Tennessee Valley Authority 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TENNESSEE VALLEY AUTHORITY CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended September 30 (in millions) 2021 2020 2019 Operating revenues Revenue from sales of electricity $ 10,357 $ 10,104 $ 11,159 Other revenue 146 145 159 Total operating revenues 10,503 10,249 11,318 Operating expenses Fuel 1,737 1,584 1,896 Purchased power 984 880 1,007 Operating and maintenance 2,890 2,720 3,090 Depreciation and amortization 1,533 1,826 1,973 Tax equivalents 514 528 541 Total operating expenses 7,658 7,538 8,507 Operating income 2,845 2,711 2,811 Other income (expense), net 13 36 62 Other net periodic benefit cost 258 253 258 Interest expense Interest expense 1,088 1,142 1,198 Net income (loss) $ 1,512 $ 1,352 $ 1,417 The accompanying notes are an integral part of these consolidated financial statements. 95 Table of Contents TENNESSEE VALLEY AUTHORITY CONSOLIDATED BALANCE SHEETS At September 30 (in millions) ASSETS 2021 2020 Current assets Cash and cash equivalents $ 499 $ 500 Accounts receivable, net 1,566 1,529 Inventories, net 950 1,003 Regulatory assets 196 130 Other current assets 287 84 Total current assets 3,498 3,246 Property, plant, and equipment Completed plant 66,411 64,970 Less accumulated depreciation ( 34,663 ) ( 33,550 ) Net completed plant 31,748 31,420 Construction in progress 2,458 2,139 Nuclear fuel 1,566 1,504 Finance leases 692 516 Total property, plant, and equipment, net 36,464 35,579 Investment funds 4,053 3,198 Regulatory and other long-term assets Regulatory assets 7,956 10,245 Operating lease assets, net of amortization 165 232 Other long-term assets 320 325 Total regulatory and other long-term assets 8,441 10,802 Total assets $ 52,456 $ 52,825 The accompanying notes are an integral part of these consolidated financial statements. 96 Table of Contents TENNESSEE VALLEY AUTHORITY CONSOLIDATED BALANCE SHEETS At September 30 (in millions) LIABILITIES AND PROPRIETARY CAPITAL 2021 2020 Current liabilities Accounts payable and accrued liabilities $ 2,215 $ 1,844 Accrued interest 282 298 Asset retirement obligations 266 345 Current portion of leaseback obligations 25 198 Regulatory liabilities 340 141 Short-term debt, net 780 57 Current maturities of power bonds 1,028 1,787 Current maturities of long-term debt of variable interest entities 43 41 Total current liabilities 4,979 4,711 Other liabilities Post-retirement and post-employment benefit obligations 5,045 6,617 Asset retirement obligations 6,736 6,440 Finance lease liabilities 687 525 Other long-term liabilities 2,041 2,548 Leaseback obligations — 25 Regulatory liabilities 40 23 Total other liabilities 14,549 16,178 Long-term debt, net Long-term power bonds, net 17,457 17,956 Long-term debt of variable interest entities, net 1,006 1,048 Total long-term debt, net 18,463 19,004 Total liabilities 37,991 39,893 Commitments and contingencies (Note 23) Proprietary capital Power program appropriation investment 258 258 Power program retained earnings 13,689 12,177 Total power program proprietary capital 13,947 12,435 Nonpower programs appropriation investment, net 540 548 Accumulated other comprehensive income (loss) ( 22 ) ( 51 ) Total proprietary capital 14,465 12,932 Total liabilities and proprietary capital $ 52,456 $ 52,825 The accompanying notes are an integral part of these consolidated financial statements. 97 Table of Contents TENNESSEE VALLEY AUTHORITY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the years ended September 30 (in millions) 2021 2020 2019 Net income (loss) $ 1,512 $ 1,352 $ 1,417 Other comprehensive income (loss) Net unrealized gain (loss) on cash flow hedges 126 ( 1 ) ( 114 ) Net unrealized (gain) loss reclassified to earnings from cash flow hedges ( 97 ) ( 38 ) 45 Total other comprehensive income (loss) 29 ( 39 ) ( 69 ) Total comprehensive income (loss) $ 1,541 $ 1,313 $ 1,348 The accompanying notes are an integral part of these consolidated financial statements. 98 Table of Contents TENNESSEE VALLEY AUTHORITY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 30 (in millions) 2021 2020 2019 Cash flows from operating activities Net income (loss) $ 1,512 $ 1,352 $ 1,417 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization (1) 1,555 1,848 1,993 Amortization of nuclear fuel cost 383 388 379 Non-cash retirement benefit expense 333 324 314 Prepayment credits applied to revenue — — ( 10 ) Other regulatory amortization and deferrals ( 72 ) ( 21 ) 261 Changes in current assets and liabilities Accounts receivable, net ( 18 ) 259 ( 40 ) Inventories and other current assets, net 42 ( 12 ) ( 87 ) Accounts payable and accrued liabilities 178 ( 38 ) ( 155 ) Accrued interest ( 18 ) 1 ( 8 ) Pension contributions ( 306 ) ( 305 ) ( 307 ) Settlements of asset retirement obligations ( 242 ) ( 114 ) ( 89 ) Other, net ( 91 ) ( 46 ) 52 Net cash provided by operating activities 3,256 3,636 3,720 Cash flows from investing activities Construction expenditures ( 1,963 ) ( 1,643 ) ( 1,700 ) Nuclear fuel expenditures ( 354 ) ( 342 ) ( 474 ) Purchases of investments ( 50 ) ( 49 ) ( 48 ) Loans and other receivables Advances ( 7 ) ( 8 ) ( 10 ) Repayments 9 7 11 Other, net 27 20 ( 22 ) Net cash used in investing activities ( 2,338 ) ( 2,015 ) ( 2,243 ) Cash flows from financing activities Long-term debt Issues of power bonds 500 997 — Redemptions and repurchases of power bonds ( 1,860 ) ( 1,427 ) ( 1,035 ) Payments on debt of variable interest entities ( 41 ) ( 39 ) ( 38 ) Redemptions of notes payable — ( 23 ) ( 46 ) Short-term debt issues (redemptions), net 723 ( 865 ) ( 294 ) Payments on leases and leasebacks ( 250 ) ( 55 ) ( 43 ) Financing costs, net ( 2 ) ( 4 ) — Other, net 9 ( 6 ) ( 21 ) Net cash (used in) provided by financing activities ( 921 ) ( 1,422 ) ( 1,477 ) Net change in cash, cash equivalents, and restricted cash ( 3 ) 199 — Cash, cash equivalents, and restricted cash at beginning of year 521 322 322 Cash, cash equivalents, and restricted cash at end of year $ 518 $ 521 $ 322 Note (1) Including amortization of debt issuance costs and premiums/discounts. The accompanying notes are an integral part of these consolidated financial statements. 99 Table of Contents TENNESSEE VALLEY AUTHORITY CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL For the years ended September 30 (in millions) Power Program Appropriation Investment Power Program Retained Earnings Nonpower Programs Appropriation Investment, Net Accumulated Other Comprehensive Income (Loss) Total Balance at September 30, 2018 $ 258 $ 9,404 $ 564 $ 57 $ 10,283 Net income (loss) — 1,425 ( 8 ) — 1,417 Total other comprehensive income (loss) — — — ( 69 ) ( 69 ) Return on power program appropriation investment — ( 6 ) — — ( 6 ) Balance at September 30, 2019 $ 258 $ 10,823 $ 556 $ ( 12 ) $ 11,625 Net income (loss) — 1,360 ( 8 ) — 1,352 Total other comprehensive income (loss) — — — ( 39 ) ( 39 ) Return on power program appropriation investment — ( 6 ) — — ( 6 ) Balance at September 30, 2020 $ 258 $ 12,177 $ 548 $ ( 51 ) $ 12,932 Net income (loss) — 1,520 ( 8 ) — 1,512 Total other comprehensive income (loss) — — — 29 29 Return on power program appropriation investment — ( 4 ) — — ( 4 ) Implementation of new accounting standard (1) — ( 4 ) — — ( 4 ) Balance at September 30, 2021 $ 258 $ 13,689 $ 540 $ ( 22 ) $ 14,465 Note (1) See Note 2 — Impact of New Accounting Standards and Interpretations. The accompanying notes are an integral part of these consolidated financial statements. 100 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions except where noted) Note Page No. 1 Summary of Significant Accounting Policies 101 2 Impact of New Accounting Standards and Interpretations 107 3 Accounts Receivable, Net 108 4 Inventories, Net 109 5 Other Current Assets 109 6 Net Completed Plant 109 7 Plant Closures 110 8 Leases 110 9 Other Long-Term Assets 113 10 Regulatory Assets and Liabilities 114 11 Variable Interest Entities 116 12 Other Long-Term Liabilities 119 13 Asset Retirement Obligations 120 14 Debt and Other Obligations 121 15 Accumulated Other Comprehensive Income (Loss) 127 16 Risk Management Activities and Derivative Transactions 127 17 Fair Value Measurements 132 18 Revenue 136 19 Proprietary Capital 140 20 Other Income (Expense), Net 141 21 Supplemental Cash Flow Information 141 22 Benefit Plans 141 23 Commitments and Contingencies 155 24 Related Parties 160 1. Summary of Significant Accounting Policies General The Tennessee Valley Authority ("TVA") is a corporate agency and instrumentality of the United States ("U.S.") that was created in 1933 by federal legislation in response to a proposal by President Franklin D. Roosevelt. TVA was created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA's service area in the southeastern U.S., and sell the electricity generated at the facilities TVA operates. Today, TVA operates the nation's largest public power system and supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of northern Georgia, western North Carolina, and southwestern Virginia to a population of approximately 10 million people. TVA also manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity. Consistent with these primary purposes, TVA also manages the river system and public lands to provide recreational opportunities, adequate water supply, improved water quality, cultural and natural resource protection, and economic development. The power program has historically been separate and distinct from the stewardship programs. It is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, or other evidences of indebtedness (collectively, "Bonds"). Although TVA does not currently receive congressional appropriations, it is required to make annual payments to the United States Department of the Treasury ("U.S. Treasury") as a return on the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment"). In the 1998 Energy and Water Development Appropriations Act, Congress directed TVA to fund essential stewardship activities related to its management of the Tennessee River system and nonpower or stewardship properties with power revenues in the event that there were insufficient appropriations or other available funds to pay for such activities in any fiscal year. Congress has not 101 Table of Contents provided any appropriations to TVA to fund such activities since 1999. Consequently, during 2000, TVA began paying for essential stewardship activities primarily with power revenues, with the remainder funded with user fees and other forms of revenues derived in connection with those activities. The activities related to stewardship properties do not meet the criteria of an operating segment under accounting principles generally accepted in the United States of America ("GAAP"). Accordingly, these assets and properties are included as part of the power program, TVA's only operating segment. Power rates are established by the TVA Board of Directors (the "TVA Board") as authorized by the Tennessee Valley Authority Act of 1933, as amended (the "TVA Act"). The TVA Act requires TVA to charge rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; payments to states and counties in lieu of taxes ("tax equivalents"); debt service on outstanding indebtedness; payments to the U.S. Treasury in repayment of and as a return on the 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 with TVA's power business. TVA fulfilled its requirement to repay $ 1.0 billion of the Power Program Appropriation Investment with the 2014 payment; therefore, this item is no longer a component of rate setting. In setting TVA's rates, 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 shall be sold at rates as low as are feasible. Rates set by the TVA Board are not subject to review or approval by any state or other federal regulatory body. Fiscal Year TVA's fiscal year ends September 30. Years (2021, 2020, etc.) refer to TVA's fiscal years unless they are preceded by "CY," in which case the references are to calendar years. Cost-Based Regulation Since the TVA Board is authorized by the TVA Act to set rates for power sold to its customers, TVA is self-regulated. Additionally, TVA's regulated rates are designed to recover its costs. Based on current projections, TVA believes that rates, set at levels that will recover TVA's costs, can be charged and collected. As a result of these factors, TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. TVA assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, potential legislation, and changes in technology. Based on these assessments, TVA believes the existing regulatory assets are probable of recovery. This determination reflects the current regulatory and political environment and is subject to change in the future. If future recovery of regulatory assets ceases to be probable, or TVA is no longer considered to be a regulated entity, then costs would be required to be written off. All regulatory asset write offs would be required to be recognized in earnings in the period in which future recovery ceases to be probable. Basis of Presentation The accompanying consolidated financial statements, which have been prepared in accordance with GAAP, include the accounts of TVA and variable interest entities ("VIEs") of which TVA is the primary beneficiary. See Note 11 — Variable Interest Entities . Intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the consolidated financial statements. Although the consolidated financial statements are prepared in conformity with GAAP, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses, including impacts from the Coronavirus Disease 2019 ("COVID-19") pandemic, reported during the reporting period. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are considered 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 would materially impact TVA's financial condition, results of operations, or cash flows. Cash, Cash Equivalents, and Restricted Cash Cash includes cash on hand, non-interest bearing cash, and deposit accounts. All highly liquid investments with original maturities of three months or less are considered cash equivalents. Cash and cash equivalents that are restricted, as to withdrawal or use under the terms of certain contractual agreements, are recorded in Other long-term assets on the Consolidated Balance Sheets. Restricted cash and cash equivalents include cash held in trusts that are currently restricted for TVA economic development loans and for certain TVA environmental programs in accordance with agreements related to 102 Table of Contents compliance with certain environmental regulations. See Note 23 — Commitments and Contingencies — Legal Proceedings — Environmental Agreements . The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Consolidated Balance Sheets and Consolidated Statements of Cash Flows: Cash, Cash Equivalents, and Restricted Cash At September 30 2021 2020 Cash and cash equivalents $ 499 $ 500 Restricted cash and cash equivalents included in Other long-term assets 19 21 Total cash, cash equivalents, and restricted cash $ 518 $ 521 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. Allowance for Uncollectible Accounts As described in Note 2 — Impact of New Accounting Standards and Interpretations , TVA adopted Financial Instruments - Credit Losses on October 1, 2020, using a modified retrospective method through a cumulative-effect adjustment to retained earnings. The standard, Current Expected Credit Losses ("CECL"), requires TVA to recognize an allowance that reflects the current estimate for credit losses expected to be incurred over the life of the financial assets based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amounts. TVA has reviewed the current portfolio of financial receivables and developed a methodology to reasonably measure the estimate of credit losses for each major financial receivable type. The appropriateness of the allowance is evaluated at the end of each reporting period. TVA continues to monitor the impact of the COVID-19 pandemic on accounts and loans receivable balances to evaluate the allowance for uncollectible accounts. To determine the allowance for trade receivables, TVA considers historical experience and other currently available information, including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements by the due date. TVA's corporate credit department also performs an assessment of the financial condition of customers and the credit quality of the receivables. In addition, TVA reviews other reasonable and supportable forecasts to determine if the allowance for uncollectible amounts should be further adjusted in accordance with the accounting guidance for CECL. To determine the allowance for loans receivables, TVA aggregates loans into the appropriate pools based on the existence of similar risk characteristics such as collateral types and internal assessed credit risks. In situations where a loan exhibits unique risk characteristics and is no longer expected to experience similar risks to the rest of its pool, the loan will be evaluated separately. TVA derives an annual loss rate based on historical loss and then adjusts the rate to reflect TVA's consideration of available information on current conditions and reasonable and supportable future forecasts. This information may include economic and business conditions, default trends, and other internal and external factors. For periods beyond the reasonable and supportable forecast period, TVA uses the current calculated long-term average historical loss rate for the remaining life of the loan portfolio. The allowance for uncollectible accounts was less than $ 1 million at both September 30, 2021 and 2020, for trade accounts receivable. Additionally, loans receivable of $ 99 million and $ 105 million at September 30, 2021 and 2020, respectively, are included in Accounts receivable, net and Other long-term assets, for the current and long-term portions, respectively. Loans receivables are reported net of allowances for uncollectible accounts of $ 4 million and less than $ 1 million at September 30, 2021 and 2020, respectively. The increase in allowances for uncollectible accounts is due to the adoption of CECL. See Note 2 — Impact of New Accounting Standards and Interpretations. Revenues TVA recognizes revenue from contracts with customers to depict the transfer of goods or services to customers in an amount to which the entity expects to be entitled in exchange for those goods or services. For the generation and transmission of electricity, this is generally at the time the power is delivered to a metered customer delivery point for the customer's consumption or distribution. As a result, revenues from power sales are recorded as electricity is delivered to customers. In addition to power sales invoiced and recorded during the month, TVA accrues estimated unbilled revenues for power sales provided to five customers whose billing date occurs prior to the end of the month. Exchange power sales are presented in the accompanying Consolidated Statements of Operations as a component of sales of electricity. Exchange power sales are sales of excess power after meeting TVA native load and directly served requirements. Native load refers to the customers on whose behalf a company, by statute, franchise, regulatory requirement, or contract, has undertaken an obligation to serve. TVA engages in other arrangements in addition to power sales. Certain other revenue from activities related to TVA's overall mission is recorded in Other revenue. Revenues that are not related to the overall mission are recorded in Other income (expense), net. 103 Table of Contents Inventories Certain Fuel, Materials, and Supplies . Materials and supplies inventories are valued using an average unit cost method. A new average cost is computed after each inventory purchase transaction, and inventory issuances are priced at the latest moving weighted average unit cost. Coal, fuel oil, and natural gas inventories are valued using an average cost method. A new weighted average cost is computed monthly, and monthly issues are priced accordingly. Renewable Energy Credits. TVA accounts for Renewable Energy Certificates ("RECs") using the specific identification cost method. RECs that are acquired through power purchases are recorded as inventory and charged to purchased power expense when the RECs are subsequently used or sold. TVA assigns a value to the RECs at the inception of the power purchase arrangement using a relative fair value approach. RECs created through TVA-owned asset generation are recorded at zero cost. Emission Allowances . TVA has emission allowances for sulfur dioxide ("SO 2 ") and nitrogen oxide ("NO x ") which are accounted for as inventory. The cost of specific allowances used each month is charged to operating expense based on tons of SO 2 and NO x emitted during the respective compliance periods. Allowances granted to TVA by the Environmental Protection Agency ("EPA") are recorded at zero cost. Allowance for Inventory Obsolescence . TVA reviews materials and supplies inventories by category and usage on a periodic basis. Each category is assigned a probability of becoming obsolete based on the type of material and historical usage data. TVA has a fleet-wide inventory management policy for each generation type. Based on the estimated value of the inventory, TVA adjusts its allowance for inventory obsolescence. Property, Plant, and Equipment, and Depreciation Property, Plant, and Equipment. Additions to plant are recorded at cost, which includes direct and indirect costs. The cost of current repairs and minor replacements is charged to operating expense. Nuclear fuel, which is included in Property, plant, and equipment, is valued using the average cost method for raw materials and the specific identification method for nuclear fuel in a reactor. Amortization of nuclear fuel in a reactor is calculated on a units-of-production basis and is included in fuel expense. When property, plant, and equipment is retired, accumulated depreciation is charged for the original cost of the assets. Gains or losses are only recognized upon the sale of land or an entire operating unit. Depreciation. TVA accounts for depreciation of its properties using the composite depreciation convention of accounting. Under the composite method, assets with similar economic characteristics are grouped and depreciated as one asset. Depreciation is generally computed on a straight-line basis over the estimated service lives of the various classes of assets. The estimation of asset useful lives requires management judgment, supported by external depreciation studies of historical asset retirement experience. Depreciation rates are determined based on external depreciation studies that are updated approximately every five years. During the first quarter of 2022, TVA implemented a new depreciation study related to its completed plant. The new 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. Implementation of the 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. Depreciation expense for the years ended September 30, 2021, 2020, and 2019 was $ 1.4 billion, $ 1.6 billion, and $ 1.8 billion, respectively. Depreciation expense expressed as a percentage of the average annual depreciable completed plant was 2.28 percent for 2021, 2.74 percent for 2020, and 3.09 percent for 2019. Average depreciation rates by asset class are as follows: Property, Plant, and Equipment Depreciation Rates At September 30 (percent) 2021 2020 2019 Asset Class Nuclear 2.38 2.38 2.38 Coal-fired (1) 1.95 3.62 4.96 Hydroelectric 1.60 1.60 1.61 Gas and oil-fired 2.98 3.04 3.00 Transmission 1.34 1.34 1.34 Other 7.12 7.26 7.16 Note (1) The rates include the acceleration of depreciation related to retiring certain coal-fired units. 104 Table of Contents Coal-Fired . As a result of TVA's decision to idle or retire certain units since the previous depreciation study, TVA recognized $ 136 million, $ 387 million, and $ 566 million in accelerated depreciation expense related to the units during the years ended September 30, 2021, 2020, and 2019, respectively. Accelerated depreciation is based on the remaining useful life of the asset at the time the decision is made to idle or retire a unit. Reacquired Rights . Property, plant, and equipment includes intangible reacquired rights, net of amortization, of $ 184 million and $ 192 million as of September 30, 2021 and 2020, respectively, related to the purchase of residual interests from lease/leaseback agreements of certain combustion turbine units ("CTs"). Reacquired rights are amortized over the estimated useful life of the underlying CTs. Amortization expense was $ 8 million for all years 2021, 2020, and 2019. Software Costs. TVA capitalizes certain costs incurred in connection with developing or obtaining internal-use software. Capitalized software costs are included in Property, plant, and equipment on the Consolidated Balance Sheets and are generally amortized over seven years . At September 30, 2021 and 2020, unamortized computer software costs totaled $ 27 million and $ 54 million, respectively. Amortization expense related to capitalized computer software costs was $ 38 million, $ 42 million, and $ 38 million for 2021, 2020, and 2019, respectively. Software costs that do not meet capitalization criteria are expensed as incurred. Impairment of Assets. TVA evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. For long-lived assets, TVA bases its evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, regulatory approval and ability to set rates at levels that allow for recoverability of the assets, and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of an asset may not be recoverable, TVA determines whether an impairment has occurred based on an estimate of undiscounted cash flows attributable to the asset as compared with the carrying value of the asset. If an impairment has occurred, the amount of the impairment recognized is measured as the excess of the asset's carrying value over its fair value. Additionally, TVA regularly evaluates construction projects. If the project is canceled or deemed to have no