Tennessee Valley Authority 10-K

ITEM 1. BUSINESS The Corporation General 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 U.S., and sell the electricity generated at the facilities TVA operates. Today, TVA operates the nation's largest public power system and supplies power to a population of approximately 10 million people. TVA also manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity. Consistent with these primary purposes, TVA also manages the river system to provide recreational opportunities, adequate water supply, improved water quality, cultural and 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. TVA's Mission of Service TVA was built for the people, created by federal legislation, and charged with a unique mission - to improve the quality of life in a seven-state region through the integrated management of the region's resources. TVA's mission focuses on three key areas: • Energy — Delivering reliable, low cost, clean energy; • Environment — Caring for the region's natural resources; and • Economic Development — Creating sustainable economic growth. TVA's Strategic Priorities While TVA's mission has not changed since it was established in 1933, the climate in which TVA operates continues to evolve. To continue to deliver its mission of service while evolving for future success, TVA must realize five strategic priorities: • Powerful Partnerships — Promoting progress through the shared success of TVA's customers and stakeholders; • People Advantage — Amplifying the energy, passion, and creativity within each TVA employee; • Operational Excellence — Building on TVA's best-in-class reputation for reliable service and competitively priced power; • Igniting Innovation — Pursuing innovative solutions for TVA and its customers and communities; and • Financial Strength — Investing in the future, while keeping energy costs as low as possible. 9 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, Item 1A, Risk Factors — Regulatory, Legislative, and Legal Risks — TVA may lose its protected service territory , and Note 23 — Commitments and Contingencies — Legal Proceedings — Challenge to Anti-Cherrypicking Amendment . In 2021, the revenues generated from TVA's electricity sales were $10.4 billion and accounted for virtually all of TVA's revenues. See Note 18 — Revenue for details regarding revenues by state for each of the last three years. 10 Table of Contents 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 U.S. TVA implemented a company-wide pandemic plan to address specific aspects of the COVID-19 pandemic, including impacts from variants. TVA's pandemic plan continually evolves 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 actively monitored, and TVA's operations and delivery of energy to customers have not been materially impacted by the COVID-19 pandemic at this time. While TVA experienced a reduction in revenue for the year ended September 30, 2020, based on current internal models, TVA estimates that the COVID-19 pandemic had little impact on TVA's sales volume for the year ended September 30, 2021. TVA continues to assess potential supplier risk, and through September 30, 2021, TVA has seen an increase in supplier impacts as a result of COVID-19, such as delays and price fluctuations, but has not experienced significant business disruptions at this time. 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 created initiatives such as the Public Power Support and Stabilization Program, Back-to-Business Credit Program, Community Care Fund, and Pandemic Credits. TVA has also provided regulatory flexibility for LPCs to halt disconnection of services. 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. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives — COVID-19 Pandemic for an expanded discussion of the impact to TVA and related initiatives. 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 and Note 18 — Revenue for details regarding operating revenues for each of the last three years. Local Power Company Customers Revenues from LPCs accounted for approximately 91 percent of TVA's total operating revenues for 2021. TVA had wholesale power contracts with 153 LPCs at September 30, 2021. 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 or purchase up to approximately five percent of average total hourly energy sales over 2015 - 2019 in order 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 for 2021. Certain LPCs, including MLGW, are evaluating options for future energy choices. In addition, in January 2021, four LPCs filed a complaint and petition with FERC asking FERC to order TVA to provide transmission and interconnection service to the LPCs or other suppliers that want to serve them. In August 2021, one of the LPCs notified FERC of its withdrawal from the complaint and petition. The remaining three LPCs accounted for three percent of TVA's total operating revenues for the year ended September 30, 2021. See Note 23 — Commitments and Contingencies — Legal Proceedings — Challenge to Anti-Cherrypicking Amendment for updates to this legal proceeding. 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 Partnership Agreement option that better aligns the length of LPC power contracts with TVA's long-term commitments. Under the partnership arrangement, the LPC power contracts automatically renew each year and have a 20-year termination notice. The partnership arrangements can be terminated under certain circumstances, including TVA's failure to limit rate increases as provided for in the agreements going forward. Participating LPCs receive benefits including a 3.1 11 Table of Contents 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 or purchase up to approximately five percent of average total hourly energy sales over 2015 - 2019 in order to meet their individual customers' needs. As of November 12, 2021, 145 LPCs had signed the 20-year Partnership Agreement with TVA, and 74 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 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 an 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 seven percent of TVA's total operating revenues in 2021. 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 2021. 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 2021. 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 19 — 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 12 Table of Contents 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. 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 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 prior years, TVA, LPCs, and directly served industries developed changes to TVA's rate structures that focus on TVA's long-term pricing efforts. These changes improved pricing by better aligning rates with underlying cost drivers and by sending improved pricing signals, while maintaining competitive industrial rates and keeping residential rates affordable. The rate structures also reduced wholesale energy rates for Standard Service and introduced 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. TVA will continue to collaborate with LPCs and directly served industries as necessary to ensure alignment with this approach. 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 ("PPAs"). 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. TVA is making investments in its generating portfolio to modernize the fleet while also allowing TVA to maintain competitive rates and high reliability and work toward carbon emission reductions. As TVA continues to evaluate the impact of retiring its coal-fired fleet by 2035, it is also evaluating adding flexible lower carbon-emitting gas plants as a bridging strategy to maintain reliability, such as the ongoing projects at TVA’s Paradise and Colbert sites. In addition, TVA is committed to investing in the future of nuclear with the evaluation of emerging advanced nuclear technologies, such as small modular reactors ("SMRs"), and has uprated the existing Browns Ferry units to generate more low-cost, reliable, and carbon-free energy. TVA is also implementing the Hydro Life Extension Program with a focus on improving the availability and flexibility of the hydroelectric fleet. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives — Generation Resources — Extended Power Uprate , Natural Gas-Fired Units , and Small Modular Reactors , in addition to Renewable Energy Resources — Hydro Modernization Program below. In addition, TVA and other utilities across the southeastern United States are exploring the creation of an automated energy exchange platform across the region to facilitate more short-term power exchanges. The energy exchange would be an enhancement to the existing market. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives — Automated Energy Exchange Platform . Power generating facilities operated by TVA at September 30, 2021, 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 13 solar installations. See Item 2, Properties — Generating Properties — Net Capability for a discussion of the units at these facilities. TVA also acquires power under 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 . 13 Table of Contents 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) 2021 2020 2019 Nuclear 41% 42% 39% Natural gas and/or oil-fired 21% 22% 20% Coal-fired 15% 13% 17% Hydroelectric 10% 10% 10% Purchased power (non-renewable) 8% 8% 9% Purchased power (renewable) 5% 5% 5% 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. Nuclear At September 30, 2021, 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, 2021 Nuclear Unit Summer Net Capability (MW) Net Capacity Factor for 2021 (%) Date of Expiration of Operating License Browns Ferry Unit 1 (1) 1,227 87.7 2033 Browns Ferry Unit 2 (1) 1,208 83.3 2034 Browns Ferry Unit 3 (1) 1,227 99.3 2036 Sequoyah Unit 1 1,152 85.9 2040 Sequoyah Unit 2 1,140 97.2 2041 Watts Bar Unit 1 1,157 95.4 2035 Watts Bar Unit 2 1,164 74.8 2055 Note (1) Summer net capability for Browns Ferry includes the impact of the extended power uprate project which was finalized in 2021 through issuance of related engineering memos. 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 SMRs at TVA's Clinch River Nuclear 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 23 — Commitments and Contingencies — Contingencies for a discussion of TVA's nuclear decommissioning liabilities and the related trust and nuclear insurance, and Note 23 — 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. 