injunctive relief relating to TVA's cleanup response to the 2008 ash spill at Kingston.

In May 2019, Roane County and the Cities of Kingston and Harriman ("local governments") filed a lawsuit in the Circuit Court for Roane County, Tennessee, against TVA and Jacobs for monetary damages and unspecified injunctive relief relating to TVA's cleanup response to the 2008 ash spill at Kingston.

The local governments allege that TVA and Jacobs failed to take proper measures to mitigate environmental and health risks during the cleanup response and misled the local governments and their citizens about health and environmental risks associated with exposure to coal fly ash.

The local governments seek to recover monetary damages on behalf of their citizens for personal injury and property loss claims, damages for lost tax revenue, damages for increased emergency and medical response costs claims, punitive damages, and unspecified injunctive relief.

On June 6, 2019, TVA removed the lawsuit to the Eastern District.

TVA has filed a motion to dismiss the case.

Trial has been scheduled for March 23, 2021.

The local governments seek to recover monetary damages on behalf of their citizens for personal injury and property loss claims, damages for lost tax revenue, damages for increased emergency and medical response costs, punitive damages, and unspecified injunctive relief.

In June 2019, TVA removed the lawsuit to the Eastern District, and TVA and Jacobs filed separate motions to dismiss.

Plaintiffs, in response, filed a response opposing both motions and a separate motion seeking leave to file a proposed amended class action complaint in which Roane County would serve as class representative for the municipalities and their citizens.

In December 2019, the Eastern District court ruled that the local governments did not have standing to assert representative claims on behalf of their citizens and rejected their motion to proceed as a class action on behalf of their citizens because of the dissimilarity of the injuries allegedly suffered by the local governments (lost tax revenue) and the personal injuries and personal medical expenses allegedly suffered by the individuals.

The court indicated, however, that the local governments may have legal standing to assert claims for their direct injuries (claims relating to municipally owned property) and directed the local governments to file an amended pleading in conformance with the court's order by January 16, 2020.

The plaintiffs filed their amended complaint on January 15, 2020.

On February 26, 2020, TVA and Jacobs moved to dismiss the amended complaint, and on September 30, 2020, the court dismissed the lawsuit without prejudice.

Class Action Lawsuit Involving Kingston Fossil Plant .

On November 7, 2019, a resident of Roane County, Tennessee, filed a proposed class action lawsuit against Jacobs and TVA in the United States District Court for the Eastern District of Tennessee.

On November 7, 2019, a resident of Roane County, Tennessee, filed a proposed class action lawsuit against Jacobs and TVA in the Eastern District.

The complaint alleges that the class representative and all other members of the proposed class were damaged as a result of the 2008 ash spill at Kingston and the resulting cleanup activities.

The complaint alleges, among other things, that (1) TVA was negligent in its construction and operation of the Kingston CCR facility, (2) TVA and Jacobs failed to take proper measures to mitigate environmental and health risks during the cleanup response, and (3) TVA and Jacobs misled the community about health and environmental risks associated with exposure to coal fly ash.

The complaint seeks monetary damages and injunctive relief in the form of an order requiring that the defendants establish a blood testing program and medical monitoring protocol, and to remediate damage to the proposed class’ properties.

Lawsuit Brought by TDEC Involving Gallatin Fossil Plant CCR Facilities.

In January 2015, the Tennessee Department of Environment and Conservation ("TDEC") filed a lawsuit against TVA in the Chancery Court for Davidson County, Tennessee, alleging that pollutants from Gallatin have been discharged in violation of the Tennessee Water Quality Control Act and the Tennessee Solid Waste Disposal Act.

The Tennessee Scenic Rivers Association ("TSRA") and Tennessee Clean Water Network ("TCWN") were also plaintiffs.

On June 13, 2019, the parties filed a consent decree with the court to resolve this matter, which the court approved and entered on July 24, 2019.

Under the consent decree, TVA agreed to close the existing wet ash disposal impoundments by removal, either to an onsite landfill or to an offsite facility, which will be determined after appropriate environmental reviews.

TVA may also submit a plan that allows for beneficial reuse of the CCR material.

Under the consent decree, TVA must submit a removal and closure plan to TDEC and must remove the CCR material within 20 years of TDEC's approval of the plan.

The consent decree does not contain penalties or any admission of fault or liability.

In addition to the consent decree, TDEC entered an administrative order providing for ongoing investigation and monitoring related to a closed legacy impoundment at the site.

After a five-year study period, TDEC and TVA will determine whether any additional corrective action and/or closure activities are necessary for the legacy impoundment.

Lawsuit Brought by TSRA and TCWN Involving Gallatin Fossil Plant CCR Facilities .

In April 2015, TSRA and TCWN filed a lawsuit against TVA in the U.S.

District Court for the Middle District of Tennessee alleging that pollutants have been discharged into the Cumberland River from CCR facilities at Gallatin in violation of the Clean Water Act ("CWA") .

The plaintiffs sought injunctive relief, including an order requiring TVA to relocate the CCR facilities, civil penalties of up to $37,500 per violation per day, and attorneys' fees.

