Tennessee Valley Authority 10-K

ITEM 1. BUSINESS The Corporation The Tennessee Valley Authority ("TVA") is a corporate agency and instrumentality of the United States ("U.S.") that was created in 1933 by federal legislation in response to a proposal by President Franklin D. Roosevelt. TVA was created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA's service area in the southeastern United States, and sell the electricity generated at the facilities TVA operates. Today, TVA operates the nation's largest public power system and supplies power to a population of approximately 10 million people. TVA manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity. TVA also manages the river system to provide recreational opportunities, adequate water supply, improved water quality, natural resource protection, and economic development. TVA performs these management duties in cooperation with other federal and state agencies that have jurisdiction and authority over certain aspects of the river system. In addition, the TVA Board of Directors ("TVA Board") has established two councils — the Regional Resource Stewardship Council and the Regional Energy Resource Council — to advise TVA on its stewardship activities in the Tennessee Valley and its energy resource activities. Initially, all TVA operations were funded by federal appropriations. Direct appropriations for the TVA power program ended in 1959, and appropriations for TVA's stewardship, economic development, and multipurpose activities ended in 1999. Since 1999, TVA has funded all of its operations almost entirely from the sale of electricity and power system financings. TVA's power system financings consist primarily of the sale of bonds, notes, or other evidences of indebtedness (collectively, "Bonds") and secondarily of alternative forms of financing, such as lease arrangements. As a wholly-owned government corporation, TVA is not authorized to issue equity securities. 8 Table of Contents Service Area TVA's service area, the area in which it sells power, is defined by the Tennessee Valley Authority Act of 1933, as amended ("TVA Act"). TVA supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky, and in portions of northern Georgia, western North Carolina, and southwestern Virginia. Under the TVA Act, subject to certain minor exceptions, TVA may not, without the enactment of authorizing federal legislation, enter into contracts that would have the effect of making it, or the wholesale customers that distribute TVA power ("local power company customers" or "LPCs"), a source of power supply outside the area for which TVA or its LPCs were the primary source of power supply on July 1, 1957. This provision is referred to as the "fence" because it bounds TVA's sales activities, essentially limiting TVA to power sales within a defined service area. Note See Power Supply and Load Management Resources. In addition, the Federal Power Act ("FPA") includes a provision that helps protect TVA's ability to sell power within its service area. This provision, called the "anti-cherrypicking" provision, prevents the Federal Energy Regulatory Commission ("FERC") from ordering TVA to provide access to its transmission lines to others to deliver power to customers within TVA's defined service area. As a result, the anti-cherrypicking provision reduces TVA's exposure to loss of its customers. However, there have been some efforts to circumvent the anti-cherrypicking provision, and the protection of the provision could be limited and perhaps eliminated by federal legislation at some time in the future. See Competition and Item 1A, Risk Factors — Regulatory, Legislative, and Legal Risks — TVA may lose its protected service territory . In 2020, the revenues generated from TVA's electricity sales were $10.1 billion and accounted for virtually all of TVA's revenues. See Note 17 — Revenue for details regarding revenues by state for each of the last three years. COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of the Coronavirus Disease 2019 ("COVID-19") to be a pandemic, which continues to be a serious challenge throughout the United States. TVA has implemented a company-wide 9 Table of Contents pandemic plan to address specific aspects of the COVID-19 pandemic. TVA's pandemic plan continues to evolve based on medical guidance and federal, regional, and local requirements and guidelines. TVA has put in place measures to protect its workforce, stakeholders, and critical operations, such as extending the timeframe for workforce reintegration and continuing to implement strong physical and cybersecurity measures. Generation, transmission, and distribution functions are being actively monitored, and TVA's operations and delivery of energy to customers have not been materially impacted at this time. TVA has experienced a reduction in revenue through September 30, 2020 due to a decrease in energy demand, resulting from the COVID-19 pandemic, and therefore has implemented various cost savings initiatives such as deferring and prioritizing certain capital projects and decreasing discretionary spending. TVA continues to assess potential supplier risk and through September 30, 2020, has experienced minimal impacts in this regard. The COVID-19 pandemic has also created economic uncertainty for TVA's LPCs and the communities they serve. To support LPCs and strengthen the public power response to the COVID-19 pandemic, TVA has created initiatives such as the Public Power Support and Stabilization Program, Back-to-Business Credit Program, Community Care Fund, and Pandemic Relief Credit. TVA has also provided regulatory flexibility for LPCs to halt disconnection of services. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives — Coronavirus Pandemic for an expanded discussion of the impact to TVA and related initiatives. The COVID-19 pandemic is an evolving situation, and TVA will continue to monitor and adjust its response as necessary to ensure reliable service while protecting the safety and health of its workforce. Customers TVA is primarily a wholesaler of power, selling power to LPCs that then resell power to their customers at retail rates. TVA's LPCs consist of (1) municipalities and other local government entities ("municipalities") and (2) customer-owned entities ("cooperatives"). These municipalities and cooperatives operate public power electric systems whose primary purpose is not to make a profit but to supply electricity to the general public or the cooperatives' members. TVA also sells power directly to certain end-use customers, primarily large commercial and industrial loads and federal agencies with loads larger than 5,000 kilowatts ("kW"). Whether TVA or an LPC serves a new power customer is determined by the applicable TVA-LPC wholesale power contract. Each contract contains a formula that balances the size of the LPC and the amount of any TVA infrastructure investment to determine which party is entitled to serve the new customer. In addition, power in excess of the needs of the TVA system may, where consistent with the provisions of the TVA Act, be sold under exchange power arrangements with other specific electric systems. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Revenues . See Note 17 — Revenue for details regarding operating revenues for each of the last three years. Local Power Company Customers Revenues from LPCs accounted for approximately 92 percent of TVA's total operating revenues in 2020. Following the merger in July 2020 of two LPCs, TVA had wholesale power contracts with 153 LPCs at September 30, 2020. Each of these contracts requires the LPC to purchase from TVA all of the electric power required for service to the LPC's customers; however, flexibility agreements available to LPCs that have executed long-term contracts with TVA allow LPCs to locally generate up to approximately five percent of average total hourly energy sales over the prior five years to meet their individual customers' needs. LPCs purchase power under contracts with terms of five or 20 years to terminate. TVA's two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES accounted for nine percent and eight percent, respectively, of TVA's total operating revenues in 2020. In May 2020, MLGW published a draft Integrated Resource Plan ("IRP") to guide energy choices in the future, and in July 2020, TVA made a proposal to MLGW that highlights the benefits of remaining a TVA customer. In August 2020, MLGW published a final IRP and announced their plan to issue requests for proposal to validate the cost estimates included in the IRP. In addition, certain other LPCs are evaluating options for future energy choices. TVA and LPCs continue to work together to meet the changing needs of consumers around the Tennessee Valley. In 2019, the TVA Board approved a 20-year Partnership Agreement option that better aligns the length of LPC contracts with TVA's long-term commitments. These agreements are automatically extended each year after their initial effective date, contingent upon certain circumstances, including limited rate increases going forward. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. In June 2020, TVA provided participating LPCs a flexibility option that allows them to locally generate up to approximately five percent of average total hourly energy sales over the prior five years in order to meet their individual customers' needs. As of November 16, 2020, 142 LPCs had signed the 20-year Partnership Agreement with TVA, and 64 LPCs had signed a Flexibility Agreement. The power contracts between TVA and LPCs provide for the purchase of power by LPCs at the wholesale rates established by the TVA Board. Under the TVA Act, the TVA Board is authorized to regulate LPCs to carry out the purposes of the 10 Table of Contents TVA Act through contract terms and conditions as well as through rules and regulations. TVA regulates LPCs primarily through the provisions of TVA's wholesale power contracts. All of the power contracts between TVA and the LPCs require that power purchased from TVA be sold and distributed to the ultimate consumer without discrimination among consumers of the same class and prohibit direct or indirect discriminatory rates, rebates, or other special concessions. In addition, there are a number of wholesale power contract provisions through which TVA seeks to ensure that the electric system revenues of the LPCs are used only for electric system purposes. Furthermore, almost all of these contracts specify the resale rates and charges at which the LPC must resell TVA power to its customers. These rates are revised from time to time, subject to TVA approval, to reflect changes in costs, including changes in the wholesale cost of power. TVA also regulates LPC policies for customer deposits, termination of service for non-payment, information to consumers, and billing through a service practice policy framework. TVA's regulatory framework provides for consistent regulatory policy for ratepayers across the Tennessee Valley, while recognizing local considerations. The regulatory provisions in TVA's wholesale power contracts are designed to carry out the objectives of the TVA Act, including the objective of providing for adequate supply of power at the lowest feasible rates. See Rates — Rate Methodology below. Other Customers Revenues from directly served industrial customers accounted for approximately six percent of TVA's total operating revenues in 2020. Contracts with these customers are subject to termination by the customer or TVA upon a minimum notice period that varies according to a number of factors, including the customer's contract demand and the period of time service has been provided. TVA also serves seven federal customers, ‎including U.S. Department of Energy ("DOE") facilities and military installations, which accounted for approximately one percent of TVA's total operating revenues in 2020. Other Revenue Other revenue consists primarily of wheeling and network transmission charges, sales of excess steam that is a by-product of power production, delivery point charges for interconnection points between TVA and the customer, and certain other minor items. Other revenue accounted for approximately one percent of TVA's total operating revenues in 2020. Rates Rate Authority The TVA Act gives the TVA Board sole responsibility for establishing the rates TVA charges for power. These rates are not subject to judicial review or to review or approval by any state or other federal regulatory body. Under the TVA Act, TVA is required to charge rates for power that will produce gross revenues sufficient to provide funds for: • Operation, maintenance, and administration of its power system; • Payments to states and counties in lieu of taxes ("tax equivalents"); • Debt service on outstanding indebtedness; • Payments to the U.S. Treasury in repayment of and as a return on the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment"); and • Such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of their maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's power business, having due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. See Note 18 — Proprietary Capital . TVA fulfilled its requirement to repay $1.0 billion of the Power Program Appropriation Investment in 2014; therefore, the repayment of this amount is no longer a component of rate setting. Rate Methodology TVA uses a seasonal time of use wholesale rate structure comprised of base demand and energy rates, a fuel rate, and a grid access charge ("GAC") . In setting the base rates, TVA uses a debt-service coverage ("DSC") methodology to derive annual revenue requirements in a manner similar to that used by other public power entities that also use the DSC rate methodology. Under the DSC methodology, rates are calculated so that an entity will be able to cover its operating costs and to satisfy its obligations to pay principal and interest on debt, plus an additional margin. This ratemaking approach is particularly suitable for use by entities financed primarily, if not entirely, by debt, such as TVA, and helps ensure that TVA produces gross revenues sufficient to fund requirements specified in the TVA Act listed under Rate Authority above. TVA recovers fuel costs and tax equivalent payments associated with