future economic benefit, the project is written off as an asset impairment or, upon TVA Board approval, reclassified as a regulatory asset. See Note 7 — Plant Closures . Leases TVA recognizes a lease asset and lease liability for leases with terms of greater than 12 months. Lease assets represent TVA's right to use an underlying asset for the lease term, and lease liabilities represent TVA's obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. TVA has certain lease agreements that include variable lease payments that are based on energy production levels. These variable lease payments are not included in the measurement of the lease assets or lease liabilities but are recognized in the period in which the expenses are incurred. While not specifically structured as leases, certain power purchase agreements ("PPAs") are deemed to contain a lease of the underlying generating units when the terms convey the right to control the use of the assets. Amounts recorded for these leases are generally based on the amount of the scheduled capacity payments due over the remaining terms of the PPAs, the terms of which vary. The total lease obligations included in Accounts payable and accrued liabilities and lease liabilities related to these agreements were $ 464 million and $ 143 million for finance and operating leases, respectively, at September 30, 2021. TVA has agreements with lease and non-lease components and has elected to account for the components separately. Consideration is allocated to lease and non-lease components generally based on relative standalone selling prices. TVA has lease agreements which include options for renewal and early termination. The intent to renew a lease varies depending on the lease type and asset. Renewal options that are reasonably certain to be exercised are included in the lease measurements. The decision to terminate a lease early is dependent on various economic factors. No termination options have been included in TVA's lease measurements. Leases with an initial term of 12 months or less, which do not include an option to extend the initial term of the lease to greater than 12 months that TVA is reasonably certain to exercise, are not recorded on the Consolidated Balance Sheets at September 30, 2021. Operating leases are recognized on a straight-line basis over the term of the lease agreement. Rent expense associated with short-term leases and variable leases is recorded in Operating and maintenance expense, Fuel expense, or Purchased power expense on the Consolidated Statements of Operations. Expenses associated with finance leases result in the separate presentation of interest expense on the lease liability and amortization expense of the related lease asset on the Consolidated Statements of Operations. 105 Table of Contents Decommissioning Costs TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets. These obligations relate to fossil fuel-fired generating plants, nuclear generating plants, hydroelectric generating plants/dams, transmission structures, and other property-related assets. Activities involved with retiring these assets could include decontamination and demolition of structures, removal and disposal of wastes, and site restoration. Revisions to the estimates of asset retirement obligations ("AROs") are made whenever factors indicate that the timing or amounts of estimated cash flows have changed materially. 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. Down-blend Offering for Tritium TVA, the U.S. Department of Energy ("DOE"), and certain nuclear fuel contractors have entered into agreements, referred to as the Down-blend Offering for Tritium ("DBOT"), that provide for the production, processing, and storage of low-enriched uranium that is to be made using surplus DOE highly enriched uranium and other uranium. Low-enriched uranium can be fabricated into fuel for use in a nuclear power plant. Production of the low-enriched uranium began in 2019 and is contracted to continue through October 2027. Beginning October 2027, contract activity will consist of storage and flag management. Flag management ensures that the uranium is of U.S. origin, free from foreign obligations, and unencumbered by policy restrictions, so that it can be used in connection with the production of tritium. Under the terms of the interagency agreement between the DOE and TVA, the DOE will reimburse TVA for a portion of the costs of converting the highly enriched uranium to low-enriched uranium. Since 2019, TVA has received $ 137 million in reimbursements from the DOE. At September 30, 2021, TVA recorded $ 11 million in Accounts receivable, net related to this agreement. Investment Funds Investment funds consist primarily of trust funds designated to fund decommissioning requirements (see Note 23 — Commitments and Contingencies — Decommissioning Costs ), the Supplemental Executive Retirement Plan ("SERP") (see Note 22 — Benefit Plans — Overview of Plans and Benefits — Supplemental Executive Retirement Plan ), and the Deferred Compensation Plan ("DCP"). The Nuclear Decommissioning Trust ("NDT") holds funds primarily for the ultimate decommissioning of TVA's nuclear power plants. The Asset Retirement Trust ("ART") holds funds primarily for the costs related to the future closure and retirement of TVA's other long-lived assets. The NDT, ART, SERP, and DCP funds are invested in portfolios of securities generally designed to achieve a return in line with overall equity and debt market performance. The NDT, ART, SERP, and DCP funds are all classified as trading. Insurance Although TVA uses private companies to administer its healthcare plans for eligible active and retired employees not covered by Medicare, TVA does not purchase health insurance. Third-party actuarial specialists assist TVA in determining certain liabilities for self-insured claims. TVA recovers the costs of claims through power rates and through adjustments to the participants' contributions to their benefit plans. These liabilities are included in Other liabilities on the Consolidated Balance Sheets. The Federal Employees' Compensation Act ("FECA") governs liability to employees for service-connected injuries. TVA purchases excess workers' compensation insurance above a self-insured retention. In addition to excess workers' compensation insurance, TVA purchases property and liability insurance for nuclear assets and operations. See Note 23 — Commitments and Contingencies — Nuclear Insurance . TVA also purchases liability insurance and property insurance for certain conventional (non-nuclear) assets, and other insurance policies when commercially feasible. The insurance policies are subject to the terms and conditions of the specific policy, including deductibles or self-insured retentions. To the extent insurance would not provide either a partial or total recovery of the costs associated with a loss, TVA would have to recover any such costs through other means, including through power rates. Research and Development Costs Research and development costs are expensed when incurred. TVA's research programs include those related to power delivery technologies, emerging technologies (clean energy, renewables, distributed resources, and energy efficiency), technologies related to generation (fossil fuel, nuclear, and hydroelectric), and environmental technologies. Tax Equivalents TVA is not subject to federal income taxation. In addition, neither TVA nor its property, franchises, or income is subject to taxation by states or their subdivisions. The TVA Act requires TVA to make payments to states and counties in which TVA 106 Table of Contents conducts its power operations and in which TVA has acquired power properties previously subject to state and local taxation. The total amount of these payments is five percent of gross revenues from sales of power during the preceding year, excluding sales or deliveries to other federal agencies and off-system sales with other utilities, with a provision for minimum payments under certain circumstances. TVA calculates tax equivalent expense by subtracting the prior year fuel cost-related tax equivalent regulatory asset or liability from the payments made to the states and counties during the current year and adding back the current year fuel cost-related tax equivalent regulatory asset or liability. Fuel cost-related tax equivalent expense is recognized in the same accounting period in which the fuel cost-related revenue is recognized. Maintenance Costs TVA records maintenance costs and repairs related to its property, plant, and equipment on the Consolidated Statements of Operations as they are incurred except for the recording of certain regulatory assets for retirement and removal costs. 2. Impact of New Accounting Standards and Interpretations The following are accounting standard updates issued by the Financial Accounting Standards Board ("FASB") that TVA adopted during 2021: Financial Instruments - Credit Losses Description This guidance eliminates the probable initial recognition threshold in current GAAP and, instead, requires an allowance to be recorded for all expected credit losses for certain financial assets that are not measured at fair value. The allowance for credit losses is based on historical information, current conditions, and reasonable and supportable forecasts. The new standard also makes revisions to the other than temporary impairment model for available-for-sale debt securities. Effective Date for TVA October 1, 2020 Effect on the Financial Statements or Other Significant Matters TVA adopted this standard on a modified retrospective method through a cumulative-effect adjustment to retained earnings on October 1, 2020. TVA recorded an initial transition adjustment of $ 4 million to retained earnings. The adoption of this standard did not materially impact TVA's financial condition, results of operations, or cash flows. Fair Value Measurement Disclosure Description This guidance changes certain disclosure requirements for fair value measurements. It removes certain disclosure requirements, such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of the transfers between levels; and the valuation processes for Level 3 fair value measurements. Some disclosure requirements are added, such as the change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Effective Date for TVA October 1, 2020 Effect on the Financial Statements or Other Significant Matters Adoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows. 107 Table of Contents The following accounting standards have been issued but as of September 30, 2021, were not effective and had not been adopted by TVA: Reference Rate Reform Description This guidance provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rates. Effective Date for TVA The new standard is effective for adoption at any time between March 12, 2020, and December 31, 2022. Effect on the Financial Statements or Other Significant Matters TVA continues to review this standard and evaluate the impact of using an alternative reference rate instead of LIBOR in its interest rate swap contracts. TVA does not expect the adoption of this standard to have a material impact on its financial condition, results of operations, or cash flows. Lessor-Certain Leases with Variable Lease Payments Description This guidance amends the lessor lease classification for leases that have variable lease payments that are not based on an index or rate. If the lease meets the criteria for classification as either (1) a sale-type or (2) direct finance lease, and application of the lease guidance would result in recognition of a day-one selling loss, then the lease should be classified as an operating lease. There are two transition methods provided by the guidance for entities that have adopted the standard: • Retrospective application to leases that commenced or were modified after the beginning of the period in which the standard was adopted, or • Prospective application to leases that commence or are modified subsequent to the date that amendments in the guidance are first applied. Effective Date for TVA This new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2022. Early adoption is permitted, and TVA adopted this standard on October 1, 2021, on a prospective basis. Effect on the Financial Statements or Other Significant Matters Adoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows. 3. Accounts Receivable, Net Accounts receivable primarily consist of amounts due from customers for power sales. The table below summarizes the types and amounts of TVA's accounts receivable: Accounts Receivable, Net At September 30 2021 2020 Power receivables $ 1,480 $ 1,401 Other receivables 86 128 Accounts receivable, net (1) $ 1,566 $ 1,529 Note (1) Allowance for uncollectible accounts was less than $ 1 million at September 30, 2021 and 2020, and therefore is not represented in the table above. The allowance at September 30, 2021 includes the impact from adopting CECL on October 1, 2020. In response to the COVID-19 pandemic, the TVA Board approved the Public Power Support and Stabilization program in 2020. Through this program, TVA offered up to $ 1.0 billion of credit support to local power company customers ("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 on 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. 