14 Table of Contents Natural Gas and/or Oil-Fired At September 30, 2021, 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 12,183 MW of summer net capability. Sixty-six 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. As TVA evaluates its coal-fired fleet, it will also evaluate adding flexible lower carbon-emitting gas plants as a bridging strategy. See Item 2, Properties — Generating Properties, Note 8 — Leases , Note 11 — Variable Interest Entities , and Note 14 — 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. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Natural Gas-Fired Units for a discussion of ongoing projects at certain natural gas-fired facilities . Coal-Fired At September 30, 2021, TVA had five coal-fired plants consisting of 25 active units, accounting for 6,580 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 ("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 and carbon reduction efforts 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. Following the publication of the 2019 IRP, TVA began conducting end-of-life evaluations of the remaining coal fleet to inform long-term planning. TVA’s recent evaluation confirms that the aging coal fleet is among the oldest in the nation and is experiencing deterioration of material condition and performance challenges. The performance challenges are projected to increase due to the coal fleet’s advancing age and the difficulty of adapting the coal fleet’s generation within the changing generation profile. Additionally, the coal fleet is contributing to environmental, economic, and reliability risks. TVA is evaluating the impact of retiring the balance of the coal-fired fleet by 2035, and that evaluation includes environmental review, public input, and TVA Board approval. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Optimum Energy Portfolio. Diesel Generators At September 30, 2021, 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 to the transmission grid. Raccoon Mountain Pumped-Storage Plant At September 30, 2021, 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. Renewable Energy Resources As more consumers and businesses are demanding cleaner energy, the utility industry is evolving to meet those needs. As TVA also evolves, it will see impacts to the way it does business through the pricing of products, transmission of energy, and 15 Table of Contents development of new products and services for its customers in support of changing customer preferences. Many companies are focusing on sustainability and requiring more energy efficiency and renewable energy options. In addition, TVA also seeks to obtain greater amounts of its power supply from clean resources to work towards carbon emission reductions. As a result, TVA is increasing its renewable energy portfolio, by investing in existing assets and securing power purchase agreements for out-of-Valley wind and in-Valley solar. New utility-scale solar is increasing, in part driven by customers’ demand through TVA’s Green Invest Program. TVA also encourages renewable power and offers renewable solutions through various current programs and offerings. Finally, TVA is investing in its hydroelectric fleet through the Hydro Life Extension Program. See Distributed Energy Resources below for information on renewable energy solutions and Power Purchase and Other Agreements below for information on TVA’s power purchase agreements, including renewable agreements. 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, 2021, these units accounted for 3,750 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. 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. At September 30, 2021, Hiwassee Hydro Unit 2 accounted for 86 MW of the conventional hydroelectric summer net capability. 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. 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 implementing the Hydro Life Extension Program with a focus on improving the availability and flexibility of the hydroelectric fleet to help meet these changing customer preferences. Self-Directed Solar. During 2019, the TVA Board approved the opportunity for TVA to explore being directly involved in the development of a utility-scale solar project, contingent on the successful completion of environmental reviews under National Environmental Policy Act ("NEPA") and other applicable laws. A project structure has been developed that will allow TVA to work with financial partners for solar development, and in September 2021, TVA purchased land for this planned 200 MW development. As of September 30, 2021, TVA had spent approximately $24 million on the project and expects to spend an additional $293 million through 2024. Other Renewable Energy Resources. TVA's other renewable energy resources include TVA-owned solar and renewable energy purchases, a majority associated with TVA renewable programs. In addition to the hydroelectric units above, TVA owns 13 solar installations that account for approximately 1 MW of summer net capability. See Distributed Energy Resources below for a description of TVA's current renewable energy offerings and Power Purchase and Other Agreements for information on renewable energy purchases. 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 power that can be sold to customers to meet their needs. Overall, TVA will procure needed renewable supply through a diversified approach, which could include a competitive procurement process, strategic partnerships, or construction of renewable facilities to meet these needs. 16 Table of Contents Total Renewable Energy Resources . As of September 30, 2021, TVA's total renewable capacity, including TVA-owned and operated facilities, operating and contracted PPAs, and TVA's self-directed solar project, amounted to 8,269 MW. Notes (1) Contracted resources are executed power purchase agreements expected to come online at a future date. (2) Hydroelectric power consists of 3,750 MW from TVA-owned conventional hydroelectric facilities and 402 MW from a renewable PPA. (3) Biomass consists of 49 MW of operating resources and 5 MW of contracted resources. TVA's operating renewables by location and by source are detailed below: Notes (1) In-Valley refers to the renewable energy that is sourced within TVA's service territory. Out-of-Valley refers to the renewable energy that is sourced outside of TVA's service territory and solely consists of wind power. (2) See Power Purchase and Other Agreements below. PPAs also includes capability from various historical renewable energy programs primarily with individuals and small businesses. 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. 17 Table of Contents DER Programs and Offerings . TVA encourages renewable power through various current programs and offerings. These solutions include: Small-scale Solutions . The Green Connect Program, launched in January 2021, connects residential customers interested in on-site solar installations with qualified solar installers. Mid-scale Solutions . The Flexibility Research Project was a joint pilot project with LPCs to enable solutions for situations where the end-use consumer needs onsite renewable or distributed generation. The Flexibility Research Project ceased accepting new applications in January 2021 as TVA introduced other flexible programs and offerings discussed in this section. Utility-scale Solutions . The Green Invest Program matches customer demand with renewable supply through a Green Invest Agreement. The goal of the Green Invest program is to meet the long-term sustainability needs of customers at scale. TVA will procure the needed renewable supply through a diversified approach, which could include a competitive procurement process, strategic partnerships, or construction of renewable facilities to meet these needs. In addition, Generation Flexibility is a solution available to long-term LPC partners and supports the deployment of up to 2,000 MW of distributed solar to provide clean, local generation. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Ratemaking . Other Renewable Solutions. The Green Switch Program allows customers to support wind, solar, and biomass renewable resources through purchasing renewable energy generated in the Tennessee Valley, sold in 200 kWh blocks. The Green Flex Program gives commercial and industrial customers the ability to meet sustainability goals and to make renewable energy claims through RECs from wind generation located outside TVA's service area. Other DER Initiatives . TVA also offers various energy efficiency programs. Through the Home Uplift Program, TVA is partnering with LPCs, state and local governments, non-profit agencies, energy efficiency advocates, third-party contributors, and the Tennessee Valley Public Power Association ("TVPPA") 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. Through the School Uplift Program pilot, TVA is partnering with LPCs as well as state and local governments to assist schools with adopting strategic energy management practices. The engagement with each school includes monthly virtual workshops and fosters performance through competitions for energy efficiency grants and grants for solar pavilions. Finally, through the Community Centered Growth Program, TVA is partnering with LPCs to assist small businesses located within underserved communities with energy evaluations and no-cost energy improvement investments. In 2017, the TVA Board authorized up to $300 million to be spent over the next 10 years, subject to annual budget availability and necessary environmental reviews, to build an enhanced fiber optic network that will better connect TVA's operational assets. Fiber is a vital part of TVA's modern communication infrastructure. The new fiber optic lines will improve the reliability and resiliency of the generation and transmission system while enabling the system to better accommodate DER as they enter the market. 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 continues to focus on utilizing more EVs and installing charging stations inside the Tennessee Valley. TVA's electric vehicle ("EV") strategy is a staged approach that will evolve as the local EV market matures. TVA 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. TVA is partnering with LPCs and others to support the electrification of transportation in the Valley in a multi-year EV initiative. The initiative focuses on reducing or eliminating EV market barriers by setting EV policies, improving charging infrastructure availability, expanding EV availability and offerings, and spreading EV consumer awareness. In November 2020, the TVA Board approved new policies and an optional wholesale EV rate aimed at encouraging the development of charging infrastructure in the Valley. The updated policies enable LPC investment in public charging infrastructure and allow for the conditional resale of electricity, for transportation purposes only, by any charging developer on a kWh basis. The optional wholesale rate was developed with high power EV charging in mind and provides a stable option for those developing charging infrastructure. 