fuel cost adjustments through a monthly rate reflecting the forecasted costs of fuel. Beginning on October 1, 2018, fuel costs are allocated to three groups of customers: Standard Service (residential and small commercial customers), large manufacturing customers with contract demands greater than 5 megawatts ("MW"), and large general service customers with contract demands greater than 5 MW. Fuel costs are 11 Table of Contents allocated to these three classes of customers in relation to their hourly loads and TVA's hourly incremental dispatch cost. Total monthly fuel costs include costs for natural gas, fuel oil, coal, purchased power, emission allowances, nuclear fuel, and other fuel-related commodities as well as realized gains and losses on derivatives purchased to hedge the costs of such commodities. In recent years, TVA, LPCs, and directly served industries have worked collaboratively to develop changes to TVA's rate structures that focus on TVA's long-term pricing efforts. These changes are improving pricing by better aligning rates with underlying cost drivers and by sending improved pricing signals, while maintaining competitive industrial rates and keeping residential rates affordable. The rate structures are also designed to reduce wholesale energy rates for Standard Service and introduce a GAC at an offsetting rate to better recover fixed costs. This approach more accurately reflects the wholesale cost of energy and recognizes the value of the grid's reliability and associated fixed costs. TVA's modernized approach to pricing provides bill stability while maintaining reliability and fairness for all TVA's customers. Power Supply and Load Management Resources General TVA seeks to balance production capabilities with power supply requirements by promoting the conservation and efficient use of electricity and, when necessary, buying, building, or leasing assets or entering into power purchase agreements. TVA also seeks to employ a diverse mix of energy generating sources and works toward obtaining greater amounts of its power supply from clean (low or zero carbon emitting) resources. Power generating facilities operated by TVA at September 30, 2020, included three nuclear sites, 17 natural gas and/or oil-fired sites, five coal-fired sites, 29 conventional hydroelectric sites, one pumped-storage hydroelectric site, one diesel generator site, and 14 solar energy sites, although a certain number of these facilities were out of service as of September 30, 2020. See Item 2, Properties — Generating Properties — Net Capability for a discussion of the units at these facilities. TVA also acquires power under power purchase agreements ("PPAs") of varying durations, including short-term contracts of less than 24-hours in duration. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Expenses . The following table shows TVA's generation and purchased power by generating source as a percentage of all electric power generated and purchased (based on kilowatt hours ("kWh")) for the periods indicated: Total Power Supply by Generating Source For the years ended September 30 Generation Resource (1) 2020 2019 2018 Nuclear 42% 39% 39% Natural gas and/or oil-fired 22% 20% 20% Coal-fired 13% 17% 19% Hydroelectric 10% 10% 9% Purchased power (non-renewable) 8% 9% 9% Purchased power (renewable) 5% 5% 4% Note (1) TVA's non-hydro renewable resources from TVA facilities are less than one percent for all periods shown, and therefore are not represented on the table above. Purchased power (renewable) contains the majority of non-hydro renewable energy supply. 12 Table of Contents Nuclear At September 30, 2020, TVA had three nuclear sites consisting of seven units in operation. The units at Browns Ferry Nuclear Plant ("Browns Ferry") are boiling water reactor units, and the units at Sequoyah Nuclear Plant ("Sequoyah") and Watts Bar Nuclear Plant ("Watts Bar") are pressurized water reactor units. Operating information for each of these units is included in the table below. TVA Nuclear Power At September 30, 2020 Nuclear Unit Summer Net Capability (MW) Net Capacity Factor for 2020 (%) Date of Expiration of Operating License Browns Ferry Unit 1 (1) 1,101 107.9 2033 Browns Ferry Unit 2 (1) 1,103 100.7 2034 Browns Ferry Unit 3 (1) 1,105 91.7 2036 Sequoyah Unit 1 1,152 82.3 2040 Sequoyah Unit 2 1,140 90.0 2041 Watts Bar Unit 1 1,157 81.6 2035 Watts Bar Unit 2 1,164 89.2 2055 Note (1) The summer net capability for Browns Ferry excludes the impact of the extended power uprate project. The generating capability is expected to increase by an estimated 465 MW after sufficient run time to validate the new capacity. Extended Power Uprate . On August 14, 2017, the Nuclear Regulatory Commission ("NRC") approved TVA's request for a 465 MW extended power uprate ("EPU") project at Browns Ferry. Physical work on all units was completed in 2019. The generating capacity is expected to increase 465 MW after sufficient run time to validate the new capacity, which is expected to occur in 2021. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Extended Power Uprate. Other Nuclear Initiatives . The NRC issued an Early Site Permit to TVA in December 2019 to license small modular reactors ("SMRs") at TVA's Clinch River Site in Oak Ridge, Tennessee. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Small Modular Reactors . Other Nuclear Matters. Operating nuclear facilities subjects TVA to waste disposal, decommissioning, and insurance requirements, as well as litigation risks. See Fuel Supply — Nuclear Fuel below for a discussion of spent nuclear fuel and low-level radioactive waste, Note 22 — Commitments and Contingencies — Contingencies for a discussion of TVA's nuclear decommissioning liabilities and the related trust and nuclear insurance, and Note 22 — Commitments and Contingencies — Legal Proceedings and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Apparent Violations of NRC Regulations for a discussion of legal and administrative proceedings related to TVA's nuclear program, which discussions are incorporated herein by reference. Natural Gas and/or Oil-Fired At September 30, 2020, TVA's natural gas and oil-fired fleet consisted of 101 combustion turbine power blocks (86 simple-cycle units, one cogeneration unit, and 14 combined-cycle power units), accounting for 12,509 MW of summer net capability. Sixty of the simple-cycle units are currently capable of quick-start response allowing full generation capability in approximately 10 minutes. The economic dispatch of natural gas-fired plants depends on both the day-to-day price of natural gas and the price of other available intermediate resources such as coal-fired plants. TVA uses simple-cycle units to meet peaking or backup power needs. TVA's 2019 IRP projects significant solar expansion over the next decade. The natural gas-fired fleet supports that expansion by providing reliability across all hours, as well as the flexibility to help manage ramping and intermittency. See Item 2, Properties — Generating Properties, Note 7 — Leases , Note 10 — Variable Interest Entities , and Note 13 — Debt and Other Obligations for a discussion of lease arrangements into which TVA has entered in connection with certain combustion turbine units. Because of TVA's strategy of portfolio diversification and reduction of air emissions, TVA may decide to make further strategic investments in natural gas-fired facilities in the future by purchase, construction, or lease. Coal-Fired At September 30, 2020, TVA had five coal-fired plants consisting of 25 active units, accounting for 6,915 MW of summer net capability. TVA considers units to be in an active state when the unit is generating, available for service, or temporarily unavailable due to equipment failures, inspections, or repairs. All other coal-fired units are considered retired. In 2018, the TVA Board approved a plan to perform assessments of Bull Run Fossil Plant ("Bull Run") and Paradise Fossil Plant 13 Table of Contents ("Paradise"). Results of these assessments were presented to the TVA Board at its February 2019 meeting, and the Board approved the retirement of Paradise Unit 3 by December 2020 and Bull Run by December 2023. Paradise Unit 3 was taken offline on February 1, 2020, effectively retiring the plant. Coal-fired plants have been subject to increasingly stringent regulatory requirements over the last few decades, including those under the Clean Air Act ("CAA"), the Clean Water Act ("CWA"), and the Resource Conservation and Recovery Act ("RCRA"). TVA has committed to a programmatic approach for the evaluation of its sites where coal combustion residuals ("CCR") are stored to meet all applicable state and federal regulations. Increasing regulatory costs have caused TVA to consider whether to make the required capital investments to continue operating its coal-fired facilities. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities. TVA is moving toward a more balanced generation plan with greater reliance on lower-cost and cleaner energy generation technologies. Since September 30, 2010, TVA has reduced its summer net capability of coal-fired units by 7,653 MW. The 2019 IRP indicated evaluation of additional coal unit retirements. Most of the remaining coal-fired plants are among the oldest in the nation still in operation, and their fit within TVA's power supply portfolio will be further tested in the future with increasing amounts of solar generation utilized by TVA. TVA's long-range plans will continue to consider the costs and benefits of significant environmental and other major capital investments at its remaining coal-fired plants. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Optimum Energy Portfolio. Hydroelectric Conventional Hydroelectric Dams . TVA maintains 29 conventional hydroelectric dams with 109 generating units throughout the Tennessee River system for the production of electricity. As of September 30, 2020, these units accounted for 3,759 MW of summer net capability. The amount of electricity that TVA is able to generate from its hydroelectric plants depends on a number of factors, including the amount of precipitation and runoff, initial water levels, generating unit availability, and the need for water for competing water management objectives. When these factors are unfavorable, TVA must increase its reliance on higher cost generation plants and purchased power. In addition, a portion of energy generated by nine U.S. Army Corps of Engineers ("USACE") dams on the Cumberland River system contributes to the TVA power system. See Weather and Seasonality below and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Dam Safety and Remediation Initiatives. Raccoon Mountain Pumped-Storage Plant . At September 30, 2020, TVA had four units at Raccoon Mountain Pumped-Storage Plant ("Raccoon Mountain") with a total net summer capability of 1,635 MW. These units are utilized to balance the transmission system as well as generate power. TVA uses electricity generated by its fleet during periods of low demand to operate pumps that fill the reservoir at Raccoon Mountain. Then, during periods of high or peak demand, the water is released and the pumps reverse to work as power generating turbines. Hiwassee Hydro Unit 2. Hiwassee Hydro Unit 2 has a unique reversible turbine/generator that acts as a pump and a turbine enhancing TVA's ability to balance baseload generation. Hiwassee Hydro Unit 2 has a summer net capability of 86 MW. Hydro Modernization Program . TVA's Hydro Modernization Program began in 1992 and focused on units with potential to increase peaking capacity and improve reliability. With the completion of Pickwick Landing Dam ("Pickwick") Unit 2 in 2020, the initial Hydro Modernization Program has concluded with modernization completed on 62 conventional hydroelectric units under the program. The modernization projects resulted in 453 MW of increased capacity from the conventional hydroelectric units, with an average efficiency gain of approximately five percent. In 2019, TVA began its transition to a new program, the Hydro Major Maintenance Program, intended to focus on addressing reliability risks that will support the preservation of TVA's hydroelectric fleet capacity. Hydroelectric generation will continue to be an important part of TVA's energy mix since it plays a vital role in carbon reduction initiatives, the ability to integrate other renewables into the power portfolio, and, ultimately, TVA's ability to meet changing customer preferences for cleaner energy sources. As such, TVA is currently evaluating the need to revitalize the Hydro Modernization Program to increase the capability, flexibility, and availability of the hydroelectric fleet to help meet these changing customer preferences. Other Renewable Energy Resources TVA's renewable energy portfolio includes both TVA-owned assets and renewable energy purchases. TVA owns 14 solar sites with a total net summer capability of approximately 1 MW. TVA currently plans to meet renewable goals through power purchases and arrangements with LPCs. See Distributed Energy Resources and Power Purchase and Other Agreements below. TVA tracks its renewable energy commitments and claims through the management of Renewable Energy Certificates ("RECs"). The RECs, which each represent 1 megawatt-hour ("MWh") of renewable energy generation, are principally associated with wind, solar, biomass, and low-impact hydroelectric. TVA continues to evaluate ways to adjust to customer preferences and requirements for cleaner and greener energy, including the acquisition of RECs from renewable purchased 14 Table of Contents power. These RECs can be sold to customers to meet their needs. Diesel Generators At September 30, 2020, TVA had one diesel generator plant consisting of five units, and this facility accounted for 9 MW of summer net capability. These units are not currently dispatched for generation. Distributed Energy Resources Consumer desire for energy choice, among other things, is driving the expectation for flexible options in the electric industry. TVA and LPCs are working together to leverage the strengths of the Tennessee Valley public power model to provide distributed energy solutions that are economical, sustainable, and flexible. TVA will focus on the safety and reliability impacts of these resources as they are interconnected to the grid and will ensure that the pricing of electricity remains as low as feasible. Additional regulatory considerations and analysis may be required as the distributed energy resources ("DER") market, technologies, and programs evolve. TVA is working to develop pricing and regulatory structures with a deliberate and thoughtful analysis of each current and future program offering. This requires strong partnerships with LPCs to give customers choices and provide end-use consumers the flexibility they desire. In 2019, the TVA Board approved new renewable power solutions, including a utility-scale option and a mid-scale option, that better equip TVA and LPCs with the flexibility to meet changing end-use customer needs. The utility-scale option, which aggregates demand through a competitive procurement process, is implemented by a renewable investment agreement through TVA's Green Invest Program. TVA may also construct its own renewable facilities to meet these needs. The mid-scale option, also known as the Flexibility Research Project, is a joint project with LPCs to enable solutions for situations where the end-use consumer needs onsite renewable or distributed generation and to enable TVA to gain market knowledge and operational insights from these research projects. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Renewable Power Solutions. Through the Home Uplift Program, TVA is partnering with LPCs, state and local governments, non-profit agencies, energy efficiency advocates, and the Tennessee Valley Public Power Association to complete home evaluations and make high-impact home energy upgrades for qualifying homeowners. In addition, TVA and LPCs conduct workshops to educate homeowners about low and no-cost energy efficiency upgrades that improve their quality of life. TVA has encouraged the development of solar, wind, biomass, and low-impact hydroelectric generation systems through various current and former program offerings, with total operating capacity of 1,705 MW and nearly 1,178 MW of additional approved capacity as of September 30, 2020. Inside the Tennessee Valley, the combined participation for all such renewable solutions is 490 MW of installed operating capacity through both TVA-owned sites and PPAs. Outside the Tennessee Valley, TVA contracts for approximately 1,215 MW of operating wind capacity through PPAs. In 2017, the TVA Board authorized up to $300 million to be spent over the next 10 years, subject to annual budget availability and necessary environmental reviews, to build an enhanced fiber optic network that will better connect TVA's operational assets. Fiber is a vital part of TVA's modern communication infrastructure. The new fiber optic lines will improve the reliability and resiliency of the generation and transmission system while enabling the system to better accommodate DER as these resources enter the market. New energy management systems and energy storage technologies present opportunities for more sophisticated and integrated operation of the entire grid. The advent of electric vehicles and small-scale renewable generation has hastened the development of energy storage technologies that have the potential to mitigate the intermittent supply issues associated with many renewable generation options. Implementation of these technologies in conjunction with two-way communication to the site creates the potential for more efficient usage of other DER on the grid. TVA's electric vehicle ("EV") strategy is a staged approach that will evolve as the local EV market matures. TVA continues to focus on utilizing more EVs and installing charging stations inside the Tennessee Valley. This approach has enabled TVA to gain insights on the value and impact to utilities of large-scale electrification. TVA has also partnered with over 30 organizations across the State of Tennessee (known as the "Drive Electric Tennessee" collaborative) to create a roadmap to outline local market needs for widespread adoption. This foundational information is crucial as more affordable, longer range EVs come to the market in the next few years. In November 2020, the TVA Board approved changes that remove market barriers facing EV adoptions, including setting supportive utility level policies such as rate options and regulatory policies. Onsite energy management technologies and the proliferation of companies interested in providing services to support and aggregate the impacts of such systems provide another DER opportunity. Such systems can afford the consumer benefits through reduced consumption, increased comfort, detailed energy use data, and savings from time-sensitive rate structures. TVA and LPCs must consider the integration of the impacts from changes in energy usage patterns resulting from the operation of such systems. 15 Table of Contents Demand response systems that take advantage of the increasing sophistication in communication to homes, businesses, and distribution system assets also afford the opportunity for more granular control of system demand. Technologies can manage individual customer systems to shift usage from peak to off-peak periods and create significant reductions in the need for peak generation output or curtail usage for short periods to balance system demand. More sophisticated distribution control systems can also lower peak demand through control of excess voltage on the grid on either a dispatchable or continuous basis. Some large industrial customers also have the capacity to respond instantaneously and can augment operational flexibility by providing ancillary services. TVA is leading an initiative to determine the value of DER for its system. Initial efforts are focused on small-scale distributed (rooftop) solar, but the efforts are general enough to allow for other distributed options. These efforts are ongoing, led by a team that includes technical support from the Electric Power Research Institute ("EPRI"), to develop a methodology to identify site preferences on the distribution systems of the LPCs. This work, along with locational analysis already completed by TVA, will help in placing utility-scale solar in furtherance of the IRP recommendations as well as distributed solar to meet the needs of LPCs. See Research and Development below. Power Purchase and Other Agreements TVA acquires power from a variety of power producers generally through long-term and short-term PPAs as well as through spot market purchases. During 2020, TVA acquired approximately 93 percent of the power that it purchased through the long-term PPAs described below, including agreements for long-term renewable generation resources, and approximately seven percent on the spot market. Renewable Power Purchase Agreements. In order to meet customer preferences and requirements for cleaner and greener energy, TVA has entered into certain PPAs with renewable resource providers. As of September 30, 2020, TVA is contracted for 2,958 MW of summer net capability under renewable PPAs. These agreements are part of progressive partnerships that align the core values of TVA and the public power model with the desire of TVA's customers for renewable energy. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Changing Customer Preferences — Renewable Power Purchase Agreements. 16 Table of Contents A portion of TVA's capability provided by power purchase agreements is provided under contracts that expire between 2023 and 2043, and the most significant of these contracts are described in the table below. Power Purchase Contracts At September 30, 2020 Type of Facility Location Summer Net Capability (MW) Contract Termination Date Lignite Mississippi 440 2032 Natural gas Alabama 790 2033 Natural gas Alabama 735 2026 Solar Alabama 75 2037 Solar (1) Alabama 227 2041 Solar (2) Alabama 150 2042 Solar Tennessee 53 2039 Solar Tennessee 5 2032 Solar (2) Tennessee 147 2042 Solar (3) Tennessee 69 2038 Solar (3) Tennessee 100 2038 Solar (3) Tennessee 70 2038 Solar (3) Tennessee 35 2038 Solar (3) Tennessee 177 2043 Solar (3) Mississippi 200 2043 Landfill gas Tennessee 6 2031 Hydroelectric Tennessee and Kentucky 402 Upon three years' notice Wind Iowa 198 2031 Wind Iowa 101 2030 Wind Kansas 201 2032 Wind Kansas 165 2033 Wind Illinois 150 2032 Wind Illinois 200 2032 Wind Illinois 200 2033 Wind Tennessee 27 2025 Diesel Tennessee 23 2029 Diesel Tennessee 20 2032 Diesel Tennessee 8 2023 Diesel Tennessee 8 2028 Diesel Mississippi 20 2023 Diesel Mississippi 26 2028 Diesel Alabama 10 2028 Battery storage (3) Mississippi 50 2043 Notes (1) Power delivery is expected to commence in 2021. Of the four solar PPAs TVA signed in 2019, one of the counterparties failed to comply with the terms of its PPA. TVA terminated this 150 MW PPA in 2020, and it is excluded from the table above. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives — Changing Customer Preferences — Renewable Power Purchase Agreements . (2) Power delivery is expected to commence in 2022. (3) Power delivery is expected to commence in 2023. Under federal law, TVA is required to purchase energy from qualifying facilities (cogenerators and small power producers) at TVA's avoided cost of either generating this energy itself or purchasing this energy from another source. TVA fulfills this requirement through the Dispersed Power Production Program. As of September 30, 2020, there were 111 generation sources, with a combined qualifying capacity of 268 MW, whose power TVA purchases under this program. 17 Table of Contents Fuel Supply General TVA's consumption of various types of fuel depends largely on the demand for electricity by TVA's customers, the availability of various generating units, and the availability and cost of fuel. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Expenses. Nuclear Fuel Current Fuel Supply . Converting uranium to nuclear fuel generally involves four stages: the mining and milling of uranium ore to produce uranium concentrates; the conversion of uranium concentrates to uranium hexafluoride gas; the enrichment of uranium hexafluoride; and the fabrication of the enriched uranium hexafluoride into fuel assemblies. For its forward four-year (2021-2024) requirements, TVA currently has 100 percent of its uranium mining and milling, conversion services, enrichment services, and fabrication services requirements either in inventory or under contract with various suppliers. TVA anticipates being able to fill its needs beyond this period by normal contracting processes as market forecasts indicate that the fuel cycle components will be readily available. The net book value of TVA's nuclear fuel was $1.5 billion at both September 30, 2020 and 2019. See Note 15 — Risk Management Activities and Derivative Transactions — Counterparty Risk . TVA, the DOE, and certain nuclear fuel contractors have entered into agreements, referred to as the Down-blend Offering for Tritium ("DBOT"), that provide for the production, processing, and storage of low-enriched uranium that is to be made using surplus DOE highly enriched uranium and other uranium. Low-enriched uranium can be fabricated into fuel for use in a nuclear power plant. Production of the low-enriched uranium began in 2019 and is contracted to continue through September 2025. Beginning October 2025, contract activity will consist of storage and flag management. Flag management ensures that the uranium is free from foreign obligations, and unencumbered by policy restrictions, so that it can be used in connection with the production of tritium. Under the terms of the interagency agreement between the DOE and TVA, the DOE will reimburse TVA for a portion of the costs of converting the highly enriched uranium to low-enriched uranium. See Note 1 — Summary of Significant Accounting Policies — Down-blend Offering for Tritium for a more detailed discussion of the DBOT project. Low-Level Radioactive Waste. Certain materials and supplies used in the normal operation of nuclear electrical generating units are potentially exposed to low levels of radiation. TVA sends shipments of low-level radioactive waste to burial facilities in Clive, Utah and Andrews, Texas. TVA is capable of storing some low-level radioactive waste at its own facilities for an extended period of time, if necessary. Spent Nuclear Fuel. All three nuclear sites have dry cask storage facilities. Sequoyah will need additional capacity by 2028. Watts Bar will need additional capacity by 2041. Browns Ferry completed a project in early 2020 to build another independent spent fuel storage installation pad. To recover the cost of providing long-term, onsite storage for spent nuclear fuel, TVA filed a breach of contract suit against the U.S. in the Court of Federal Claims in 2001. As a result of this lawsuit and related agreements, TVA has collected approximately $340 million through 2020. Tritium-Related Services. TVA and the DOE are engaged in a long-term interagency agreement under which TVA will, at the DOE's request, irradiate tritium-producing burnable absorber rods ("TPBARs") to assist the DOE in producing tritium for the Department of Defense ("DOD"). This agreement, which ends in 2035, requires the DOE to reimburse TVA for the costs that TVA incurs in connection with providing irradiation services and to pay TVA an irradiation services fee at a specified rate per TPBAR over the period when irradiation occurs. In general, TPBARs are irradiated for one operating cycle, which lasts about 18 months. At the end of the cycle, TVA removes the irradiated rods and loads them into a shipping cask. The DOE then ships them to its tritium-extraction facility. TVA loads a fresh set of TPBARs into the reactor during each refueling outage. Irradiating the TPBARs does not affect TVA's ability to safely operate the reactors to produce electricity. TVA has provided irradiation services using only Watts Bar Unit 1 since 2003. Although the interagency agreement provides for irradiation services to be performed at Watts Bar and Sequoyah, TVA expects the Watts Bar site to provide sufficient capacity to fulfill this agreement in the near term. The DOE notified TVA of future increased needs for tritium requiring the use of a second reactor. In 2019, TVA received approval from the NRC for a license amendment to authorize the irradiation of