TVC filing — read by section

Item 7. Management’s Discussion and Analysis

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 (Dollars in millions except where noted) 
 
 The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the Tennessee Valley Authority ("TVA"), its financial condition, results of operations, and cash flows, and its present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, TVA's consolidated financial statements and the accompanying notes thereto contained in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (the "Annual Report"). See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in TVA's Annual Report on Form 10-K for the year ended September 30, 2020, filed with the Securities and Exchange Commission ("SEC") on November 16, 2020, for a discussion of variance drivers for the year ended September 30, 2020, as compared to the year ended September 30, 2019. The MD&A includes the following sections: 
 
 • Business and Mission — a general description of TVA's business, objectives, strategic priorities, and core capabilities; 
 
 • Executive Overview — a general overview of TVA's activities and results of operations for 2021; 
 
 • Results of Operations — an analysis of TVA's consolidated results of operations for 2020 and 2021; 
 
 • Liquidity and Capital Resources — an analysis of cash flows, a description of aggregate contractual obligations, and an overview of financial position; 
 
 • Key Initiatives and Challenges — an overview of current and future initiatives and challenges facing TVA; 
 
 • Critical Accounting Estimates — a summary of significant estimates, judgements, and assumptions that effect the amounts reported in the consolidated financial statements and accompanying notes; 
 
 • Legislative and Regulatory Matters — a summary of laws and regulations that may impact TVA; and 
 
 • Risk Management Activities — a description of TVA's risk governance and exposure to various market risks. 
 
 Business and Mission 
 
 Business 
 
 TVA operates the nation's largest public power system. At September 30, 2021, TVA provided electricity to approximately 57 directly served customers, which include seven federal agency customers, and 153 local power company customers ("LPCs") that serve approximately 10 million people in parts of seven southeastern states. TVA generates nearly all of its revenues from the sale of electricity, and in 2021 revenues from the sale of electricity totaled $10.4 billion. As a wholly-owned agency and instrumentality of the United States ("U.S."), however, TVA differs from other electric utilities in a number of ways: 
 
 • TVA is a government corporation. 
 
 • The area in which TVA sells power is limited by the Tennessee Valley Authority Act of 1933, as amended (the "TVA Act") under a provision known as the "fence"; however, another provision of federal law known as the Anti-Cherrypicking Amendment ("ACPA") generally protects TVA from being forced to provide access to its transmission lines to others for the purpose of delivering power to customers within substantially all of TVA's defined service area. 
 
 • The rates TVA charges for power are set solely by the TVA Board of Directors ("TVA Board") and are not set or reviewed by another entity, such as a public utility commission. In setting rates, however, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power be sold at rates as low as feasible. 
 
 • TVA is not authorized to raise capital by issuing equity securities. TVA relies primarily on cash from operations and proceeds from power program borrowings to fund its operations and is authorized by the TVA Act to issue bonds, notes, or other evidences of indebtedness (collectively, "Bonds") in an amount not to exceed $30.0 billion 
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 outstanding at any given time. Although TVA's operations were originally funded primarily with appropriations from Congress, TVA has not received any appropriations from Congress for any activities since 1999 and, as directed by Congress, has funded essential stewardship activities primarily with power revenues. 
 
 TVA's Mission of Service 
 
 TVA was built for the people, created by federal legislation, and charged with a unique mission - to improve the quality of life in a seven-state region through the integrated management of the region's resources. TVA's mission focuses on three key areas: 
 
 ENERGY ENVIRONMENT ECONOMIC DEVELOPMENT 

 • Energy — Delivering reliable, low cost, clean energy; 
 
 • Environment — Caring for the region's natural resources; and 
 
 • Economic Development — Creating sustainable economic growth. 
 
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 While TVA's mission has not changed since it was established in 1933, the climate in which TVA operates continues to evolve. The business and economic environment has become more challenging due to economic conditions; tougher environmental standards; and the need to diversify its power supply and adapt to changing customer usage behaviors, new technologies, and emerging, non-traditional competition. To continue to deliver its mission of service while evolving for future success, TVA must realize five strategic priorities, which are comprised of several strategic elements each: 
 
 Enhance our Role as a Community Leader and Trusted Partner Create a Culture that Lives up to TVA's Values Nation’s Top Nuclear Fleet by 2025 Advance Energy Transformation in the Valley through Innovation Deliver Value to Enhance Prosperity in the Valley 
 Champion the Unique Value of the Valley Public Power Model Accelerate the Impact of Inclusion with Diversity within TVA and the Communities TVA Serves Evolve TVA's Reliable and Clean Energy Supply into the Energy System of the Future Establish a Focused Innovation Framework and Mindset Balance Commitments & Obligations 
 Region’s Top Choice for Business and Industry Lead the Industry in Cost-effective Carbon Reduction Develop Long-Term Business Model 
 Meet Resource and Environmental Stewardship Commitments Build the Integrated and Reliable Grid of Tomorrow Achieve Sustainable Debt Level 

 TVA's mission sets the stage for its strategic planning process that includes strategic objectives, initiatives, and scorecards for performance designed to provide clear direction for improving TVA's core business. 
 
 Linking the Mission to Performance 
 
 TVA has formulated key performance measures to support its strategic priorities. The intent of these measures is to align employees to TVA's mission by focusing its collective efforts on operational excellence, fiscal responsibility, economic development, and environmental stewardship. The measures are designed to promote teamwork, encourage high performance behaviors, and motivate TVA employees to achieve goals aligned with TVA's mission and values. The 2021 corporate results compared with targets for these key measures are reflected in the chart below, in addition to the 2022 approved corporate measures. See Item 11, Executive Compensation — Compensation Discussion and Analysis for information regarding how the measures are calculated. 
 
 2021 Corporate Measure Weight Actual Threshold Target Stretch 
 TVA total spending ($ millions) 40% $ 5,144 $ 5,488 $ 5,333 $ 5,178 
 Load not served (system minutes) 30% 3.2 4.6 3.9 3.4 
 Annualized nuclear unit capability factor (%) 15% 90.5 % 89.5 % 90.2 % 91.9 % 
 Combined cycle equivalent availability factor (%) 10% 85.3 % 75.9 % 80.9 % 85.8 % 
 Coal equivalent availability factor (%) 5% 71.6 % 59.0 % 64.0 % 82.1 % 

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 2022 Corporate Measure Weight Threshold Target Stretch 
 TVA total spending ($ millions) 40% Budget 
 Load not served (system minutes) 30% 4.5 3.9 3.2 
 Annualized nuclear online reliability loss factor (%) 15% 3.73 % 2.71 % 1.69 % 
 Combined cycle equivalent availability factor (%) 10% 77.6 % 82.6 % 84.9 % 
 Coal equivalent availability factor (%) 5% 58.2 % 63.2 % 69.6 % 

 Executive Overview 
 
 TVA's operating revenues were $10.5 billion and $10.2 billion for the years ended September 30, 2021 and 2020, respectively. Operating revenues increased for the year ended September 30, 2021 as compared to the prior year, primarily as a result of higher energy sales and an increase in fuel cost recovery revenue attributable to higher fuel rates. These increases were partially offset by lower effective rates primarily from the Pandemic Relief Credit that the TVA Board approved in 2020, which was in effect for 2021. The 2.5 percent monthly base rate credit, applied to service provided to TVA's local power company customers ("LPCs"), their large commercial and industrial customers, and TVA's directly served customers. For the year ended September 30, 2021, these credits accounted for $221 million of a decrease to operating revenue. In August 2021, the TVA Board approved a 2.5 percent monthly base rate credit, the Pandemic Recovery Credit, which will be effective for 2022. The credit, expected to approximate $220 million, will also apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. 
 
 Total operating expenses increased $120 million for the year ended September 30, 2021 as compared to the prior year, primarily as a result of a $257 million increase in fuel and purchased power expense and a $170 million increase in operating and maintenance expense. The increase in fuel and purchased power expense was primarily due to higher effective fuel rates from higher natural gas prices and higher market rates of purchased power, as well as an increase in volume due to higher demand. The increase in Operating and maintenance expense was primarily due to an increase in contract labor driven by operational needs and work to support the company's strategic priorities and an increase in payroll and benefit costs driven by labor escalation for cost of living increases. These increases were partially offset by a $293 million decrease in Depreciation and amortization expense for the year ended September 30, 2021 as compared to the same period of the prior year. This decrease was primarily driven by a decrease in depreciation expense as a result of the decision in 2019 to accelerate the retirements of Bull Run Fossil Plant ("Bull Run") and Paradise Fossil Plant ("Paradise"). Paradise was fully depreciated in the second quarter of 2020. 
 TVA continues to closely monitor developments associated with the Coronavirus Disease 2019 ("COVID-19") pandemic, including impacts from variants. 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. At this time, TVA does not anticipate sales volume will be materially impacted due to the COVID-19 pandemic beyond 2021. In addition, operations and delivery of energy to customers have not been materially impacted by the COVID-19 pandemic at this time. 
 TVA issued its first green global power bond in September 2021. The $500 million bond has a 10-year maturity and carries a coupon interest rate of 1.500%, which set a record for the lowest rate achieved by TVA on a 10-year financing since TVA began issuing debt in the public capital markets. TVA intends to use amounts equal to the proceeds from the sale for capital investments in renewable energy, energy efficiency, climate adaptation, and green innovation, including research and development expenditures related to the deployment of carbon-free and/or energy efficient solutions and other innovations. 
 During 2021, TVA continued to achieve 99.999 percent reliability in delivering energy to its customers. TVA's reliability, competitive rates, and economic development efforts continued to attract and encourage the expansion of business and industries in the Tennessee Valley, with over $8.8 billion in investments and approximately 80,900 jobs created or retained during the year. 
 
 Results of Operations 
 
 Sales of Electricity 
 
 Sales of electricity, which accounted for nearly all of TVA's operating revenues, were 157,353 million and 151,251 million kilowatt hours ("kWh") for 2021 and 2020, respectively. TVA sells power at wholesale rates to LPCs that then resell the power to their customers at retail rates. TVA also sells power to directly served customers, consisting primarily of federal agencies and customers with large or nonstandard loads. In addition, power exceeding TVA's system needs is sold under exchange power arrangements with certain other power systems. 
 
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 The following chart compares TVA's sales of electricity by customer type for the years ended September 30, 2021 and 2020: 
 
 Sales of Electricity 
 For the years ended September 30 
 (millions of kWh) 

 The following charts show a breakdown of TVA's energy load: 
 
 Note 
 Information included in the charts above was derived from energy usage of directly served customers and customers served by LPCs during calendar year 2020, and these graphs will continue to be updated on a calendar year basis. 
 
 Weather affects both the demand for TVA power and the price for that power. TVA uses degree days to measure the impact of weather on its power operations. Degree days measure the extent to which the TVA system 23-station average temperatures vary from 65 degrees Fahrenheit. 
 
 Degree Days 
 2021 Normal Percent Variation 2020 Normal Percent Variation 2021 2020 Percent Change 
 Heating Degree Days 3,216 3,360 (4.3) % 3,056 3,369 (9.3) % 3,216 3,056 5.2 % 
 
 Cooling Degree Days 1,611 1,686 (4.4) % 1,688 1,691 (0.2) % 1,611 1,688 (4.6) % 
 
 Sales of electricity increased approximately four percent for the year ended September 30, 2021, as compared to the prior year primarily due to lower energy sales for 2020, associated with the COVID-19 pandemic. Sales of electricity from 
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 industries directly served increased as a result of certain customers shifting maintenance outages from December 2020 to the summer of 2020, while businesses were closed due to the COVID-19 pandemic. 
 
 Financial Results 
 
 The following table compares operating results for 2021 and 2020: 
 
 Summary Consolidated Statements of Operations 
 (in millions) 
 
 2021 2020 Change Percent Change 
 Operating revenues $ 10,503 $ 10,249 $ 254 2.5 % 
 Operating expenses 7,658 7,538 120 1.6 % 
 Operating income 2,845 2,711 134 4.9 % 
 Other income (expense), net 13 36 (23) (63.9) % 
 Other net periodic benefit cost 258 253 5 2.0 % 
 Interest expense 1,088 1,142 (54) (4.7) % 
 Net income $ 1,512 $ 1,352 $ 160 11.8 % 

 Operating Revenues. Operating revenues for the years ended September 30, 2021 and 2020, were $10.5 billion and $10.2 billion, respectively. The following chart compares TVA's operating revenues for the periods indicated: 
 
 TVA's two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES accounted for nine percent and eight percent, respectively, of TVA's total operating revenues during both the years ended September 30, 2021 and 2020. Certain LPCs, including MLGW, are evaluating options for future energy choices. In addition, in January 2021, four LPCs filed a complaint and petition with the Federal Energy Regulatory Commission ("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's rate structure uses pricing signals to indicate seasons and hours of higher cost to serve its customers and to capture a portion of TVA's fixed costs in fixed charges. The structure includes three base revenue components: time of use demand charges, time of use energy charges, and a grid access charge ("GAC"). The demand charges are based upon the customer's peak monthly usage and increase as the peak increases. The energy charges are based on time differentiated kWh used by the customer. Both of these components can be significantly impacted by weather. The GAC captures a portion of fixed costs and is offset by a corresponding reduction to the energy rates. The GAC also reduces the impact of weather variability to the overall rate structure. 
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 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 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. As of November 12, 2021, 145 LPCs had signed the 20-year Partnership Agreement with TVA. 
 
 In August 2020, the TVA Board approved a Pandemic Relief Credit that was effective for 2021. The 2.5 percent monthly base rate credit, which totaled $221 million for 2021, applied to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers through September 2021. In August 2021, the TVA Board approved a 2.5 percent monthly base rate credit, the Pandemic Recovery Credit, which will be effective for 2022. The credit, expected to approximate $220 million, will also apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. In November 2021, the TVA Board approved a 1.5 percent monthly base rate credit, which is an extension of the Pandemic Recovery Credit, to be effective for 2023. The 2023 credit is expected to approximate $133 million, and it will be administered in a manner similar to the Pandemic Recovery Credit. 
 
 In addition to base revenues, the rate structure includes a separate fuel rate that includes the costs of natural gas, fuel oil, purchased power, coal, emission allowances, nuclear fuel, and other fuel-related commodities; realized gains and losses on derivatives purchased to hedge the costs of such commodities; and payments to states and counties in lieu of taxes ("tax equivalents") associated with the fuel cost adjustments. See Item 1, Business — Rates — Rate Methodology . 
 
 The changes in revenue components are summarized below: 
 
 Changes in Revenue Components 
 For the years ended September 30 
 (in millions) 
 
 2021 2020 Change 
 Base revenue 
 Energy revenue $ 4,719 $ 4,546 $ 173 
 Demand revenue 3,478 3,426 52 
 Grid access charge 596 597 (1) 
 Long-term partnership credits for LPCs (189) (163) (26) 
 Pandemic relief credits (221) — (221) 
 Other charges and credits (1) 
 (631) (616) (15) 
 Total base revenue 7,752 7,790 (38) 
 Fuel cost recovery 2,601 2,310 291 
 Off-system sales 4 4 — 
 Revenue from sales of electricity 10,357 10,104 253 
 Other revenue 146 145 1 
 Total operating revenues $ 10,503 $ 10,249 $ 254 

 Note 
 (1) Includes economic development credits to promote growth in the Tennessee Valley, hydro preference credits for residential customers of LPCs, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. See Note 18 — Revenue. 
 
 Operating revenues increased $254 million for the year ended September 30, 2021, as compared to the prior year, primarily due to a $291 million increase in fuel cost recovery revenue, and partially offset by a $38 million decrease in base revenue. The $291 million increase in fuel cost recovery revenue was driven by a $198 million increase attributable to higher fuel rates and a $93 million increase attributable to higher energy sales during 2021. Higher fuel rates resulted from an increase in natural gas and coal market prices in 2021. The $38 million decrease in base revenue was driven by a decrease of $352 million attributable to lower effective rates and partially offset by an increase of $314 million attributable to higher sales volume. Lower effective rates resulted primarily from the Pandemic Relief Credit, which was effective for 2021, totaling $221 million for the year ended September 30, 2021. Higher sales volume was primarily due to lower energy sales in 2020, associated with the COVID-19 pandemic, compared to 2021. 
 