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. 18 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 2021, TVA acquired approximately 94 percent of the power that it purchased through the long-term PPAs described below, including agreements for long-term renewable generation resources, approximately one percent through short-term PPAs, and approximately five percent on the spot market. 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, 2021, TVA had operating or contracted capacity totaling 4,313 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. 19 Table of Contents TVA's capability provided by PPAs is primarily provided under contracts that expire between 2022 and 2045, and are described in the table below. Power Purchase Agreements At September 30, 2021 Type of Facility Location Number of Contracts Summer Net Capability (MW) Contract Termination Date Renewable PPAs Operating Solar Tennessee 2 58 2032 - 2039 Solar (1) Alabama 2 302 2037 - 2041 Total Operating Solar 4 360 Wind Tennessee 1 27 2025 Wind Iowa 2 299 2030 - 2031 Wind Kansas 2 366 2032 - 2033 Wind Illinois 3 550 2032 - 2033 Total Operating Wind 8 1,242 Hydroelectric Tennessee and Kentucky 1 402 Upon three years' notice Landfill Gas Tennessee 1 5 2031 Subtotal Operating 14 2,009 Contract Renewable Resources (2) 326 Total Operating 2,335 Contracted Solar (3) Tennessee 11 1,186 2038 - 2045 Solar (4) Kentucky 2 242 2038 - 2043 Solar (4) Mississippi 3 550 2043 Total Contracted 16 1,978 Total Renewable PPAs 30 4,313 Nonrenewable PPAs Operating Diesel Tennessee 4 59 2023 - 2032 Diesel Alabama 1 10 2035 Diesel Mississippi 2 46 2023 - 2028 Total Operating Diesel 7 115 Natural Gas Alabama 4 2,573 2022 - 2033 Lignite Mississippi 1 440 2032 Total Operating 12 3,128 Contracted Battery Storage (5) Tennessee 1 66 2045 Battery Storage (4) Kentucky 1 30 2043 Battery Storage (4) Mississippi 3 150 2043 Total Contracted 5 246 Total Nonrenewable PPAs 17 3,374 Notes (1) 227 MW of power delivery commenced in 2021. 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) Contract Renewable Resources is capability from various historical renewable energy programs that consist of PPAs primarily with individuals and small businesses. (3) Power delivery is expected to commence between 2022 - 2025. (4) Power delivery is expected to commence in 2023. (5) Power delivery is expected to commence in 2025. 20 Table of Contents 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. At September 30, 2021, there were 369 generation sources, with a combined qualifying capacity of 270 MW, whose power TVA purchases under this program. 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. TVA plans to continue using contracts of various products, lengths, and terms as well as inventory to meet the projected nuclear fuel needs of its nuclear fleet. The net book value of TVA's nuclear fuel was $1.6 billion and $1.5 billion at September 30, 2021 and 2020, respectively. See Note 16 — 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 2029. Watts Bar will need additional capacity by 2039. Browns Ferry will need additional capacity by 2037. 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 $392 million through 2021. 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 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 began tritium production in Watts Bar Unit 2 in November 2020. The DOE's decision also allows for irradiation of TPBARs at Sequoyah in the future; however, TVA does not have plans to employ Sequoyah units for tritium production in the near term. TVA does intend to increase its production in Watts Bar Unit 1 beginning in November 2024, to align with a DOE request for increased tritium. TVA is currently working to submit a license amendment request with the NRC to fulfill this request. 21 Table of Contents Natural Gas and Fuel Oil During 2021, TVA purchased a significant amount of its natural gas requirements from a variety of suppliers under contracts with terms of up to 3 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 $22 million and $19 million at September 30, 2021 and 2020, respectively. The net book value of TVA's fuel oil inventory was $69 million and $82 million at September 30, 2021 and 2020, respectively. At September 30, 2021, 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. TVA purchases natural gas from multiple suppliers on a daily, monthly, seasonal, and term basis. During 2021, daily, monthly, seasonal, and term contracts accounted for 23 percent, 14 percent, 26 percent, and 37 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 2021, TVA arranged for the transportation of natural gas on nine separate pipelines, with approximately 66 percent being transported on two pipelines. During 2021, TVA maintained a total of approximately 1,517,000 million British thermal unit(s) ("mmBtu") per day of firm transportation capacity on seven 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 5.00 Bcf of interruptible service to manage the daily balancing requirements of the nine pipelines used by TVA, with approximately 59 percent of the total storage capacity being maintained at two facilities. During 2021, 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 2022, TVA expects to increase its storage portfolio by approximately 10 percent. Coal Coal consumption at TVA's coal-fired generating facilities during 2021 and 2020 was approximately 12 million tons and 11 million tons, respectively. At September 30, 2021 and 2020, TVA had 21 days and 30 days of system-wide coal supply at full burn rate, respectively, with net book values of $107 million and $152 million, respectively. TVA utilizes both short-term and long-term coal contracts. During 2021, long-term contracts made up 82 percent of coal purchases, and short-term contracts accounted for the remaining 18 percent. TVA plans to continue using contracts of various lengths, terms, and coal quality to meet its expected consumption and inventory requirements. During 2021 and 2020, TVA purchased coal by basin as follows: 22 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 were lower than anticipated throughout 2021 primarily as a result of higher than forecasted coal generation, coal supply limitations, and transportation challenges. Higher coal generation was primarily the result of higher demand than anticipated in 2021 after the lower energy sales in 2020 associated with the COVID-19 pandemic and an increase in natural gas prices making coal a more favorable economic fuel choice. Supply limitations and transportation challenges were due to reduced mine production and/or mine closures, an increase in coal exports, and a reallocation of transportation capacity to support export sales. TVA anticipates that these challenges will continue into 2022. See also Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Supply . Transmission The TVA transmission system is one of the largest high-voltage transmission systems in North America. TVA's transmission system has 69 interconnections with 13 neighboring electric systems and delivered approximately 157 billion kWh of electricity to TVA customers in 2021. 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 addition to upgrades to maintain reliability, TVA’s Grid of Tomorrow initiative aims to increase grid flexibility to enable greater use of renewable resources such as solar, wind, and other forms of distributed generation and includes making data and communications upgrades as demonstrated by the below initiatives. This initiative supports TVA’s decarbonization efforts while ensuring TVA continues to deliver reliable power at the lowest feasible rate. Investments in a modernized grid will enable enhanced monitoring and control of TVA’s transmission and generation portfolio. 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, 2021 , TVA had spent $151 million on installation of the fiber optic lines and expects to spend an additional $149 million. A new system operations center has been approved for $289 million. The new secured facility is being built to accommodate a new energy management system and adapt to new regulatory requirements, and will have improved physical security from the previous center. The facility is expected to be constructed by the third quarter of 2023 and fully operational in 2025. As of September 30, 2021 , TVA had spent approximately $92 million on the project and expects to spend an additional $197 million. The new energy management system has been approved for $90 million. As the current energy management 23 Table of Contents system is nearing the end of its life cycle, this project will replace the existing analog system with a digital system . The new digital system will have higher capacity and speed, for communications with the TVA grid and for inputs from monitoring equipment, which will network the new control center with existing locations and enable better remote visibility and control. The system is expected to be complete in 2026. As of September 30, 2021, TVA had spent approximately $37 million on the project and expects to spend an additional $53 million. In addition, TVA is working on various projects with universities, EPRI and others to help enable a dynamic and multi-directional grid. TVA is also working in partnership with LPCs to modernize their distribution systems by developing a shared vision and roadmap for transforming the Valley’s transmission and distribution systems into an integrated regional grid. 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 Environmental Matters — Climate Change — Physical Impacts of Climate Change below and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Sales of Electricity. 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 FPA, the Anti-Cherrypicking Amendment ("ACPA") 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 or purchase up to approximately five percent of average total hourly energy sales over 2015 - 2019 in order 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 ACPA, and the protection of the provision could be limited and perhaps eliminated by federal legislation at some time in the future. See Note 23 — Commitments and Contingencies — Legal Proceedings — Challenge to Anti-Cherrypicking Amendment for updates to this legal proceeding. 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, and customers could choose another utility to meet some or all of their power needs where available, pursue self-generation to meet some or all of their power needs, or move their operations outside of TVA's service territory. 