TPBARs in Watts Bar Unit 2. TVA is projecting to begin tritium production in Watts Bar Unit 2 in the fall of 2021. Natural Gas and Fuel Oil During 2020, TVA purchased a significant amount of its natural gas requirements from a variety of suppliers under contracts with terms of up to four years and purchased substantially all of its fuel oil requirements on the spot market. The net book value of TVA's natural gas inventory was $19 million and $15 million at September 30, 2020 and 2019, respectively. The net book value of TVA's fuel oil inventory was $82 million at both September 30, 2020 and 2019. At September 30, 2020, 80 of the combustion turbines that TVA operates were dual-fuel capable, and TVA has fuel oil stored on each of these sites as a backup to natural gas. 18 Table of Contents TVA purchases natural gas from multiple suppliers on a daily, monthly, seasonal, and term basis. During 2020, daily, monthly, seasonal, and term contracts accounted for 26 percent, nine percent, 16 percent, and 49 percent of purchases, respectively. TVA plans to continue using contracts of various lengths and terms to meet the projected natural gas needs of its natural gas fleet. During 2020, TVA arranged for the transportation of natural gas on eight separate pipelines, with approximately 63 percent being transported on two pipelines. During 2020, TVA maintained a total of approximately 1,485,000 million British thermal unit(s) ("mmBtu") per day of firm transportation capacity on six major pipelines, with approximately 59 percent of total firm transportation capacity being maintained on two pipelines. TVA utilizes natural gas storage services at seven facilities with a total capacity of 7.25 billion per cubic feet ("Bcf") of firm service and 4.40 Bcf of interruptible service to manage the daily balancing requirements of the eight pipelines used by TVA, with approximately 62 percent of the total storage capacity being maintained at two facilities. During 2020, storage levels were generally maintained at between 40 and 80 percent of the maximum contracted capacity at each facility. As TVA's natural gas requirements grow, it is anticipated that additional storage capacity may need to be acquired to meet the needs of the generating assets. In 2021, TVA does not expect to add a significant amount of firm capacity to its storage portfolio. Coal Coal consumption at TVA's coal-fired generating facilities during 2020 and 2019 was approximately 11 million tons and 15 million tons, respectively. At September 30, 2020 and 2019, TVA had 30 days and 33 days of system-wide coal supply at full burn rate, respectively, with net book values of $152 million and $197 million, respectively. TVA utilizes both short-term and long-term coal contracts. During 2020, long-term contracts made up 71 percent of coal purchases, and short-term contracts accounted for the remaining 29 percent. TVA plans to continue using contracts of various lengths, terms, and coal quality to meet its expected consumption and inventory requirements. During 2020 and 2019, TVA purchased coal by basin as follows: 19 Table of Contents The following charts present the proportion of each delivery method TVA utilizes for its coal supply for the periods indicated: Total system coal inventories fluctuated significantly throughout the year. TVA began 2020 with average coal inventory levels and increased to high levels due to the mild winter, demand reduction resulting from the COVID-19 pandemic, and low natural gas prices. Inventory balances were significantly reduced during the summer peak months due to higher than forecasted load, nuclear outages, and natural gas outages. Transmission The TVA transmission system is one of the largest in North America. TVA's transmission system has 69 interconnections with 13 neighboring electric systems and delivered approximately 151 billion kWh of electricity to TVA customers in 2020. In carrying out its responsibility for transmission grid reliability in the TVA service area, TVA has operated with 99.999 percent reliability since 2000 in delivering electricity to customers. See Item 2, Properties — Transmission Properties . Pursuant to its Transmission Service Guidelines, TVA offers transmission services to eligible customers to transmit wholesale power in a manner that is comparable to TVA's own use of the transmission system. TVA has also adopted and operates in accordance with its published Transmission Standards of Conduct and separates its transmission function from its power marketing function. TVA also is subject to federal reliability standards that are set forth by the North American Electric Reliability Corporation ("NERC") and approved by FERC. See Regulation . Additional transmission upgrades may be required to maintain reliability. Upgrades may include enhancements to existing lines and substations or new installations as necessary to provide adequate power transmission capacity, maintain voltage support, and ensure generating plant and transmission system stability. In 2017, the TVA Board authorized a strategic fiber optic initiative of up to $300 million to be spent over the next 10 years, subject to annual budget availability and necessary environmental reviews, that will expand TVA's fiber capacity and improve the reliability and resiliency of the generation and transmission system. The network expansion is designed to help meet the power system's growing need for bandwidth as well as accommodate the integration of new DER. As of September 30, 2020, TVA had spent $121 million on installation of the fiber optic lines and expects to spend an additional $179 million. A new system operations center has been approved for $255 million. The new secured facility is being built to accommodate a new energy management system and to adapt to new regulatory requirements. The facility is expected to be constructed by 2022 and fully operational by 2024. As of September 30, 2020, TVA had spent approximately $37 million on the project and expects to spend an additional $218 million. Weather and Seasonality Weather affects both the demand for and the market prices of electricity. TVA's power system is generally a dual-peaking system in which the demand for electricity peaks during the summer and winter months to meet cooling and heating needs. TVA uses degree days to measure the impact of weather on its power operations. Degree days measure the extent to which the TVA system 23-station average temperatures vary from 65 degrees Fahrenheit. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Sales of Electricity. 20 Table of Contents Competition TVA provides electricity in a service area that is largely free of competition from other electric power providers. This service area is defined primarily by provisions of law and long-term contracts. The region in which TVA or LPCs that distribute TVA power may provide power is limited and is often referred to as "the fence." Under the Federal Power Act ("FPA"), the anti-cherrypicking provision limits the ability of others to use the TVA transmission system for the purpose of serving customers within TVA's service area. State service territory laws limit unregulated third parties' ability to sell electricity to consumers. All TVA wholesale power contracts are all requirements contracts; however, Flexibility Agreements available to LPCs that have executed long-term contracts with TVA allow LPCs to locally generate up to approximately five percent of average total hourly energy sales over the prior five years to meet their individual customers' needs. In addition, other utilities may use their own transmission lines to serve customers within TVA's service area, and third parties are able to avoid the restrictions on serving end-use customers by selling or leasing generating assets to a customer rather than selling electricity. These threats underscore the need for TVA to design rates and strategically price its products and services to be competitive. There have also been some efforts to erode the anti-cherrypicking provision, and the protection of the provision could be limited and perhaps eliminated by federal legislation at some time in the future. TVA also faces competition in the form of emerging technologies. Improvements in energy efficiency technologies, smart technologies, and energy storage technologies may reduce the demand for centrally provided power. The growing interest by customers in generating their own power through DER has the potential to lead to a reduction in the load served by TVA as well as cause TVA to re-evaluate how it operates the overall grid system to continue to provide highly reliable power at affordable rates. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Distributed Energy Resources. Finally, TVA and other utility companies are facing an evolving marketplace of increased competition driven by customer choice and behavior. As technology develops, consumers' demands for access to diverse products and services may increase, creating opportunities for growth with new products and services resulting from emerging technologies. Research and Development Investments in TVA's research portfolio are supported through partnership and collaboration with LPCs, EPRI, the DOE, federal agencies, national labs, peer utilities, universities, and industry vendors and through participation in professional societies and other research consortiums. Annual investments made in science and technological innovation help meet future business and operational challenges. Each year, TVA's annual research portfolio is updated based on a broad range of operational and industry drivers to assess key technology gaps, performance issues, or other significant issues, addressed through research and development. Core research activities directly support optimization of TVA's generation and transmission assets, air and water quality, energy utilization, and distributed/clean energy integration. TVA also provides research and development services on behalf of LPCs by helping optimize their distribution systems and helping minimize technology gaps in energy utilization and consumer technologies. TVA's research program is also focused on enabling transformational innovation. At the forefront is deploying grid-scale battery energy storage technology to optimize the existing TVA generation assets and improve the resiliency of the transmission system. In 2020, TVA launched its first TVA-owned, grid scale, lithium-ion demonstration battery project. The system integration learnings from this project will guide future application of battery storage as part of the evolving bulk power system in the region. Additionally, TVA has joined a coalition of utilities and researchers, led by EPRI and Gas Technology Institute, whose purpose is to engage, inform, and support global low-carbon resources initiatives to develop the pathways for the advancement of carbon reducing technologies for large scale utility deployment. This is a five-year program and includes research to optimize the utilization of clean DER as part of the overall low-carbon resource mix. TVA evaluates emerging energy efficiency and load management technologies for market and program readiness. Efforts are directed towards demonstrating and validating the performance, reliability, and consumer acceptance of new efficiency technologies, as well as the value of energy efficiency and load management technologies for the consumer, LPCs, and TVA. TVA is assessing potential electrification programs that improve resource use and reduce environmental impacts (especially in the transportation sector). Assessments include a multi-stakeholder vision and roadmap effort aimed at identifying the path forward for electric vehicles in Tennessee. The approach provides for broad engagement from industry, government, and utilities that could be applied in other states in the TVA service territory. In addition, TVA is continuing its evaluation of potential electric vehicle adoption strategies through coordination of activities with EPRI and industry stakeholders related to operational fleet requirements. Additional areas of focus include LPC engagement on plug-in electric vehicle grid integration and readiness for various transportation electrification technologies. In addition, research continues in electrification applications on charging stations, impacts from charging stations to the power grid, refinement of power-system control processes, and development of smart charging strategies to maximize the potential of electricity to replace petroleum as the transportation fuel of choice. 