 See Sales of Electricity above for further discussion of the change in the volume of sales of electricity and Operating Expenses below for further discussion of the change in fuel expense. 
 
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 Operating Expenses. Operating expense components as a percentage of total operating expenses for 2021 and 2020 consisted of the following: 
 
 Operating Expenses 
 (in millions) 
 
 2021 2020 Change Percent Change 
 Operating expenses 
 Fuel $ 1,737 $ 1,584 $ 153 9.7 % 
 Purchased power 984 880 104 11.8 % 
 Operating and maintenance 2,890 2,720 170 6.3 % 
 Depreciation and amortization 1,533 1,826 (293) (16.0) % 
 Tax equivalents 514 528 (14) (2.7) % 
 Total operating expenses $ 7,658 $ 7,538 $ 120 1.6 % 

 The following table summarizes TVA's expenses for various fuels for the years indicated: 
 
 Fuel Expense for TVA-Owned Facilities (1) 
 For the years ended September 30 
 
 Fuel Expense By Source Cost per kWh (4) 
 
 2021 2020 2021 2020 
 Coal (2) 
 $ 577 $ 533 $ 2.46 $ 2.69 
 Natural gas and/or oil-fired (3) 
 841 660 2.52 1.96 
 Nuclear fuel 363 378 0.55 0.58 
 Total fuel $ 1,781 $ 1,571 $ 1.44 $ 1.33 

 Notes 
 (1) Excludes effects of the fuel cost adjustment deferrals and amortization on fuel expense in the amounts of $(44) million and $13 million for the years ended September 30, 2021 and 2020, respectively. 
 (2) Fuel expense related to oil consumed for startup at coal-fired facilities was $18 million and $17 million for the years ended September 30, 2021 and 2020, respectively. 
 (3) Fuel expense related to oil consumed for generation at natural gas and/or oil-fired facilities was $4 million and $2 million for the years ended September 30, 2021 and 2020. 
 (4) Total cost per kWh is based on a weighted average. 
 
 Fuel expense increased $153 million for the year ended September 30, 2021, as compared to the prior year. This increase was primarily due to higher effective fuel rates of $153 million resulting from higher natural gas prices, as well as an increase in fuel volume of $58 million due to higher demand primarily met by TVA-owned generation. Partially offsetting these increases was a decrease in fuel cost recovery of $58 million resulting from volatility in the natural gas and purchased power markets in the year ended September 30, 2021. 
 
 Purchased power expense increased $104 million for the year ended September 30, 2021, as compared to the prior year. This was primarily due to an increase in the effective rate of purchased power of $82 million resulting from higher market prices, as well as an increase in volume of $46 million. Partially offsetting these increases was a decrease in fuel cost recovery of $24 million resulting from volatility in the natural gas and purchased power markets in the year ended September 30, 2021. 
 
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 Operating and maintenance expense increased $170 million for the year ended September 30, 2021, as compared to the prior year. This was primarily due to a $97 million increase in contract labor driven by operational needs and work to support the company's strategic priorities, a $60 million increase in payroll and benefit costs primarily due to labor escalation for cost of living increases, and an increase in outage expense of $30 million driven by an increase in nuclear outage days. Partially offsetting these increases was a decrease of other post-employment benefit expense of $32 million primarily due to the increase in the discount rate assumption used in the actuarial valuation of the liability related to workers’ compensation claims and a reduction related to TVA's capital spare program of $15 million. 
 
 Depreciation and amortization expense decreased $293 million for the year ended September 30, 2021, as compared to the prior year. This decrease was primarily driven by a net decrease in depreciation expense of $262 million related to the decision in 2019 to accelerate the retirements of Bull Run and Paradise. Paradise was fully depreciated in the second quarter of 2020. Additionally, amortization expense of decommissioning costs recovered in rates decreased $96 million. Partially offsetting these decreases was an increase due to depreciation of additions to completed plant. 
 
 Depreciation rates are determined based on an external depreciation study. See Note 1 — Summary of Significant Accounting Policies — Property, Plant, and Equipment, and Depreciation — Depreciation . TVA obtained and implemented a new depreciation study related to its completed plant during the first quarter of 2022. The new study includes a decline in the service life estimates of TVA’s coal-fired plants based on planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035. Any decision to retire individual plants would include environmental review, public input, and TVA Board approval. Implementation of the new study is expected to result in an increase to depreciation and amortization expense of approximately $369 million during 2022. This estimate represents the impact of implementing the new study only and does not include any potential impact of other possible changes, including additions to or retirements of net completed plant, that may occur during 2022. 
 
 Tax equivalents expense decreased $14 million for the year ended September 30, 2021, as compared to the prior year. This change is primarily driven by a decrease in TVA's revenue from sales of electricity in 2020, which is used as the basis for calculating tax equivalent expense. Partially offsetting this decrease was an increase in tax equivalents collected in the fuel cost recovery. 
 
 Generating Sources. The following table shows TVA's generation and purchased power by generating source as a percentage of all electrical power generated and purchased (based on kWh) for the periods indicated: 
 
 Total Power Supply by Generating Source 
 For the years ended September 30 
 (millions of kWh) 
 
 2021 2020 
 
 Nuclear 66,265 41 % 64,531 42 % 
 Natural gas and/or oil-fired 33,290 21 % 33,479 22 % 
 Coal-fired 23,391 15 % 19,732 13 % 
 
 Hydroelectric 16,354 10 % 16,644 10 % 
 Total TVA-operated generation facilities (1)(2) 
 139,300 87 % 134,386 87 % 
 Purchased power (natural gas and/or oil-fired) (3) 
 10,836 7 % 9,343 6 % 
 Purchased power (other renewables) (4) 
 5,113 3 % 4,784 3 % 
 
 Purchased power (hydroelectric) 2,156 2 % 2,899 2 % 
 Purchased power (coal-fired) 2,373 1 % 2,409 2 % 
 Total purchased power (2) 
 20,478 13 % 19,435 13 % 
 Total power supply 159,778 100 % 153,821 100 % 

 Notes 
 (1) Generation from TVA-owned renewable resources (non-hydroelectric) is less than one percent for all periods shown and therefore is not represented in the table above. 
 (2) Raccoon Mountain Pumped-Storage Plant net generation is allocated against each TVA-operated generation facility and purchased power type for both 2021 and 2020. See Item1, Business — Power Supply and Load Management Resources — Raccoon Mountain Pumped-Storage Plant for a discussion of Raccoon Mountain Pumped-Storage Plant. 
 (3) Purchased power (gas) includes generation from Caledonia Combined Cycle Plant ("Caledonia CC"), which is currently a leased facility operated by TVA. Generation from Caledonia CC was 4,255 million kWh and 4,229 million kWh for the years ended September 30, 2021 and 2020, respectively. 
 (4) Purchased power (other renewables) includes purchased power from the following renewable sources: solar, wind, biomass, and renewable cogeneration. 
 
 In addition to power supply sources included here, TVA offers energy efficiency programs that effectively reduced 2021 energy needs by about 2,300 GWh or 1.4%. 
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 Interest Expense . Interest expense and interest rates for 2021 and 2020, were as follows: 
 
 Interest Expense and Rates
For the years ended September 30 
 2021 2020 Percent Change 
 Interest expense (1) 
 $ 1,088 $ 1,142 (4.7) % 
 
 Average blended debt balance (2) 
 $ 20,916 $ 21,978 (4.8) % 
 
 Average blended interest rate (3) 
 5.06 % 5.05 % 0.2 % 

 Notes 
 (1) Includes amortization of debt discounts, issuance, and reacquisition costs, net. 
 (2) Includes average balances of long-term power bonds, debt of variable interest entities ("VIE"), and discount notes. 
 (3) Includes interest on long-term power bonds, debt of VIE, and discount notes. 
 
 Total interest expense decreased $54 million for the year ended September 30, 2021, as compared to the prior year. This was primarily driven by a decrease of $56 million due to lower average debt balances and partially offset by an increase of $2 million due primarily to higher average long-term rates. 
 
 Other Income (Expense), Net 
 
 During 2021, Other income (expense), net decreased $23 million, primarily driven by a $28 million court directed payment related to the sale of Bellefonte. In 2019, the purchaser, Nuclear Development, LLC ("Nuclear Development"), failed to fulfill the requirements of the sales contract with respect to obtaining Nuclear Regulatory Commission ("NRC") approval of the transfer of required nuclear licenses and payment of the remainder of the selling price before the November 30, 2018 closing date. In August 2021, the court found that, under the contract's termination provision, Nuclear Development was entitled to have TVA return Nuclear Development's down payment and its payments of compensated costs, along with prejudgment interest, which was fully paid in 2021. Partially offsetting this expense was a $7 million increase in gains (losses) on investments driven by higher market returns in 2021. See Note 23 — Commitments and Contingencies — Legal Proceedings — Case Involving Bellefonte Nuclear Plant for a discussion of the lawsuit filed by Nuclear Development. 
 
 Other Net Periodic Benefit Cost 
 
 Other net periodic benefit cost increased $5 million for the year ended September 30, 2021, as compared to the prior year. Other net periodic benefit cost is subject to significant economic assumptions, such as changes in the discount rate used to measure the benefit plans, that can materially impact TVA. However, TVA uses regulatory accounting to recognize other net periodic benefit cost as a regulatory asset to the extent that the amount calculated under U.S. generally accepted accounting principles ("GAAP") as pension expense differs from the amount TVA contributes to the pension plan as pension plan contributions. See Note 22 — Benefit Plans . 
 
 Liquidity and Capital Resources 
 
 Sources of Liquidity 
 
 TVA depends on various sources of liquidity to meet cash needs and contingencies. TVA's primary sources of liquidity 
 are cash from operations and proceeds from the issuance of short-term debt in the form of discount notes, along with periodic 
 issuances of long-term debt. TVA's balance of short-term debt typically changes frequently as TVA issues discount notes to 
 meet short-term cash needs and pay scheduled maturities of discount notes and long-term debt. The periodic amounts of short-term debt issued are determined by near-term expectations for cash receipts, cash expenditures, and funding needs, while 
 seeking to maintain a target range of cash and cash equivalents on hand. 
 
 In addition to cash from operations and proceeds from the issuance of short-term and long-term debt, TVA's sources of liquidity include a $150 million credit facility with the United States Department of the Treasury ("U.S. Treasury"), four long-term revolving credit facilities totaling approximately $2.7 billion, and proceeds from other financings. See Note 14 — Debt and Other Obligations — Credit Facility Agreements. Other financing arrangements may include sales of receivables, loans, or other assets. 
 
 The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30.0 billion outstanding at any time. Power bonds outstanding, excluding unamortized discounts and premiums and net exchange gains from foreign currency transactions, at September 30, 2021 and 2020, were $19.4 billion (including current maturities) and $20.1 billion (including current maturities), respectively. The balance of Bonds outstanding directly affects TVA's capacity to meet operational liquidity needs and to strategically use Bonds to fund certain capital investments as management and the TVA Board may deem desirable. Other options for financing not subject to the limit on Bonds, including lease financings (see Lease Financings below and Note 11 — Variable Interest Entities ), could provide supplementary funding if needed. Currently, TVA expects to have adequate capability to 
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 fund its ongoing operational liquidity needs and make planned capital investments over the next decade. See Lease Financings below, Note 11 — Variable Interest Entities , and Note 14 — Debt and Other Obligations for additional information. 
 
 TVA may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for securities, in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, TVA's liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. 
 
 Due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA increased its balance of Cash and cash equivalents beginning in March 2020. TVA may hold higher cash balances from time to time in response to potential market volatility or other business conditions. TVA has maintained continued debt market access since the outbreak of the pandemic. TVA successfully funded the maturity of $1.5 billion of power bonds in February 2021 and $331 million of power bonds in June 2021 with cash from operations and proceeds from the issuance of discount notes. In September 2021, TVA issued $500 million of green global power bonds at the lowest interest rate achieved by TVA on a 10-year maturity financing since TVA began issuing debt in the public capital markets. TVA intends to use amounts equal to the proceeds from the sale for capital investments in renewable energy, energy efficiency, climate change adaptation, and green innovation, including research and development expenditures related to the deployment of carbon-free and energy efficient solutions and other innovations. TVA’s next significant power bond maturity is $1.0 billion in August 2022. 
 
 Debt Securities . TVA's Bonds are not obligations of the U.S., and the U.S. does not guarantee the payments of principal or interest on Bonds. TVA's Bonds consist of power bonds and discount notes. Power bonds have maturities of between one and 50 years. At September 30, 2021, the average maturity of long-term power bonds was 15.69 years, and the weighted average interest rate was 4.51 percent. Discount notes have maturities of less than one year. Power bonds and discount notes have a first priority and equal claim of payment out of net power proceeds. Net power proceeds are defined as the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein. In addition to power bonds and discount notes, TVA had long-term debt associated with certain VIEs outstanding at September 30, 2021. See Lease Financing below, Note 11 — Variable Interest Entities , and Note 14 — Debt and Other Obligations for additional information. 
 
 Power bonds and discount notes are both issued pursuant to Section 15d of the TVA Act and pursuant to the Basic Tennessee Valley Authority Power Bond Resolution adopted by the TVA Board on October 6, 1960, as amended on September 28, 1976, October 17, 1989, and March 25, 1992 (the "Basic Resolution"). The TVA Act and the Basic Resolution each contain two bond tests: the rate test and the bondholder protection test. 
 
 Under the rate test, TVA must charge rates for power which will produce gross revenues sufficient to provide funds for: 
 
 • Operation, maintenance, and administration of its power system; 
 • Tax equivalents; 
 • Debt service on outstanding Bonds; 
 • Payments to the U.S. Treasury in repayment of and as a return on the 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 maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected wit h TVA's pow er business, having due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. See Note 19 — Proprietary Capital — Appropriation Investment . 
 
 TVA fulfilled its requirement to repay $1.0 billion of the Power Program Appropriation Investment in 2014; therefore, the repayment of this amount is no longer a component of rate setting. 
 
 The rate test for the one-year period ended September 30, 2021, was calculated after the end of 2021, and TVA met the test's requirements. 
 
 Under the bondholder protection test, TVA must, in successive five-year periods, use an amount of net power proceeds at least equal to the sum of the depreciation accruals and other charges representing the amortization of capital expenditures and the net proceeds from any disposition of power facilities, for either the reduction of its capital obligations (including Bonds and the Power Program Appropriation Investment) or investment in power assets. 
 
 The bondholder protection test for the five-year period ended September 30, 2020, was calculated after the end of 2020, and TVA met the test's requirements. TVA must next meet the bondholder protection test for the five-year period ending September 30, 2025, and expects to meet the test. 
 
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 TVA uses proceeds from the issuance of discount notes, in addition to other sources of liquidity, to fund short-term cash needs and scheduled maturities of long-term debt. 
 
 The following table provides additional information regarding TVA's short-term borrowings. 
 
 Short-Term Borrowing Table 
 At September 30, 2021 For the year ended September 30, 2021 At September 30, 2020 For the year ended September 30, 2020 
 Gross Amount Outstanding (at End of Period) or Average Gross Amount Outstanding (During Period) 
 Discount notes $ 780 $ 876 $ 57 $ 812 
 Maximum Month-End Gross Amount Outstanding (During Period) 
 Discount notes N/A $ 1,598 N/A $ 1,875 
 Weighted Average Interest Rate 
 Discount notes 0.03 % 0.03 % 0.06 % 0.77 % 

 TVA ended the year at September 30, 2021, with a higher balance for both short-term debt and average short-term debt as compared to 2020. The increase was primarily due to the timing of cash flows and lower issuance of long-term debt in 2021 than 2020. 
 
 TVA generally uses proceeds from the issuance of power bonds to refinance maturing power bonds or other financing obligations, as necessary, or for other power system purposes. The total balance of power bonds may decline in periods where redemptions of power bonds exceed issuance due to net positive cash flow from operating and investing activities. In 2020, TVA achieved and surpassed its strategic goal of reducing debt to $21.8 billion by 2023, and made even further reductions in debt in 2021. TVA anticipates the balance of Bonds and other financing obligations may increase slightly through 2022 due to an expected increase in capital expenditures, consistent with TVA's strategic financial plan. 
 