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. In 2020, TVA placed a high priority on providing research which aligns to and supports its five transformative initiatives: energy storage, electric vehicles, advanced nuclear, connected communities, and regional grid transformation. TVA has also placed a special emphasis on research leading to the understanding and application of clean resources to support the reduction of carbon emissions from its power supply. This research supports both TVA and national strategic interests to reduce carbon 24 Table of Contents emissions and will serve to both catalyze and support TVA’s sixth transformative initiative, decarbonization, which commenced in 2022. At the forefront of the energy storage initiative 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 and in 2021, TVA awarded the contract for the battery project which will be located near Vonore, Tennessee. 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. TVA continues to assess 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 state 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 surrounding vehicle 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. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Distributed Energy Resources — Electric Vehicles. TVA is committed to investing in the future of nuclear and continues to evaluate the licensing and design of emerging nuclear technologies, such as advanced light water SMRs and advanced non-light water reactors, as part of technology innovation efforts aimed at developing the energy system of the future. In December 2019, TVA became the first utility in the nation to successfully obtain approval for an early site permit from the NRC to potentially construct and operate SMRs at its Clinch River Site. Additionally, TVA is partnering with like-minded organizations to evaluate the economic feasibility of advanced nuclear reactors. TVA has entered into memorandums of understanding and agreements that allow for mutual collaboration to explore advanced reactor designs as a next-generation nuclear technology while leveraging the expertise of federally funded research and development centers, utilities, vendors, and academic institutions. These partnerships are important steps in the early stages of evaluation as TVA considers the prospect of new nuclear. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Distributed Energy Resources — Small Modular Reactors. TVA is working to establish connected communities pilot projects with stakeholders and has been engaging in advanced buildings research to support the initiative. Connected communities projects are aimed at addressing today’s challenges with community-driven information and technology solutions to improve the quality of life in the Tennessee Valley. Research will continue to identify best practices, better understand challenges in the Valley, and build a roadmap for the future. TVA and LPCs are engaged 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 . Finally, TVA is in the second year of 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 support creating resource options, such as alternative fuels (hydrogen, ammonia, and methanized derivatives), carbon capture, electrification, and utilization of clean DER as part of the overall low-carbon resource mix. 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 2021, approximately 62 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 2021 which included the second wettest August on record with nearly 10 inches of rainfall. 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 is estimated to have prevented approximately $170 million in damages across the Tennessee Valley. 25 Table of Contents 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 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 2020, changes were made to TVA's NRP to support a more strategic, flexible, and comprehensive management approach to TVA's natural resource stewardship work. 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. 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 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 2021, TVA's economic development efforts helped recruit or expand 269 companies into the TVA service area. These companies announced capital investments of over $8.8 billion and expect to create and/or retain approximately 80,900 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. 26 Table of Contents Securities and Exchange Commission Section 37 of the Securities Exchange Act of 1934 (the "Exchange Act") requires TVA to file with the Securities and Exchange Commission ("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 ACPA; (4) could be 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 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. 27 Table of Contents 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 97 percent below peak 1995 levels and emissions of sulfur dioxide ("SO 2 ") have been reduced by 99 percent below 1977 levels through CY 2020. For CY 2020, TVA's emissions of carbon dioxide ("CO 2 ") from its owned and operated units, including purchased power and REC retirement adjustments which reduce the CO 2 emissions, were 43 million tons, resulting in a TVA system average, as delivered, CO 2 emission rate of 562 lbs/MWh. This represents a 63 percent reduction in mass carbon emissions from 2005 levels. 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. Additional quantitative emissions data is as follows: Emissions and Intensity Rates (1) 2020 2019 Nitrogen Oxide (NO x ) (2) Total NO x Emissions (MT) 12,577 19,430 Total NO x Emissions Intensity (MT/Net MWh) 0.000094 0.000140 Sulfur Dioxide (SO 2 ) (2) Total SO 2 Emissions (MT) 17,082 26,972 Total SO 2 Emissions Intensity (MT/Net MWh) 0.000127 0.000194 Mercury (Hg) Total Hg Emissions (kg) 17.5 50.1 Total Hg Emissions Intensity (kg/Net MWh) 0.0000001 0.0000004 Notes (1) Intensity rates are calculated based on generation from TVA's most recent fiscal year for years indicated and emissions data from the most recent calendar years. (2) Emissions data is consistent with Edison Electric Institute Environmental, Social, Governance and Sustainability Report standards, which are based on metric tons ("MTs") whereas overall CO 2 emission rates and baseline reductions from historical levels are based on short tons. Clean Air Act The 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. 28 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 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") 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 March 15, 2021, the EPA Administrator signed the final revisions to the CSAPR Update Rule. The revisions address the defects identified by the D.C. Circuit and took effect on June 29, 2021. In this final action, the EPA reduced ozone-season NO x allowances for a group of 12 states, including Kentucky, and required sources in those states to surrender most of their banked allowances. TVA's Shawnee Fossil Plant ("Shawnee") facility is affected by these revisions, and TVA is in the process of analyzing compliance strategies to determine how any shortage in allowances will be overcome for the ozone season in 2022 and beyond. Mercury and Air Toxics Standards for Electric Utility Units . In April 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 ("RTR") 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 filed petitions in the D.C. Circuit challenging the "appropriate and necessary" finding and the RTR finding. On February 16, 2021, the EPA filed a motion requesting the D.C. Circuit to hold the cases in abeyance pending the agency's review of the final rule under Executive Order ("EO") 13990, which, among other things, requires the EPA to reconsider the final rule by August 2021. The EPA did not meet the August 2021 deadline, but is expected to issue a proposed rule that reverses the findings of the April 2020 final rule. TVA will evaluate the proposal when it is issued. Environmental Agreements. See Note 23 — Commitments and Contingencies — Legal Proceedings — Environmental Agreements for a discussion of two substantively similar agreements into which TVA entered in April 2011: one with the EPA and the other with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental Agreements"), 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 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 were required to submit their Regional Haze SIPs to the EPA by July 31, 2021. In response to requests from state air pollution control agencies in Tennessee and Kentucky, TVA submitted regional haze analyses for Cumberland Fossil Plant ("Cumberland") and Shawnee. The reports evaluate SO 2 emission reduction options for these facilities and will be used by these state agencies in preparing their Regional Haze SIPs. 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 ("2015 Rule"). The 2015 Rule required states to modify their implementation plans 29 Table of Contents 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 2015 Rule before the D.C. Circuit. In April 2017, the D.C. Circuit, at the request of the EPA Administrator, ordered this litigation to be suspended pending the EPA's review to determine whether to reconsider all or part of the 2015 Rule. On October 9, 2020, the EPA issued a guidance memorandum ("2020 Memorandum") that superseded and replaced policy statements outlined in the 2015 Rule. On September 30, 2021, the EPA withdrew the 2020 Memorandum, reinstating the agency's prior policy as set out in the 2015 Rule. The EPA's evaluation of state SIPs will be undertaken in light of the considerations outlined in the September 30, 2021 memorandum. TVA cannot predict the outcome of future SIP evaluations. New York Petition to Address Impacts from Upwind High Emitting Sources . In 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 requirements to reduce Kentucky NO x emissions are necessary. In 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. In July 2020, the D.C. Circuit vacated the EPA's denial of the petition and remanded the petition to the EPA for reconsideration. In its recently published Unified Regulatory Agenda, the EPA indicated that it will respond to the D.C. Circuit's decision by providing a revised response to New York's Section 126(b) petition. Specific impacts to TVA cannot be determined until the EPA takes further action on the petition. Affordable Clean Energy Rule . In 2019, the EPA finalized the 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 established guidelines for GHG emissions from existing coal-fired units based on efficiency improvements that can be achieved at those units at reasonable cost. Several industry, environmental, and state and local petitioners filed for judicial review of the ACE rule. On January 19, 2021, the D.C. Circuit vacated and remanded the ACE rule, and specified that the court's mandate will not issue with regard to the portion of the ACE rule that repeals the Clean Power Plan until after the EPA develops a replacement for the ACE rule. In Congressional hearings in February 2021, the EPA Administrator stated that the EPA will propose a new rule to regulate CO 2 emissions from electric generating units. On April 29, 2021, a coalition of states asked the Supreme Court to reverse the D.C. Circuit's decision to vacate and remand the ACE rule. TVA is unable to predict the future course of this litigation on appeal, nor the direction that the EPA may take in the future to regulate GHG emissions from fossil fuel-fired units. New Source Performance Standards . In 2018, the EPA proposed revisions to the GHG emission standards for new, modified, and reconstructed electric utility generating units required under Section 111(b) of the CAA. 