108 Table of Contents 4. Inventories, Net The table below summarizes the types and amounts of TVA's inventories: Inventories, Net At September 30 2021 2020 Materials and supplies inventory $ 775 $ 770 Fuel inventory 198 253 Renewable energy certificates inventory, net 12 15 Allowance for inventory obsolescence ( 35 ) ( 35 ) Inventories, net $ 950 $ 1,003 5. Other Current Assets Other current assets consisted of the following: Other Current Assets At September 30 2021 2020 Commodity contract derivative assets $ 210 $ 26 Other 77 58 Other current assets $ 287 $ 84 Commodity Contract Derivative Assets. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity. See Note 16 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives for a discussion of TVA's commodity contract derivatives. 6. Net Completed Plant Net completed plant consisted of the following: Net Completed Plant At September 30 2021 2020 Cost Accumulated Depreciation Net Cost Accumulated Depreciation Net Coal-fired (1)(2) $ 19,319 $ 14,357 $ 4,962 $ 18,613 $ 13,944 $ 4,669 Gas and oil-fired 6,076 1,824 4,252 6,010 1,696 4,314 Nuclear 26,024 12,632 13,392 25,741 12,141 13,600 Transmission 8,597 3,215 5,382 8,283 3,140 5,143 Hydroelectric 3,525 1,135 2,390 3,410 1,090 2,320 Other electrical plant 1,940 1,101 839 1,981 1,146 835 Intangible software 3 2 1 3 2 1 Multipurpose dams 900 388 512 900 381 519 Other stewardship 27 9 18 29 10 19 Total $ 66,411 $ 34,663 $ 31,748 $ 64,970 $ 33,550 $ 31,420 Notes (1) TVA recognized accelerated depreciation as a result of the decision to idle or retire certain units. See Note 7 — Plant Closures . (2) In 2020, TVA recorded approximately $ 1.1 billion in upward revisions to asset retirement costs for coal-fired assets. See Note 13 — Asset Retirement Obligations . 109 Table of Contents 7. Plant Closures Background TVA must continuously evaluate all generating assets to ensure an optimal energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. Based on results of assessments presented to the TVA Board in 2019, the retirement of Paradise Fossil Plant ("Paradise") Unit 3 by December 2020 and Bull Run Fossil Plant ("Bull Run") by December 2023 was approved. Subsequent to the TVA Board approval, TVA determined that Paradise would not be restarted after January 2020 due to the plant's material condition. Paradise Unit 3 was taken offline on February 1, 2020, effectively retiring the plant. In addition, TVA is evaluating the impact of retiring the balance of the coal-fired fleet by 2035, and that evaluation includes environmental review, public input, and TVA Board approval. Financial Impact As a result of TVA's decision to accelerate the retirements of Paradise and Bull Run, certain construction projects at these locations were identified as probable of abandonment or were no longer expected to be in service for greater than one year prior to the plants' retirement dates. The write-off of these projects resulted in $ 4 million , $ 11 million , and $ 151 million of Operating and maintenance expense during the years ended September 30, 2021, 2020, and 2019, respectively. TVA also recognized losses of $ 2 million and $ 19 million in Operating and maintenance expense related to additional materials and supplies inventory reserves and write-offs identified at Paradise during the years ended September 30, 2020 and 2019, respectively. Losses recognized during the year ended September 30, 2021, were less than $ 1 million. TVA's policy is to adjust depreciation rates to reflect the most current assumptions, ensuring units will be fully depreciated by the applicable retirement dates. As a result of TVA's decision to accelerate the retirement of Paradise and Bull Run, TVA has recognized a cumulative $ 1.1 billion of accelerated depreciation. Of this amount, $ 136 million, $ 387 million, and $ 566 million were recognized for the years ended September 30, 2021, 2020, and 2019, respectively. 8 . Leases The following table provides information regarding the presentation of leases on the Consolidated Balance Sheets: Amounts Recognized on TVA's Consolidated Balance Sheets At September 30 2021 2020 Assets Operating Operating lease assets, net of amortization $ 165 $ 232 Finance Finance leases 692 516 Total lease assets $ 857 $ 748 Liabilities Current Operating Accounts payable and accrued liabilities $ 40 $ 63 Finance Accounts payable and accrued liabilities 60 41 Non-current Operating Other long-term liabilities 122 171 Finance Finance lease liabilities 687 525 Total lease liabilities $ 909 $ 800 110 Table of Contents TVA's leases consist primarily of railcars, equipment, real estate/land, power generating facilities, and gas pipelines. TVA's leases have various terms and expiration dates remaining from less than one year to approximately 25 years. The components of lease costs were as follows: Lease Costs For the years ended September 30 (in millions) 2021 2020 Operating lease costs (1) $ 52 $ 84 Variable lease costs (1) 75 75 Short-term lease costs (1) 12 7 Finance lease costs Amortization of lease assets (2) 51 15 Interest on lease liabilities (3)(4) 39 33 Total finance lease costs 90 48 Total lease costs $ 229 $ 214 Notes (1) Costs are included in Operating and maintenance expense, Fuel expense, Purchased power expense, and Tax equivalents expense on the Consolidated Statements of Operations. TVA's rental expense for operating leases was approximately $ 97 million for the year ended September 30, 2019. (2) Expense is included in Depreciation and amortization expense on the Consolidated Statements of Operations. (3) Expense is included in Interest expense on the Consolidated Statements of Operations. (4) Certain finance leases receive regulatory accounting treatment and are reclassified to Fuel expense and Purchased power expense. TVA's variable lease costs are primarily related to renewable energy purchase agreements that require TVA to purchase all output from the underlying facility. Payments under those agreements are solely based on the actual output over the lease term. Certain TVA lease agreements contain renewal options. Those renewal options that are reasonably certain to be exercised are included in the lease measurements. The following table contains additional information with respect to cash and non-cash activities related to leases: Amounts Recognized on TVA's Consolidated Statements of Cash Flows For the years ended September 30 (in millions) 2021 2020 Operating cash flows for operating leases $ 53 $ 85 Operating cash flows for finance leases 39 33 Financing cash flows for finance leases 52 15 Lease assets obtained in exchange for lease obligations (non-cash) Operating leases (1) $ ( 22 ) $ 110 Finance leases 233 394 Note (1) Amount for 2021 represents a non-cash reduction due to a lease that was amended during the fiscal year resulting in derecognition of the operating lease asset and obligation upon remeasurement. Amount for 2020 excludes operating lease assets recorded as a result of the adoption of the new lease standard. 111 Table of Contents TVA has certain finance leases under PPAs under which the present value of the minimum lease payments exceeds the fair value of the related lease asset at the date of measurement. This resulted in an interest rate that was higher than TVA's incremental borrowing rate. The weighted average remaining lease term in years and the weighted average discount rate for TVA's operating and financing leases were as follows: Weighted Averages At September 30 2021 2020 Weighted average remaining lease terms Operating leases 5 years 5 years Finance leases 12 years 12 years Weighted average discount rate (1) Operating leases 1.5 % 1.6 % Finance leases 17.7 % 21.8 % Note (1) The discount rate is calculated using the rate implicit in a lease if it is readily determinable. If the rate used by the lessor is not readily determinable, TVA uses its incremental borrowing rate as permitted by accounting guidance. The incremental borrowing rate is influenced by TVA's credit rating and lease term and as such may differ for individual leases, embedded leases, or portfolios of leased assets. The following table presents maturities of lease liabilities and a reconciliation of the undiscounted cash flows to lease liabilities at September 30, 2021 : Future Minimum Lease Payments Minimum Payments Due at September 30, 2021 Operating leases 2022 $ 42 2023 40 2024 37 2025 34 2026 10 Thereafter 5 Minimum annual payments 168 Less: present value discount ( 6 ) Operating present value of net minimum lease payments $ 162 Finance leases 2022 $ 115 2023 112 2024 107 2025 106 2026 105 Thereafter 656 Minimum annual payments 1,201 Less: amount representing interest ( 454 ) Finance present value of net minimum lease payments $ 747 TVA has entered into five PPAs with renewable resource providers for solar generation and rights to charge and discharge battery energy storage systems. The systems are considered a lease component in these agreements. These PPAs have terms of 20 years, and are expected to commence between October 2022 and December 2024. Payments made over the term of these PPAs are expected to total approximately $ 413 million. 112 Table of Contents 9. Other Long-Term Assets The table below summarizes the types and amounts of TVA's other long-term assets: Other Long-Term Assets At September 30 2021 2020 (1) Loans and other long-term receivables, net $ 96 $ 100 EnergyRight ® receivables, net 57 69 Prepaid long-term service agreements 44 42 Commodity contract derivative assets 40 23 Other 83 91 Total other long-term assets $ 320 $ 325 Note (1) At September 30, 2020, $ 21 million previously classified as Restricted cash and cash equivalents (a component of Other long-term assets) and $ 11 million previously classified as Prepaid capacity payments (a component of Other long-term assets) have been reclassified to Other (a component of Other long-term assets) to conform with current year presentation. Loans and Other Long-Term Receivables . TVA's loans and other long-term receivables primarily consist of economic development loans for qualifying organizations and a receivable for reimbursements to recover the cost of providing long-term, on-site storage for spent nuclear fuel. The current and long-term portions of the loans receivable are reported in Accounts receivable, net and Other long-term assets, respectively, on TVA's Consolidated Balance Sheets. At September 30, 2021 and 2020, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately $ 3 million and $ 5 million, respectively. EnergyRight ® Receivables . In association with the EnergyRight ® program, TVA's LPCs offer financing to end-use customers for the purchase of energy-efficient equipment. Depending on the nature of the energy-efficiency project, loans may have a maximum term of five years or 10 years. TVA purchases the resulting loans receivable from its LPCs. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loans receivable that have been in default for 180 days or more or that TVA has determined are uncollectible. Given this continuing involvement, TVA accounts for the transfer of the loans receivable as secured borrowings. The current and long-term portions of the loans receivable are reported in Accounts receivable, net and Other long-term assets, respectively, on TVA's Consolidated Balance Sheets. At September 30, 2021 and 2020, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately $ 15 million and $ 18 million, respectively. See Note 12 — Other Long-Term Liabilities for information regarding the associated financing obligation. In response to the COVID-19 pandemic, customers experiencing financial hardship could request a deferral of EnergyRight ® loan payments for a period of up to six months. The deferral option began in April 2020 and ended October 31, 2020. All EnergyRight ® loans approved for the deferral period resumed payments in the second quarter of 2021. The deferred loans did not accrue interest during the deferral months and totaled less than $ 1 million. Allowance for Loan Losses. As described in Note 2 — Impact of New Accounting Standards and Interpretations, TVA adopted CECL on October 1, 2020, to determine its allowance for loan loss. The allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of the loan receivables, that considers reasonable and supportable forecasts of future economic conditions in addition to information about historical experience and current conditions. See Note 1 — Summary of Significant Accounting Policies — Allowance for Uncollectible Accounts . The allowance components, which consist of a collective allowance and specific loans allowance, are based on the risk characteristics of TVA's loans. Loans that share similar risk characteristics are evaluated on a collective basis in measuring credit losses, while loans that do not share similar risk characteristics with other loans are evaluated on an individual basis. Allowance Components At September 30, 2021 (in millions) EnergyRight ® loan reserve $ 1 Economic development loan collective reserve 1 Economic development loan specific loan reserve 2 Total allowance for loan losses $ 4 Prepaid Long-Term Service Agreements. TVA has entered into various long-term service agreements for major maintenance activities at certain of its combined cycle plants. TVA uses the direct expense method of accounting for these 113 Table of Contents arrangements. TVA accrues for parts when it takes ownership and for contractor services when they are rendered. Under certain of these agreements, payments made exceed the value of parts received and services rendered. The current and long-term portions of the resulting prepayments are reported in Other current assets and Other long-term assets, respectively, on TVA's Consolidated Balance Sheets. At September 30, 2021 and 2020, prepayments of $ 12 million and $ 3 million, respectively, were recorded in Other current assets. Commodity Contract Derivative Assets. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity. See Note 16 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives for a discussion of TVA's commodity contract derivatives. 10. Regulatory Assets and Liabilities Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. Components of regulatory assets and regulatory liabilities are summarized in the table below. Regulatory Assets and Liabilities At September 30 2021 2020 Current regulatory assets Unrealized losses on interest rate derivatives $ 114 $ 114 Unrealized losses on commodity derivatives 3 4 Fuel cost adjustment receivable 79 12 Total current regulatory assets 196 130 Non-current regulatory assets Deferred pension costs and other post-retirement benefits costs 3,668 5,193 Non-nuclear decommissioning costs 2,653 2,512 Unrealized losses on interest rate derivatives 1,122 1,506 Nuclear decommissioning costs 363 896 Other non-current regulatory assets 150 138 Total non-current regulatory assets 7,956 10,245 Total regulatory assets $ 8,152 $ 10,375 Current regulatory liabilities Fuel cost adjustment tax equivalents $ 130 $ 115 Unrealized gains on commodity derivatives 210 26 Total current regulatory liabilities 340 141 Non-current regulatory liabilities Unrealized gains on commodity derivatives 40 23 Total non-current regulatory liabilities 40 23 Total regulatory liabilities $ 380 $ 164 Deferred Pension Costs and Other Post-retirement Benefit Costs . TVA measures the funded status of its pension and post-retirement ("OPEB") benefit plans at each year-end balance sheet date. The funded status is measured as the difference between the fair value of plan assets and the benefit obligations at the measurement date for each plan. The changes in funded status are actuarial gains and losses that are recognized on TVA's Consolidated Balance Sheets by adjusting the recognized pension and OPEB liabilities, with the offset deferred as a regulatory asset or a regulatory liability. In an unregulated environment, these deferred costs would be recognized as an increase or decrease to accumulated other comprehensive income (loss) ("AOCI"). "Incurred cost" is a cost arising from cash paid out or an obligation to pay for an acquired asset or service, and a loss from any cause that has been sustained and for which payment has been or must be made. In the cases of pension and OPEB 114 Table of Contents costs, the unfunded obligation represents a projected liability to the employee for services rendered, and thus it meets the definition of an incurred cost. Therefore, amounts that otherwise would be charged to AOCI for these costs are recorded as a regulatory asset or liability since TVA has historically recovered pension and OPEB expense in rates. Through historical and current year expense included in ratemaking, the TVA Board has demonstrated the ability and intent to include pension and OPEB costs in allowable costs and in rates for ratemaking purposes. As a result, it is probable that future revenue will result from inclusion of the pension and OPEB regulatory assets or regulatory liability in allowable costs for ratemaking purposes. The regulatory asset and liability are classified as long-term, which is consistent with the pension and OPEB liabilities, and are not amortized to the consolidated statements of operations over a specified recovery period. They are adjusted either upward or downward each year in conjunction with the adjustments to the unfunded pension liability and OPEB liability, as calculated by the actuaries. Ultimately the regulatory asset and liability will be recognized in the consolidated statements of operations in the form of pension and OPEB expense as the actuarial liabilities are eliminated in future periods. See Note 22 — Benefit Plans — Obligations and Funded Status . Additionally on October 1, 2014, TVA began recognizing pension costs as a regulatory asset to the extent that the amount calculated under GAAP as pension expense differs from the amount TVA contributes to the pension plan. As a result of previous plan design changes, future contributions are expected to exceed the expense calculated under U.S. GAAP. Accordingly, TVA will discontinue this regulatory accounting practice once all such deferred costs have been recovered, at which time it will recognize pension costs in accordance with U.S. GAAP. Non-Nuclear Decommissioning Costs. Non-nuclear decommissioning costs include: (1) certain deferred charges related to the future closure and decommissioning of TVA's non-nuclear long-lived assets, (2) recognition of changes in the liability, (3) recognition of changes in the value of TVA's ART, and (4) certain other deferred charges under the accounting rules for AROs. TVA has established the ART to more effectively segregate, manage, and invest funds to help meet future non-nuclear AROs. The funds from the ART may be used, among other things, to pay the costs related to the future closure and retirement of non-nuclear long-lived assets under various legal requirements. These future costs can be funded through a combination of investment funds set aside in the ART, future earnings on those investment funds, and future cash contributions to the ART. In 2021, TVA recovered in rates an amount determined by the average life of debt financed for non-nuclear decommissioning expenditures, assuming a 20-year debt service period, and contributions to the ART. Deferred charges will be recovered in rates based on an analysis of the expected expenditures, contributions, and investment earnings required to recover the decommissioning costs. Recovery of future decommissioning costs is dependent upon the future earnings of the ART, timing of decommissioning activities, and changes in decommissioning estimates. The regulatory asset is classified as long-term as amounts recovered are used to service debt or to contribute to the ART, which is restricted for future decommissioning costs. Unrealized Losses on Interest Rate Derivatives . TVA uses regulatory accounting treatment to defer the unrealized gains and losses on certain interest rate derivative contracts. When amounts in these contracts are realized, the resulting gains or losses are included in the ratemaking formula. The unrealized losses on these interest rate derivatives are recorded on TVA's Consolidated Balance Sheets as current and non-current regulatory assets, and the related realized gains or losses, if any, are recorded on TVA's Consolidated Statements of Operations when the contracts settle. A portion of certain unrealized gains and losses will be amortized into earnings over the remaining lives of the contracts. Gains and losses on interest rate derivatives that are expected to be realized within the next year are included as a current regulatory asset or liability on TVA's Consolidated Balance Sheet. Due to changing interest rates in the financial markets associated with the COVID-19 pandemic, TVA experienced unrealized losses related to its derivative instruments for the year ended September 30, 2020. TVA does not recognize unrealized gains and losses from the investment portfolios and derivative instruments within earnings but rather defers all such gains and losses within a regulatory liability or asset in accordance with its accounting policy. See Note 16 — Risk Management Activities and Derivative Transactions and Note 17 — Fair Value Measurements. Nuclear Decommissioning Costs. Nuclear decommissioning costs include: (1) certain deferred charges related to the future closure and decommissioning of TVA's nuclear generating units under the Nuclear Regulatory Commission ("NRC") requirements, (2) recognition of changes in the liability, (3) recognition of changes in the value of TVA's NDT, and (4) certain other deferred charges under the accounting rules for AROs. These future costs can be funded through a combination of investment funds set aside in the NDT and ART and future earnings on those investment funds. For 2021, TVA recovered in rates a portion of the contributions to the ART that are expected to settle liabilities included in the nuclear ARO. Deferred charges will be recovered in rates based on the analysis of expected expenditures, contributions, and investment earnings required to recover the decommissioning costs. See Note 1 — Summary of Significant Accounting Policies — Investment Funds. Recovery of future decommissioning costs is dependent upon the future earnings of the NDT and ART, timing of decommissioning activities, and changes in decommissioning estimates. The regulatory asset is classified as long-term as amounts recovered are contributed to the NDT or the ART, which are restricted for future decommissioning costs. Unrealized Gains (Losses) on Commodity Derivatives. TVA enters into certain derivative contracts for natural gas that require the physical delivery of the contracted quantity of the commodity. Unrealized gains (losses) on natural gas purchase contracts, included as part of unrealized gains (losses) on commodity derivatives, relate to the mark-to-market ("MtM") valuation of natural gas purchase contracts. During the fourth quarter of 2020, TVA discontinued derivative accounting for forward coal contracts because these contracts no longer meet the criteria of net settlement. As a result, the associated net regulatory assets 115 Table of Contents were derecognized. The natural gas purchase contracts qualify as derivative contracts but do not qualify for cash flow hedge accounting treatment. As a result, TVA recognizes the changes in the market value of these derivative contracts as a regulatory liability or asset. This treatment reflects TVA's ability and intent to recover the cost of these commodity contracts on a settlement basis for ratemaking purposes through the fuel cost adjustment. TVA recognizes the actual cost of fuel received under these contracts in fuel expense at the time the fuel is used to generate electricity. These contracts expire at various times through 2024. Unrealized gains and losses on contracts with a maturity of less than one year are included as a current regulatory asset or liability on TVA's Consolidated Balance Sheets. See Note 16 — Risk Management Activities and Derivative Transactions . Fuel Cost Adjustment Receivable. The fuel cost adjustment provides a mechanism to alter rates monthly to reflect changing fuel and purchased power costs. There is typically a lag between the occurrence of a change in fuel and purchased power costs and the reflection of the change in fuel rates. Balances in the fuel cost adjustment regulatory accounts represent over-collected or under-collected revenues that offset fuel and purchased power costs, and the fuel rate is designed to recover or refund the balance in less than one year. Other Non-Current Regulatory Assets. Other non-current regulatory assets consist of the following: Deferred Lease Asset and Other Financing Obligations . For certain leases, TVA recognized the initial capital lease and other financing asset and liability at inception of the lease or other obligation. However, the annual expense recognized in rates is equal to the annual payments, which differs from GAAP treatment. This practice results in TVA's asset balances being higher than they otherwise would have been under GAAP, with the difference representing a regulatory asset related to the lease or other financing obligation. These costs will be amortized over the respective lease or other financing obligation terms as payments are made. As the costs associated with this regulatory asset are not currently being considered in rates and the asset is expected to increase over the next year, the regulatory asset has been classified as long-term. Debt Reacquisition Costs . Reacquisition expenses, call premiums, and other related costs, such as unamortized debt issue costs associated with redeemed Bond issues, are deferred and amortized (accreted) on a straight-line basis over the weighted average life of TVA's debt portfolio. Because