 TVA issued $500 million and $1.0 billion of power bonds during 2021 and 2020, respectively. TVA redeemed $1.9 billion and $1.5 billion of Bonds during 2021 and 2020, respectively. For additional information about TVA debt issuance activity and debt instruments issued and outstanding at September 30, 2021 and 2020, including rates, maturities, outstanding principal amounts, and redemption features, see Note 14 — Debt and Other Obligations — Debt Securities Activity and Debt Outstanding . 
 
 TVA Bonds are traded in the public bond markets and are listed on the New York Stock Exchange ("NYSE") except for TVA's discount notes, the 2009 Series B power bonds, and the power bonds issued under TVA's electronotes ® program. TVA's Putable Automatic Rate Reset Securities ("PARRS") are traded on the NYSE under the exchange symbols "TVC" and "TVE." Other bonds listed on the NYSE are assigned various symbols by the exchange, which are noted on the NYSE's website. TVA has also listed certain bonds on foreign exchanges from time to time, including the Luxembourg, Hong Kong, and Singapore Stock Exchanges. See Item 1A, Risk Factors for additional information regarding the market for TVA's Bonds. 
 
 Although TVA Bonds are not obligations of the U.S., TVA, as a corporate agency and instrumentality of the U.S. government, may be impacted if the sovereign credit ratings of the U.S. are downgraded. Additionally, TVA may be impacted by how the U.S. government addresses situations of approaching its statutory debt limit. According to statements made by nationally recognized credit rating agencies, downward pressure on the ratings of the U.S. could eventually develop if there are no changes in current policies and budget deficits and the trajectory of debt continues to increase; additionally, current ratings factor in the prospect that debates over raising the debt ceiling of the U.S. government could continue to be protracted and difficult. The outlook on the ratings of the U.S. government is currently stable with two of the three agencies that provide ratings on TVA Bonds. In July 2020, Fitch Ratings downgraded the U.S.'s credit rating outlook to negative from stable reflecting the ongoing deterioration in U.S. public finances and the absence of a credible fiscal consolidation plan, worsened by the economic challenges from the COVID-19 pandemic. In August 2020, the outlook on the credit rating of TVA was subsequently changed by Fitch to negative from stable, reflecting the actions on the U.S. The outlook on the ratings of TVA is currently stable with two of three credit rating agencies. TVA's rated senior unsecured Bonds are currently rated Aaa, AAA, and AA+. TVA's short-term discount notes are not rated. 
 
 Lease Financings . TVA has entered into certain leasing transactions with special purpose entities ("SPEs") to obtain third-party financing for its facilities. These SPEs are sometimes identified as VIEs of which TVA is determined to be the primary beneficiary. TVA is required to account for these VIEs on a consolidated basis. See Note 11 — Variable Interest Entities and Note 14 — Debt and Other Obligations for information about TVA's lease financing activities. During 2017 and 2016, TVA acquired 100 percent of the equity interests in certain SPEs created for the purpose of facilitating lease financing. TVA may seek to enter into similar arrangements in the future. In 2019, TVA made final rent payments under lease/leaseback transactions involving eight combustion turbine units ("CTs"), and terminated these transactions. In 2020, TVA made final rent payments under lease/leaseback transactions involving eight additional CTs. In 2021, TVA made final rent payments under lease/leaseback transactions involving four additional CTs. TVA will continue making rent payments under the remaining lease/ 
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 leaseback transactions through 2022. 
 
 Summary Cash Flows 
 
 A major source of TVA's liquidity is operating cash flows resulting from the generation and sale of electricity. Cash, cash equivalents, and restricted cash totaled $518 million and $521 million at September 30, 2021 and 2020, respectively. A summary of cash flow components for the years ended September 30 follows: 
 
 Cash provided by (used in): 
 
 Operating Activities . TVA's cash flows from operations are primarily driven by sales of electricity, fuel expense, and operating and maintenance expense. The timing and level of cash flows from operations can be affected by the weather, changes in working capital, commodity price fluctuations, outages, and other project expenses. 
 
 Net cash flows provided by operating activities decreased $380 million for the year ended September 30, 2021, as compared to 2020. The decrease was primarily due to increased fuel and purchased power payments as a result of higher natural gas and market prices, as well as increased electricity demand. Increases in payroll and benefit costs due to labor escalation for cost of living increases and higher cash used for asset retirement obligation ("ARO") settlements also contributed to the decrease in cash flows from operations. These decreases were partially offset by less cash paid for interest and inventory purchases. 
 
 Investing Activities . The majority of TVA's investing cash flows are due to investments to acquire, upgrade, or maintain generating and transmission assets, including environmental projects and the purchase of nuclear fuel. Nuclear fuel expenditures vary depending on the number of outages and the prices and timing of purchases of uranium and enrichment services. 
 
 Net cash flows used in investing activities increased $323 million for the year ended September 30, 2021, as compared to the prior year driven by an increase in capacity expansion projects primarily related to two combustion turbine gas facilities at TVA's Paradise and Colbert Fossil Plant ("Colbert") sites, the Johnsonville aeroderivative combustion turbine project, and nuclear fleet improvement projects. This increase was partially offset by a decrease in expenditures for the Pickwick South Embankment remediation project nearing completion. 
 
 Financing Activities . TVA's cash flows provided by or used in financing activities are primarily driven by the timing and level of cash flows provided by operating activities, cash flows used in investing activities, and net issuance and redemption of debt instruments to maintain a strategic balance of cash on hand. 
 
 Net cash flows used in financing activities decreased $501 million for the year ended September 30, 2021, as compared to 2020. TVA had $678 million in net debt redemptions in 2021 compared to $1.4 billion in net debt redemptions in 2020. In addition, payments on leaseback transactions were $195 million higher in 2021 compared to 2020. TVA's financing activities continue to reflect an overall reduction in debt driven by strong financial performance. 
 
 Impact of COVID-19 
 
 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. At this time, TVA does not anticipate sales volume will be materially impacted due to the COVID-19 pandemic beyond 2021. 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. See Key Initiatives and Challenges — COVID-19 Pandemic for an expanded discussion of these initiatives and the impact to TVA. 
 
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 Cash Requirements 
 
 Actual capital expenditures and future planned capital expenditures for property, plant, and equipment additions, including clean air projects and new generation, and nuclear fuel are as follows: 
 
 Capital Expenditures 
 For the years ended September 30 
 
 Actual Estimated Capital Expenditures (1) 
 
 2021 2022 2023 2024 
 Capacity expansion expenditures $ 588 $ 1,322 $ 1,102 $ 845 
 Environmental expenditures 126 134 75 11 
 Nuclear fuel 445 298 284 334 
 Transmission expenditures 473 516 458 498 
 Other capital expenditures (2) 
 933 919 933 868 
 Total capital expenditures $ 2,565 (3) 
 $ 3,189 $ 2,852 $ 2,556 

 Notes 
 (1) TVA plans to fund these expenditures with cash from operations and proceeds from power program financings. Estimated capital expenditures only include expenditures that are currently planned. Additional expenditures may be required, among other things, for TVA to meet growth in demand for power in its service area or to comply with new environmental laws, regulations, or orders. 
 (2) Other capital expenditures are primarily associated with short lead time construction projects aimed at the continued safe and reliable operation of generating assets. 
 (3) The numbers above include construction in progress and nuclear fuel expenditures included in Accounts payable and accrued liabilities of $240 million, nuclear fuel vendor credits of $6 million, and nuclear fuel prepayments made in prior years of $2 million. 
 
 TVA continually reviews its capital expenditures and financing programs. The amounts shown in the table above are forward-looking amounts based on a number of assumptions and are subject to various uncertainties. Amounts may differ materially based upon a number of factors, including, but not limited to, changes in assumptions about system load growth, environmental regulation, rates of inflation, total cost of major projects, and availability and cost of external sources of capital. See Forward-Looking Information and Item 1A, Risk Factors . 
 
 TVA has certain obligations and commitments to make future payments under contracts, including contracts executed in connection with certain of the planned construction expenditures. TVA estimates total commitments and contingencies at September 30, 2021 are approximately $5.4 billion for the year ended September 30, 2022 and $45.9 billion for the years thereafter. See Note 8 — Leases , Note 11 — Variable Interest Entities , Note 14 — Debt and Other Obligations , and Note 22 — Benefit Plans for the obligations and commitments attributable to leases, VIEs and membership interests of VIEs subject to mandatory redemption, debt and leaseback obligations, and the retirement plan, respectively. TVA's estimate of future payments for other commitments and contingencies at September 30, 2021 are set forth in the table below. 
 
 Other Commitments and Contingencies 
 Payments due for the years ending September 30 
 
 2022 2023 2024 2025 2026 Thereafter Total 
 
 Interest payments relating to debt (1) 
 $ 958 $ 936 $ 935 $ 906 $ 852 $ 12,250 $ 16,837 
 
 Interest payments relating to debt of VIEs 49 47 45 44 42 363 590 
 Interest payments relating to membership interests of VIEs subject to mandatory redemption 2 1 1 1 1 5 11 
 
 Purchase obligations 
 Power (2) 
 313 224 237 196 177 1,222 2,369 
 Fuel (3) 
 1,525 759 506 402 242 1,060 4,494 
 Other (4) 
 171 90 44 28 52 201 586 
 
 Flood response commitment to NRC 27 — — — — — 27 
 
 Total $ 3,045 $ 2,057 $ 1,768 $ 1,577 $ 1,366 $ 15,101 $ 24,914 

 Notes 
 (1) Includes the effects of interest rate derivatives employed to manage interest rate risk. 
 (2) Includes commitments for energy and/or capacity under power purchase agreements ("PPAs") from coal-fired, hydroelectric, diesel, renewable, and gas-fired facilities, as well as transmission service agreements to support purchases of power from the market. Certain PPAs are accounted for as leases and have lease and non-lease components. For these contracts, the lease component is included in lease obligations (see Note 8 — Leases ) and the non-lease component is included in power, except for PPA contracts containing a lease component that have not commenced in which case the entire contract amount is included above. 
 (3) Includes commitments to purchase nuclear fuel, coal, and natural gas, as well as related transportation and storage services. 
 (4) Primarily includes long-term service contracts, contracts that contain minimum purchase levels for the purchase of limestone along with related storage and transportation, and contractual obligations related to TVA's load control program. 
 
 EnergyRight ® Program. TVA purchases certain loans receivable from its LPCs in association with the EnergyRight ® program. Depending on the nature of the energy-efficiency project, loans may have a maximum term of five years or 10 years. 
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 The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loan receivable that has been in default for 180 days or more or that TVA has determined is uncollectible. At September 30, 2021, the total carrying amount of the loans receivable, net of discount, was approximately $72 million. Such amounts are not reflected in the Other Commitments and Contingencies table above. The total carrying amount of the financing obligation was approximately $82 million at September 30, 2021. See Note 9 — Other Long-Term Assets and Note 12 — Other Long-Term Liabilities for additional information. 
 
 Off-Balance Sheet Arrangements 
 
 At September 30, 2021, TVA had no off-balance sheet arrangements. 
 
 Key Initiatives and Challenges 
 
 COVID-19 Pandemic 
 
 In 2020, in response to the spread of COVID-19, TVA implemented a company-wide pandemic plan to address specific aspects of the COVID-19 pandemic, and the pandemic plan continually evolves based on medical guidance and federal, regional, and local requirements and guidelines. The pandemic plan included mandatory telework for those employees who do not have to be physically present at a TVA facility or office building to provide mission-essential activities or produce safe, reliable power. Based on ongoing monitoring, COVID-19 continues to pose a significant risk in the U.S. and in the Tennessee Valley region, and as a result TVA has extended the timeframe for workforce reintegration and continues to limit non-essential travel for those not fully vaccinated. At this time, TVA does not anticipate that the telework restrictions will be lifted until January 2022. TVA has and will continue to monitor risk and potential impacts throughout the situation, including impacts from variants. 
 
 TVA continues to implement strong physical and cybersecurity measures to ensure that systems remain functional to keep employees, customers, and communities safe and enable TVA to continue achieving its mission to serve the people of the Valley. In addition to measures to protect its workforce, stakeholders, and critical operations, TVA is actively monitoring generation, transmission, and distribution functions. Operations and delivery of energy to customers have not been materially impacted by the COVID-19 pandemic at this time. All TVA recreation areas that had initially closed to slow the spread of the virus have now reopened. Visitor centers at TVA dams remain closed for public and staff safety. 
 
 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. At this time, TVA does not anticipate sales volume will be materially impacted due to the COVID-19 pandemic beyond 2021. The ultimate impact of the COVID-19 pandemic on TVA's financial condition depends on factors beyond TVA's knowledge or control, including the duration and severity, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on the country and region's economy. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Revenues . 
 
 TVA also continues to assess potential supplier performance risks, including procurement of fuel, parts, and services. If suppliers are unable to perform under TVA's existing contracts or if TVA is unable to obtain similar services from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that may impact generation, maintenance, and capital programs. TVA has seen an increase in supplier impacts as a result of COVID-19, such as delays and price fluctuations, but has been able to manage these impacts through existing contracts and increased lead times and communications with suppliers; therefore, TVA has not experienced significant business disruptions at this time. TVA has also experienced minimal impacts due to force majeure events, with the exception of a manufacturing delay for a major turbine component. A mitigation strategy was developed by TVA and the vendor which reduced impacts to TVA's outage schedule. TVA will continue to monitor the supply base and remain in contact with suppliers to identify potential risks, including impacts on workforce availability due to recently announced special protocols for unvaccinated federal government employees and contractors. 
 
 Regulatory Actions. On January 20, 2021, President Biden issued Executive Order 13991, directing federal agencies to implement COVID-19 countermeasures consistent with CDC guidance and establishing a Safer Federal Workforce Task Force (“Task Force”) to develop model safety principles to which all federal agencies would subsequently align their pandemic countermeasures. TVA continues to implement these principles and remains in regular contact with the Office of Management and Budget (“OMB”), which chairs the Task Force. On September 9, 2021, President Biden issued two new executive orders in response to the COVID-19 pandemic. The first executive order required that all federal employees be vaccinated against COVID-19. Only employees entitled to certain accommodations under law would be exempt from this requirement. The Task Force has stated that all employees must be fully vaccinated by November 22, 2021. TVA is working with its union partners and workforce to meet this deadline. As part of the process to implement the vaccination requirement, TVA and its union partners have negotiated and implemented a standalone disciplinary process for employees who have neither been vaccinated by the deadline nor received an exemption allowed by law. This policy includes a progression of counseling for employees and, for those who do not get vaccinated after counseling, a testing program. 
 
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 The second executive order required that federal agencies include clauses in contracts with federal contractors requiring the contractors to comply with guidance issued by the Task Force concerning contractors. This executive order does not apply to TVA, and therefore TVA is not requiring the clauses at this time. 
 
 On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) issued an Emergency Temporary Standard ("ETS") in response to the COVID-19 pandemic. The ETS, among other things, obligates employers with at least 100 employees to adopt a vaccination policy that requires employees to either be fully vaccinated or submit to at least weekly testing. The deadline for implementing the vaccination/testing program is January 4, 2022. 
 
 The ETS does not apply to any federal contractors that must comply with the Task Force contractor guidance. TVA has not required its contractors to comply with the Task Force guidance. Therefore, unless those contractors are required to follow Task Force guidance based on contractual relationships with other federal agencies, TVA's contractors would be covered by the ETS. 
 
 OSHA has also stated that the ETS does not apply to federal agencies; rather, federal agencies are covered by the vaccination requirement established by President Biden on September 9, 2021. The Task Force has stated that federal employees should be vaccinated by November 22, 2021, and has confirmed that this deadline remains in effect. Accordingly, TVA is continuing to work toward this deadline. 
 
 On November 5, 2021, the United States Court of Appeals for the Fifth Circuit issued an order staying the ETS pending further action by the court. Employers will not be required to comply with the ETS until the stay is lifted. 
 
 Customer Pandemic Initiatives . The COVID-19 pandemic created economic uncertainty for TVA's customers and the communities they serve. To support and strengthen the public power response to the COVID-19 pandemic, TVA announced the following initiatives: 
 
 Regulatory Flexibility . TVA continues to provide regulatory flexibility for LPCs to halt disconnection of services and respond to the local needs of their customers and communities. 
 