On August 4, 2017, the court issued a decision (the "August 2017 Order") that found TVA had discharged pollutants into the Cumberland River in the past and that the discharge was likely ongoing.

On October 2, 2017, TVA appealed the August 2017 Order to the United States Court of Appeals for the Sixth Circuit ("Sixth Circuit").

On September 24, 2018, a panel of the Sixth Circuit reversed the district court decision and held that the district court erred by imposing CWA liability against TVA and that, therefore, the imposition of injunctive relief was an abuse of discretion.

On April 15, 2019, the plaintiffs filed a petition with the U.S.

Supreme Court ("Supreme Court") requesting that the Supreme Court accept an appeal of the Sixth Circuit's decision.

The plaintiffs subsequently filed a motion requesting that the petition be dismissed.

The Supreme Court granted this request on September 23, 2019, effectively ending this lawsuit.

Consent Decree Involving Colbert Fossil Plant.

In May 2013, the Alabama Department of Environmental Management ("ADEM") and TVA entered into a consent decree concerning alleged violations of the Alabama Water Pollution Control Act.

The consent decree required, among other things, that TVA continue remediation efforts TVA had begun prior to the suit being filed and stop using an unlined landfill after a lined landfill is approved and constructed.

In August 2018, the parties agreed to amend the consent decree to deal with groundwater issues identified after TVA published groundwater monitoring reports in accordance with the CCR rule.

The amended consent decree requires TVA to investigate the nature and extent of any groundwater contamination, develop and implement a remedy, provide semiannual status reports to ADEM, and remedy any seeps identified during inspections.

TVA also paid $100,000 to Alabama under the amended consent decree.

In accordance with the amended consent decree, TVA submitted to ADEM a Comprehensive Groundwater Investigation Report on May 17, 2019, and an Assessment of Corrective Measures on July 17, 2019.

The complaint seeks monetary damages and injunctive relief in the form of an order requiring the defendants to establish a blood testing program and medical monitoring protocol and to remediate damage to the properties of the proposed class.

On April 22, 2020, TVA and Jacobs moved to dismiss the complaint, and the court has not yet ruled on this motion.

Case Involving Bull Run Fossil Plant .

On February 5, 2020, two plaintiffs who reside near Bull Run filed suit against TVA in the Circuit Court for Anderson County, Tennessee, on behalf of themselves and their two minor children.

The plaintiffs allege that they and their children were injured from direct exposures to CCR material originating from Bull Run and from second-hand exposures to coal ash through contact with a family member who worked at an undisclosed TVA facility.

TVA removed the case to the Eastern District on March 5, 2020, and the plaintiffs filed an amended complaint in federal court on March 12, 2020.

On June 19, 2020, TVA moved to dismiss the amended complaint, and on August 5, 2020, the court dismissed the amended complaint without prejudice on procedural grounds.

Case Involving Tennessee River Boat Accident .

On July 23, 2015, plaintiffs filed suit in the United States District Court for the Northern District of Alabama, seeking recovery for personal injuries sustained when the plaintiffs' boat struck a TVA transmission line which was being raised from the Tennessee River during a repair operation.

The district court dismissed the case, finding that TVA's exercise of its discretion as a governmental entity in deciding how to carry out the operation barred any liability for negligence.

In August 2017, the United States Court of Appeals for the Eleventh Circuit ("Eleventh Circuit") affirmed the decision.

In July 2015, plaintiffs filed suit in the U.S.

District Court for the Northern District of Alabama ("Northern District"), seeking recovery for personal injuries sustained when the plaintiffs' boat struck a TVA transmission line which was being raised from the Tennessee River during a repair operation.

The Northern District dismissed the case, finding that TVA's exercise of its discretion as a governmental entity in deciding how to carry out the operation barred any liability for negligence.

In August 2017, the U.S.

Court of Appeals for the Eleventh Circuit ("Eleventh Circuit") affirmed the decision.

The plaintiffs petitioned the Supreme Court for review of the decision, arguing that the provision of the TVA Act which allows suit to be brought against TVA does not allow TVA to claim immunity for discretionary actions.

On April 29, 2019, the Supreme Court issued its opinion reversing the judgment of the Eleventh Circuit and remanding the case to the Eleventh Circuit.

On July 17, 2019, the Eleventh Circuit remanded the case to the district court for further proceedings consistent with the Supreme Court's opinion.

The district court has issued a scheduling order setting the trial for February 16, 2021.

2019, the Supreme Court issued its opinion reversing the judgment of the Eleventh Circuit and remanding the case to the Eleventh Circuit.

In July 2019, the Eleventh Circuit remanded the case to the district court for further proceedings consistent with the Supreme Court's opinion.

Trial is currently scheduled for February 16, 2021.

Case Involving Bellefonte Nuclear Plant.

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

In November 2018, Nuclear Development, LLC, filed suit against TVA in the Northern District.

The plaintiff alleges that TVA breached its agreement to sell Bellefonte to the plaintiff.

The plaintiff seeks, among other things, (1) an injunction requiring TVA to maintain Bellefonte and the associated NRC permits until the case is concluded, (2) an order compelling TVA to complete the sale of Bellefonte to the plaintiff, and (3) if the court does not order TVA to complete the sale, monetary damages in excess of $ 30 million.