timing of additional reacquisition expenses and changes to the weighted average life of the debt are uncertain, the regulatory asset is classified as long-term. Retirement Removal Costs . Retirement removal costs, net of salvage, that are not legally required are recognized as a regulatory asset. Net removal costs are amortized over a one-year period subsequent to completion of the removal activities. TVA treats this regulatory asset as long-term in its entirety primarily because it relates to assets that are long-term in nature. Fuel Cost Adjustment Tax Equivalents. The fuel cost adjustment includes a provision related to the current funding of the future payments TVA will make. As TVA records the fuel cost adjustment, five percent of the calculation that relates to a future asset or liability for tax equivalent payments is recorded as a current regulatory liability and paid or refunded in the following year. 11. Variable Interest Entities A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of owning a controlling financial interest. When TVA determines that it has a variable interest in a VIE, a qualitative evaluation is performed to assess which interest holders have the power to direct the activities that most significantly impact the economic performance of the entity and have the obligation to absorb losses or receive benefits that could be significant to the entity. The evaluation considers the purpose and design of the business, the risks that the business was designed to create and pass along to other entities, the activities of the business that can be directed and which party can direct them, and the expected relative impact of those activities on the economic performance of the business through its life. TVA has the power to direct the activities of an entity when it has the ability to make key operating and financing decisions, including, but not limited to, capital investment and the issuance of debt. Based on the evaluation of these criteria, TVA has determined it is the primary beneficiary of certain entities and as such is required to account for the VIEs on a consolidated basis. John Sevier VIEs In 2012, TVA entered into a $ 1.0 billion construction management agreement and lease financing arrangement with John Sevier Combined Cycle Generation LLC ("JSCCG") for the completion and lease by TVA of the John Sevier Combined Cycle Facility ("John Sevier CCF"). JSCCG is a special single-purpose limited liability company formed in January 2012 to finance the John Sevier CCF through a $ 900 million secured note issuance (the "JSCCG notes") and the issuance of $ 100 million of membership interests subject to mandatory redemption. The membership interests were purchased by John Sevier Holdco LLC ("Holdco"). Holdco is a special single-purpose entity, also formed in January 2012, established to acquire and hold the membership interests in JSCCG. A non-controlling interest in Holdco is held by a third-party through nominal membership interests, to which none of the income, expenses, and cash flows are allocated. The membership interests held by Holdco in JSCCG were purchased with proceeds from the issuance of $ 100 million of secured notes (the "Holdco notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each January 15 and July 15, with a final payment due in January 2042. The payment dates for the 116 Table of Contents mandatorily redeemable membership interests are the same as those of the Holdco notes. The sale of the JSCCG notes, the membership interests in JSCCG, and the Holdco notes closed in January 2012. The JSCCG notes are secured by TVA's lease payments, and the Holdco notes are secured by Holdco's investment in, and amounts receivable from, JSCCG. TVA's lease payments to JSCCG are equal to and payable on the same dates as JSCCG's and Holdco's semi-annual debt service payments. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by JSCCG and Holdco. Certain agreements related to this transaction contain default and acceleration provisions. Due to its participation in the design, business conduct, and credit and financial support of JSCCG and Holdco, TVA has determined that it has a variable interest in each of these entities. Based on its analysis, TVA has concluded that it is the primary beneficiary of JSCCG and Holdco and, as such, is required to account for the VIEs on a consolidated basis. Holdco's membership interests in JSCCG are eliminated in consolidation. Southaven VIE In 2013, TVA entered into a $ 400 million lease financing arrangement with Southaven Combined Cycle Generation LLC ("SCCG") for the lease by TVA of the Southaven Combined Cycle Facility ("Southaven CCF"). SCCG is a special single-purpose limited liability company formed in June 2013 to finance the Southaven CCF through a $ 360 million secured notes issuance (the "SCCG notes") and the issuance of $ 40 million of membership interests subject to mandatory redemption. The membership interests were purchased by Southaven Holdco LLC ("SHLLC"). SHLLC is a special single-purpose entity, also formed in June 2013, established to acquire and hold the membership interests in SCCG. A non-controlling interest in SHLLC is held by a third-party through nominal membership interests, to which none of the income, expenses, and cash flows of SHLLC are allocated. The membership interests held by SHLLC were purchased with proceeds from the issuance of $ 40 million of secured notes (the "SHLLC notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each February 15 and August 15, with a final payment due on August 15, 2033. The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes, and the payment amounts are sufficient to provide returns on, as well as returns of, capital until the investment has been repaid to SHLLC in full. The rate of return on investment to SHLLC is 7.0 percent, which is reflected as interest expense in the consolidated statements of operations. SHLLC is required to pay a pre-determined portion of the return on investment to Seven States Southaven, LLC ("SSSL") on each lease payment date as agreed in SHLLC's formation documents (the "Seven States Return"). The current and long-term portions of the Membership interests of VIE subject to mandatory redemption are included in Accounts payable and accrued liabilities and Other long-term liabilities, respectively. The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes. The SCCG notes are secured by TVA's lease payments, and the SHLLC notes are secured by SHLLC's investment in, and amounts receivable from, SCCG. TVA's lease payments to SCCG are payable on the same dates as SCCG's and SHLLC's semi-annual debt service payments and are equal to the sum of (i) the amount of SCCG's semi-annual debt service payments, (ii) the amount of SHLLC's semi-annual debt service payments, and (iii) the amount of the Seven States Return. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by SCCG and SHLLC. Certain agreements related to this transaction contain default and acceleration provisions. In the event that TVA were to choose to exercise an early buy out feature of the Southaven facility lease, in part or in whole, TVA must pay to SCCG amounts sufficient for SCCG to repay or partially repay on a pro rata basis the membership interests held by SHLLC, including any outstanding investment amount plus accrued but unpaid return. TVA also has the right, at any time and without any early redemption of the other portions of the Southaven facility lease payments due to SCCG, to fully repay SHLLC's investment, upon which repayment SHLLC will transfer the membership interests to a designee of TVA. TVA participated in the design, business conduct, and financial support of SCCG and has determined that it has a direct variable interest in SCCG resulting from risk associated with the value of the Southaven CCF at the end of the lease term. Based on its analysis, TVA has determined that it is the primary beneficiary of SCCG and, as such, is required to account for the VIE on a consolidated basis. 117 Table of Contents Impact on Consolidated Financial Statements The financial statement items attributable to carrying amounts and classifications of JSCCG, Holdco, and SCCG as of September 30, 2021 and 2020, as reflected on the Consolidated Balance Sheets, are as follows: Summary of Impact of VIEs on Consolidated Balance Sheets At September 30 2021 2020 Current liabilities Accrued interest $ 10 $ 10 Accounts payable and accrued liabilities 3 3 Current maturities of long-term debt of variable interest entities 43 41 Total current liabilities 56 54 Other liabilities Other long-term liabilities 20 23 Long-term debt, net Long-term debt of variable interest entities, net 1,006 1,048 Total liabilities $ 1,082 $ 1,125 Interest expense of $ 52 million, $ 54 million, and $ 56 million related to debt of VIEs and membership interests of variable interest entity subject to mandatory redemption is included on the Consolidated Statements of Operations for the years ended September 30, 2021, 2020, and 2019, respectively. At September 30, 2021, TVA had outstanding debt of VIEs of $ 1.0 billion and outstanding membership interests subject to mandatory redemption (including current portion) of $ 23 million issued by one of its VIEs of which it is the primary beneficiary. The following table sets forth TVA's future payments at September 30, 2021: Maturities Due in the Year Ending September 30 2022 2023 2024 2025 2026 Thereafter Long-term debt of VIEs including current maturities (1) $ 43 $ 40 $ 36 $ 37 $ 39 $ 861 Membership interests of variable interest entity subject to mandatory redemption 3 2 1 1 1 15 Note (1) Long-term debt of VIEs does not include non-cash item of unamortized debt issue costs of $ 7 million. Creditors of the VIEs do not have any recourse to the general credit of TVA. TVA does not have any obligations to provide financial support to the VIEs other than as prescribed in the terms of the agreements related to these transactions. 118 Table of Contents 12. Other Long-Term Liabilities Other long-term liabilities consist primarily of liabilities related to certain derivative agreements as well as for environmental remediation liabilities and liabilities under agreements related to compliance with certain environmental regulations. See Note 8 — Leases , Note 13 — Asset Retirement Obligations , and Note 16 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivatives . The table below summarizes the types and amounts of Other long-term liabilities: Other Long-Term Liabilities At September 30 2021 2020 (1) Interest rate swap liabilities $ 1,524 $ 1,927 Operating lease liabilities 122 171 Currency swap liabilities 76 123 EnergyRight® financing obligation 66 78 Long-term deferred compensation 42 38 Long-term deferred revenue 42 38 Accrued long-term service agreements 29 56 Other 140 117 Total other long-term liabilities $ 2,041 $ 2,548 Note (1) At September 30, 2020, $38 million and $38 million previously classified as Other (a component of Other long-term liabilities) have been reclassified to Long-term deferred compensation (a component of Other long-term liabilities) and Long-term deferred revenue (a component of Other long-term liabilities), respectively, to conform with current year presentation. Interest Rate Swap Liabilities . TVA uses interest rate swaps to fix variable short-term debt to a fixed rate. The values of these derivatives are included in Accounts payable and accrued liabilities, Accrued interest, and Other long-term liabilities on the Consolidated Balance Sheets. At September 30, 2021 and 2020, the carrying amount of the interest rate swap liabilities reported in Accounts payable and accrued liabilities and Accrued interest was $ 115 million and $ 114 million, respectively. See Note 16 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivative s for information regarding the interest rate swap liabilities. As of September 30, 2021, Interest rate swap liabilities decreased $ 402 million as compared to September 30, 2020, primarily due to an increase in market interest rates along with net settlement payments made during the year. Operating Lease Liabilities . TVA's operating leases consist primarily of railcars, equipment, real estate/land, and power generating facilities. At September 30, 2021 and 2020, the current portion of TVA's operating leases reported in Accounts payable and accrued liabilities was $ 40 million and $ 63 million, respectively. See Note 8 — Leases for more information regarding leases. Currency Swap Liabilities . To protect against exchange rate risk related to British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. At September 30, 2021 and 2020, the carrying amount of the currency swap liabilities reported in Accounts payable and accrued liabilities was $ 7 million and $ 86 million, respectively. See Note 16 — Risk Management Activities and Derivative Transactions — Cash Flow Hedging Strategy for Currency Swaps for more information regarding the currency swap liabilities. EnergyRight ® Financing Obligation . TVA purchases certain loans receivable