 Program Flexibility . In 2020, TVA established flexibility provisions for certain economic development programs for participating customers impacted by the COVID-19 pandemic. These provisions were made available through the December 2020 application period, which provided flexibility to customers through 2021. TVA also offered deferral options for EnergyRight ® program loan payments, through October 31, 2020, for customers experiencing financial hardship. All EnergyRight ® loans approved for the deferral period resumed payments in the second quarter of 2021. See Note 9 — Other Long-Term Assets, Note 12 — Other Long-Term Liabilities , and Note 18 — Revenue . 
 
 Financial Support . In 2020, the TVA Board approved the Public Power Support and Stabilization Program. Through this program, TVA offered up to $1.0 billion of credit support to LPCs that demonstrated the need for temporary financial relief, through the deferral of a portion of LPCs' wholesale power payments owed to TVA. The program ended December 31, 2020, with a total of $1 million of credit support approved under the program. The $1 million was fully repaid in the second quarter of 2021. 
 
 Back-to-Business Credit Program . TVA created the Back-to-Business Credit Program to enable TVA and LPCs to provide relief to certain large customers affected by the COVID-19 pandemic by providing certain credits when returning to operations. As of September 30, 2021, TVA had provided approximately $13 million in Back-to-Business credits under this program since its inception, with over $3 million provided for the year ended September 30, 2021. This program ended September 30, 2021. 
 
 Community Care Fund . TVA also continues to partner with LPCs through the Community Care Fund by making available over $9 million in TVA matching funds to support local initiatives that address hardships created by the COVID-19 pandemic. As of September 30, 2021, over $4 million in matching funds had been provided by TVA, with nearly $2 million provided for the year ended September 30, 2021. 
 
 Pandemic Credits . In August 2020, the TVA Board approved a Pandemic Relief Credit that was effective for 2021. The 2.5 percent monthly base rate credit, which totaled $221 million for 2021, applied to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers through September 2021. In August 2021, the TVA Board approved a 2.5 percent monthly base rate credit, the Pandemic Recovery Credit, which will be effective for 2022. The credit, expected to approximate $220 million, will also apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. In November 2021, the TVA Board approved a 1.5 percent monthly base rate credit, which is an extension of the Pandemic Recovery Credit, to be effective for 2023. The 2023 credit is expected to approximate $133 million, and it will be administered in a manner similar to the Pandemic Recovery Credit. 
 
 These actions show TVA's commitment to support the financial integrity of LPCs along with communities and customers across the Tennessee Valley during these challenging economic conditions caused by the COVID-19 pandemic. The COVID-19 pandemic is an evolving situation that may lead to extended disruption of economic activity and an adverse impact on TVA's 
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 results of operations. TVA continues to closely monitor developments and will adjust its response as necessary to ensure reliable service while protecting the safety and health of its workforce. 
 
 Distributed Energy Resources 
 
 Consumer desire for energy choice, among other things, is driving the expectation for flexible options in the electric industry. TVA and LPCs are working together to leverage the strengths of the Tennessee Valley public power model to provide distributed energy solutions that are economical, sustainable, and flexible. TVA will focus on the safety and reliability impacts of these resources as they are interconnected to the grid and will ensure that the pricing of electricity remains as low as feasible. Additional regulatory considerations and analysis may be required as the distributed energy resources ("DER") market, technologies, and programs evolve. 
 
 Fiber Optic Network . In 2017, the TVA Board authorized up to $300 million to be spent over the next 10 years, subject to annual budget availability and necessary environmental reviews, to build an enhanced fiber optic network that will better connect TVA's operational assets. Fiber is a vital part of TVA's modern communication infrastructure. The new fiber optic lines will improve the reliability and resiliency of the generation and transmission system while enabling the system to better accommodate DER as they enter the market. As of September 30, 2021 , TVA had spent $151 million on installation of the fiber optic lines and expects to spend an additional $149 million. 
 
 Electric Vehicles . TVA is partnering with LPCs and others to support the electrification of transportation in the Valley in a multi-year electric vehicle ("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. 
 
 TVA is also working with state agencies, LPCs, and third-party charging developers to create a network of public fast charging stations along major travel corridors in its seven-state region, known as the Fast Charge Network program. In February 2021, TVA began a partnership with the State of Tennessee to develop funding programs for a statewide EV fast charging network with plans for fast charging stations every 50 miles along Tennessee's interstates and major highways. In March 2021, TVA and five other major utilities formed the Electric Highway Coalition to develop a network of fast charging stations along all major highway routes within their service territories. Since formation, the Electric Highway Coalition has gained additional members committed to coordination on the development of EV charging infrastructure across the central U.S. 
 
 Changing Customer Preferences 
 
 As more consumers and businesses are demanding cleaner energy, the utility industry is evolving to meet those needs. As TVA also evolves, it will see impacts to the way it does business through the pricing of products, transmission of energy, and development of new products and services for its customers in support of changing customer preferences and its economic development efforts. End-use customers are becoming more technologically sophisticated and want greater control over their energy usage. Many companies are focusing on sustainability and requiring more energy efficiency and renewable energy options. 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 from out-of-Valley wind and in-Valley solar generation facilities. New utility-scale solar is increasing, in part driven by customers’ demand. TVA also encourages renewable power and offers renewable solutions through various current programs and offerings. 
 
 Renewable Power Solutions. 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 
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 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 Ratemaking below. 
 
 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. 
 
 Renewable Power Purchase Agreements . In recent years, TVA has issued request for proposals ("RFP") in order to meet customer preferences and requirements for cleaner energy. As a result of those RFPs, TVA entered into certain PPAs with renewable resource providers, which are summarized below: 
 
 Notes 
 (1) The 2017 RFP consists of four solar PPAs; however one of those projects is not moving forward, and the PPA for that project has been terminated. Of the remaining three projects, one came online in the fourth quarter of 2021, one is expected to come online in 2022, and one is expected to come online in 2023. 
 (2) The 2019 RFP consists of six solar PPAs, and the projects are expected to come online in 2023. 
 (3) The 2020 RFP consists of eight solar PPAs. Of these eight projects, six are expected to come online in 2023, one is expected to come online in 2024, and one is expected to come online in 2025. 
 (4) In addition, the 2019 RFP includes 50 MW of battery storage and the 2020 RFP includes 196 MW of battery storage that are not included in the chart above. 
 
 TVA issued an additional RFP during the third quarter of 2021 for up to 200 MW of new renewable energy and anticipates making selections in 2022. TVA will procure the renewable energy and sell the resulting Renewable Energy Certificates ("RECs") to specific customers, allowing TVA to increase its renewable energy portfolio without additional costs to other Tennessee Valley customers. These agreements help to align the core values of TVA and the public power model with the desire of TVA's customers for renewable energy. Of the renewable PPAs above, more than 2,000 MW has been matched to customers through TVA’s Green Invest Program to meet their needs for new-to-the-world renewable energy. 
 
 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 NEPA and other applicable laws. A project structure has been developed which 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. 
 
 Low-Income 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. 
 
 Automated Energy Exchange Platform 
 
 TVA and other utilities across the southeastern U.S. 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. The creation of this energy exchange platform requires approval of the FERC, which regulates the transmission and wholesale sale of electricity in interstate commerce. The utilities under full FERC jurisdiction filed for approval of the energy exchange on February 12, 2021, and although not subject to FERC’s jurisdiction with respect to the energy exchange, TVA intervened in support of the FERC proceeding and joined with the other utilities in answering comments offered by interested parties. On May 4, 2021, FERC issued a deficiency letter in which it requested more detail on several aspects of the Southeast Energy Exchange Market ("SEEM"). The utilities under full jurisdiction filed a response on June 7, 2021, in which they provided the detail that FERC requested and also offered several improvements to SEEM. FERC issued a second deficiency letter on August 6, 2021, and the utilities under full jurisdiction filed a response on August 11, 2021. On October 12, 2021, SEEM took effect as a result of a tie vote by FERC commissioners. TVA’s participation will be subject to TVA Board approval and the completion of appropriate environmental reviews. These discussions demonstrate TVA's commitment to seeking new ways to continue to deliver low-cost power to the Tennessee Valley. 
 
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 Sustainability Reports 
 
 Sustainability has been a critical part of TVA's mission since the TVA Act was signed in 1933 and continues to be a focus in TVA's mission to deliver affordable and reliable energy, steward the environment, and create sustainable economic growth. TVA issued its first Corporate Sustainability Report in 2020, which highlighted the energy, environmental, economic, and societal impacts of TVA's everyday activities. In 2021, TVA continued to highlight its sustainability efforts with issuances of its next Corporate Sustainability Report, a supplemental Carbon Report, and an Edison Electric Institute Environmental, Social, Governance and Sustainability Report, among others. 
 
 Strategic Financial Plan 
 
 In 2019, the TVA Board approved an annual budget that reflects the first year of a new Strategic Financial Plan. This Strategic Financial Plan, which extends from 2020 through 2030, is flexible in aligning customer preferences and TVA's mission while at the same time establishing a long-term forecast of financial results. Key focus areas of the Strategic Financial Plan include maintaining flat rates, stabilizing debt, establishing alignment between the length of LPC contracts and TVA's long-term commitments, driving efficiencies into the business, and advancing the public power model. As TVA executes the plan, key assumptions and focus areas may change. 
 
 In 2021, TVA retained Lazard Frères & Co. LLC ("Lazard"), an international financial advisory and asset management firm, to evaluate TVA’s financial performance from 2014 through 2020 against TVA’s 2014 long-range financial plan ("2014 Plan"). Further, Lazard also reassessed whether the public power model and TVA’s existing business structure are reasonable approaches to support TVA’s mission, consistent with the scope of analysis and findings from Lazard’s 2014 Strategic Assessment Report ("2014 Lazard Report"). In the 2021 report, Lazard concluded that TVA’s financial performance from 2014 through 2020 has been strong when measured against the financial performance objectives as set forth in TVA’s 2014 Plan and the performance of other large utility companies. Lazard also concluded that TVA’s performance in recent years and current positioning suggest that the public power model is a reasonable approach to support TVA’s mission. In addition, the 2021 report reaffirmed that Lazard’s previous conclusions from the 2014 Lazard Report with respect to the benefits and considerations of the public power model compared against alternative business models are still valid today. 
 
 Generation Resources 
 
 Extreme Flooding Preparedness. Updates to the TVA analytical hydrology model completed in 2009 indicated that under "probable maximum flood" conditions, some of TVA's dams might not have been capable of regulating the higher flood waters. A "probable maximum flood" is an extremely unlikely event; however, TVA has a responsibility to provide protection for its nuclear plants against such events. As a result, TVA installed a series of modifications at four dams. 
 
 Since 2009, TVA has performed further hydrology modeling of portions of the TVA watershed using updated modeling tools. The revised hydrology models were reviewed and approved by the NRC for Watts Bar Nuclear Plant ("Watts Bar") Units 1 and 2. However, TVA identified an error in the modeling that will require the models for Watts Bar Units 1 and 2 to be resubmitted. TVA plans to resubmit models for Watts Bar Units 1 and 2 in 2022. In addition, TVA submitted models for Sequoyah Nuclear Plant ("Sequoyah") Units 1 and 2 in 2020. As a result of the recently identified necessary changes to dam stability assumptions, TVA will submit a revision to the Sequoyah model in 2022. TVA will subsequently address conditions at Browns Ferry as needed. As of September 30, 2021, TVA had spent $155 million on the modifications and improvements related to extreme flooding preparedness. TVA is deferring the decision on the need for additional modifications until after the modeling work is complete. 
 
 Mitigation of Beyond-Design-Basis Events . NRC rulemaking has been developed to codify the requirements promulgated by orders related to beyond-design-basis events. The NRC Commissioners approved the final rule in 2019. TVA plans to implement the requirements for Sequoyah and Watts Bar by 2022 and for Browns Ferry by 2023. A gap review of the revised rule has been performed, and no new gaps to compliance were identified. 
 
 Work Environment at Nuclear Plants. In 2016, the NRC issued a Chilling Effect Letter ("CEL") to TVA regarding work environment concerns identified at Watts Bar. In the mid-cycle assessment letter issued in 2018, the NRC issued a Cross Cutting Issue in safety conscious work environment ("CCI") and outlined the closure criteria for both the CEL and CCI. In October 2019, TVA informed the NRC of its CEL and CCI closure criteria readiness, and the NRC completed its inspection, resulting in no additional findings with progress noted as documented in its December 2019 inspection report. In March 2020, the NRC issued its Annual Assessment Letter for Watts Bar noting TVA's progress in addressing the CEL and CCI while stating that the NRC continues to monitor TVA's activities as they deliberate on the appropriate time to close the CEL and CCI. In February 2021, the NRC issued a letter to TVA closing the CEL. In the March 2021 Annual Assessment Letter for Watts Bar, the NRC also closed the CCI. 
 
 Apparent Violations of NRC Regulations . On March 2, 2020, the NRC issued a letter to TVA identifying four apparent violations of NRC regulations that prohibit licensees from retaliating against employees for their having raised protected nuclear safety concerns. In June 2020, TVA participated in a pre-decisional enforcement conference before the NRC, and in August 2020, the NRC issued violations to TVA and a notice of proposed imposition of civil penalties in an amount less than $1 million. 
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 TVA submitted a written response to the NRC that denied the violations and opposed the imposition of civil penalties. In October 2020, the NRC issued an order imposing civil penalties in an amount less than $1 million. In November 2020, TVA responded to the NRC, opposing the order and civil penalty and requesting an evidentiary hearing before the NRC's Atomic Safety and Licensing Board ("ASLB"). In August 2021, TVA filed two Motions for Summary Disposition with the ASLB seeking to have the four violations dismissed. In September 2021, the NRC Staff filed a response to TVA's Motions for Summary Disposition. The ASLB held oral argument on TVA's Motions for Summary Disposition on October 14, 2021. On November 3, 2021, the ASLB granted summary disposition on three of the four violations and in part on the fourth violation. On November 8, 2021, the NRC notified TVA that it was rescinding all four violations, and the NRC and TVA jointly filed a motion to terminate the enforcement proceeding. On November 10, 2021, the ASLB granted this motion. 
 
 On March 9, 2020, the NRC issued a letter to TVA identifying twelve apparent violations of NRC regulations: six relating to operational activities and six relating to NRC regulations governing the completeness and accuracy of information. TVA participated in a pre-decisional enforcement conference before the NRC in July 2020, and in November 2020, the NRC issued five violations to TVA and a notice of proposed imposition of civil penalties in an amount less than $1 million. TVA submitted a written response to the NRC violations in December 2020, accepting the violations in part and denying them in part, and requesting a reduction of the civil penalties consistent with the denial. On July 23, 2021, the NRC issued final determinations imposing reduced civil penalties in an amount less than $1 million. In August 2021, TVA accepted this final result and paid the civil penalty. 
 
 Tritium-Producing Burnable Absorber Rods. TVA was a cooperating agency in the 2016 Department of Energy ("DOE") Final Supplemental Environmental Impact Statement for the Production of Tritium in a Commercial Light Water Reactor. In 2017, due to an anticipated need for more tritium-producing burnable absorber rods ("TPBARs"), the DOE announced its preferred alternative for irradiation services, which included use of an additional reactor. As a result of TVA's assessment of and concurrence with the DOE's alternative, TVA submitted a license amendment request ("LAR") to the NRC to authorize the irradiation of TPBARs in Watts Bar Unit 2. The NRC approved the request in 2019, and 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, which has provided irradiation services since 2003, beginning in November 2024, to align with a DOE request for increased tritium. TVA is currently working to submit a LAR with the NRC to fulfill this request. 
 
 Extended Power Uprate . TVA has undertaken an extended power uprate ("EPU") project at Browns Ferry to increase the amount of electrical generation capacity of its reactors. The license for each reactor was amended to allow reactor operation at the higher power level. The Browns Ferry EPU license amendments were approved by the NRC in 2017, following a nearly two-year review. 
 
 The project involved extensive engineering analyses and modification and replacement of certain existing plant components to enable the units to produce the additional power requested by the license amendments. Physical work on all units was completed in 2019. The generating capacity was validated through operation of all units for four seasons, completion of additional testing, and issuance of related engineering memos. The project had a total cost of $457 million and increased nuclear summer net capability by approximately 353 MW. 
 