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. In January 2021, the EPA published criteria in the Federal Register for making a significant contribution finding for GHGs from a source category for the purpose of regulating those emissions under Section 111(b) of the CAA, and the EPA did not take final action on the 2018 proposed revisions in this rulemaking. On March 17, 2021, the EPA asked the D.C. Circuit to vacate and remand the "significant contribution" finding since the rule was promulgated without public notice or opportunity to comment. On April 5, 2021, the D.C. Circuit vacated and remanded the January 2021 final rule. 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. Climate Change Executive Actions. On January 20, 2021, President Biden issued EO 13990, "Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis." EO 13990 directs federal agencies to review and revise regulations consistent with broad policy goals to improve public health and the environment, reduce GHG emissions, and prioritize environmental justice. On March 8, 2021, a coalition of 12 states filed a lawsuit in the U.S. District Court for the Eastern District of Missouri challenging President Biden's authority to establish interim values for the social cost of GHGs under EO 13990. On August 31, 2021, the court dismissed the matter, but the plaintiffs have appealed the decision to the U.S. Court of Appeals for the Eighth Circuit. A similar lawsuit is pending in the U.S. District Court for the Western District of Louisiana. EO 13990 also requires the EPA to review several environmental regulations to determine their consistency with the goals and policies prescribed in the EO. Specific impacts to TVA of EO 13990 cannot be determined at this time. In addition, on January 27, 2021, President Biden issued EO 14008, "Executive Order on Tackling the Climate Crisis at Home and Abroad." Among other things, EO 14008 expresses the following policies of the federal government: (1) to organize and deploy the full capacity of its agencies to combat the climate crisis to implement a government-wide approach that reduces climate pollution in every sector of the economy, (2) to align the management of federal procurement and real property, public lands and waters, and financial programs to support robust climate action, (3) to use all available procurement authorities to achieve or facilitate (a) a carbon pollution-free electricity sector no later than 2035 and (b) clean and zero-emission vehicles for 30 Table of Contents federal, state, local, and tribal government fleets, (4) to put the U.S. on a path to achieve net-zero emissions, economy-wide, by no later than 2050, (5) to accelerate the deployment of clean energy and transmission projects in an environmentally stable manner, (6) to ensure that, to the extent consistent with applicable law, federal funding is not directly subsidizing fossil fuels, (7) to promote the flow of capital toward climate-aligned investments and away from high-carbon investments, (8) improve air and water quality, and (9) secure an equitable economic future by making environmental justice part of an agency's mission. TVA is closely monitoring these developments, including the Justice40 Initiative, the Department of Treasury effort to establish a carbon market, establishment and development of the Civilian Climate Corps, and establishment of several White House comprehensive plans. In addition, EO 14008 created the Special Presidential Envoy for Climate and called for an early Leaders' Climate Summit aimed at raising climate ambition and making a positive contribution to the 26th United Nations Climate Change Conference of the Parties and beyond. EO 14008 also stated the U.S. would reconvene the Major Economies Forum on Energy and Climate, beginning with the Leader's Climate Summit. Federal agencies were directed to update their Climate Change Action Plans, and TVA submitted its draft plan in May 2021 and submitted its final plan in August 2021. Aside from the directive to update TVA’s Climate Change Action Plan, specific impacts of EO 14008 on TVA cannot be determined at this time. On May 20, 2021, President Biden also issued EO 14030, “Climate-Related Financial Risk,” which calls for a governmental-wide strategy on the disclosure of climate-related financial risk. EO 14030 requires the development of government-wide strategy regarding the following: (1) the measurement, assessment, mitigation, and disclosure of climate-related financial risk to federal government programs, assets, and liabilities in order to increase the long-term stability of federal operations; (2) financing needs associated with achieving net-zero greenhouse gas emissions for the U.S. economy by no later than 2050, limiting global average temperature rise to 1.5 degrees Celsius, and adapting to the acute and chronic impacts of climate change; and (3) areas in which private and public investments can play complementary roles in meeting these financing needs while advancing economic opportunity, worker empowerment, and environmental mitigation, especially in disadvantaged communities and communities of color. While TVA is subject to this EO, the specific impacts of EO 14030 cannot be determined at this time. 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. On January 20, 2021, President Biden formally rejoined the Paris Agreement on behalf of the U.S. The means for tracking emissions targets under the Paris Agreement are nationally determined contributions ("NDCs"). Each nation that is a party to the Paris Agreement is asked to prepare five-year, successive NDCs that it plans to achieve. On April 22, 2021, the Biden Administration announced its GHG NDCs for 2030 under the Paris Agreement, and these NDCs establish a new target for the U.S. to achieve a 50 to 52 percent reduction from 2005 levels in economy-wide net GHG pollution in 2030. Specific impacts to TVA cannot be determined at this time. Litigation . In addition to legislative activity, climate change issues have been the subject of a number of lawsuits, including lawsuits against TVA, and TVA may be subject to additional lawsuits in the future. 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 clean 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. Physical impacts of climate change may include, but not be limited to, changing weather patterns, extreme weather conditions, and other events such as flooding, droughts, wildfires, and snow or ice storms, and these events can impact TVA's system in terms of system operability, customer demand, and the health of regional economies. TVA has a Climate Change Action Plan which it updated in 2021 in accordance with EO 14008. TVA submitted its draft Climate Change Action Plan in May 2021 and its final plan in August 2021. The goal of the action 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 facilities and its operations. 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. As TVA evolves its generation portfolio, and after appropriate environmental review under NEPA, the TVA Board could make decisions about the timing, retirement, and replacement of aging fossil units or other expiring capacity, which may further TVA’s CO 2 and other emissions reductions. 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. 31 Table of Contents Renewable/Clean Energy Standards Thirty 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. Two states within the TVA service area, North Carolina and Virginia, have mandatory renewable standards that, while not applying directly to TVA, do apply to TVA's LPCs serving retail customers in those states. 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 Waters of the United States . In 2015, the EPA and the USACE issued the Clean Water Rule, which redefined waters of the United States ("WOTUS") in the agencies' regulations for the first time since the 1980s and was intended to clarify the regulatory jurisdiction of the EPA and the USACE ("2015 WOTUS Rule"). In April 2020, the USACE and the EPA issued the Navigable Waters Protection Rule (“NWPR”), which established a new regulatory definition of WOTUS and replaced the definition set forth in the 2015 WOTUS Rule. The NWPR established four categories of waters considered jurisdictional under the CWA: (1) territorial seas and traditional navigable waters, (2) perennial and intermittent tributaries to those waters, (3) certain lakes and ponds, and impoundments of jurisdictional waters, and (4) wetlands adjacent to jurisdictional waters. The rule excluded twelve categories of waters, including ephemerals, groundwater, many ditches, and waste treatment systems. The NWPR reduced the jurisdictional reach of the CWA and could potentially reduce permitting and mitigation requirements for TVA projects that impact waters that were previously considered jurisdictional under the 2015 WOTUS Rule. The NWPR was challenged in multiple courts, and on August 30, 2021, it was vacated by the United States District Court for the District of Arizona. The United States District Court for the District of New Mexico also vacated it on September 27, 2021. Two other courts declined to vacate the rule, but remanded it to the EPA and the Army Corps of Engineers. Previously, on June 9, 2021, the EPA and the Department of the Army announced their intention to initiate a new rulemaking process to restore the definition of WOTUS that was in place prior to the 2015 WOTUS Rule and to develop a new rule to establish a new definition of WOTUS. The impact of the rulemaking process cannot be ascertained fully at this time. Pending the completion of the rulemaking process, the EPA and the USACE are interpreting WOTUS consistent with the pre-2015 definition. Cooling Water Intake Structures. In 2014, the EPA released a final rule under Section 316(b) of the CWA 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 CWIS. 