from its LPCs in association with the EnergyRight ® program. The current and long-term portions of the resulting financing obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. At September 30, 2021 and 2020, the carrying amount of the financing obligation reported in Accounts payable and accrued liabilities was approximately $ 16 million and $ 19 million, respectively. See Note 9 — Other Long-Term Assets for information regarding the associated loans receivable. In response to the COVID-19 pandemic, customers experiencing financial hardship could request a deferral of EnergyRight ® loan payments for a period of up to six months. The deferral option began in April 2020 and ended October 31, 2020. All EnergyRight ® loans approved for the deferral period resumed payments in the second quarter of 2021. The deferred loans did not accrue interest during the deferral months and totaled less than $ 1 million. Long-Term Deferred Compensation . TVA provides compensation arrangements to engage and retain certain employees, both executive and non-executive, which are designed to provide participants with the ability to defer compensation to future periods. The current and long-term portions are reported in Accounts payable and accrued liabilities and Other long- 119 Table of Contents term liabilities, respectively, on TVA’s Consolidated Balance Sheets. At September 30, 2021 and 2020, the current amount of deferred compensation reported in Accounts payable and accrued liabilities was $ 51 million and $ 47 million, respectively. Long-Term Deferred Revenue . Long-term deferred revenue represents payments received that exceed services rendered resulting in the deferral of revenue. This long-term portion represents amounts that will not be recognized within the next 12 months primarily related to fiber and transmission agreements. The current and long-term portions of the deferral are reported in Accounts Payable and accrued liabilities and Other long-term liabilities, respectively, on TVA’s Consolidated Balance Sheets. At September 30, 2021 and 2020, the current amount of deferred revenue was $ 10 million and $ 11 million, respectively, and is included in Accounts payable and accrued liabilities. Accrued Long-Term Service Agreement. TVA has entered into various long-term service agreements for major maintenance activities at certain of its combined cycle plants. TVA uses the direct expense method of accounting for these arrangements. TVA accrues for parts when it takes ownership and for contractor services when they are rendered. Under certain of these agreements, parts received and services rendered exceed payments made. The current and long-term portions of the resulting obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. At September 30, 2021 and 2020, related liabilities of $ 28 million and $ 15 million, respectively, were recorded in Accounts payable and accrued liabilities. 13. Asset Retirement Obligations During the year ended September 30, 2021, TVA's total ARO liability increased $ 217 million. To estimate its decommissioning obligation related to its nuclear generating stations, TVA uses a probability-weighted, discounted cash flow model which, on a unit-by-unit basis, considers multiple outcome scenarios that include significant estimations and assumptions. Those assumptions include (1) estimates of the cost of decommissioning; (2) the method of decommissioning and the timing of the related cash flows; (3) the license period of the nuclear plant, considering the probability of license extensions; (4) cost escalation factors; and (5) the credit adjusted risk free rate to measure the obligation at the present value of the future estimated costs. 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 radioactive contamination to 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. These cost studies are updated for each of TVA's nuclear units at least every five years. TVA plans to complete new cost studies for its nuclear units in 2022. TVA also has decommissioning obligations related to its non-nuclear generating sites, ash impoundments, transmission substation and distribution assets, and certain general facilities. To estimate its decommissioning obligation related to these assets, TVA uses estimations and assumptions for the amounts and timing of future expenditures and makes judgments concerning whether or not such costs are considered a legal obligation. Those assumptions include (1) estimates of the costs of decommissioning, (2) the method of decommissioning and the timing of the related cash flows, (3) the expected retirement date of each asset, (4) cost escalation factors, and (5) the credit adjusted risk free rate to measure the obligation at the present value of the future estimated costs. TVA bases its decommissioning estimates for each asset on its identified preferred closure method. The revisions in non-nuclear estimates increased $ 191 million for the year ended September 30, 2021. This increase was primarily driven by revisions of approximately $ 122 million to certain coal combustion residuals ("CCR") closure liabilities at Shawnee Fossil Plant ("Shawnee"), Paradise, Colbert Fossil Plant, Cumberland Fossil Plant, and Gallatin Fossil Plant ("Gallatin") resulting from revised engineering estimates for construction costs, new vendor bids, modified closure designs, and expected costs associated with post-closure care of the closed areas. CCR ARO liabilities associated with groundwater well monitoring also increased approximately $ 69 million due to expansion in the scope of recurring activities including measuring, modeling, and reporting. In addition, TVA's use of a new CCR landfill at Shawnee and expansion of landfill acreage used at Gallatin resulted in new obligations of $ 30 million and $ 13 million, respectively. The revisions in non-nuclear estimates increased $ 1.1 billion for the year ended September 30, 2020. In November 2019, the Tennessee Department of Environment and Conservation ("TDEC") released amendments to its regulations that govern solid waste disposal facilities, including TVA's active CCR facilities covered by a solid waste disposal permit and those which closed pursuant to a TDEC approved closure plan. Such facilities are generally subject to a 30-year post-closure care period during which the owner or operator must undertake certain activities, including monitoring and maintaining the facility. The amendments, among other things, add an additional 50-year period after the end of the post-closure care period, require TVA to submit recommendations as to what activities must be performed during this 50-year period to protect human health and the environment, and require TVA to submit revised closure plans every 10 years. This regulatory revision resulted in an increase of $ 129 million, of which $ 38 million was related to operating CCR facilities and $ 91 million was related to inactive or closed CCR facilities. In June 2020, based on recent project cost data and estimates, TVA revised its AROs for closure-by-removal of certain 120 Table of Contents CCR facilities at Allen Fossil Plant, resulting in an increase to AROs of $ 273 million. In September 2020, TVA completed an engineering review of its cost estimates to close the ash pond complex at Gallatin, resulting in an increase of $ 173 million due to expected cost increases for excavation, disposal, and other activities required in a closure-by-removal project. Also in September 2020, TVA completed a study of its plant decommissioning obligations and CCR post-closure care and monitoring obligations. TVA increased its plant decommissioning obligations by $ 19 million, primarily due to asbestos and hazardous material abatement costs. TVA increased its CCR post-closure care and monitoring AROs primarily as a result of expected cost increases to monitor groundwater and maintain CCR areas after closure as well as increases in expected acreage to maintain after closure, totaling $ 460 million. Additionally, during the years ended September 30, 2021 and 2020, both the nuclear and non-nuclear liabilities were increased by periodic accretion, partially offset by settlement projects that were conducted during these periods. The nuclear and non-nuclear accretion amounts were deferred as regulatory assets. During 2021, 2020, and 2019, $ 72 million, $ 169 million, and $ 144 million, respectively, of the related regulatory assets were amortized into expense as these amounts were collected in rates. See Note 10 — Regulatory Assets and Liabilities . TVA maintains investment trusts to help fund its decommissioning obligations. See Note 17 — Fair Value Measurements — Investment Funds and Note 23 — Commitments and Contingencies — Decommissioning Costs for a discussion of the trusts' objectives and the current balances of the trusts. Asset Retirement Obligation Activity Nuclear Non-Nuclear Total Balance at September 30, 2019 $ 3,136 $ 2,480 $ 5,616 Settlements ( 1 ) ( 113 ) ( 114 ) Revisions in estimate — 1,077 1,077 Accretion (recorded as regulatory asset) 143 63 206 Balance at September 30, 2020 3,278 3,507 6,785 (1) Settlements ( 11 ) ( 231 ) ( 242 ) Revisions in estimate 12 191 203 Additional obligations — 43 43 Accretion (recorded as regulatory asset) 149 64 213 Balance at September 30, 2021 $ 3,428 $ 3,574 $ 7,002 (1) Note (1) Includes $ 266 million a nd $ 345 million at September 30, 2021 and 2020, respectively, in Current liabilities. 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. 14. Debt and Other Obligations General The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $ 30.0 billion at any time. At September 30, 2021, TVA had only two types of Bonds outstanding: power bonds and discount notes. Power bonds have maturities between one year and 50 years, and discount notes have maturities of less than one year. 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"). Bonds are not obligations of the U.S., and the U.S. does not guarantee the payments of principal or interest on Bonds. Power bonds and discount notes rank on parity and have first priority of payment from net power proceeds, which are defined as the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and tax equivalent payments, 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. TVA considers its scheduled rent payments under its leaseback transactions, as well as its scheduled payments under its lease financing arrangements involving John Sevier CCF and Southaven CCF, as costs of operating, maintaining, and administering its power properties. Costs of operating, maintaining, and administering TVA's power properties have priority over 121 Table of Contents TVA's payments on the Bonds. Once net power proceeds have been applied to payments on power bonds and discount notes as well as any other Bonds that TVA may issue in the future that rank on parity with or subordinate to power bonds and discount notes, Section 2.3 of the Basic Resolution provides that the remaining net power proceeds shall be used only for (1) minimum payments into the U.S. Treasury required by the TVA Act as repayment of, and as a return on, the Power Program Appropriation Investment; (2) investment in power system assets; (3) additional reductions of TVA's capital obligations; and (4) other lawful purposes related to TVA's power business. The TVA Act and the Basic Resolution each contain two bond tests: 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, among other things, debt service on outstanding Bonds. As of September 30, 2021, TVA was in compliance with the rate test. See Note 1 — Summary of Significant Accounting Policies — General. 