 Watts Bar Unit 2. During the refueling outage in the first quarter of 2021, TVA identified degraded steam generator conditions on Watts Bar Unit 2. Based on a continued operational assessment, TVA submitted a License Amendment Request that supported unit operation until September 2021, which was approved by the NRC in June 2021. A project team was put in place to ensure operational assessments, analysis work, and regulatory interface occurred to allow for a safe and efficient mid-cycle steam generator inspection. Watts Bar Unit 2 remained at 90 percent of rated output until assessments were complete and the mid-cycle outage began in September 2021. The mid-cycle outage concluded in October 2021 and focused on an inspection protocol with multiple contingency repair strategies such that safe and reliable operation can be assured until the permanent steam generator replacement occurs. Watts Bar Unit 2 will remain below 95 percent of rated output until the permanent replacement occurs, which is projected for March 2022. 
 
 Plant Closures. Results of assessments performed at Paradise and Bull Run were presented to the TVA Board at its February 2019 meeting. The TVA Board approved the retirement of Paradise Unit 3 by December 2020 and Bull Run by December 2023. Subsequent to the TVA Board approval, TVA determined that Paradise would not be restarted after January 2020 due to the plant's material condition. Paradise Unit 3 was taken offline on February 1, 2020, effectively retiring the plant. See Note 7 — Plant Closures . 
 
 Optimum Energy Portfolio . TVA must continuously evaluate all generating assets to ensure an optimal energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. During 2019, the TVA Board approved the Integrated Resource Plan, which recommended an action to evaluate the engineering end-of-life of aging fossil units. 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. Therefore, TVA is evaluating the impact of retiring the balance of the coal-fired fleet by 2035. TVA is also considering plans for 
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 additional generating facilities to replace retiring or expiring capacity and to support a low cost, reliable, flexible, and increasingly clean power system. 
 
 TVA will prepare environmental reviews pursuant to the National Environmental Policy Act ("NEPA") prior to retiring or building a plant. Environmental reviews evaluating the potential retirement of the Cumberland Fossil Plant ("Cumberland") and Kingston Fossil Plant ("Kingston") and replacement with other generation are now underway. In addition, on November 10, 2021, the TVA Board authorized the CEO to evaluate, decide upon, and complete, if necessary, the retirements of Cumberland and Kingston plants and replacement generation projects, subject to complying with all required environmental reviews, periodically updating the TVA Board on plans and actions, and notifying the TVA Board before making final decisions. The TVA Board approved a budget of up to $3.5 billion for these projects. 
 
 Decarbonization . TVA seeks to obtain greater amounts of its power supply from clean resources to work towards carbon emission reductions and is making investments in its generating portfolio to modernize the fleet while also allowing TVA to maintain competitive rates and high reliability. In addition, TVA's sixth transformative initiative, decarbonization, commenced in 2022 and is aimed at understanding and applying clean resources to support the reduction of carbon emissions from its power supply. Related to its carbon reduction efforts, TVA has established six guiding principles which are as follows: 
 
 • Prioritize the needs of Valley stakeholders as TVA works to achieve its goals by maintaining low rates and high reliability, and attracting new jobs in the Valley. 
 
 • Use best-available science and support research and policies that further carbon-free dispatchable technologies. 
 
 • Partner with long-term LPCs and other customers and communities to support economy-wide decarbonization efforts and the strategic electrification of other sectors, such as transportation. 
 
 • Maintain nuclear generation, hydro generation, and a strong transmission grid as key enabling assets. 
 
 • Be transparent with stakeholders in measuring and sharing TVA's progress, and listen and work effectively with all its stakeholders to understand their priorities and needs. 
 
 • Adapt to new technologies and changing policies, and be willing and open to changing TVA's plans and projects to achieve deep carbon reduction. 
 
 Natural Gas-Fired Units. During 2019, the TVA Board approved an expansion of approximately 1,500 MW of peaking gas replacement capacity at two combustion turbine gas facilities to coincide with the retirement of Allen combustion turbine units 1-20 and Johnsonville combustion turbine units 1-16, contingent on the successful completion of environmental reviews under NEPA and other applicable laws. In 2020, detailed design and engineering work began at TVA’s Paradise and Colbert sites to further scope out the projects and supply information needed for the NEPA review. In July 2021, environmental reviews under NEPA and other applicable laws were complete, and TVA received the air permits for the Paradise and Colbert facilities in August 2021 and September 2021, respectively. Each project is expected to increase combustion turbine generation capacity by 750 MW at a cost not to exceed approximately $503 million per project. As of September 30, 2021 , TVA had spent approximately $325 million on these expansions for the design and engineering work and for long lead time equipment that could be used at any site. TVA expects to spend an additional $681 million on these expansions and expects both projects to enter commercial operations by the end of CY 2023. 
 
 During 2019, the TVA Board approved approximately 500 MW for an aeroderivative combustion turbine project, at a cost not to exceed $499 million, contingent on the successful completion of environmental reviews under NEPA and other applicable laws. In 2020, detailed design and engineering work began at TVA’s Johnsonville site to further scope out the project and supply information needed for the NEPA review. As of September 30, 2021, TVA had spent approximately $103 million on the design and engineering work and for long lead time equipment that could be used at any site. TVA expects to spend an additional $396 million on these expansions and expects the project to enter commercial operations by the end of CY 2024. 
 
 Coal Combustion Residuals Facilities . TVA has committed to a programmatic approach for the elimination of wet storage of coal combustion residuals ("CCR") within the TVA service area. Under this program ("CCR Program"), TVA performed stability remediation, completed the conversion of all operational coal-fired plants to dry CCR storage, and is now closing all remaining wet storage facilities. 
 
 Dry generation and dewatering projects . Conversion of coal plant CCR wet processes to dry generation or dewatering is complete at Bull Run, Shawnee Fossil Plant ("Shawnee"), and Kingston. Construction at Gallatin Fossil Plant ("Gallatin") was completed during 2020. Construction of dewatering and dry generation facilities at Cumberland was completed in the second quarter of 2021. 
 
 Landfills . TVA has made strategic decisions to build and maintain lined and permitted dry storage facilities on TVA-owned property at some TVA locations, allowing these facilities to operate beyond existing dry storage capacity. Lined and permitted landfills are completed and operational at Bull Run, Kingston, Gallatin, and Shawnee; construction of a lined and 
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 permitted landfill at Cumberland is expected to start in 2022; and TVA is designing and permitting a new landfill at Gallatin. TVA has withdrawn its permit applications for a new lined landfill at Bull Run and has stopped construction of a permitted lined landfill expansion at Kingston until TVA can determine its need for these landfills with certainty. Construction of additional lined and dry storage facilities may occur to support future business requirements. 
 
 Wet CCR impoundment closures . TVA is working to close wet CCR impoundments in accordance with federal and state requirements. Closure project schedules and costs are driven by the selected closure methodology (such as closure-in-place or closure-by-removal). Closure initiation dates are driven by environmental regulations. TVA's predominant closure methodology is closure-in-place, with exceptions at certain facilities. TVA issued an environmental impact statement ("EIS") in June 2016 that addresses the closure of CCR impoundments at TVA's coal-fired plants. TVA issued its associated Record of Decision in July 2016. Although the EIS was designed to be programmatic in order to address the mode of impoundment closures, it specifically addressed closure methods at 10 impoundments. TVA subsequently decided to close those impoundments. The method of final closure for each of these facilities will depend on various factors, including approval by appropriate state regulators. Additional site-specific NEPA studies will be conducted as other facilities are designated for closure. See Note 13 — Asset Retirement Obligations . 
 
 Groundwater monitoring . Compliance with the Environmental Protection Agency's ("EPA's") CCR rule ("CCR Rule") required implementation of a groundwater monitoring program, additional engineering, and ongoing analysis. As further analyses are performed, including evaluation of monitoring results, there is the potential for additional costs for investigation and/or remediation. These costs cannot reasonably be predicted until a final remedy is selected, if necessary. 
 
 The final Part A revision to the CCR Rule became effective September 28, 2020. Among other things, the final Part A rule requires 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. TVA ceased sending CCR and non-CCR wastestreams to, and initiated closure of, unlined CCR surface impoundments by the specified deadline. 
 
 In compliance with the CCR Rule, TVA published the results of 2020 groundwater testing at its CCR facilities during the second quarter of 2021. The results included values above groundwater protection standards for some constituents at certain CCR units. TVA previously identified several CCR units with constituents at statistically significant levels above site-specific groundwater protection standards. TVA has completed an assessment of corrective measures (“ACM”), which analyzes the effectiveness of potential corrective actions, and has published ACM reports to its CCR Rule Compliance Data and Information website. Based on the results of the ACM, TVA is required to select a remedy as soon as feasible. TVA continues to investigate and evaluate remedies and will continue posting semi-annual progress reports on the status of remedy selection until the final remedy is selected. 
 
 As of September 30, 2021, TVA had spent approximately $2.3 billion on its CCR Program. TVA expects to spend an additional $789 million on the CCR Program through 2026. These estimates may change depending on the final closure method selected for each facility. While the conversion portion of the CCR Program is completed, TVA will continue to undertake CCR closure and storage projects, including building new landfill cells under existing permits and closing existing cells once they reach capacity. 
 
 TVA was involved in two lawsuits concerning the CCR facilities at Gallatin. One of these cases was decided in TVA's favor by the U.S. Court of Appeals for the Sixth Circuit, and the other case was resolved by the entry of a consent order in Davidson County Chancery Court that became effective July 24, 2019. Under the consent order, TVA agreed to close the existing wet ash impoundments by removal, either to an onsite landfill or to an offsite facility. TVA may also consider options for beneficial reuse of the CCR. TVA has submitted the removal plan to the Tennessee Department of Environment and Conservation ("TDEC") and other applicable parties pursuant to the consent order. See Note 13 — Asset Retirement Obligations . 
 
 In October 2019, TDEC released amendments to its regulations which govern solid waste disposal facilities, including TVA's active CCR facilities covered by a solid waste disposal permit and those which closed pursuant to a TDEC approved closure plan. Such facilities are generally subject to a 30-year post-closure care period during which the owner or operator must undertake certain activities, including monitoring and maintaining the facility. The amendments, among other things, add an additional 50-year period after the end of the post-closure care period, require TVA to submit recommendations as to what activities must be performed during this 50-year period to protect human health and the environment, and require TVA to submit revised closure plans every 10 years. 
 
 Allen Groundwater Investigation . The CCR Rule required TVA to implement a comprehensive groundwater monitoring program at units subject to the rule. As a result of this groundwater monitoring program, TVA reported to TDEC in 2017 elevated levels of arsenic, lead, and fluoride in groundwater samples collected from two shallow-aquifer groundwater monitoring wells around the Allen East Ash Disposal Area. TVA, under the oversight of TDEC, conducted a remedial investigation into the nature and extent of the contamination. In 2018, TVA submitted a draft Remedial Investigation Report to TDEC which was revised after discussions with TDEC and additional investigation. TVA submitted the Final Updated Remedial Investigation Report to TDEC in 2019. 
 
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 The remedial investigation confirmed that the high arsenic, fluoride, and lead concentrations are limited to the shallow alluvial aquifer in the north and south areas of the Allen East Ash Disposal Area. These areas are not adversely impacting the Memphis aquifer, which is the source of the public drinking water supply. All samples taken from the Memphis aquifer through TVA production wells were below the EPA drinking water standards. As the result of a pumping test conducted on TVA production wells at the nearby Allen Combined Cycle Plant ("Allen CC") by the United States Geological Survey and the University of Memphis, TVA is committed to not operating these production wells until additional data supports safe use. TVA constructed water tanks on site and is purchasing cooling water from MLGW. The use of water tanks rather than the wells may impose some operational restrictions on the Allen CC due to the lower availability of cooling water. 
 
 TVA is taking steps to remediate the groundwater at the East Ash Disposal Area. The Interim Response Action Plan includes a groundwater extraction system and a groundwater treatment system. TVA will also continue to dewater the East Ash Disposal Area and treat the water before it is discharged to the NPDES outfall. A feasibility study to evaluate remedial actions for the site was submitted to TDEC on September 4, 2020. A virtual public meeting to present the Interim Response Action as the Proposed Plan for the site was held on November 17, 2020. The public was invited to review the remediation documents and encouraged to comment on the Proposed Plan during the public comment period. TVA submitted the public comments along with responses to TDEC for consideration. After considering public comments, TDEC signed the Record of Decision on August 16, 2021. TVA has also prepared a Remedial Action Plan ("RAP") to move forward with the remediation at the site. The RAP has been submitted to TDEC for review and approval. 
 
 TVA's Remedial Investigation/Interim Response Action Groundwater Monitoring Plan is reviewed and modified annually. The 2021 Remedial Investigation/Interim Response Action Groundwater Monitoring Plan was submitted to TDEC on April 1, 2021. TVA continues to sample the monitoring wells at the site as described by the plan quarterly. TVA prepares a memorandum after each quarterly event and prepares an annual report to evaluate the sampling results. The 2020 Remedial Investigation/Interim Response Action Groundwater Monitoring Report was submitted to TDEC on March 31, 2021. 
 
 TVA has evaluated closure options for the Allen East Ash Disposal Area, as well as the nearby West Ash Impoundment, through an EIS pursuant to NEPA. In March 2019, TVA released its public scoping report, which eliminated closure-in-place as an alternative. TVA published the final EIS on March 13, 2020 and its Record of Decision on April 14, 2020, which documents the final decision regarding the closure method for the CCR units at the Allen Fossil Plant. TVA has decided to remove CCR from the above identified areas and transport the CCR to an existing permitted offsite landfill. TVA conducted two virtual public outreach meetings, one on September 22, 2021 and the other on September 30, 2021, to discuss the project and selected landfill. 
 
 Potential Liability Associated with Workers' Exposure to CCR Materials. In response to the 2008 ash spill at Kingston, TVA hired Jacobs Engineering Group, Inc. ("Jacobs") to oversee certain aspects of the cleanup. After the cleanup was completed, Jacobs was sued in the U.S. District Court for the Eastern District of Tennessee ("Eastern District") by employees of a contractor involved in the cleanup and family members of some of the employees. The plaintiffs alleged that Jacobs had failed to take or provide proper health precautions and misled workers about the health risks associated with exposure to coal fly ash, which is a CCR material. The plaintiffs alleged that exposure to the fly ash caused a variety of significant health issues and illnesses, including in some cases death. The case was split into two phases, with the first phase considering, among other issues, general causation and the second determining specific causation and damages. On November 7, 2018, a jury hearing the first phase returned a verdict in favor of the plaintiffs, including determinations that Jacobs failed to adhere to its contract with TVA or the Site Wide Safety and Health Plan; Jacobs failed to provide reasonable care to the plaintiffs; and Jacobs's failures were capable of causing a list of medical conditions, ranging from hypertension to cancer. On January 11, 2019, the Eastern District referred the parties to mediation. Mediation has concluded, but the parties did not resolve the matter. On August 24, 2021, the U.S. Court of Appeals for the Sixth Circuit accepted Jacobs's petition for interim appeal on issues relating to the availability of derivative governmental immunity as a defense to the plaintiffs' claims. On September 29, 2021, the Eastern District certified four questions to the Tennessee Supreme Court regarding the applicability of the Tennessee Silicosis Claims Priority Act to the plaintiffs' claims. The Eastern District's order also stayed all proceedings pending the Tennessee Supreme Court's decision. If the litigation proceeds to the second phase, the principal question for resolution will be whether Jacobs's breaches were the specific medical cause of the plaintiffs' alleged injuries and damages. No trial date has been set for the second phase. 
 
 Other contractor employees and family members have filed lawsuits against Jacobs that are pending in the Eastern District. These pending lawsuits are stayed and raise similar claims to those being litigated in the case referenced above. 
 
 While TVA is not a party to any of these lawsuits, TVA may potentially have an indemnity obligation to reimburse Jacobs for some amounts that Jacobs is required to pay. TVA will continue monitoring the litigation to determine whether these or similar cases could have broader implications for the utility industry. TVA does not expect any potential liability to have a material adverse impact on its results of operations or financial condition. See Note 23 — Commitments and Contingencies. 
 
 Coal Supply. TVA experienced challenges in 2021 related to coal supply, as a result of supply limitation and transportation challenges. In addition, in October 2021, one of TVA's coal handling service providers experienced an event that damaged a number of systems and resulted in the inability to unload trains for a period of time. This service provider is a transfer point for two of TVA's plants. TVA immediately identified and put in place mitigation actions, including shifting to 
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 alternative terminals, to ensure the availability of supply; however, these alternative terminals could affect plant operations due to lower offsite coal blending options, available inventory capacity, and longer lead times as a result of location. TVA will continue to monitor the situation and respond to potential risks as the situation evolves. 
 