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 CWA. 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 cycles (i.e., technology retrofits), and compliance is expected to be required beginning in the CY 2022 - 2024 timeframe. The EPA has never previously applied the requirements under Section 316(b) to hydroelectric facilities. However, on September 30, 2021, EPA Region 10, which covers an area outside TVA’s service area, issued NPDES permits to four hydroelectric plants that include Section 316(b) requirements. In determining the best technology available (“BTA”) to minimize adverse impacts on the environment using best professional judgment, Region 10 analyzed the existing controls that the hydroelectric facilities were already implementing and concluded that those controls constitute BTA. It is not clear whether this approach will be adopted nationwide or how the BTA standard would be applied to TVA's hydroelectric facilities; accordingly, the specific impacts to TVA from the new Region 10 permits 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 CWA 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 32 Table of Contents 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 October 2020, the EPA issued final revised ELGs for bottom ash transport water and FGD wastewater. The primary impact for TVA is on the operation of existing coal-fired generation facilities. The revised ELGs could impact long-term investment decisions being made relative to the long-term compliance and operability of these plants. The revisions may require TVA to install additional wastewater treatment systems for FGD wastewater and bottom ash transport water, and TVA could incur substantial costs to comply with the new rule. In addition, the revised ELGs could cause TVA to reduce utilization of its coal-fired generation facilities or even close such facilities. The revision also includes a subcategory for which 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 CY 2028. TVA is evaluating the applicability of those subcategories to its plants as appropriate. In October 2021, TVA filed Notices of Planned Participation preserving the option for TVA's Bull Run, Cumberland, and Kingston plants to participate in the subcategory for units that cease coal combustion by the end of CY 2028. Petitions for judicial review of the October 2020 ELG rule were filed in the D.C. Circuit and the U.S. Court of Appeals for the Fourth Circuit (the "Fourth Circuit") and have been consolidated in the Fourth Circuit in the case Appalachian Voices, et al. v. EPA . On August 3, 2021, the EPA announced a supplemental rulemaking to revise the Steam Electric Power Generating Effluent Limitations Guidelines and Standards. As part of the rulemaking process, the EPA will determine whether more stringent limitations and standards are appropriate and consistent with the technology-forcing statutory scheme and the goals of the Clean Water Act. The impact of the proposed rulemaking cannot be fully determined at this time. Because this rulemaking could result in more stringent ELGs, the EPA has requested that the Appalachian Voices, et al. v. EPA litigation in the Fourth Circuit be held in abeyance. Consistent with the 2020 rule, on January 8, 2021, TVA submitted requests to state regulatory authorities to modify NPDES permits for Kingston Fossil Plant ("Kingston"), Cumberland, Bull Run, Shawnee, and Gallatin Fossil Plant ("Gallatin") to incorporate into the permits limitations in the 2020 rule. The Kentucky Department for Environmental Protection released a final revised permit for Shawnee in the fourth quarter of 2021, and TVA anticipates the Tennessee Department of Environment and Conservation ("TDEC") will issue draft permits for Kingston, Cumberland, Bull Run, and Gallatin by December 2021. Nationwide Permits for Dredge and Fill. On January 12, 2021, the USACE published notice of a final rule that reissued and modified Nationwide Permits (“NWPs”) that authorize discharges of dredge and fill material into waters of the U.S. The final rule limits applicability of NWP 12, which previously authorized discharges from all utility line activities, to oil and natural gas pipelines, creates new NWPs for certain utility line activities, including NWP 57 for electric utility line and telecommunication activities, and modifies certain pre-construction notification requirements. The new NWP 12 is being challenged in court on the same grounds that were litigated in Northern Plains Resource Council v. U.S. Army Corps of Engineers , where the U.S. District Court for the District of Montana found the permit unlawful and vacated it. Although the new lawsuit does not challenge NWP 57, the NWP upon which TVA is most likely to rely for its utility line activities, the lawsuit raises claims that apply with equal force to NWP 57. However, the impact on TVA from this litigation cannot be evaluated fully until the legal challenge is resolved. 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 Supreme Court Decision On April 23, 2020, in County of Maui v. Hawaii Wildlife Fund , the Supreme Court held that the CWA 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. After evaluating the potential impact of the decision, TVA determined that this decision will not require TVA to change its operations. 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 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 historical operations at certain facilities have resulted in releases of contaminants that TVA is addressing, including at TVA's Environmental Research Center at Muscle Shoals, Alabama. TVA has completed several removal, remedial, and characterization actions at the site, as required by a permit issued by the Alabama Department of Environmental Management. At September 30, 2021, TVA's estimated liability for required cleanup and similar environmental 33 Table of Contents work for those sites for which sufficient information was available to develop a cost estimate was approximately $18 million and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheet. TVA must submit an application for renewal of the RCRA permit by September 27, 2022, and the renewal process may include additional mandates for further remedial activities. TVA has evaluated the potential impact that a permit renewal could have on its operations and does not believe that the renewal will have any adverse impacts at this time. 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 23 — 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 required 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, and TVA ceased doing so, and initiated closure, by the specified deadline. 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 initiated closure of its unlined CCR surface impoundments by the regulatory deadline and already makes groundwater monitoring and corrective action reports publicly available. A separate final Part B rule was published in the Federal Register on November 12, 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, TDEC issued an order that (1) established a process for TDEC to oversee TVA's implementation of the EPA's CCR rule and 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. TVA submitted to TDEC an environmental assessment report (“EAR”) for Allen in the fourth quarter of 2021. TVA is currently conducting environmental investigations for the remaining six sites in accordance with the TDEC-approved Environmental Investigation Plans and will submit EARs to TDEC upon completion of the related investigations. 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 — Allen Groundwater Investigation and Note 13 — Asset Retirement Obligations. Environmental Investments From 1970 to 2021, 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. 34 Table of Contents SO 2 Emissions and NO x Emissions. To reduce SO 2 emissions, TVA operates scrubbers on 18 of its coal-fired units and switched to lower-sulfur coal at certain coal-fired units. To reduce NO x emissions, TVA operates SCRs on 18 coal-fired units, operates low-NO x burners or low-NO x combustion systems on 21 units, optimized combustion on all 25 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 in the TVA fleet 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 . 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. There could be additional material costs if further reductions of GHGs, including CO 2 , are mandated by legislative, executive, 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. 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) For the years ended September 30, 2021 (in millions) 2022 2023 Thereafter (3)(4) Total Coal Combustion Residual Program (5) $ 232 $ 189 $ 368 $ 789 Clean Air Act control projects (6) 31 38 90 159 Clean Water Act requirements (7) 77 64 7 148 Notes (1) These estimates are subject to change as additional information becomes available and as regulations change. (2) These estimates include $134 million, $75 million, and $52 million for 2022, 2023, and thereafter, respectively, in capital expenditures. (3) See Note 23 — Commitments and Contingencies . (4) These estimates include expenditures expected to be incurred during 2024, 2025, and 2026. (5) Includes costs associated with the closure of facilities 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 13 — 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 Clean Water Act regarding CWIS and ELGs for steam electric power plants. Human Capital Management People Strategy and TVA's Values As 2021 remained a challenge due to the continuation of the COVID-19 pandemic, the employees of TVA kept its mission in focus and continued to create a culture that lives up to its values - Safety, Integrity, Inclusion, and Service. TVA employees collectively came together to address business needs and enable strong performance while serving the 10 million people of the Tennessee Valley. As part of its People Advantage strategic priority, TVA strives to create a work environment that supports and responds to the changing needs of the workforce. People Advantage is one of TVA's five strategic priorities and a multi-year commitment to evolve TVA's culture. The recent and on-going effects of the pandemic have brought the importance of employee health, well-being and retention into sharp focus. This importance centers around TVA's valuable human capital and putting its people first. The focus on People Advantage, along with the other four strategic priorities of Operational Excellence, Financial Strength, Powerful