21 Table of Contents Finally, TVA and LPCs engage in several initiatives related to grid modernization. Research includes technologies and applications advancement in intelligent transmission and distribution systems. Smart meter technology has the potential to shift usage patterns away from peak demand times which could change costs significantly. Additionally, intelligent transmission systems would give TVA the ability to nearly instantaneously diagnose problems, make corrections, and engage transmission and generation resources quickly so that power would keep flowing. This could promote reduced emissions, lower energy costs, and add greater flexibility to accommodate the new consumer-generated sources under TVA's renewable energy programs. See Power Supply and Load Management Resources — Distributed Energy Resources . Flood Control Activities The Tennessee River watershed has one of the highest annual rainfall totals of any watershed in the U.S., averaging 51 inches per year. During 2020, approximately 76 inches of rain fell in the Tennessee Valley. TVA manages the Tennessee River system in an integrated manner, balancing hydroelectric generation with navigation, flood damage reduction, water quality and supply, and recreation. TVA spills or releases excess water through its dams in order to reduce flood damage to the Tennessee Valley. TVA typically spills only when all available hydroelectric generating turbines are operating at full capacity and additional water still needs to be moved downstream. The Tennessee Valley experienced above normal rainfall during 2020, setting a new record for the wettest October through September period in TVA's history. Despite significant rainfall, runoff, and flooding during the period, TVA continued to generate low-cost hydroelectric power while meeting its river system commitments, including flood mitigation, which prevented approximately $1.0 billion in damages across the Tennessee Valley. Environmental Stewardship Activities TVA's mission includes managing the Tennessee River, its tributaries, and federal lands along the shoreline to provide, among other things, year-round navigation, flood damage reduction, affordable and reliable electricity, recreational opportunities, adequate water supply, improved water quality, and natural resource protection. There are 49 dams that comprise TVA's integrated reservoir system. Each dam may also have ancillary structures used to support or assist the main dam's function. The reservoir system provides approximately 800 miles of commercially navigable waterways and also provides significant flood reduction benefits both within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers. The reservoir system also provides a water supply for residential and industrial customers, as well as cooling water for TVA's coal-fired plants, combined cycle plants, and nuclear power plants. In May 2020, the TVA Board approved a new Environmental Policy. TVA's updated policy provides objectives for an integrated approach related to providing reliable, affordable, and increasingly clean energy; engaging in proactive stewardship of the Tennessee River system and public lands; and supporting sustainable economic growth. The Environmental Policy also provides additional direction in several environmental stewardship areas related to reducing environmental impacts on the Valley's natural resources, including reducing carbon intensity and air emissions; minimizing waste; and protecting water resources, biodiversity, and cultural resources. TVA serves the people of the TVA region through the integrated management of the Tennessee River system and public lands, which include approximately 11,000 miles of shoreline; 650,000 surface acres of reservoir water; and 293,000 acres of reservoir lands. TVA accomplishes this mission and supports the objectives of the TVA Environmental Policy through implementation of its natural resources stewardship strategy. Within this strategy, TVA confirms a desire to remain agile, balance competing demands, and be a catalyst for collaboration in order to protect and enhance biological, cultural, and water resources as well as create and sustain destinations for recreation and opportunities for learning and research. As part of the strategy, TVA intends to assist water-based community development with issuing permits, technical support, and land agreements using planning, clear regulations, meaningful guidelines, and consistent enforcement. Additional guidance for carrying out many of TVA's essential stewardship responsibilities is provided in TVA's Natural Resource Plan ("NRP") . In May 2020, the TVA Board of Directors accepted changes to TVA's NRP to support a more strategic, flexible, and comprehensive management approach to TVA's natural resource stewardship work. TVA published its Record of Decision to complete its environmental review process in July 2020. The updated plan enhances alignment with TVA's mission through economic development, energy, and environmental stewardship and guides business planning. In the newly published NRP, TVA expanded from six resource areas to ten focus areas, ensuring the NRP provides a more comprehensive view of resource stewardship efforts. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Natural Resource Plan . Economic Development Activities Economic development, along with energy production and environmental stewardship, is one of the primary statutory purposes of TVA. Economic development programs developed by TVA support all communities, including rural and economically distressed communities, across the Tennessee Valley . Through its economic development activities, TVA endeavors to recruit and retain companies in targeted business sectors, foster capital investment and job growth, and assist communities in the Tennessee Valley with economic growth opportunities. TVA seeks to achieve these goals through a combination of initiatives and partnerships with LPCs, regional, state, and local agencies, and communities by providing financial incentives, technical services, industry expertise, and site-selection 22 Table of Contents assistance to new and existing businesses in the Tennessee Valley. TVA's economic development incentive programs offer competitive incentives to new and existing power customers in certain business sectors that make multi-year commitments to invest in the Tennessee Valley. In addition to providing financial support to businesses, TVA offers communities and economic developers site selection services, technical and project development assistance, and leadership training services. In 2020, TVA's economic development efforts helped recruit or expand 188 companies into the TVA service area. These companies announced capital investments of over $8.6 billion and expect to create and/or retain approximately 67,000 jobs. Regulation TVA is required to comply with comprehensive and complex laws, regulations, and orders. The costs of complying with these laws, regulations, and orders are expected to be substantial, and costs could be significantly more than TVA anticipates. Congress TVA exists pursuant to the TVA Act as enacted by Congress and carries on its operations in accordance with this legislation. Congress can enact legislation expanding or reducing TVA's activities, change TVA's structure, and even eliminate TVA. Congress can also enact legislation requiring the sale of some or all of the assets TVA operates or reduce the U.S.'s ownership in TVA. To allow TVA to operate more flexibly than a traditional government agency, Congress exempted TVA from all or parts of certain general federal laws that govern other agencies, such as federal labor relations laws and the laws related to the hiring of federal employees, the procurement of supplies and services, and the acquisition of land. Other federal laws enacted since the creation of TVA that are applicable to other agencies have been made applicable to TVA, including those related to paying employees overtime and protecting the environment, cultural resources, and civil rights. Securities and Exchange Commission Section 37 of the Securities Exchange Act of 1934 (the "Exchange Act") requires TVA to file with the SEC such periodic, current, and supplementary information, documents, and reports as would be required pursuant to Section 13 of the Exchange Act if TVA were an issuer of a security registered pursuant to Section 12 of the Exchange Act. Section 37 of the Exchange Act exempts TVA from complying with Section 10A(m)(3) of the Exchange Act, which requires each member of a listed issuer's audit committee to be an independent member of the board of directors of the issuer. Since TVA is an agency and instrumentality of the U.S., securities issued or guaranteed by TVA are "exempted securities" under the Securities Act of 1933, as amended (the "Securities Act"), and may be offered and sold without registration under the Securities Act. In addition, securities issued or guaranteed by TVA are "exempted securities" and "government securities" under the Exchange Act. TVA is also exempt from Sections 14(a)-(d) and 14(f)-(h) of the Exchange Act (which address proxy solicitations) insofar as those sections relate to securities issued by TVA, and transactions in TVA securities are exempt from rules governing tender offers under Regulation 14E of the Exchange Act. Also, since TVA securities are exempted securities under the Securities Act, TVA is exempt from the Trust Indenture Act of 1939 insofar as it relates to securities issued by TVA, and no independent trustee is required for these securities. Federal Energy Regulatory Commission Under the FPA, TVA is not a "public utility," a term which primarily refers to investor-owned utilities. Therefore, TVA is not subject to the full jurisdiction that FERC exercises over public utilities under the FPA. TVA is, however, an "electric utility" and a "transmitting utility" as defined in the FPA and, thus, is directly subject to certain aspects of FERC's jurisdiction. Under the FPA, for example, TVA (1) must comply with certain standards designed to maintain transmission system reliability; (2) can be ordered to interconnect its transmission facilities with the electrical facilities of independent generators and of other electric utilities that meet certain requirements; (3) can be ordered to transmit wholesale power provided that the order (a) does not impair the reliability of the TVA or surrounding systems, (b) meets the applicable requirements concerning terms, conditions, and rates for service, and (c) does not implicate the anti-cherrypicking provision; (4) is subject to FERC review of the transmission rates and the terms and conditions of service that TVA provides; and (5) is prohibited from (a) reporting false information on the price of electricity sold at wholesale or the availability of transmission capacity to a federal agency with intent to fraudulently affect the data being compiled by the agency and (b) using manipulative or deceptive devices or contrivances in connection with the purchase or sale of power or transmission services subject to FERC's jurisdiction. In addition, the FPA provides FERC with authority (1) to order refunds of excessive prices on short-term sales (transactions lasting 31 days or less) by all market participants, including TVA, in price gouging situations if such sales are through an independent system operator or regional transmission organization under a FERC-approved tariff; (2) to issue regulations requiring the reporting, on a timely basis, of information about the availability and prices of wholesale power and transmission service by all market participants, including TVA; (3) to investigate electric industry practices, including TVA's operations that are subject to FERC's jurisdiction; and (4) to impose civil penalties of up to $1 million per day for each violation of the provisions of the FPA discussed in the prior paragraph that are applicable to TVA. Criminal penalties may also result from such violations. Finally, while not required to do so, TVA has elected to implement various FERC orders and regulations pertaining to 23 Table of Contents public utilities on a voluntary basis to the extent that they are consistent with TVA's obligations under the TVA Act. NERC Compliance TVA is subject to federal reliability standards that are set forth by NERC and approved by FERC. These standards are designed to maintain the reliability of the bulk electric system, including TVA's generation and transmission system, and include areas such as maintenance, training, operations, planning, modeling, critical infrastructure, physical and cyber security, vegetation management, and facility ratings. TVA recognizes that reliability standards and expectations continue to become more complex and stringent for transmission systems. Nuclear Regulatory Commission TVA operates its nuclear facilities in a highly regulated environment and is subject to the oversight of the NRC, an independent federal agency that sets the rules that users of radioactive materials must follow. The NRC has broad authority to impose requirements relating to the licensing, operation, and decommissioning of nuclear generating facilities. In addition, if TVA fails to comply with requirements promulgated by the NRC, the NRC has the authority to impose fines, shut down units, or modify, suspend, or revoke TVA's operating licenses. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources. Environmental Protection Agency TVA is subject to regulation by the EPA in a variety of areas, including air quality control, water quality control, and management and disposal of solid and hazardous wastes. See Environmental Matters below and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges. States The Supremacy Clause of the U.S. Constitution prohibits states, without federal legislative consent, from regulating the manner in which the federal government conducts its activities. As a federal agency, TVA is exempt from regulation, control, and taxation by states except in certain areas where Congress has clearly made TVA subject to state regulation. See Environmental Matters below. Other Federal Entities TVA's activities and records are also subject to review to varying degrees by other federal entities, including the Government Accountability Office and the Office of Management and Budget ("OMB"). There is also an Office of the Inspector General which reviews TVA's activities and records. Taxation and Tax Equivalents TVA is not subject to federal income taxation. In addition, neither TVA nor its property, franchises, or income is subject to taxation by states or their subdivisions. The TVA Act, however, does require TVA to make tax equivalent payments to states and counties in which TVA conducts power operations or in which TVA has acquired properties previously subject to state and local taxation. The total amount of these payments is five percent of gross revenues from the sale of power during the preceding year excluding sales or deliveries to other federal agencies and off-system sales with other utilities, with a provision for minimum payments under certain circumstances. Except for certain direct payments TVA is required to make to counties, distribution of tax equivalent payments within a state is determined by individual state legislation. Environmental Matters TVA's activities, particularly its power generation activities, are subject to comprehensive regulation under environmental laws and regulations relating to air pollution, water pollution, and management and disposal of solid and hazardous wastes, among other matters. Emissions from all TVA-owned and operated units (including small combustion turbine units of less than 25 MW) have been reduced from historic peaks. Emissions of nitrogen oxide ("NO x ") have been reduced by 96 percent below peak 1995 levels and emissions of sulfur dioxide ("SO 2 ") have been reduced by 99 percent below 1977 levels through CY 2019. For CY 2019, TVA's emission of carbon dioxide ("CO 2 ") from its sources was 47 million tons, a 55 percent reduction from 2005 levels. This amount includes 2,383 tons from units rated at less than 25 MW. To remain consistent and to align with the EPA's reporting requirements, TVA intends to continue reporting CO 2 emissions on a calendar year basis. Clean Air Act The Clean Air Act ("CAA") establishes a comprehensive program to protect and improve the nation's air quality and control sources of air pollution. The major CAA programs that affect TVA's power generation activities are described below. 