 River Management . Rainfall and runoff in the Tennessee Valley in 2021 were 123 percent and 121 percent of normal, respectively. Above normal rainfall and runoff have continued to help TVA meet its river system commitments, including managing minimum river flows and minimum depths for navigation, generating low-cost hydroelectric power, maintaining flows that support habitat for fish and other aquatic species, maintaining water supply, and providing recreational opportunities for the Tennessee Valley. In addition, having cool water available helps TVA to meet thermal compliance and support normal operation of TVA's nuclear and fossil-fueled plants, while oxygenating water helps fish species remain healthy. 
 
 Aquatic Vegetation. In 2020, the unprecedented growth and breakaway of aquatic vegetation in Wheeler Lake challenged the Browns Ferry intake structures and impacted the source of cooling water for the plant. Two units were removed from operation and power was reduced on the third unit to accommodate the decreased capability of the cooling systems. Nuclear safety was not challenged during the event. Breakaway of aquatic vegetation will continue to be a concern until a permanent solution is finalized. However, mitigation solutions have been identified to eliminate marine biofouling of the plant intake system. A permanent design solution is expected to be implemented by the end of CY 2025. 
 
 Small Modular Reactors . 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 small modular reactors at TVA’s Clinch River Nuclear Site. The permit is valid through 2039 and therefore provides TVA a great deal of flexibility to make new nuclear decisions based on energy needs and economic factors. In 2021, TVA initiated a Programmatic Environmental Impact Statement that will evaluate a variety of alternatives for a proposed advanced nuclear technology park at the Clinch River Nuclear Site and will provide additional flexibility for future decision making. The decision to potentially build small modular reactors is an ongoing discussion as part of the asset strategy for TVA’s future generation portfolio. 
 
 TVA is committed to investing in the future of nuclear and is partnering with like-minded organizations to evaluate the economic feasibility of advanced nuclear reactors. To this end, TVA has entered into memorandums of understanding with Oak Ridge National Laboratory and the University of Tennessee 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 and academic institutions. Further, in 2021, TVA entered a cooperative development agreement with Kairos Power to provide defined engineering, operations, and licensing services in support of a low-power demonstration reactor Kairos Power plans to deploy at the East Tennessee Technology Park in Oak Ridge, TN. 
 
 Any future decision to construct an advanced reactor would require approval by the TVA Board and the NRC. As of September 30, 2021, TVA had spent $91 million on work regarding SMRs, including work to complete the early site permit application for the Clinch River Nuclear Site, of which the DOE had reimbursed TVA $29 million. Additional expenditures will be determined based on future project development. 
 
 System Operations Center . 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. 
 
 Energy Management System. The new energy management system has been approved for $90 million. As the current energy management 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 also 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. 
 
 Dam Safety and Remediation Initiatives 
 
 Assurance Initiatives. TVA has an established dam safety program, which includes procedures based on the Federal Guidelines for Dam Safety, with the objective of reducing the risk of a dam safety event. The program analyzes, evaluates, and manages risks through a systematic and thorough process that facilitates decision making for the safety of a structure, identifying necessary actions to reduce risk, including remediation projects, and prioritization of actions for TVA's river dams. Prioritization is driven by reducing risk to the public and asset preservation. TVA also continues to provide routine care of the dams as part of the dam safety program through inspections, monitoring, and maintenance, among other activities. 
 
 Boone Dam Remediation . In 2015, a sinkhole was discovered near the base of the earthen embankment at Boone Dam, and a small amount of water and sediment was found seeping from the river bank below the dam. TVA identified underground pathways contributing to the seepage and prepared a plan to repair the dam, which consists of the construction of a composite seepage barrier wall in the dam's earthen embankment. TVA has completed grouting, construction of an upstream and downstream buttress, installation of the concrete cut-off wall, and raising of the reservoir for fluctuation testing of the repair. 
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 TVA is currently constructing a floodwall to return the embankment to its original height. Construction of the floodwall as well as site restoration activities are planned for completion in 2022. 
 
 As of September 30, 2021, TVA had spent $300 million related to this project and expects to spend an additional $122 million through 2023. TVA expects the reservoir to return to normal operations in 2022 and is continuing to work with the community to help mitigate local impacts of the extended drawdown. 
 
 Pickwick South Embankment Remediation. Reassessments of Pickwick Landing Dam ("Pickwick") found low safety factors for post-earthquake stability indicating that the dam is at significant risk for slope stability failure following a seismic event in portions of the south embankment. Slope stability failure could lead to a breach of the south embankment and loss of the reservoir, resulting in loss of life and damage to property downstream, disruption to navigation, and loss of generation and recreation. 
 
 TVA is nearing completion on constructing berms on the upstream and downstream slopes to upgrade the south embankment. TVA is also currently working on projects with the local water utility to relocate an affected water intake system, which will allow for completion of the remaining berms. This work is estimated to be complete in 2022. As of September 30, 2021, TVA had spent $118 million related to this project and expects to spend an additional $10 million through 2022. 
 
 Real Property Portfolio 
 
 TVA continues to study its real property portfolio as part of the Strategic Real Estate Plan, which is aimed at reducing cost, right-sizing the portfolio, and aligning real estate holdings with TVA's strategic direction. In addition, as TVA continues to implement mandatory telework for those who do not have to be physically present during the COVID-19 pandemic, it is also assessing and reviewing the pandemic's long-term impacts to real estate. 
 
 Regional Consolidations . Consolidation of the centralized field offices in Norris, Tennessee and additional consolidations from the Greenway Area Office are currently being performed and are expected to be completed in early 2022. 
 
 Supply Chain 
 
 Federal Contracting and Hiring Practices . On August 3, 2020, the Trump Administration issued an "Executive Order ("EO") on Aligning Federal Contracting and Hiring Practices With the Interests of American Workers." Among other things, the EO directs federal agencies to review contracts awarded in 2018 and 2019 to assess (i) whether temporary foreign labor was used and impacts from such use, and (ii) whether any offshoring occurred and its impacts. The EO also directs agencies to review employment policies for compliance with specific laws. TVA conducted a review and reported a summary of its findings to OMB in December 2020. 
 
 Buy American Executive Order . On January 25, 2021, President Biden issued EO 14005, "Ensuring the Future Is Made in All of America by All of America’s Workers." EO 14005 imposes new reporting and procedural requirements, as well as additional executive oversight, for federal agency purchases of foreign goods and services. OMB issued guidance in connection with EO 14005 on June 11, 2021. TVA is evaluating and preparing for any anticipated impacts and continuing to monitor guidance regarding the new requirements. In July 2021, TVA submitted a report in response. 
 
 Inflation . TVA has seen an increase in supplier impacts as a result of COVID-19, including price fluctuations. TVA has actively managed spend to mitigate inflationary pressures; however, broader inflationary pressures are expected to persist into 2022. TVA will continue to monitor these pressures and spend to lower TVA’s risk. 
 
 Ratemaking 
 
 TVA, LPCs, and directly served industries have worked collaboratively in recent years to develop changes to rates that focus on TVA's long-term pricing efforts and the changing needs of customers in the Tennessee Valley. These changes have improved pricing by better aligning rates with underlying cost drivers and by sending improved pricing signals, while maintaining competitive industrial rates and keeping residential rates affordable. 
 
 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 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. 
 
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 Safeguarding Assets 
 
 Physical Security — Non-Nuclear Asset Protection. TVA utilizes a variety of security technologies, security awareness activities, and security personnel to prevent sabotage, vandalism, and thefts. Any of these activities could negatively impact the ability of TVA to generate, transmit, and deliver power to its customers. TVA's Police and Emergency Management personnel are active participants with numerous professional and peer physical security organizations in both the electric industry and law enforcement communities. 
 
 Physical attacks on transmission facilities across the country have heightened awareness of the need to physically protect facilities. TVA continues to work with the North American Electric Reliability Corporation ("NERC"), the SERC Reliability Corporation, the North American Transmission Forum, and other utilities to implement industry approved recommendations and standards. 
 
 Nuclear Security . Nuclear security is carried out in accordance with federal regulations as set forth by the NRC. These regulations are designed for the protection of TVA's nuclear power plants, the public, and employees from the threat of radiological sabotage and other nuclear-related terrorist threats. TVA has security forces to guard against such threats. 
 
 Cybersecurity. TVA operates in a highly regulated environment with respect to cybersecurity. TVA's cybersecurity program aligns or complies with the Federal Information Security Management Act, the NERC Critical Infrastructure Protection requirements, and the NRC requirements for cybersecurity, as well as industry best practices. As part of the U.S. government, TVA coordinates with and works closely with the U.S. Department of Homeland Security's Cybersecurity and Infrastructure Security Agency ("CISA") and the U.S. Computer Emergency Readiness Team ("US-CERT"). CISA serves as the agency assisting other federal entities in defending against threats and securing critical infrastructure. US-CERT functions as a liaison between the U.S. Department of Homeland Security and the public and private sectors to coordinate responses to security threats. 
 
 The risk of cybersecurity events such as malicious code attacks, unauthorized access attempts, and social engineering attempts continues to intensify across all industries, including the energy sector. Over the last few years, TVA has observed a significant increase in malicious activity including phishing campaigns, malicious websites, distributed denial of service attacks, and activity specific to the COVID-19 pandemic, among others. These types of malicious activity have also been observed by TVA's external vendors, stakeholders, and partners. This activity has caused the need for heightened awareness and preparedness. 
 
 In December 2020, TVA was notified of the SolarWinds breach by multiple sources including CISA. TVA cybersecurity personnel immediately responded to determine any impact and took measures intended to protect TVA from potential risks from the compromised software. TVA evaluated all information received regarding the event and continues to take the necessary actions to protect the computing environment. This event did not have a significant or material impact on business or operations. 
 
 In May 2021, TVA was notified of the Colonial Pipeline ransomware attack. TVA cybersecurity personnel immediately began monitoring and evaluating the situation. There were no direct attacks to TVA related to this event. See Note 16 — Risk Management Activities and Derivative Transactions — Counterparty Risk — Suppliers for discussion of supply impact. 
 
 On May 12, 2021, President Biden signed EO 14028, "Improving the Nation's Cybersecurity." This EO is intended to improve the nation's cybersecurity posture and protect federal government networks by improving information-sharing between the U.S. government and the private sector on cyber issues and strengthening the United States' ability to respond to incidents when they occur. This EO is focused on specific goals and requirements including actions for zero trust architectures; cloud services; FedRAMP programs; supply chain and contracts; secure software development; endpoint detection and response, standardized vulnerability, and incident response operational plans; threat and vulnerability analysis; assessment and threat-hunting; event logging, monitoring, and retention; and information sharing. TVA continues to evaluate and respond to the EO, associated OMB memorandums, and other emerging requirements in alignment with the order. TVA has submitted all reports as required, established response teams and an oversight structure, and initiated projects as necessary to address the required actions. 
 
 TVA is leveraging federal and other partners to better identify, detect, protect, and respond to these potential attacks. While TVA and its third-party vendors and service providers have been, and will likely continue to be, subjected to such attacks and attempts to disrupt operations, to date the attacks have not had a significant or material impact on business or operations and have not impacted TVA's ability to operate as planned. See Item 1A, Risk Factors — Cybersecurity Risks — TVA's facilities and information infrastructure may not operate as planned due to cyber threats to TVA's assets and operations . 
 
 Transmission Assets . In addition to physical and cybersecurity attacks, TVA's transmission assets are vulnerable to various types of electrically charged energy disruptions such as those from geomagnetic disturbances and electromagnetic pulses ("EMPs"). In September 2016, the FERC approved a new standard to address geomagnetic disturbances events, and in March 2020, FERC approved a revision to the standard. TVA has met the requirements of the original standard and subsequent revisions, and has evaluated the effects of solar storms ranging from NERC's reference case to possible extreme levels. TVA continues as an active participant with NERC in this field. The most serious threats from EMP are those caused by high-altitude 
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 nuclear explosions. Like others in the industry, TVA is coordinating with federal and state authorities, NERC, Electric Power Research Institute ("EPRI"), and other grid owners and operators to address this concern. 
 
 Bulk-Power System Assets . On May 1, 2020, the Trump Administration issued EO 13920, "Securing the United States Bulk-Power System." Among other things, the EO prohibits the acquisition or installation of any bulk-power system electric equipment where the transaction (1) involves any property in which any foreign country or a national thereof has any interest and (2) poses an undue risk to the bulk-power system in, or national security of, the U.S. On December 17, 2020, the DOE issued a Prohibition Order Securing Critical Defense Facilities, which was suspended and then revoked. EO 13920 has expired and is no longer in effect. EO 13990, "Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis," directs DOE and OMB to consider whether to recommend the issuance of a replacement EO to EO 13920. The DOE issued a Request for Information on April 22, 2021, to help inform any recommendation that it may make for a replacement EO. At this time, it is uncertain to what extent a future EO that may potentially address risks associated with the bulk-power system may impact TVA's operations. 
 
 Critical Accounting Estimates 
 
 TVA's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which require management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change also would materially impact TVA's financial condition, results of operations, or cash flows. TVA's critical accounting policies are discussed in Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. 
 
 TVA believes that its most critical accounting estimates relate to the following: 
 
 • AROs; 
 • Fair Value Measurements; and 
 • Pension and Other Post-Retirement Benefits. 
 
 Management has discussed the development, selection, and disclosure of critical accounting estimates with the Audit, Finance, Risk, and Cybersecurity Committee of the TVA Board. While TVA's estimates and assumptions are based on its knowledge of current events and actions it may undertake in the future, actual results may ultimately differ from these estimates and assumptions. 
 
 Asset Retirement Obligations 
 
 TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets. These obligations relate to TVA's generating facilities, including coal-fired, nuclear, hydroelectric, and natural gas and/or oil-fired. They also pertain to coal ash impoundments, transmission facilities, and other property-related assets. Activities involved with the retirement of these assets could include decontamination and demolition of structures, removal and disposal of wastes, and site restoration. TVA periodically reviews its estimated ARO liabilities. Revisions to the ARO estimates are made whenever factors indicate that the timing or amounts of estimated cash flows have changed. Any change to an ARO liability is recognized prospectively as an equivalent increase or decrease in the carrying value of the capitalized asset. Any accretion or depreciation expense related to these liabilities and assets is charged to a regulatory asset. See Note 10 — Regulatory Assets and Liabilities — Nuclear Decommissioning Costs and Non-Nuclear Decommissioning Costs and Note 13 — Asset Retirement Obligations . 
 
 The initial obligation is measured at its estimated fair value using various judgments and assumptions. Fair value is developed using an expected present value technique that is based on assumptions of market participants and that considers estimated retirement costs in current period dollars that are inflated to the anticipated decommissioning date and then discounted back to the date the ARO was incurred. Decommissioning cost studies are updated for each of TVA's nuclear units long-lived assets at least every five years. Changes in assumptions and estimates included within the calculations of the value of the AROs could result in significantly different results than those identified and recorded in the financial statements, including amortization of the regulatory assets. 
 
 Nuclear Decommissioning . At September 30, 2021, the estimated future nuclear decommissioning cost recognized in the financial statements was $3.4 billion and was included in AROs, and the unamortized regulatory asset related to nuclear decommissioning ARO costs of $363 million was included in Regulatory assets. 
 
 The following key assumptions can have a significant effect on estimates related to the nuclear decommissioning costs reported in TVA's nuclear ARO liability: 
 
 Timing and Method – In projecting decommissioning costs, two assumptions must be made to estimate the timing of plant decommissioning. First, the date of the plant's retirement must be estimated. At Browns Ferry and Sequoyah, the estimated retirement date is based on the unit with the longest license period remaining. At Watts Bar, the estimated retirement 
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 date is based on each unit's license period. Second, an assumption must be made on the timing of the decommissioning. TVA has ascribed probabilities to two different decommissioning methods related to its nuclear decommissioning obligation estimate: the DECON method and the SAFSTOR method. The DECON method requires that radioactive contamination be removed from a site and safely disposed of or decontaminated to a level that permits the site to be released for unrestricted use shortly after it ceases operation. The SAFSTOR method allows nuclear facilities to be placed and maintained in a condition that allows the 
 facilities to be safely stored and subsequently decontaminated to levels that permit release for unrestricted use. TVA bases its nuclear decommissioning estimates on site-specific cost studies, which are updated for each of TVA's nuclear units at least every five years. TVA plans to complete new cost studies in 2022. Changes in probabilities ascribed to the assumptions or the timing of decommissioning can significantly change the present value of TVA's obligations. 
 