Partnerships, and Igniting Innovation, allows TVA to fulfill its daily mission of service to the people of the Tennessee Valley. The three initiatives in People Advantage that influence the desired TVA culture impact to the communities that TVA serves are (1) Inclusion with Diversity ("IwD"), (2) Talent, and (3) Engagement. To help shape an inclusive work environment that values all voices, TVA has intensified its efforts over the past few years to integrate diversity and inclusion into its culture and make its efforts and progress sustainable and a part of TVA's daily operations. Similarly, TVA has promoted a people-focused organization that amplifies and harnesses the energy, power, and creativity of an experienced and talented workforce - one that continues to bring about the best from its people - manifesting itself as a "destination for difference makers" for highly-skilled candidates. TVA is working to cultivate a positive employee experience to heighten workforce engagement. This work is 35 Table of Contents focused on equipping leaders to champion engagement across the enterprise through the understanding and leveraging of employee surveys, workplace flexibility opportunities, and health, safety, and well-being programs. Ethics Ethics and integrity are highly valued at TVA. Since its establishment in 1933, a commitment to ethics has been a part of TVA's DNA. In 2021, TVA partnered with a third-party administrator to execute a survey that measured employees' perceptions of TVA's ethical culture. TVA is committed to leveraging the results from the survey to further strengthen TVA's strong ethical culture. TVA's Ethics & Compliance office aims to help employees make the right decisions for the right reasons and offers guidance when the right decisions may not be clear. The office is focused on educating and creating awareness while also assisting employees with ethical decision-making inside and outside of the TVA workplace. Further, TVA requires all employees and contractors to take its annual ethics training and attest to its Code of Conduct, which sets forth standards for adhering to TVA's core values and conducting its affairs with openness, honesty, and integrity every day. TVA Board Governance and Oversight The TVA Board’s People and Governance Committee assists the TVA Board in fulfilling its responsibilities under the TVA Act by overseeing policies and strategies that affect a wide array of people-related programs inclusive of leadership development, culture, engagement, labor relations, safety, communications, compensation, performance incentives, benefits, and well-being. Specifically, the Committee advises the TVA Board in areas of overall Board governance, CEO goals, performance, compensation, and succession planning. Emergent people issues are discussed by this Committee, or in TVA Board briefings, as appropriate. The TVA Board's Audit, Finance, Risk, and Cybersecurity Committee oversees TVA's compliance and ethics programs. Inclusion with Diversity In 2020, the company added Inclusion as one of its core values and adopted IwD as an enterprise-wide transformational strategic element. Since then, IwD has become increasingly integrated into TVA’s daily operations. To accelerate the impact of IwD within TVA and the communities it serves, TVA is working to recognize and sustain diversity as an imperative, leveraging the public power model to advance inclusion with diversity in TVA communities. In 2021, TVA's initiatives and accomplishments in promoting diversity and inclusion included the following: • Established an IwD Council, comprised of senior leadership from all six strategic business units with accountability directly to TVA’s CEO and his direct reports; the council advises, champions, and oversees all IwD strategies and actions across the enterprise; • Established a Supplier Diversity Stakeholder Advisory Council and Supplier Mentoring Program; • Established the reinforcement of IwD by the TVA Board as an enterprise priority and goal for TVA’s CEO, which is reflected in his individual performance assessment under the annual incentive compensation program; see Item 11, Executive Compensation — C ompensation Discussion and Analysis — 2021 Performance Goals and Performance Achievement — Executive Annual Incentive Plan — Individual Performance Multiplier Reinforces Pay for Performance for additional information; • Refreshed courses to ensure that existing learning and development programs have the right level of content and emphasis on inclusion with diversity and expanded accessibility to courses through partnership with an online platform; • Maintained an inclusion score, which measures sense of belonging, above market median at 74%; and • Created new virtual programs for safe and open conversations about diversity and inclusion. TVA is also advancing IwD in the communities it serves. For example, TVA is enhancing its economic development program support for women-, minority- and veteran-owned businesses . Employee Resource Groups. TVA is powered by its people and strengthened by its diversity. TVA supports nine Employee Resource Groups ("ERGs") to help strengthen an inclusive culture and make life better for the people it serves: • ABLED Events — allows TVA employees to bring unique perspectives and gifts together as a united team to celebrate commonalities and differences through “Awareness Benefitting Leaders & Employees about disAbilities” in the workplace. • ACTion — celebrates and honors the many Asian cultures represented within TVA, from Japan to India, and to the Philippines and beyond. It regularly highlights social events and supports career-enriching workshops. 36 Table of Contents • African American Voices — provides an avenue for African American and others interested in fellowship and smart career connections within TVA. It promotes mentoring and development opportunities, as well as group workshop events on such topics as personal branding, personal finance, and networking and negotiation skills. • IGNITE — provides TVA’s workforce with an opportunity to engage with others on various topics of interest about products, services, processes, and solutions provided by TVA; and in doing so, provides a more diverse and creative knowledge base for TVA and its employees. • New Employee Network — makes life easier for new employees entering a large company. It provides organizational information and cross-functional connections not only on the front-end to new employees but throughout an employee’s tenure at the company. • Spectrum — highlights the open, accepting, and safe work environment TVA provides for all employees and focuses increasing visibility on educational and social opportunities on LGBTQ+ issues by offering employees a variety of community and professional networking opportunities within the Tennessee Valley. • TVA & Amigos — provides an avenue for TVA's Hispanic employees and those interested in Latin culture to be involved in professional, educational, and service-oriented events. • TVA Veterans Association — allows employees unique camaraderie opportunities as they support a wide array of local and national ceremonies and events and is one of the oldest and most active resource groups at TVA, with all branches of the military represented. • Women Empowered (WE) — supports women at all stages of their careers and advocates for the equal rights of all female employees across TVA. This extends externally as TVA supports inclusion, networking, and developmental opportunities for girls and young women in local communities. Together, TVA and its employees collectively champion personal and professional growth through a network of professional, social, and volunteer opportunities made available by each ERG and TVA’s diverse mix of employees. Talent To bring out the best from its people, TVA utilizes a set of business functions that operate together to address the enterprise’s workforce needs around human capital talent selection, organization, development, engagement, and performance. Attracting and Retaining Talent. 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 their talents and time while bringing their authentic selves to work each day. Recruiting efforts also support the strategic element of IwD to build a culture that lives up to TVA's values, as TVA actively recruits employees of all races, colors, sexual orientations, ethnicities, gender identities, abilities, religions, and ages. TVA continues to improve employment opportunities for underrepresented populations within TVA’s workforce, to partner with colleges and universities for internships and recent graduates, and to maintain its status as a top industry employer for military veterans. While public reports have shown that employees in all sectors of the United States economy have been voluntarily leaving the workforce as a result of the COVID-19 pandemic at an historically high rate, TVA’s voluntary attrition rate has remained stable, and an area that TVA continues to monitor while also listening to workforce needs. TVA believes this is largely attributable to its People Advantage focus, which includes competitive compensation and comprehensive benefits programs, inclusion and well-being programs, flexible workplace practices, and an environment that promotes retention of its complex and valuable workforce. Competitive Total Rewards. TVA’s total rewards package is a significant factor in attracting and retaining top talent. TVA’s competitive benefits portfolio supports the values and needs of its employees. TVA provides market-based and competitive compensation which includes an annual incentive plan that is designed to reward accomplishments against established business and individual goals within a given year. All eligible employees participate in TVA's annual incentive plan, including TVA's represented employee population. Additionally, in support of its cultural commitment to IwD, TVA periodically reviews compensation practices to promote fairness and equity. TVA has engaged third party vendors to conduct independent pay equity analysis and continues to monitor its pay practices and to provide its leaders with tools to assist in making equitable pay decisions. 