24 Table of Contents National Ambient Air Quality Standards. The CAA requires the EPA to set National Ambient Air Quality Standards ("NAAQS") for certain air pollutants. The EPA has done this for ozone, particulate matter ("PM"), SO 2 , nitrogen dioxide, carbon monoxide, and lead. Over the years, the EPA has made the NAAQS more stringent. Each state must develop a plan to be approved by the EPA for achieving and maintaining NAAQS within its borders. These plans impose limits on emissions from pollution sources, including TVA fossil fuel-fired plants. Areas meeting a NAAQS are designated as attainment areas. Areas not meeting a NAAQS are designated as non-attainment areas, and more stringent requirements apply in those areas, including stricter controls on industrial facilities and more complicated permitting processes. TVA fossil fuel-fired plants can be impacted by these requirements. All TVA generating units are located in areas designated as in attainment with NAAQS. Cross-State Air Pollution Rule. The EPA issued the Cross-State Air Pollution Rule ("CSAPR") in July 2011 requiring several states in the eastern U.S. to improve air quality by reducing power plant emissions that contribute to pollution in other states. In 2016, the EPA issued an update to CSAPR to address cross-state air pollution (the "CSAPR Update Rule"). The EPA subsequently issued an additional rule to resolve any remaining cross-state air pollutant issues ("CSAPR Close-Out Rule"). The U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") has remanded a portion of the CSAPR Update Rule back to the EPA to address its failure to require upwind states to eliminate substantial contributions to downwind non-attainment areas by the statutory deadline. The D.C. Circuit also vacated the CSAPR Close-Out Rule. On October 15, 2020, the EPA proposed revisions to the CSAPR Update Rule to address the court's remand, which must be finalized by March 2021. On October 30, 2020, the EPA published the proposed rule in the Federal Register. TVA is currently analyzing the proposed rule to determine whether its provisions could affect operations. Mercury and Air Toxics Standards for Electric Utility Units . On April 16, 2020, the EPA issued a final rule which revokes the agency's earlier finding that regulation of hazardous air pollutants ("HAP") emitted from steam electric utilities is appropriate and necessary. The rule does not remove electric generating units from the source categories listed under Section 112 of the CAA nor does it rescind the Mercury and Air Toxics Standards ("MATS") requirements. Additionally, the EPA determined that further restrictions on HAP emissions are not warranted based on a residual risk and technology review for this source category. TVA does not anticipate that the final rule will change TVA's MATS compliance requirements or strategy. Certain states and environmental groups have filed petitions in the D.C. Circuit challenging the EPA's finding that regulating HAPs from electric generating units is not appropriate and necessary. TVA cannot predict the outcome of these judicial petitions at this time. Environmental Agreements. See Note 22 — Commitments and Contingencies — Legal Proceedings — Environmental Agreements for a discussion of the Environmental Agreements, which discussion is incorporated herein by reference. Acid Rain Program. The Acid Rain Program is intended to help reduce emissions of SO 2 and NO x , which are the primary pollutants implicated in the formation of acid rain. The program includes a cap-and-trade emission reduction program for SO 2 emissions from power plants. TVA continues to reduce SO 2 and NO x emissions from its coal-fired plants, and the SO 2 allowances allocated to TVA under the Acid Rain Program are sufficient to cover the operation of its coal-fired plants. In the TVA service area, the limitations imposed on SO 2 and NO x emissions by the CSAPR program are more stringent than the Acid Rain Program. Therefore, TVA does not anticipate that the Acid Rain Program will impose any additional material requirements on TVA. Regional Haze Program . The EPA issued the Clean Air Visibility Rule, which required certain older sources to install best available retrofit technology. No additional controls or lower operating limits are required for any TVA units to meet best available retrofit technology requirements. In January 2017, the EPA published the final rule that changed some of the requirements for Regional Haze State Implementation Plans ("SIPs"). Specific impacts cannot be determined until future Regional Haze SIPs are developed for the next decennial review under the visibility haze provisions of the CAA. States must submit their Regional Haze SIPs to the EPA by July 31, 2021. Opacity. Opacity, or visible emissions, measures the denseness (or color) of power plant plumes and has traditionally been used by states as a means of monitoring good maintenance and operation of particulate control equipment. Under some conditions, retrofitting a unit with additional equipment to better control SO 2 and NO x emissions can adversely affect opacity performance, and TVA and other utilities have addressed this issue. The evaluation of utilities' compliance with opacity requirements is coming under increased scrutiny, especially during periods of startup, shutdown, and malfunction. Historically, SIPs developed under the CAA typically excluded periods of startup, shutdowns, and malfunctions, but in June 2015, the EPA finalized a rule to eliminate such exclusions. The EPA rule required states to modify their implementation plans by November 2016. Kentucky, Tennessee, and Mississippi submitted implementation plans, but Alabama has not. Environmental petitioners and several states filed petitions for judicial review of the EPA final rule before the D.C. Circuit. In April 2017, the D.C. Circuit, at the request of the new EPA Administrator, ordered this litigation to be suspended pending the EPA's review to determine whether to reconsider all or part of the rule. TVA does not expect significant impacts from these rule changes. New York Petition to Address Impacts from Upwind High Emitting Sources . In March 2018, the State of New York filed a petition with the EPA under Section 126(b) of the CAA to address ozone impacts on New York from the NO x emissions from sources emitting at least 400 tons of NO x in CY 2017 from nine states including Kentucky. The New York petition requests that the EPA require daily NO x limits for utility units with selective catalytic reduction systems ("SCRs") such as Shawnee Units 1 and 4 and emission reductions from utility units without SCRs such as Shawnee Units 2, 3, and 5-9. Kentucky utility unit NO x emissions are already limited by the CSAPR Update Rule and are declining, and current EPA modeling projects no additional 25 Table of Contents requirements to reduce Kentucky NO x emissions are necessary. In September 2019, the EPA finalized its denial of New York's petition because the state did not demonstrate, and the EPA could not independently establish, that sources in the states listed in the petition contribute to exceedances of the 2008 and 2015 ozone NAAQS in New York. The State of New York filed a petition in the D.C. Circuit for judicial review of the EPA's denial of the petition. On July 14, 2020, the D.C. Circuit vacated the EPA's denial of the petition and remanded the petition to the EPA for reconsideration. Specific impacts to TVA cannot be determined until the EPA takes further action on the petition. Affordable Clean Energy Rule . In June 2019, the EPA finalized the final Affordable Clean Energy ("ACE") rule and repealed the EPA's previous regulation addressing greenhouse gas ("GHG") emissions from existing fossil fuel-fired units. The ACE rule establishes guidelines for GHG emissions from existing coal-fired units based on efficiency improvements that can be achieved at those units at reasonable cost. States are required to apply the emission guidelines to coal-fired units within their respective jurisdictions and take into account the remaining useful lives of those units. The impact of the ACE rule on TVA's coal-fired units cannot be determined until Tennessee and Kentucky submit to the EPA their SIPs implementing guidelines in the ACE rule and the EPA approves these SIPs. The ACE rule allows states three years to submit their SIPs and allows the EPA 18 months for approval. In addition, lawsuits challenging the ACE rule are pending in the D.C. Circuit, and the outcome of the litigation could change requirements under the ACE rule and modify the timeline for compliance. New Source Performance Standards . In December 2018, the EPA proposed revisions to the GHG emission standards for new, modified, and reconstructed electric utility generating units that were finalized by the EPA in October 2015. For coal-fired units, the EPA proposes to revise the current new source standards such that carbon capture and sequestration technology is no longer necessary to meet the standards of performance that reflect the best system of emission reduction. The resulting limits are less stringent than limits under the current rule and can be met by modern coal-fired units (e.g., supercritical steam generators) in combination with best operating practices, but without carbon capture and sequestration. The EPA is not proposing to revise the new source performance standard for GHG emission from gas-fired units. If finalized as proposed, the revisions are not expected to significantly impact TVA since TVA does not currently plan to construct, modify, or reconstruct any coal-fired units. Maryland Petition to Address Impacts from Upwind Electric Generating Units . In September 2017, the State of Maryland filed a lawsuit against the EPA for failing to act within 60 days on Maryland's petition under Section 126 of the CAA to address ozone impacts on Maryland from the NO x emissions of 36 electric generating units, including TVA's Paradise coal-fired Unit 3. The EPA denied the petition for electric generating units with SCR units because existing regulations already address emissions from such units. In addition, the EPA denied the petition with respect to electric generating units with non-catalytic controls because of cost. In October 2018, the State of Maryland filed a petition for judicial review with the D.C. Circuit, and on May 19, 2020, the D.C. Circuit remanded the EPA's denial of the petition back to the EPA with respect to the operation of four units with non-catalytic controls. With the retirement of Paradise Unit 3 on February 1, 2020, the partial remand of the petition to the EPA will not affect TVA. Climate Change Executive Actions. In March 2017, President Trump issued Executive Order ("EO") 13783, "Promoting Energy Independence and Economic Growth." The EO reversed or altered many actions taken by the federal government in the last four years of the Obama Administration to address climate change and mandates that federal agencies review existing regulations and actions that potentially burden energy development and use. Several EOs, policy statements, and reports that established climate change objectives were rescinded or revoked. EO 13783 did not mandate that the EPA reconsider its finding under the CAA that GHG emissions cause climate change and therefore endanger public health and the environment. Implementation of EO 13783 has resulted in the replacement of the Clean Power Plan rule for existing fossil generation units by the ACE rule and revisions to the GHG emission standards for new, modified, and reconstructed electric utility generating units. The impact of the ACE rule and the GHG emission standards are discussed above. In May 2018, EO 13834, "Efficient Federal Operations," was signed. EO 13834 emphasizes meeting statutory requirements and gives agencies greater flexibility and discretion to decide how best to improve operations in order to "optimize energy and environmental performance, reduce waste, and cut costs." It also calls on the White House Council of Environmental Quality to streamline pre-existing environmental orders by "refocusing agencies on cost-effectively meeting mandates and goals" established by law. The order seeks to consolidate requirements related to energy and water efficiency, high performance buildings, renewable energy consumption, and federal vehicle fleet management. TVA consistently seeks to improve its operations in order to optimize energy and environmental performance and does not anticipate significant changes in its planning or operations as a result of the EO. International Accords . In September 2016, the U.S. formally accepted the Paris Agreement. The agreement met the threshold of at least 55 countries that account for at least 55 percent of global GHG emissions and formally entered into force in November 2016. On November 4, 2019, the U.S. formally notified the United Nations that it would withdraw from the agreement. Under the terms of the agreement, the effective date for the withdrawal was November 4, 2020. Specific impacts to TVA cannot be determined at this time. 26 Table of Contents In response to President Trump's Paris withdrawal announcement, 25 states have formed the U.S. Climate Alliance, a bipartisan coalition of governors committed to reducing GHG emissions consistent with the goals of the Paris Agreement. North Carolina and Virginia are the only states in the TVA region that are U.S. Climate Alliance members. Among other commitments, each state commits to implement policies that advance the goals of the Paris Agreement, aiming to reduce GHG emissions by at least 26-28 percent below CY 2005 levels by CY 2025 and to accelerate new and existing policies to reduce