 Cost Estimates – There is limited experience with actual decommissioning of large nuclear facilities. Changes in technology and experience as well as changes in regulations regarding nuclear decommissioning could cause cost estimates to change significantly. TVA's cost studies assume current technology and regulations. 
 
 Cost Escalation Rate – TVA uses expected inflation rates over the remaining timeframe until the costs are expected to be incurred to estimate the amount of future cash flows required to satisfy TVA's decommissioning obligations. 
 
 Discount Rate – TVA uses its incremental borrowing rate over a period consistent with the remaining timeframe until the costs are expected to be incurred to calculate the present value of the weighted estimated cash flows required to satisfy TVA's decommissioning obligations. 
 
 The actual decommissioning costs may vary from the derived estimates because of changes in current assumptions, such as the assumed dates of decommissioning, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. A 10 percent change in TVA's ARO for nuclear decommissioning cost at September 30, 2021, would have affected the liability by approximately $343 million. 
 
 Non-Nuclear Decommissioning. At September 30, 2021, the estimated future non-nuclear decommissioning cost recognized in the financial statements was $3.6 billion and was included in AROs, and the unamortized regulatory asset related to non-nuclear decommissioning ARO costs of $2.7 billion was included in Regulatory assets. 
 
 This decommissioning cost estimate involves estimating the amount and timing of future expenditures and making judgments concerning whether or not such costs are considered a legal obligation. Estimating the amount and timing of future expenditures includes, among other things, making projections of the timing and duration of the asset retirement process and predicting how costs will escalate with inflation. These costs are predominantly CCR closure, CCR post-closure care and monitoring, and plant powerhouse asbestos removal. CCR closure estimates are primarily closure-in-place except for specific ponds located at Allen and Gallatin, which are closure-by-removal. CCR post-closure care and monitoring primarily includes costs for grounds maintenance, cover system and mechanical maintenance, inspections, and groundwater monitoring costs. Asbestos removal is based on cost per square foot to remove and dispose of asbestos-containing materials. TVA revises estimates of CCR closure on a project by project basis when updated cost information becomes available that causes management's expectation of cost to change materially. CCR post-closure care and monitoring costs and asbestos removal are studied for revision at least every five years, but revised more frequently if updated cost information becomes available that causes management's expectation of cost to change materially. 
 
 The following key assumptions can have a significant effect on estimates related to the non-nuclear decommissioning costs: 
 
 Timing and Method – In projecting non-nuclear decommissioning costs, the date of the asset's retirement must be estimated. In instances where the retirement of a specific asset will precede the retirement of the generating plant, the anticipated retirement date of the specific asset is used. Additionally, TVA expects to incur certain ongoing costs subsequent to the initial asset retirement. TVA develops its cost estimates based on likelihood of decommissioning method where options exist in fulfilling legal obligations (e.g. closure-in-place or closure-by-removal for coal ash impoundments). The decommissioning method is determined based on several factors including available technologies, environmental studies, cost factors, resource availability, and timing requirements. As these factors are considered and decommissioning methods are determined, the detailed project schedules and estimates are adjusted. See Note 10 — Regulatory Assets and Liabilities — Non-Nuclear Decommissioning Costs . 
 
 TVA implemented revised depreciation rates during the first quarter of 2022 applicable to its completed plant as a result of the completion of a new depreciation study. The study includes a decline in the service life estimates of TVA’s coal-fired plants based on current planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035. As a result of the accelerated retirements reflected in the depreciation study, TVA performed an assessment of the assumptions used in the timing of cash flows related to its non-nuclear AROs. Based on the assessment, TVA identified changes to its projections of timing of certain asset retirement processes, that will be recorded in 2022. 
 
 Technology and Regulation – Changes in technology and experience as well as changes in regulations regarding non-nuclear decommissioning could cause cost estimates to change significantly. TVA's cost estimates generally assume current 
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 technology and regulations. In April 2015, the EPA published its final rule governing CCR, which regulates landfill and impoundment location, design, and operations; dictates certain pond-closure conditions; and establishes groundwater monitoring and closure and post-closure standards. As a result of this ruling, in 2015 TVA made revisions to the assumptions and estimates used to calculate its CCR AROs. TVA continues to evaluate the impact of the rule on its operations, including cost and timing estimates of related projects. As a result, further adjustments to its ARO liabilities may be required as estimates are refined. 
 
 Cost Escalation Rate – TVA uses expected inflation rates over the remaining timeframe until the costs are expected to be incurred to estimate the amount of future cash flows required to satisfy TVA's decommissioning obligations. 
 
 Discount Rate – TVA uses its incremental borrowing rate over a period consistent with the remaining timeframe until the costs are expected to be incurred to calculate the present value of the weighted estimated cash flows required to satisfy TVA's decommissioning obligations. 
 
 The actual decommissioning costs may vary from the derived estimates because of changes in current assumptions, such as the assumed dates of decommissioning, changes in the discount or escalation rates, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. A 10 percent change in TVA's ARO for non-nuclear decommissioning costs at September 30, 2021, would have affected the liability by approximately $357 million. 
 
 Fair Value Measurements 
 
 Investments. Investment funds are comprised of equity securities and debt securities and are classified as trading. These securities are held in the Nuclear Decommissioning Trust ("NDT"), Asset Retirement Trust ("ART"), SERP, Deferred Compensation Plan ("DCP"), and qualified benefit pension plan. 
 
 Investment Funds . The assets in the NDT, ART, SERP, and DCP are generally measured at fair value based on quoted market prices or other observable market data such as interest rate indices. These investments are primarily U.S. and international equities, real estate investment trusts, fixed income investments, high-yield fixed income investments, U.S. Treasury Inflation-Protected Securities ("TIPS"), treasuries, currencies, derivative instruments, and other investments. TVA has classified all of these trading securities as either Level 1, Level 2, or Investments measured at net asset value ("NAV"). TVA’s private equity limited partnerships, private real asset investments, and private credit investments may include holdings of investments in private real estate, venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations through funds managed by third-party investment managers. These investments are valued at NAV as a practical expedient for fair value. There are no readily available quoted exchange prices for these investments. The fair value of these investments is based on information provided by the investment managers. These investments are valued on a quarterly basis. See Note 17 — Fair Value Measurements — Valuation Techniques for a discussion of valuation levels of the investments. 
 
 Plan Investments . TVA's qualified benefit pension plan is funded with qualified plan assets. These investments are primarily global public equities, private equities, fixed income securities, public real assets, and private real assets. See Note 22 — Benefit Plans — Fair Value Measurements for disclosure of fair value measurements for investments held by TVARS that support TVA's qualified defined benefit pension plan. 
 
 Pricing . Prices provided by third-parties for the assets in investment funds and plan investments are subjected to automated tolerance checks by the investment portfolio trustee to identify and avoid, where possible, the use of inaccurate prices. Any such prices identified as outside the tolerance thresholds are reported to the vendor that provided the price. If the prices are validated, the primary pricing source is used. If not, a secondary source price that has passed the applicable tolerance check is used (or queried with the vendor if it is out of tolerance), resulting in either the use of a secondary price, where validated, or the last reported default price, as in the case of a missing price. For monthly valued accounts, where secondary price sources are available, an automated inter-source tolerance report identifies prices with an inter-vendor pricing variance of over two percent at an asset class level. For daily valued accounts, each security is assigned, where possible, an indicative major market index, against which daily price movements are automatically compared. Tolerance thresholds are established by asset class. Prices found to be outside of the applicable tolerance threshold are reported and queried with vendors as described above. 
 
 For investment funds, TVA additionally performs its own analytical testing on the change in fair value measurements each period to ensure the valuations are reasonable based on changes in general market assumptions. TVA also performs pricing tests on various portfolios comprised of securities classified in Levels 1 and 2 on a quarterly basis to confirm accuracy of the values received from the investment portfolio trustee. For plan investments, TVARS reviews the trustee's Service Organization Controls report and the pricing policies of the trustee's largest pricing vendor. 
 
 Derivatives. TVA has historically entered into various derivative transactions, including commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures, to manage various market risks. Other than certain derivative instruments included in investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. 
 
 Currency and Interest Rate Derivatives . TVA has two currency swaps and four "fixed for floating" interest rate swaps. The currency swaps protect against changes in cash flows caused by volatility in exchange rates related to outstanding Bonds 
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 denominated in British pounds sterling. TVA uses interest rate swaps to fix variable short-term debt to a fixed rate. The currency and interest rate swaps are classified as Level 2 valuations as the rate curves and interest rates affecting the fair value of the contracts are based on observable data. The application of credit valuation adjustments ("CVAs") did not materially affect the fair value of these assets and liabilities at September 30, 2021. 
 
 Commodity Contracts . TVA enters into commodity contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. During the fourth quarter of 2020, TVA discontinued derivative accounting for forward coal contracts because these contracts no longer met the criteria of net settlement. As a result, the associated net derivative liabilities and regulatory assets were derecognized. The natural gas derivative contracts are classified as Level 2 valuations based on market approaches which utilize short-term and mid-term market-quoted prices from an external industry brokerage firm. The application of CVAs did not materially affect the fair value of these assets and liabilities at September 30, 2021. 
 
 TVA maintains policies and procedures to value commodity contracts using what is believed to be the best and most relevant data available. In addition, TVA's risk management group reviews valuations and pricing data. 
 
 Fair Value Considerations. In determining the fair value of its financial instruments, TVA considers the source of observable market data inputs, liquidity of the instrument, credit risk, and risk of nonperformance of itself or the counterparty to the contract. The conditions and criteria used to assess these factors are described below. 
 
 Sources of Market Assumptions. TVA derives its financial instrument market assumptions from market data sources (e.g., Chicago Mercantile Exchange and Moody's Investors Service, Inc. ("Moody's")). In some cases, where market data is not readily available, TVA uses comparable market sources and empirical evidence to derive market assumptions and determine a financial instrument's fair value. 
 
 Market Liquidity . Market liquidity is assessed by TVA based on criteria as to whether the financial instrument trades in an active or inactive market. A financial instrument is considered to be in an active market if the prices are fully transparent to the market participants, the prices can be measured by market bid and ask quotes, the market has a relatively high trading volume, and the market has a significant number of market participants that will allow the market to rapidly absorb the quantity of the assets traded without significantly affecting the market price. Other factors TVA considers when determining whether a market is active or inactive include the presence of government or regulatory control over pricing that could make it difficult to establish a market-based price upon entering into a transaction. 
 
 Nonperformance Risk . In determining the potential impact of nonperformance risk, which includes credit risk, TVA considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements. TVA is a counterparty to derivative instruments that subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to value the investment. 
 
 Nonperformance risk for most of TVA's derivative instruments is an adjustment to the initial asset/liability fair value. TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying a CVA. TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA's or the counterparty's credit rating as obtained from Moody's. For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the company. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1984 to CY 2020) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. 
 
 All derivative instruments are analyzed individually and are subject to unique risk exposures. The application of CVAs resulted in a less than $1 million decrease in the fair value of assets and a $1 million decrease in the fair value of liabilities at September 30, 2021. 
 
 Collateral. TVA's interest rate swaps and currency swaps contain contract provisions that require a party to post collateral (in a form such as cash or a letter of credit) when the party's liability balance under the agreement exceeds a certain threshold. See Note 16 — Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral for a discussion of collateral related to TVA's derivative liabilities. 
 
 Pension and Other Post-Retirement Benefits 
 
 TVA sponsors a defined benefit pension plan that is qualified under section 401(a) of the Internal Revenue Code and covers substantially all of its full-time annual employees hired prior to July 1, 2014. The TVA Retirement System ("TVARS"), a separate legal entity governed by its own board of directors (the "TVARS Board"), administers the qualified defined benefit pension plan. TVA also provides a Supplemental Executive Retirement Plan ("SERP") to certain executives in critical positions, which provides supplemental pension benefits tied to compensation levels that exceed limits imposed by IRS rules applicable to the qualified defined benefit pension plan. Additionally, TVA provides post-retirement health care benefits for most of its full-time employees who reach retirement age while still working for TVA. 
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 TVA's pension and other post-retirement benefits contain uncertainties because they require management to make certain assumptions related to TVA's cost to provide these benefits. Numerous factors are considered including the provisions of the plans, changing employee demographics, various actuarial calculations, assumptions, and accounting mechanisms. Effects of the COVID-19 pandemic on the financial markets, regulations, and experience are uncertain and still evolving, creating an additional degree of complexity associated with the future occurrence or outcome of events and conditions underlying the significant accounting assumptions discussed below. 
 
 Key actuarial assumptions utilized include expected long-term rate of return on plan assets, discount rates, projected health care cost trend rates, cost of living adjustments ("COLA"), and mortality rates. Every five years, a formal actuarial experience study that compares assumptions to the actual experience is conducted. Additional ad-hoc experience studies are performed as needed to review recent experience and validate recommended changes to the actuarial assumptions used based upon TVA's last experience study in 2018. 
 
 Expected Return on Plan Assets . The qualified defined benefit pension plan is the only plan that is funded with qualified plan assets. In determining the expected long-term rate of return on pension plan assets, TVA uses a process that incorporates actual historical asset class returns and an assessment of expected future performance and takes into consideration external actuarial advice, the current outlook on capital markets, the asset allocation policy, and the anticipated impact of active management. During 2021, the TVARS Board decreased the expected return on plan assets assumptions from 6.75 percent to 5.75 percent based upon review of the current plan's funding levels and asset target allocation mix, capital market outlooks, and the most recent studies. TVA management adopted the 5.75 percent expected long-term rate of return on plan assets assumption, which will be used to calculate the 2022 net periodic pension cost. 
 
 TVA recognizes the impact of asset performance on pension expense over a three-year phase-in period through a market-related value of assets ("MRVA") calculation. The MRVA recognizes investment gains and losses over a three-year period and is used in calculating the expected return on assets and the recognized net actuarial loss components of pension net periodic benefit cost. 
 
 A higher expected rate of return assumption decreases the net periodic pension benefit costs, whereas a lower expected rate of return assumption increases the net periodic pension benefit cost. The plan's actual rate of return for 2021 was 20.30 percent compared to the assumption of 6.75 percent. The difference between the expected and actual return on plan assets resulted in an actuarial gain of $1 billion that is recognized as a decrease in the related regulatory asset and a decrease in the pension benefit obligation at September 30, 2021. 
 
 Discount Rate. TVA's discount rates are derived by identifying a theoretical settlement portfolio of high quality corporate bonds of Aa quality or higher sufficient to provide for the projected benefit payments. The model matches the present value of the projected benefit payments to the market value of the theoretical settlement bond portfolio with any resulting excess funds presumed to be reinvested and used to meet successive year benefit payments. A single equivalent discount rate is determined to align the present value of the required cash flow with the value of the bond portfolio. The resulting discount rates are reflective of both the current interest rate and the distinct liability of the pension and post-retirement benefit plans. 
 
 The discount rate is somewhat volatile because it is determined based upon the prevailing rate of long-term corporate bonds as of the measurement date. A higher discount rate decreases the plan obligations and correspondingly decreases the net periodic pension and net post-retirement benefit costs for those plans where actuarial losses are being amortized. Alternatively, a lower discount rate increases net periodic pension and net periodic post-retirement benefit costs. The discount rates used to determine the pension and post-retirement benefit obligations were 2.90 percent and 3.05 percent, respectively, at September 30, 2021. 
 