On December 26, 2018, Nuclear Development, LLC, and TVA filed a joint stipulation with the court.

In December 2018, Nuclear Development, LLC, and TVA filed a joint stipulation with the court.

Under the stipulation, Nuclear Development, LLC, withdrew its request for an expedited hearing on its injunction in exchange for TVA's agreement to continue to maintain Bellefonte in accordance with the NRC permits and to give Nuclear Development, LLC, and the court five days prior notice of any filing by TVA to terminate the permits or sell the site.

TVA filed a motion to dismiss the case on February 4, 2019.

On May 15, 2019, the court denied TVA's motion.

Trial is currently scheduled for May 2020.

TVA filed a motion to dismiss the case in February 2019.

In May 2019, the court denied TVA's motion.

Discovery is ongoing.

On September 23, 2020, the parties filed competing motions for summary judgment, but a decision on the motions is not expected for several months.

The case is scheduled to be trial ready by December 1, 2020.

Case Involving Rate Changes .

On June 9, 2020, a proposed class action lawsuit was filed in federal court in Abingdon, Virginia, by a LPC customer, asserting claims for breach of contract and violation of the Administrative Procedure Act.

The lawsuit alleges that the customers of TVA's LPCs are third-party beneficiaries under TVA's wholesale power contracts with its LPCs and that TVA's rate changes dating back to 2010 violate Section 11 of the TVA Act.

Section 11 of the TVA Act establishes the broad policy that TVA power projects shall be considered primarily for the benefit of the people of the Tennessee Valley and that service to industry is a secondary purpose to be used principally to secure a sufficiently high load factor and revenue returns to permit domestic and rural use at the lowest possible rates.

The remedies requested include an injunction prohibiting TVA rate changes that violate Section 11, monetary damages, and repayment of rates charged in violation of Section 11.

TVA filed a motion to dismiss the case on November 9, 2020.

Case Involving Long-Term Agreements .

On August 17, 2020, the Southern Environmental Law Center ("SELC") filed a lawsuit in the United States District Court for the Western District of Tennessee on behalf of three environmental groups alleging that, beginning in August 2019, TVA violated the National Environmental Policy Act ("NEPA") and Section 10 of the TVA Act by offering a Long-Term Agreement ("LTA") to its LPCs.

The environmental groups represented by SELC are Protect Our Aquifer, Energy Alabama, and Appalachian Voices.

The environmental groups claim that TVA violated NEPA because (1) TVA failed to perform an environmental review of the LTAs, which harmed the groups' advocacy efforts and their ability to participate in and to inform TVA's decision, and (2) the LTAs will have a negative effect on the environment by increasing TVA's reliance on coal and gas and impeding TVA's customers' efforts to institute renewable energy options.

The groups also claim that the LTAs violate Section 10 of the TVA Act, which authorizes TVA to enter into power contracts "for a term not exceeding twenty years," because, the groups allege, the twenty-year rolling contract with a twenty-year notice of termination requirement makes the LTAs effectively "never ending."

The environmental groups request the federal court to (1) declare that TVA's entry into long-term power agreements without preparing an environmental review violated NEPA and the TVA Act, (2) vacate the long-term contracts, and (3) enjoin TVA from implementing "system-wide energy contract programs that significantly affect the environment." TVA filed a motion to dismiss the case on October 20, 2020.

Related Parties

3 unchanged sentences

TVA is a source of cash to the federal government.

TVA will indefinitely continue to pay a return on the outstanding $ 258 million payments to the U.S.

Treasury in repayment of and as a return on the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment") .

TVA will indefinitely continue to pay the U.S.

Treasury a return on the outstanding $ 258 million of the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment").

See Note 18 — Proprietary Capital — Appropriation Investment.

11 unchanged sentences

For the years ended, or at, September 30

2020 2019 2018

Revenue from sales of electricity $ 105 $ 118 $ 122

Other income 260 258 240

Operating expenses 224 222 220

2 unchanged sentences

Accounts receivable, net 94 76 60

Investment funds 485 279 199

Long-term accounts receivable 27 53 46

7 unchanged sentences

Unaudited Quarterly Financial Information

First Second Third Fourth Total

Operating revenues $ 2,578 $ 2,521 $ 2,251 $ 2,899 $ 10,249

3 unchanged sentences

Unaudited Quarterly Financial Information

First Second Third Fourth Total

Operating revenues $ 2,725 $ 2,750 $ 2,604 $ 3,239 $ 11,318

2 unchanged sentences

Net income (loss) 423 241 165 588 1,417

Subsequent Events

Redemption of Debt

On October 15, 2019, TVA provided notice of its intent to redeem on November 15, 2019, the following electronotes identified by their respective CUSIP numbers and maturity dates.

The notes will be redeemed at 100 percent of par value.

Maturity Date

Principal Outstanding

TDEC Regulations

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.

Report of Independent Registered Public Accounting Firm

23 unchanged sentences

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 8. Financial Statements and Supplementary Data