carbon pollution and promote clean energy deployment at the state and federal level. In June 2017, U.S. states, cities, and businesses representing more than half of the U.S. economy made a pledge to meet the GHG reduction targets of the Paris Agreement, called "America's Pledge." In September 2020, America's Pledge released its second economy-wide policy analysis with recommendations of how states, cities, businesses, and other stakeholders can influence U.S. decarbonization. It is premature to determine potential impacts to TVA. Litigation . In addition to legislative activity, climate change issues have been the subject of a number of lawsuits, including lawsuits against TVA. See Note 22 — Commitments and Contingencies for additional information. Indirect Consequences of Regulation or Business Trends . Legal, technological, political, and scientific developments regarding climate change may create new opportunities and risks. The potential indirect consequences could include an increase or decrease in electricity demand, increased demand for generation from alternative energy sources, and subsequent impacts to business reputation and public opinion. See Power Supply and Load Management Resources above . Physical Impacts of Climate Change. TVA's Climate Change Adaptation Plan was last updated in July 2020. The goal of the adaptation planning process is to ensure TVA continues to achieve its mission and program goals and to operate in a secure, effective, and efficient manner in a changing climate by integrating climate change adaptation efforts in coordination with state and local partners, tribal governments, and private stakeholders. TVA manages the potential effects of climate change on its mission, programs, and operations within its environmental management processes. Actions Taken by TVA to Reduce GHG Emissions . TVA has reduced GHG emissions from both its generation stations and its operations. Recent TVA Board actions have focused on TVA's plan to balance its coal-fired generation by increasing its nuclear capacity, modernizing its hydroelectric generation system, increasing natural gas-fired generation, installing emission control equipment on certain of its coal-fired units, increasing its purchases of renewable energy, building solar facilities, and investing in energy efficiency initiatives to reduce energy use in the Tennessee Valley. Additionally, TVA has invested to increase energy efficiency in its operations. The combination of more stringent environmental regulations, lower natural gas prices, and lower demand for energy across the Tennessee Valley has reduced the utilization of coal-fired generation. These factors have resulted in lower CO 2 emissions from the TVA system, as previously discussed in this section. Renewable/Clean Energy Standards Twenty-nine states and the District of Columbia have established enforceable or mandatory requirements for electric utilities to generate a certain amount of electricity from renewable sources. One state within the TVA service area, North Carolina, has a mandatory renewable standard that, while not applying directly to TVA, does apply to TVA's LPCs serving retail customers in that state. TVA's policy is to provide compliance assistance to any distributor of TVA power, and TVA is providing assistance to the covered LPCs that sell TVA power in North Carolina. In 2020, Virginia signed into law the Clean Economy Act. The Act establishes a mandatory requirement for utilities to generate a certain amount of electricity from renewable sources. At this time, TVA is not impacted by the legislation due to the relatively small amount of electricity that TVA provides in Virginia compared to other utilities. Likewise, the Mississippi Public Service Commission adopted an energy efficiency rule applying to electric and natural gas providers in the state, and TVA is supplying information on participation in TVA's energy efficiency programs to support the covered Mississippi LPCs. Water Quality Control Developments Cooling Water Intake Structures. In May 2014, the EPA released a final rule under Section 316(b) of the Clean Water Act relating to cooling water intake structures ("CWIS") for existing power generating facilities. The rule requires changes in CWIS used to cool the vast majority of coal, gas, and nuclear steam-electric generating plants and a wide range of manufacturing and industrial facilities in the U.S. The final rule requires CWIS to reflect the best technology available for minimizing adverse environmental impacts, primarily by reducing the amount of fish and shellfish that are impinged or entrained at a cooling water intake structure. These new requirements will potentially affect a number of TVA's fossil- and nuclear-fueled facilities and will likely require capital upgrades to ensure compliance. Most TVA facilities are projected to require retrofit of CWIS with "fish-friendly" screens and fish return systems to achieve compliance with the new rule. The rule is being implemented through permits issued under the National Pollutant Discharge Elimination System ("NPDES") in Section 402 of the Clean Water Act. State agencies administer the NPDES permit program in most states including those in which TVA's facilities are located. In addition, the responsible state agencies must provide all permit applications to the U.S. Fish and Wildlife Service for a 60-day review prior to public notice and an opportunity to comment during the public notice. As a result, the permit may include requirements for additional studies of threatened and endangered species arising from U.S. Fish and Wildlife Service comments and may require additional measures be taken to protect threatened and endangered species and critical habitats directly or indirectly related to the plant cooling water intake. TVA's review of the final rule indicates that the rule offers adequate flexibility for cost-effective compliance. The required compliance timeframe is linked to plant-specific NPDES permit renewal 27 Table of Contents cycles (i.e., technology retrofits), and compliance is expected to be required in the CYs 2022-2024 timeframe. The EPA has never applied the requirements under Section 316(b) to hydroelectric facilities. However, two EPA regions that do not cover TVA's activities are proposing to include Section 316(b) requirements in NPDES permits for hydroelectric facilities in those regions that withdraw water used for cooling purposes. It is not clear whether the requirements will be adopted nationwide or, given the unique features of hydroelectric facilities and the manner in which they withdraw water for cooling purposes, how the best technology available standard would be applied to TVA's hydroelectric facilities. The specific impacts to TVA from this potential policy change cannot be determined at this time. Hydrothermal Discharges. The EPA and many states continue to focus regulatory attention on potential effects of hydrothermal discharges. Many TVA plants have variances from thermal standards under Section 316(a) of the Clean Water Act that are subject to review as NPDES permits are renewed. Specific data requirements in the future will be determined based on negotiations between TVA and state regulators. If plant thermal limits are made more stringent, TVA may have to install cooling towers at some of its plants and operate installed cooling towers more often. This could result in a substantial cost to TVA. Steam-Electric Effluent Guidelines . In 2015, the EPA revised existing steam-electric effluent limitation guidelines ("ELGs"), which regulate water discharge pollutants and require the application of certain pollutant control technologies. The 2015 ELGs established more stringent performance standards for existing and new sources and required major upgrades to wastewater treatment options at all coal-fired plants. Compliance with new requirements was originally required in the CYs 2018-2023 timeframe, but the EPA delayed the compliance dates for flue gas desulfurization ("FGD") wastewater and bottom ash transport water until CYs 2020-2023 to allow the EPA time to review and potentially revise the ELGs with regard to these waste streams. In August 2017, the EPA Administrator announced his decision to conduct a rulemaking to potentially revise the new, more stringent effluent limitations that apply to bottom ash transport water and FGD wastewater in the 2015 ELG rule. In April 2019, the U.S. Court of Appeals for the Fifth Circuit ("Fifth Circuit") remanded portions of the 2015 ELG rule because it determined that some of the standards did not comply with statutory requirements. The EPA proposed revised ELGs for bottom ash transport water and FGD wastewater on November 4, 2019, but did not address the portions of the ELG that were remanded by the Fifth Circuit. The final ELGs were published on October 13, 2020. The primary impact for TVA is on the operation of existing coal-fired generation facilities. The revised ELGs will impact long-term investment decisions relative to the long-term compliance and operability of these plants. The revisions may require TVA to install additional wastewater treatment systems for FGD wastewater and bottom ash transport water, and TVA could incur substantial costs to comply with the new rule. The revision also includes a subcategory for which the Cumberland Fossil Plant ("Cumberland") would qualify that provides TVA greater flexibility in meeting the ELGs. The revision includes two additional subcategories for low utilization units and units that cease coal combustion by the end of 2028. TVA will evaluate the applicability of those subcategories to its plants as appropriate. Litigation on the final rule is anticipated which introduces additional uncertainty in what will be required at each facility. Other Clean Water Act Requirements . As is the case in other industrial sectors, TVA and other utilities are also facing more stringent requirements related to the protection of wetlands, reductions in storm water impacts from construction activities, new water quality criteria for nutrients and other pollutants, new wastewater analytical methods, and changes in regulation of pesticide application. Recent Clean Water Act Decisions On April 23, 2020, in County of Maui v. Hawaii Wildlife Fund , the Supreme Court held that the Clean Water Act requires a permit when there is a direct discharge of pollutants from a point source to waters of the U.S. and when there is "the functional equivalent" of a direct discharge to such waters. The Court suggested seven factors for determining when such a discharge is the functional equivalent of a direct discharge and acknowledged that the new test would be somewhat difficult to apply, potentially requiring evaluation of multiple factors. The Court noted that "time and distance" of pollutant migration often will be the most important factor but that other relevant factors may include, for example, the nature of the material through which the pollutant travels and the extent to which the pollutant is diluted or chemically changed as it travels. TVA is evaluating what potential impact the decision and application of the test could have on its operations. On April 15, 2020, in Northern Plains Resource Council v. U.S. Army Corps of Engineers , the U.S. District Court for the District of Montana ("District Court of Montana") vacated the Nationwide Permit ("NWP") 12, which authorizes discharges of dredged or fill material into waters of the U.S., and enjoined the U.S. Army Corps of Engineers from authorizing projects nationwide under the permit. The District Court of Montana subsequently amended its order on May 11, 2020, to allow NWP 12 to remain in place pending appeal for non-pipeline construction projects. The Supreme Court further granted a stay of the decision on July 6, 2020, allowing NWP 12 to remain in place for all pipeline construction projects except the Keystone XL pipeline. Consequently, the District Court of Montana's decision vacating NWP 12 does not have an immediate effect on TVA; however, unless the District Court of Montana's decision is reversed on appeal, there remains a risk that NWP 12 will not be available for TVA projects in the future. On September 15, 2020, the U.S. Army Corps of Engineers published a notice of proposed rulemaking in the Federal Register for the reissuance and modification of NWPs, including NWP 12. The notice also 28 Table of Contents included a proposal to limit the applicability of NWP 12 to oil and natural gas pipelines, modify certain pre-construction notification requirements, and create new NWPs for certain utility line activities. The proposed rule is unlikely to have a material impact on TVA, but the impact cannot be evaluated until the proposed rule is finalized and any related litigation is resolved. Cleanup of Solid and Hazardous Wastes Liability for releases and cleanup of hazardous substances is imposed under the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), and other federal and parallel state statutes. In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years. TVA Sites. TVA operations at some of its facilities have resulted in releases of contaminants that TVA is addressing including at TVA's Environmental Research Center at Muscle Shoals, Alabama. At September 30, 2020, TVA's estimated liability for cleanup and similar environmental work for those sites for which sufficient information was available to develop a cost estimate is approximately $14 million and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. In addition, the Environmental Research Center has an active groundwater monitoring program as part of a permitted corrective action plan. Non-TVA Sites. TVA is aware of alleged hazardous-substance releases at certain non-TVA areas for which it may have some liability. See Note 22 — Commitments and Contingencies — Environmental Matters . Coal Combustion Residuals. The EPA published its final rule governing CCR in 2015. The rule regulates CCR as nonhazardous waste under Subtitle D of the RCRA. While states may adopt the rule's requirements into their regulatory programs, the rule does not require states to adopt the requirements. The initial version of the rule provided for self-implementation by utilities and allows enforcement through citizen suits in federal court. The Water Infrastructure Improvements for the Nation Act ("WIIN Act") subsequently allowed state or federal-based permitting to implement the CCR rule as an alternative to self-implementation and citizen suits. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities for a discussion of the impact on TVA's operations, including the cost and timing estimates of related projects. In July 2018, the EPA issued a final CCR rule which provided additional flexibility and an extension of certain deadlines. In March 2019, the D.C. Circuit granted the EPA's request to remand the final rule to allow the EPA to reconsider the amendments. The remand also allowed the EPA time to complete a new rulemaking to establish revised timelines for unlined impoundments to initiate closure and to reexamine the October 2020 deadline for closing some unlined impoundments. In August 2019, the EPA issued a proposed rule to amend portions of the CCR Rule regarding beneficial use, temporary piles, and public access to information. On November 4, 2019, the EPA announced a proposed rule that will revise portions of the CCR Rule requiring closure of unlined surface impoundments. The final Part A rule was published in the Federal Register on August 28, 2020, and became effective September 28, 2020. Among other things, the final Part A rule requires all unlined CCR surface impoundments to stop receiving CCR and non-CCR wastestreams and to initiate closure or retrofit by no later than April 11, 2021. Additionally, the final rule provides a process for a utility to seek site-specific approval from the EPA to continue to use the unlined CCR surface impoundment until October 15, 2023, and possibly longer under certain circumstances. The final rule also includes requirements that enhance the public's access to groundwater monitoring and corrective action reports. TVA does not currently anticipate the final rule will have a significant impact because TVA is already planning to close its unlined CCR surface impoundments by the regulatory deadline and already makes groundwater monitoring and corrective action reports publicly available. A prepublication copy of a separate final Part B rule was released on October 16, 2020. This rule provides an alternative liner demonstration procedure for utilities with clay lined units which are being forced to close under the Part A rule. However, TVA does not have any units which qualify for this demonstration. In August 2015, the Tennessee Department of Environment and Conservation ("TDEC") issued an order that (1) established a process for TDEC to oversee TVA's implementation of the EPA's CCR rule to ensure coordination and compliance with Tennessee laws and regulations that govern the management of CCR and (2) required TVA to investigate and assess CCR contamination risks at seven of TVA's eight coal-fired plants in Tennessee and to remediate any unacceptable risks. The TDEC order does not allege that TVA is violating any CCR regulatory requirements nor does it assess TVA penalties. The TDEC order sets out an iterative process through which TVA and TDEC will identify and evaluate any CCR contamination risks and, if necessary, respond to such risks. Currently, TVA is conducting environmental investigations of the seven sites in accordance with the TDEC-approved Environmental Investigation Plans for each site. Upon the completion of the investigations, TVA will submit an environmental assessment report for each site. Groundwater Contamination . Environmental groups and state regulatory agencies are increasing their attention on alleged groundwater contamination associated with CCR management activities. As a result, TVA may have to change how it manages CCR at some of its plants, potentially resulting in higher costs. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities and — Regulatory Compliance — Allen Groundwater Investigation and Note 12 — Asset Retirement Obligations. 29 Table of Contents Environmental Investments From 1970 to 2020, TVA spent approximately $6.8 billion on controls to reduce emissions from its coal-fired power plants. In addition, TVA has reduced emissions by idling or retiring coal-fired units and relying more on cleaner energy resources including natural gas and nuclear generation. TVA currently anticipates spending significant amounts on environmental projects in the future, including investments in new clean energy generation including renewables to reduce TVA's overall environmental footprint. TVA environmental project expenditures also result from coal-fired plant decommissioning and from effective ash management modernization. Based on TVA's decisions regarding certain coal-fired units, the amount and timing of expenditures could change. See Power Supply and Load Management Resources — Coal-Fired above and Estimated Required Environmental Expenditures below. SO 2 Emissions and NO x Emissions. To reduce SO 2 emissions, TVA operates scrubbers on 19 of its coal-fired units and switched to lower-sulfur coal at 13 coal-fired units. To reduce NO x emissions, TVA operates SCRs on 19 coal-fired units, operates low-NO x burners or low-NO x combustion systems on 19 units, operates over-fire air on one cyclone unit, optimized combustion on six units, and operates NO x control equipment year round when units are operating (except during start-up, shutdown, and maintenance periods). TVA has also retired 34 of 59 coal-fired units. Except for seven units at Shawnee, the remaining coal-fired units have scrubbers and SCRs. See Power Supply and Load Management Resources — Coal-Fired above. Particulate Emissions. To reduce particulate emissions of air pollutants, TVA has equipped all of its coal-fired units with scrubbers, mechanical collectors, electrostatic precipitators, and/or bag houses. Greenhouse Gas Emissions . There could be additional material costs if further reductions of GHGs, including CO 2 , are mandated by legislative, regulatory, or judicial actions and if more stringent emission reduction requirements for conventional pollutants are established. These costs cannot reasonably be predicted at this time because of the uncertainty of these actions. The EPA may issue regulations establishing more stringent air, water, and waste requirements, and these requirements could result in significant changes in the structure of the U.S. power industry, especially in the eastern half of the country. Estimated Required Environmental Expenditures The following table contains information about TVA's current estimates on projects related to environmental laws and regulations. Estimated Potential Environmental Expenditures (1)(2) At September 30, 2020 (in millions) 2021 2022 Thereafter (3)(4) Total Coal Combustion Residual Conversion Program (5) $ 313 $ 224 $ 412 $ 949 Clean Air Act control projects (6) 28 45 83 156 Clean Water Act requirements (7) 41 78 71 190 Notes (1) These estimates are subject to change as additional information becomes available and as regulations change. (2) These estimates include $145 million, $134 million, and $121 million for 2021, 2022, and thereafter, respectively, in capital expenditures. (3) See Note 22 — Commitments and Contingencies . (4) These estimates include expenditures expected to be incurred during 2023, 2024, and 2025. (5) Includes costs associated with pond closures, conversion of wet to dry handling, and landfill activities. TVA is continuing to evaluate the rules and their impact on its operations, including the cost and timing estimates of related projects. See Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities and Note 12 — Asset Retirement Obligations. (6) Includes air quality projects that TVA is currently performing to comply with existing air quality regulations, but does not include any projects that may be required to comply with potential GHG regulations or transmission upgrades. (7) Includes projects that TVA is currently planning to comply with revised rules under the CWA regarding CWIS and ELGs for steam electric power plants. Human Capital Resources On September 30, 2020, TVA had 9,989 employees, of whom 3,287 were trades and labor employees. Neither the federal labor relations laws covering most private sector employers nor those covering most federal agencies apply to TVA. However, the TVA Board has a long-standing policy of acknowledging and working with recognized representatives of its employees, and that policy is reflected in long-term agreements to recognize the unions (or their successors) that represent TVA employees. Federal law prohibits TVA employees from engaging in strikes against TVA. TVA also had approximately 13,800 contractors providing both intermittent or full-time services. The majority of these contractors are managed by TVA suppliers who are providing services to TVA. Over the past year, TVA has worked to evolve its strategic direction to place an intentional focus on its people through a strategic priority identified as People Advantage. As part of this strategic priority, there are three key transformational elements: to accelerate the impact of inclusion with diversity within TVA and the communities it serves, to create a talent-focused 30 Table of Contents organization to amplify the energy, power, and creativity within each TVA employee, and to create a culture that lives up to its values. TVA employees share common core values and strategic objectives, and it is these values that are the fundamental beliefs that guide actions, behaviors, and decisions as a company. The TVA values include: • Safety — Committing to the safety and well-being of each TVA employee and the communities TVA serves; • Integrity — Conducting business in an honest and straightforward way; • Inclusion — Treating everyone with dignity and respect, emphasizing inclusion by welcoming each person's individuality so that full potential is reached; and • Service — Serving in the communities in which TVA employees live, work, and play. Each and every day, TVA is responsible for making life better in the Tennessee Valley. TVA is dedicated to keeping its employees inspired and empowered toward achieving this primary mission of service and invests in people areas including employee health and safety, employee benefits and development, and diversity and inclusion efforts. TVA continues to focus on safety, and as a result, TVA has seen a consistent decline in injuries for the last seven years and has achieved industry top decile performance in safety. TVA's safety program is based on the fundamentals of a safety management system, which includes management commitment, employee engagement, hazard recognition and control, worksite analysis, contractor safety management, training, review, and continuous improvement. Employee engagement is critical to the success of the program. TVA's vital safety behaviors are employee driven and developed with the collaboration of represented employees, union leadership, and management to improve safety behaviors. Audits and assessments are a key component of continuous improvement and in overseeing TVA's safety and health program and are performed regularly. As a federal agency, TVA is also required to complete regulatory compliance inspections of its facilities on an annual basis. To care for the well-being of employees and their families, TVA offers quality healthcare, insurance, and retirement benefits. Other benefits also include flexible work schedules, wellness incentives, scholarships for dependents of employees, tuition reimbursement, training and education opportunities, and employee development. TVA offers career opportunities and training for military veterans, college students, and recent graduates. Employee development involves individual learning-ability, team learning, mentoring, and career pathing including rotational development. As TVA continues to adapt to the evolving demands of the industry, it is imperative that it cultivate a work environment that fosters the attributes and capabilities of an interconnected workforce. TVA is enriched by the diversity of a talented, highly skilled workforce made up of people from all backgrounds. To achieve this, TVA endeavors to ensure that all qualified candidates receive fair consideration for open jobs at TVA and that all employees are encouraged, engaged, and empowered to contribute 100 percent of their talents, 100 percent of the time while bringing their authentic selves to work each day. Recruiting efforts also support the strategic element of inclusion with diversity and a culture that lives up to TVA's values, and TVA actively recruits employees of all races, colors, sexual orientations, ethnicities, gender identities, abilities, religions, and ages. TVA continues to work to improve the minority share and women share of the workforce and maintain its status as best in industry for the military veteran share of the workforce. In addition, TVA has Employee Resource Groups that support and empower employees based on their personal association to the diverse groups present at TVA. Through the People Advantage strategic priority, TVA strives to become the destination for difference makers, where TVA and employees believe the best in each other, give the best to each other, and expect the best from each other. Key measures of success are engagement and inclusion scores, regrettable losses, recordable injuries, and people of color and female representation, both in leadership. The 2019 and 2020 results for these key measures are reflected in the chart below, in addition to the performance goals for 2021. 2019 2020 2021 Performance Measure Actual Actual Plan People of Color Representation in Leadership (%) 9 % 9 % 10 % Female Representation in Leadership (%) 17 % 18 % 19 % Regrettable Losses (%) 1.1 % 1.0 % 0 % Engagement (100 point scale) (1) 75 80 81 Inclusion (100 point scale) (1) 72 72 74 Recordable Injuries (#) 54 38 0 Note (1) A new vendor was used to facilitate the Engagement and Inclusion Survey in 2020; therefore, weightings and results may vary when comparing 2020 to 2019. See also Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations – B usiness and Mission – TVA's Mission of Service for a discussion of TVA's mission, strategic priorities, and linking the mission to performance through corporate measures. 31 Table of Contents