 Health Care Cost Trends. In establishing health care cost trend rates for the post-retirement obligation, TVA reviews actual recent cost trends and projected future trends considering health care inflation, changes in health care utilization, and changes in plan benefits and premium experience. The pre-Medicare eligible per capita claims costs trend rate is 6.25 percent, declining 0.25 percent per year until it reaches the ultimate trend rate of 5.00 percent in 2027. The pre-Medicare eligible per capita contributions trend rate is 8.51 percent for years 2022 through 2024, and then assumed to realign back with the pre-Medicare eligible per capita claims costs trend rate in 2025 at 5.50 percent, reaching the ultimate rate of 5.00 percent in 2027. The post-Medicare current health care cost trend rate is zero percent for years 2022 through 2023, reaching the ultimate rate of 4.00 percent in 2024. TVA recognized a $47 million actuarial gain primarily due to lower per capita claims costs than previously assumed net of the loss from the change in the pre-Medicare eligible per capita contributions trend rate assumption. 
 
 Cost of Living Adjustments. Cost of living adjustments ("COLAs") are an increase in the benefits for eligible retirees to help maintain the purchasing power of benefits as consumer prices increase. This assumption is based on the long-term expected future rate of inflation, which is based on the capital market outlooks, economic forecasts, and the Federal Reserve policy. See Note 22 — Benefit Plans — Plan Assumptions — Cost of Living Adjustment for further discussion on the calculation of the COLA. The actual COLA for CY 2021 was 1.13 percent. The CY 2022 COLA is assumed to be 3.15 percent, and for years thereafter is assumed to be 2.00 percent . A higher COLA increases the pension benefit obligation whereas a lower assumption decreases the obligation. The actual calendar year COLA and the long-term COLA assumption are used to determine the benefit obligation at September 30 and the net periodic benefit costs for the following fiscal year. 
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 Mortality . TVA's mortality assumptions are based upon actuarial projections in combination with actuarial studies of the actual mortality experience of TVARS's pension and post-retirement benefit plan participants taking into consideration the Society of Actuaries ("SOA") mortality table and projection scales as of September 30, 2021. TVA continues to monitor the availability of updates to mortality tables, longevity improvement scales, and mortality reviews and experience studies to consider whether these updates should be reflected in the current year mortality assumption. In 2020, based upon the most recent mortality experience study, TVA adopted a modified version of the SOA PRI-2012 table. For 2021, TVA has maintained the mortality table assumption adopted in 2020, and updated to the latest mortality improvement scale at September 30, 2021. The change in TVA's mortality assumptions resulted in a $28 million increase in the pension obligation and a $1 million increase in the post-retirement obligation at September 30, 2021. 
 
 The following tables illustrate the estimated effects of changing certain of the critical actuarial assumptions discussed above, while holding all other assumptions constant and excluding any impact for unamortized actuarial gains and losses: 
 
 Sensitivity to Certain Changes in Pension Assumptions 
 At September 30, 2021 
 
Actuarial Assumption Current Assumption Change in Assumption Impact 
 Effect on 2021 pension expense: 
 
 Discount rate 2.75 % (0.25) % $ 16 
 Expected return on assets 6.75 % (0.25) % 18 
 COLA 2.00 % 0.25 % 29 
 
 Effect on benefit obligation 
 Discount rate 2.90 % (0.25) % 396 
 COLA 2.00 % 0.25 % 258 

 Sensitivity to Changes in Assumed Health Care Cost Trend Rates 
 At September 30, 2021 
 
 1% Increase 1% Decrease 
 Effect on total of service and interest cost components for the year $ 4 $ (4) 
 Effect on end-of-year accumulated post-retirement benefit obligation 71 (69) 

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 New Accounting Standards and Interpretations 
 
 See Note 2 — Impact of New Accounting Standards and Interpretations for a discussion of recent accounting standards and pronouncements that were issued by the Financial Accounting Standards Board ("FASB"), became effective for TVA, or were adopted by TVA during the presented periods. 
 
 Legislative and Regulatory Matters 
 
 TVA continues to monitor how regulatory agencies are interpreting and implementing the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in July 2010. As a result, TVA has become subject to recordkeeping, reporting, and reconciliation requirements related to its derivative transactions. In addition, depending on how regulatory agencies interpret and implement the provisions, TVA's hedging costs may increase, and TVA may have to post additional collateral and margin in connection with its derivative transactions. 
 
 For additional discussion on legislative and regulatory matters, including a discussion of environmental legislation and regulation, see Item 1, Business — Environmental Matters, Item 1, Business — Regulation, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges. 
 
 TVA does not engage, and does not control any entity that is engaged, in any activity listed under Section 13(r) of the Securities Exchange Act of 1934 (the "Exchange Act"), which requires certain issuers to disclose certain activities relating to Iran involving the issuer and its affiliates. Based on information supplied by each such person, none of TVA's directors and executive officers are involved in any such activities. While TVA is an agency and instrumentality of the U.S., TVA does not believe its disclosure obligations, if any, under Section 13(r) extend to the activities of any other departments, divisions, or agencies of the U.S. 
 
 Environmental Matters 
 
 See Item 1, Business — Environmental Matters, which discussion is incorporated by reference into this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. 
 
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 Legal Proceedings 
 
 From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting its activities, as a result of catastrophic events or otherwise. As of September 30, 2021, TVA had accrued approximately $13 million with respect to Legal Proceedings. No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected. 
 
 For a discussion of certain current material Legal Proceedings, see Note 23 — Commitments and Contingencies — Legal Proceedings , which discussions are incorporated into this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations . 
 
 Risk Management Activities 
 
 TVA is exposed to various market risks. These market risks include risks related to commodity prices, investment prices, interest rates, currency exchange rates, inflation, and counterparty credit and performance risk. To help manage certain of these risks, TVA has entered into various derivative transactions, including commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures. Other than certain derivative instruments in its trust investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. See Note 16 — Risk Management Activities and Derivative Transactions . 
 
 Risk Governance 
 
 The Enterprise Risk Council ("ERC") is responsible for the highest level of risk oversight at TVA and is also responsible for communicating enterprise-wide risks with policy implications to the TVA Board or a designated TVA Board committee. The ERC is comprised of the Enterprise Leadership Team ("ELT") and the Chief Risk Officer ("CRO") who acts as Chair. ERC members may invite additional attendees to meetings as non-voting participants. The ERC has also established subordinate committees, consisting of business unit leaders, to assist in the oversight of fuel and power procurement, DER programs and products, and general risk management. 
 
 TVA has a designated Enterprise Risk Management ("ERM") organization within its Financial Services organization responsible for (1) establishing enterprise risk management policies and guidelines, (2) developing an enterprise risk profile aligned with TVA's strategic objectives, (3) performing annual risk assessments across all TVA business units, (4) monitoring and reporting on identified enterprise risks and emerging risks, (5) facilitating enterprise risk discussions with the risk subject matter experts across the organization and at the ERC and TVA Board levels, and (6) developing and improving TVA's risk awareness culture. TVA has cataloged major short-term and long-term enterprise level risks across the organization. A discussion of significant risks is presented in Item 1A, Risk Factors. 
 
 Commodity Price Risk 
 
 TVA is exposed to effects of market fluctuations in the price of commodities that are critical to its operations, including electricity, coal, and natural gas. The magnitude of exposure to these risks is influenced by many factors including contract terms and market liquidity. TVA's commodity price risk is substantially mitigated by its cost-based rates, including its total fuel cost adjustment, and long-term fixed price commodity contracts. 
 
 TVA manages risk with commodity contracts for both coal and natural gas that require physical delivery of the contracted quantity. A hypothetical 10 percent decline in the market price of natural gas on September 30, 2021 and 2020, would have resulted in decreases of approximately $124 million and $84 million, respectively, in the fair value of TVA's natural gas derivative instruments at these dates. TVA discontinued derivative accounting for forward coal contracts during the fourth quarter of 2020; therefore, a hypothetical 10 percent decline in the market price of coal is not presented. 
 
 In 2014, TVA suspended its Financial Trading Program. In anticipation of lifting the suspension in 2022, the TVA Board, in November 2021, approved the elimination of the Value at Risk aggregate transaction limit for the Financial Hedging Program (formerly, the Financial Trading Program) and authorized the use of tolerances and measures that will be reviewed annually by the TVA Board. The tolerances will address counterparty exposure, liquidity risk, and reduction in fuel cost volatility. In addition, the TVA Board approved certain administrative changes to the Financial Hedging Program. 
 
 Investment Price Risk 
 
 TVA's investment price risk relates primarily to investments in TVA's NDT, ART, pension fund, SERP, and DCP. 
 
 Nuclear Decommissioning Trust. The NDT is generally designed to achieve a return in line with overall equity and debt market performance. The assets of the trust are invested in debt and equity securities, private partnerships, and certain derivative instruments including forwards, futures, options, and swaps, and through these investments the trust has exposure to 
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 U.S. equities, international equities, real estate investment trusts, natural resource equities, high-yield debt, domestic debt, U.S. TIPS, treasuries, private real assets, private equity, and private credit strategies. At September 30, 2021 and 2020, an immediate 10 percent decrease in the price of the investments in the trust would have reduced the value of the trust by $281 million and $223 million, respectively. 
 
 Asset Retirement Trust. The ART is presently invested to achieve a return in line with overall equity and debt market performance. The assets of the trust are invested in debt and equity securities, private partnerships, and certain derivative instruments including options, and through these investments the trust has exposure to U.S. equities, real estate investment trusts, natural resource equities, high-yield debt, domestic debt, TIPS, treasuries, private real assets, private equity, and private credit strategies. At September 30, 2021 and 2020, an immediate 10 percent decrease in the price of the investments in the trust would have reduced the value of the trust by $113 million and $87 million, respectively. 
 
 Qualified Pension Plan . In August 2021, a new asset allocation plan was put in place to reduce risk and volatility in the TVARS investment portfolio. The TVARS asset allocation policy for qualified pension plan assets has targets of 55 percent growth assets, including defensive growth assets, 20 percent defensive assets, and 25 percent inflation-sensitive assets. Pursuant to the TVARS Rules and Regulations, any proposed changes in asset allocation that would change TVARS's assumed rate of investment return are subject to TVA's review and veto. 
 
 As set forth above, the qualified pension plan assets are invested across growth assets, defensive growth assets, defensive assets, and inflation-sensitive assets. The TVARS asset allocation policy includes permissible deviations from target allocations, and action can be taken, as appropriate, to rebalance the plan's assets consistent with the asset allocation policy. At September 30, 2021 and 2020, an immediate 10 percent decrease in the value of the net assets of the fund would have reduced the value of the fund by approximately $911 million and $796 million, respectively. 
 
 Supplemental Executive Retirement Plan . The SERP is a non-qualified defined benefit pension plan similar to those typically found in other companies in TVA's peer group and is provided to selected employees of TVA. TVA's SERP was created to recruit and retain key executives. The plan is designed to provide a competitive level of retirement benefits in excess of the limitations on contributions and benefits imposed by TVA's qualified defined benefit plan and Internal Revenue Code Section 415 limits on qualified retirement plans. The SERP currently targets an asset allocation policy for its plan assets of 64 percent equity securities, which includes U.S. and non-U.S. equities, and 36 percent fixed income securities. The SERP plan assets are presently invested to achieve a return in line with overall equity and debt market performance. At September 30, 2021 and 2020, an immediate 10 percent decrease in the value of the SERP investments would have reduced the value of the investments by $8 million and $7 million, respectively. 
 
 Deferred Compensation Plan. The DCP is designed to provide participants with the ability to defer compensation to future periods. The plan assists in the recruitment of top executive talent for TVA. As in other corporations, deferred compensation can be an integral part of a total compensation package. Assets currently include deferral balances. The default return on investment of the accounts is interest calculated based on the composite rate of all marketable U.S. Treasury issues. Executives may alternatively choose to have their balances adjusted based on the return of certain mutual funds. At September 30, 2021 and 2020, an immediate 10 percent decrease in the value of the deferred compensation accounts would have reduced the value of the accounts by $2 million and $3 million, respectively. 
 
 Interest Rate Risk 
 
 TVA's interest rate risk is related primarily to its short-term investments, short-term debt, long-term debt, and interest rate derivatives. 
 
 Investments. At September 30, 2021, TVA had $499 million of cash and cash equivalents, and the average balance of cash and cash equivalents for 2021 was $657 million. The average interest rate that TVA received on its short-term investments during 2021 was only slightly higher than zero percent, and, therefore, interest income related to short-term investments was minimal. If the rates of interest that TVA received on its short-term investments during 2021 were exactly zero percent, TVA would have received a minimal amount less in interest from its short-term investments. At September 30, 2020, TVA had $500 million of cash and cash equivalents, and the average balance of cash and cash equivalents for 2020 was $637 million. The average interest rate that TVA received on its short-term investments during 2020 was less than one percent. If the rates that TVA received on its short-term investments during 2020 were zero percent, TVA would have received approximately $4 million less in interest from its short-term investments. In addition to affecting the amount of interest that TVA receives from its short-term investments, changes in interest rates could affect the value the investments in its pension plan, ART, NDT, SERP, and DCP. See Risk Management Activities — Investment Price Risk above. 
 
 Short-Term Debt . At September 30, 2021, TVA's short-term borrowings were $780 million, and the current maturities of long-term debt were $1.1 billion. Based on TVA's interest rate exposure at September 30, 2021, an immediate one percentage point increase in interest rates would have resulted in an increase of $19 million in TVA's short-term interest expense. At September 30, 2020, TVA's short-term borrowings were $57 million, and the current maturities of long-term debt were $1.8 billion. Based on TVA's interest rate exposure at September 30, 2020, an immediate one percentage point increase in interest rates would have resulted in an increase of $19 million in TVA's short-term interest expense. 
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 Long-Term Debt. At September 30, 2021 and 2020, the interest rates on all of TVA's outstanding long-term debt were fixed (or subject only to downward adjustment under certain conditions). Accordingly, an immediate one percentage point increase in interest rates would not have affected TVA's interest expense associated with its long-term debt. When TVA's long-term debt matures or is redeemed, however, TVA typically refinances debt in whole or in part by issuing additional debt. Accordingly, if interest rates are high when TVA issues this additional debt, TVA's cash flows, results of operations, and financial condition may be adversely affected. This risk is somewhat mitigated by the fact that TVA's debt portfolio is diversified in terms of maturities and has a long average life. At September 30, 2021 and 2020, the average life of TVA's debt portfolio was 15.69 years and 15.3 years, respectively. At September 30, 2021 and 2020, the average interest rate of TVA's debt portfolio was 4.51 percent and 4.56 percent, respectively. See Note 14 — Debt and Other Obligations — Debt Outstanding for a schedule of TVA's debt maturities. 
 
 Interest Rate Derivatives. Changes in interest rates also affect the mark-to-market ("MtM") valuation of TVA's interest rate derivatives. See Note 16 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivatives . TVA had four interest rate swaps outstanding at September 30, 2021 and September 30, 2020. Net unrealized gains and losses on these instruments are reflected on TVA's Consolidated Balance Sheets in a regulatory asset account, and realized gains and losses are reflected in earnings. Based on TVA's interest rate exposure at September 30, 2021 and 2020, an immediate one-half percentage point decrease in interest rates would have increased the interest rate swap liabilities by $260 million and $270 million, respectively. 
 
 London Interbank Offered Rate . TVA has four "fixed for floating" interest rate swaps related to outstanding Bonds, and receives periodic payments under these swaps based on the floating London Interbank Offered Rate ("LIBOR") benchmark rate. TVA may also have additional contracts that could be impacted. LIBOR rates will be phased out between the end of calendar year 2021 and June 2023. Various alternatives for LIBOR are being evaluated by market participants, with the Secured Overnight Financing Rate being the most widely-adopted alternative thus far. TVA may face risks related to the viability of an alternative benchmark over the remaining terms of its current contracts, or over the terms of any future contracts that rely on the benchmark rate. 
 
 Currency Exchange Rate Risk 
 
 Over the next several years, TVA plans to spend a significant amount of capital on clean air projects, capacity expansion, and other projects. A portion of this amount may be spent on contracts that are denominated in one or more foreign currencies. Additionally, TVA's two issues of Bonds denominated in British pounds sterling are hedged by currency swap agreements. The value of the U.S. dollar compared with other currencies has fluctuated widely in recent years, including fluctuations in the U.S. dollar to British pound sterling exchange rate primarily driven by the "BREXIT" vote for the United Kingdom to leave the European Union. If not effectively managed, foreign currency exposure could negatively impact TVA's counterparty risk, cash flows, results of operations, and financial condition.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Tennessee Valley Authority 10-K

Item 7. Management’s Discussion and Analysis