37 Table of Contents To support and care for the well-being of employees and their families, examples of comprehensive and competitive benefits TVA currently offers include: • medical, vision, dental, life, accident, and disability insurance • paid time-off • leave donation • health savings accounts • flexible spending accounts • tuition reimbursement • 401(k) retirement • dependent scholarships • flexible work schedules • wellness incentives • employee assistance programs Development and Training. As TVA continues to adapt to the evolving demands of the industry, it is imperative that it cultivate a work environment that motivates people to do their best work by aligning employee development, skills, and capabilities with what TVA needs to succeed now and in the future. TVA provides multiple training and development opportunities at all employee levels. Those opportunities include: • individual learning-ability • team learning • mentoring • career pathing, including rotational development • professional, technical, and leadership career pathways • over 5,000 on-line learning courses TVA also invests in the development of its employees through tuition reimbursement for academic programs aligned with TVA’s business and workforce development needs. In 2021, employees and contractors engaged in over 915,000 hours of training. Leadership and Development and Succession Planning. TVA encourages personal and professional development and has strategic leadership development programs designed to prepare employees to step into leadership positions, accepting the additional responsibilities, expectations, and challenges faced by each level of leadership. TVA also has advanced leadership programs designed to further prepare leaders for executive level positions, which require an extensive interview and assessment process for selection. Through TVA’s talent review and succession planning program, 97% of director and executive level roles have at least one succession candidate identified. Continuous focus on and support of leadership development is maintained through means such as talent discussions at least annually at every level of the organization, which includes attention to developing a diverse leadership pipeline. TVA has established goals for female and people of color representation in leadership and plans to update these goals to continuously improve this representation. Engagement TVA's work in this key area is focused on equipping leaders to champion engagement across the enterprise, leveraging and understanding the employee voice to make informed decisions that drive engagement, and enhancing policies and resources that support holistic employee well-being and promote engagement. Strong engagement levels impact all of TVA’s strategic priorities. Employee Engagement Survey. TVA’s Employee Engagement Survey is a key tool for understanding and leveraging the employee voice. The survey is administered a minimum of twice annually to all employees and measures overall engagement and drivers of engagement. The survey results provide real-time insights and analytics and are compared to a normative database comprised of other relative external benchmarks to identify strengths and opportunities for improvement. Results from the surveys are shared with employees and used by TVA leadership and business units to improve and monitor progress against People Advantage objectives. Two scores are used as key People Advantage metrics: Engagement, which measures the sense of commitment and involvement, and Inclusion, which measures the sense of belonging at work. In 2021, TVA’s engagement score of 82% places it at top decile among over 750 companies from various industries. Workplace Flexibility. As part of its People Advantage strategic priority, TVA strives to create a work environment that is welcoming, supportive, and responsive to the changing needs of the workforce. Recognizing the changing work environment, largely fostered by the COVID-19 pandemic, and responding to employee appreciation of flexibility in work location in 2021, TVA established a workplace flexibility initiative called “Reimagining How We Work.” The objective of the initiative is to promote workplace flexibility guided by safety, performance, inclusion, and engagement. Instead of returning to what was, TVA is embracing a more flexible future that puts people at the center of all it does to maximize its performance and mission. Safety, Employee Health, and Well-being. Safety is one of TVA’s core values. 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. As a federal agency, TVA is also required to complete regulatory compliance inspections of its facilities on an annual basis. 38 Table of Contents The COVID-19 pandemic has brought the importance of employee health, well-being, and retention into sharp focus. TVA has provided support for its employees throughout the pandemic to ensure the retention of valuable talent and to enhance well-being. This support includes establishing a mental health advocacy program, providing unlimited Employee Assistance Program sessions, enhancing paid leave, and providing tutoring resources, onsite vaccination clinics, and wellness incentives for vaccinations. In 2020, TVA established an Employee Relief Fund to support employees adversely affected by the COVID-19 pandemic and natural disasters and has continued those distributions in 2021 to assist employees. TVA’s safety accomplishments in 2021 include: • Consistent decline in recordable injuries and illnesses; and • Industry top decile performance in recordable injury rate and top quartile performance in serious injury rate in 2021. Partnerships with Unions. TVA 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. TVA’s labor construct is complex and unique – different from private utility peers and with union influence that has the ability to reach national levels – primarily governed by the TVA Act. Neither the federal labor relations laws covering most private sector employers, nor those covering most federal agencies, apply to TVA. TVA’s labor strategy is critical to the achievement of its strategic priorities as it prepares the workforce for the future. Its employees and contractors are represented by seven collective bargaining agreements and a total of 17 labor unions. This reflects 60% of TVA’s workforce, or approximately 6,000 employees. TVA’s partnerships with these unions go back more than 80 years and form the backbone of TVA and its ability to serve the people of the Tennessee Valley. Recent accomplishments to strengthen the relationship between TVA and its labor unions include: • Continued low-cost, reliable energy to residents across the Tennessee Valley: – TVA and the Trades and Labor Council for Annual Employees announced a 10-year extension on their agreement in 2020. – TVA and the North America’s Building Trades Unions announced a 10-year extension of their Project Labor Agreement in 2021, which provides stability for staffing of construction and maintenance projects throughout the Tennessee Valley and strengthens the relationship. • Adoption of the Code of Excellence ("COE") — a union led partnership to promote the highest quality of work, best work practices, and the development of a highly skilled workforce – to drive business outcomes by applying the SPARQ principles of Safety, Professionalism, Accountability, Relationships, and Quality, including: – During a year of unprecedented challenges, TVA set the industry benchmark for pandemic response and delivered strong operational excellence with one of the safest and most productive years on record, and TVA attributes this success in part to its strong union partnerships. – Union-led labor management panel has partnered to reduce g rievances (the number of grievances filed during 2017 was more than four times that of the grievances filed during 2021). Awards Awards and other recognition help TVA understand its strengths, identify opportunities for improvement, bolster employee pride, and better attract and retain diverse talent. Recognition in 2021 included: • Forbes America's Best Large Employers 2021 - #2 in Utilities industry • Forbes Best Employers by State 2021 - Top 5 in Tennessee for third consecutive year • 2021 Diversity Impact Awards TM Top 10 Diversity Action Award • Ranked in Top 100 - 2021 America's Most Loved Workplaces ® ( Newsweek in partnership with Best Practice Institute) • 2021 Military Friendly ® Employer Top 10 • Best in Class 401(k) Plan • One of the largest U.S. Contributor to Helmets to Hardhats Program Key Metrics TVA actively monitors internal metrics to remain aware of human capital trends and to ensure that it is making measurable progress on its People Advantage objectives. Through monitoring sources such as data and performance 39 Table of Contents dashboards, one-on-one engagements between leaders and employees, and engagement surveys, TVA obtains information that helps it understand its performance and make adjustments, if needed. Key measures of success in TVA’s People Advantage strategic priority are set forth below: Goal Actual Performance Measure 2022 2021 2020 People of color representation in leadership (%) (1) 10.0 % 9.6 % 9.0 % Female representation in leadership (%) (1) 20.0 % 18.0 % 18.0 % Diverse external hires (%) (2) 33.0 % 39.4 % 34.8 % Regrettable losses (%) (3) N/A 1.6 % 1.0 % Voluntary attrition (%) (3) 1.5 % 1.5 % 1.9 % Engagement (100 point scale) (4) 82 82 80 Inclusion (100 point scale) (5) 76 74 72 Recordable injuries (#) (6) 0 29 39 Notes (1) Defined as first line supervisors and above. (2) Defined as external hires who are female, persons of color, and persons with disabilities. (3) Regrettable Loss is generally defined as voluntary terminations by employees with acceptable performance ratings. For 2022, this measure will be replaced by Voluntary Attrition, which is a more inclusive measure and accounts for all employees who leave the business voluntarily during a fiscal year. (4) Based on score from Employee Engagement Survey defined as degree to which employees invest their cognitive, emotional, and behavioral energies toward positive organizational outcomes. (5) Based on score from Employee Engagement Survey defined as the degree to which employees sense they belong at work. (6) Defined as the number of recordable injuries and illnesses per 100 full-time employees per year. Workforce Demographics Employee Demographics 2021 2020 Number of employees on September 30 10,192 9,989 Represented by collective bargaining unit 60% Represented, or approximately 6,000 employees 60% Represented, or approximately 6,000 employees Trades and labor employees 3,261 3,287 Average tenure (years) 13 13 Average age 44.1 45.2 In addition to the employees above, TVA also had approximately 15,500 and 13,800 contractors on September 30, 2021 and 2020, respectively, providing both intermittent or full-time services. The majority of these contractors are managed by TVA suppliers that are providing services to TVA. All Employees Leadership New Hires 2021 2020 2021 2020 2021 2020 Female 2,076 2,006 270 254 211 156 People of Color 1,146 1,098 143 133 122 83 Military, Veteran 1,822 1,804 318 322 107 78 40 Table of Contents