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 (1) the depreciation accruals and other charges representing the amortization of capital expenditures and (2) 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. TVA met the bondholder protection test for the five-year period ended September 30, 2020, and must next meet the bondholder protection test for the five-year period ending September 30, 2025 . Secured Debt of VIEs On August 9, 2013, SCCG issued secured notes totaling $ 360 million that bear interest at a rate of 3.846 percent. The SCCG notes require amortizing semi-annual payments on each February 15 and August 15, and mature on August 15, 2033. Also on August 9, 2013, SCCG issued $ 40 million of membership interests subject to mandatory redemption. The proceeds from the secured notes issuance and the issuance of the membership interests were paid to TVA in accordance with the terms of the Southaven head lease. See Note 11 — Variable Interest Entities — Southaven VIE . TVA used the proceeds from the transaction primarily to fund the acquisition of the Southaven CCF from SSSL. On January 17, 2012, JSCCG issued secured notes totaling $ 900 million in aggregate principal amount that bear interest at a rate of 4.626 percent. Also on January 17, 2012, Holdco issued secured notes totaling $ 100 million that bear interest at a rate of 7.1 percent. The JSCCG notes and the Holdco notes require amortizing semi-annual payments on each January 15 and July 15, and mature on January 15, 2042. The Holdco notes require a $ 10 million balloon payment upon maturity. See Note 11 — Variable Interest Entities — John Sevier VIEs . TVA used the proceeds from the transaction to meet its requirements under the TVA Act. Secured debt of VIEs, including current maturities, outstanding at September 30, 2021 and 2020 totaled $ 1.0 billion and $ 1.1 billion, respectively. Secured Notes On September 20, 2017, TVA acquired two entities, in an asset acquisition, designed to administer rent payments TVA makes under certain of its lease/leaseback arrangements. On November 14, 2001, the entities issued secured notes totaling $ 272 million that had an interest rate of 5.572 percent and required amortizing semi-annual payments on each May 1 and November 1 with a maturity date of May 1, 2020. In 2017, TVA assumed these secured notes in the acquisition at a fair value of $ 74 million. The secured notes of the entities were paid in full in 2020. Short-Term Debt The following table provides information regarding TVA's short-term borrowings: Short-term Borrowings At September 30 2021 2020 2019 Gross amount outstanding - discount notes $ 780 $ 57 $ 922 Weighted average interest rate - discount notes 0.03 % 0.06 % 2.15 % 122 Table of Contents Put Options TVA has two issues of Putable Automatic Rate Reset Securities ("PARRS") outstanding. After a fixed-rate period of five years, the coupon rate on the PARRS may automatically be reset downward under certain market conditions on an annual basis. The coupon rate reset on the PARRS is based on a calculation. For both series of PARRS, the coupon rate will reset downward on the reset date if the rate calculated is below the then-current coupon rate on the Bond. The calculation dates, potential reset dates, and terms of the calculation are different for each series. The coupon rate on the 1998 Series D PARRS may be reset on June 1 (annually) if the sum of the five-day average of the 30-Year Constant Maturity Treasury ("CMT") rate for the week ending the last Friday in April, plus 94 basis points, is below the then-current coupon rate. The coupon rate on the 1999 Series A PARRS may be reset on May 1 (annually) if the sum of the five-day average of the 30-Year CMT rate for the week ending the last Friday in March, plus 84 basis points, is below the then-current coupon rate. The coupon rates may only be reset downward, but investors may request to redeem their Bonds at par value in conjunction with a coupon rate reset for a limited period of time prior to the reset dates under certain circumstances. The coupon rate for the 1998 Series D PARRS, which mature in June 2028, has been reset eight times, from an initial rate of 6.750 percent to the current rate of 2.134 percent. In connection with these resets, $ 318 million of the Bonds have been redeemed; therefore, $ 256 million of the Bonds were outstanding at September 30, 2021. The coupon rate for the 1999 Series A PARRS, which mature in May 2029, has been reset seven times, from an initial rate of 6.50 percent to the current rate of 2.216 percent. In connection with these resets, $ 316 million of the Bonds have been redeemed; therefore, $ 208 million of the Bonds were outstanding at September 30, 2021. Due to the contingent nature of the put option on the PARRS, TVA determines whether the PARRS should be classified as long-term debt or current maturities of long-term debt by calculating the expected reset rate for the Bonds on the calculation dates, described above. If the determination date for reset is before the balance sheet date of the reporting period and the expected reset rate is less than the then-current coupon rate on the PARRS, the PARRS are included in current maturities. Otherwise, the PARRS are included in long-term debt. Debt Securities Activity The table below summarizes the long-term debt securities activity for the years ended September 30, 2021 and 2020. Debt Securities Activity For the years ended September 30 2021 2020 Issues 2020 Series A (1) $ — $ 1,000 2021 Series A (2) 500 — Discount on debt issues — ( 3 ) Total $ 500 $ 997 Redemptions/Maturities (3) electronotes ® $ — $ 219 2009 Series B 29 28 2018 Series A — 1,000 1999 Series A PARRS (TVE) — 23 1998 Series D PARRS (TVC) — 17 1995 Series B — 140 2011 Series A 1,500 — 1998 Series H 331 — Total redemptions/maturities of power bonds 1,860 1,427 Notes payable — 23 Variable interest entities 41 39 Total $ 1,901 $ 1,489 Notes (1) The 2020 Series A Bonds were issued at 99.706 percent of par. (2) The 2021 Series A Bonds were issued at 99.982 percent of par. (3) All redemptions were at 100 percent of par. 123 Table of Contents Debt Outstanding Total debt outstanding at September 30, 2021 and 2020, consisted of the following: Short-Term Debt At September 30 CUSIP or Other Identifier Maturity Call/(Put) Date Coupon Rate 2021 2020 Short-term debt, net of discounts $ 780 $ 57 Current maturities of long-term debt of VIEs issued at par 43 41 Current maturities of notes payable — — Current maturities of power bonds issued at par 880591EN8 8/15/2022 1.875 % 1,000 — 880591EF5 12/15/2021 3.770 % 1 1 880591EF5 6/15/2022 3.770 % 27 28 880591EL2 2/15/2021 3.875 % — 1,500 880591DC3 6/7/2021 5.805 % — 258 (1) Total current maturities of power bonds issued at par 1,028 1,787 Total current debt outstanding, net $ 1,851 $ 1,885 Note (1) Includes net exchange gain from currency transactions of $ 73 million at September 30, 2020. 124 Table of Contents Long-Term Debt At September 30 CUSIP or Other Identifier Maturity Coupon Rate Effective Call Date 2021 Par 2020 Par Stock Exchange Listings 880591EN8 8/15/2022 1.875 % $ — $ 1,000 New York 880591ER9 9/15/2024 2.875 % 1,000 1,000 New York 880591EW8 5/15/2025 0.750 % 1,000 1,000 New York 880591CJ9 11/1/2025 6.750 % 1,350 1,350 New York, Hong Kong, Luxembourg, Singapore 880591EU2 2/1/2027 2.875 % 1,000 1,000 New York 880591300 (3) 6/1/2028 2.134 % 256 256 New York 880591409 (3) 5/1/2029 2.216 % 208 208 New York 880591DM1 5/1/2030 7.125 % 1,000 1,000 New York, Luxembourg 880591EX6 9/15/2031 1.500 % 500 — New York 880591DP4 6/7/2032 6.587 % (2) 337 (1) 323 (1) New York, Luxembourg 880591DV1 7/15/2033 4.700 % 472 472 New York, Luxembourg 880591EF5 6/15/2034 3.770 % 190 218 None 880591DX7 6/15/2035 4.650 % 436 436 New York 880591CK6 4/1/2036 5.980 % 121 121 New York 880591CS9 4/1/2036 5.880 % 1,500 1,500 New York 880591CP5 1/15/2038 6.150 % 1,000 1,000 New York 880591ED0 6/15/2038 5.500 % 500 500 New York 880591EH1 9/15/2039 5.250 % 2,000 2,000 New York 880591EP3 12/15/2042 3.500 % 1,000 1,000 New York 880591DU3 6/7/2043 4.962 % (2) 202 (1) 194 (1) New York, Luxembourg 880591EB4 1/15/2048 4.875 % 500 500 New York, Luxembourg 880591DZ2 4/1/2056 5.375 % 1,000 1,000 New York 880591EJ7 9/15/2060 4.625 % 1,000 1,000 New York 880591ES7 9/15/2065 4.250 % 1,000 1,000 New York Subtotal 17,572 18,078 Unamortized discounts, premiums, issue costs, and other ( 115 ) ( 122 ) Total long-term outstanding power bonds, net 17,457 17,956 Long-term debt of VIEs, net 1,006 1,048 Total long-term debt, net $ 18,463 $ 19,004 Notes (1) Includes net exchange gain from currency transactions of $ 58 million and $ 80 million at September 30, 2021 and 2020 , respectively. (2) The coupon rate represents TVA's effective interest rate. (3) TVA PARRS, CUSIP numbers 880591300 and 880591409, may be redeemed under certain conditions. See Put and Call Options above. Maturities Due in the Year Ending September 30 2022 2023 2024 2025 2026 Thereafter Total Long-term power bonds including current maturities (1) $ 1,028 $ 29 $ 1,022 $ 1,022 $ 1,370 $ 14,187 $ 18,658 Short-term debt, net of discounts 780 — — — — — 780 125 Table of Contents Note (1) Long-term power bonds does not include non-cash items of foreign currency exchange gain of $ 58 million, unamortized debt issue costs of $ 43 million, and net discount on sale of Bonds of $ 72 million. Credit Facility Agreements TVA has funding available under four long-term revolving credit facilities totaling approximately $ 2.7 billion: a $ 1.0 billion credit facility that matures on September 28, 2023, a $ 150 million credit facility that matures on February 9, 2024, a $ 500 million credit facility that matures on February 1, 2025, and a $ 1.0 billion credit facility that matures on September 21, 2026. The interest rate on any borrowing under these facilities varies based on market factors and the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $ 2.7 billion that TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. At September 30, 2021 and 2020, there were approximately $ 1.2 billion of letters of credit outstanding under these facilities, and there were no borrowings outstanding. See Note 16 — Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral . The following table provides additional information regarding TVA's funding available under the four long-term revolving credit facilities: Summary of Long-Term Credit Facilities At September 30, 2021 Maturity Date Facility Limit Letters of Credit Outstanding Cash Borrowings Availability September 2023 $ 1,000 $ 328 $ — $ 672 February 2024 150 38 — 112 February 2025 500 500 — — September 2026 1,000 301 — 699 Total $ 2,650 $ 1,167 $ — $ 1,483 TVA and the U.S. Treasury, pursuant to the TVA Act, have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $ 150 million credit facility. This credit facility was renewed for 2022 with a maturity date of September 30, 2022. Access to this credit facility or other similar financing arrangements with the U.S. Treasury has been available to TVA since the 1960s. TVA can borrow under the U.S. Treasury credit facility only if it cannot issue Bonds in the market on reasonable terms, and TVA considers the U.S. Treasury credit facility a secondary source of liquidity. The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the U.S. with maturities from date of issue of one year or less. There were no outstanding borrowings under the facility at September 30, 2021. The availability of this credit facility may be impacted by how the U.S. government addresses the possibility of approaching its debt limit. Lease/Leasebacks TVA previously entered into leasing transactions to obtain third-party financing for 24 peaking CTs as well as certain qualified technological equipment and software ("QTE"). Due to TVA's continuing involvement with the combustion turbine facilities and the QTE during the leaseback term, TVA accounted for the lease proceeds as financing obligations. On September 30, 2021 and 2020, the outstanding le aseback obligations related to the remaining CTs and QTE were $ 25 million and $ 223 million , respectively. In May 2020, TVA made final rent payments under lease/leaseback transactions involving eight CTs, and TVA had previously acquired the equity interest related to these transactions. Rent payments under the remaining CT lease/leaseback transactions are scheduled to be made through January 2022. TVA does have the option to acquire the equity interests related to transactions involving the remaining eight CTs for additional amounts. In addition, on October 30, 2019, TVA provided notice of its intent to purchase the ownership interest in certain QTE. Repurchase payments are being made through a series of installments in 2021 and 2022, after which the associated leases will be terminated. 126 Table of Contents 15. Accumulated Other Comprehensive Income (Loss) AOCI represents market valuation adjustments related to TVA's currency swaps. The currency swaps are cash flow hedges and are the only derivatives in TVA's portfolio that have been designated and qualify for hedge accounting treatment. TVA records exchange rate gains and losses on its foreign currency-denominated debt and any related accrued interest in net income and marks its currency swap assets and liabilities to market through other comprehensive income (loss) ("OCI"). TVA then reclassifies an amount out of AOCI into net income, offsetting the exchange gain/loss recorded on the debt. For the years ended September 30, 2021 and 2020, TVA reclassified $ 97 million and $ 38 million of gains, respectively, related to its cash flow hedges from AOCI to Interest expense. See Note 16 — Risk Management Activities and Derivative Transactions . TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. As such, certain items that would generally be reported in AOCI or that would impact the statements of operations are recorded as regulatory assets or regulatory liabilities. See Note 10 — Regulatory Assets and Liabilities for a schedule of regulatory assets and liabilities. See Note 16 — Risk Management Activities and Derivative Transactions for a discussion of the recognition in AOCI of gains and losses associated with certain derivative instruments. See Note 17 — Fair Value Measurements for a discussion of the recognition of certain investment fund gains and losses as regulatory assets and liabilities. See Note 22 — Benefit Plans for a discussion of the regulatory accounting related to components of TVA's benefit plans. 16. Risk Management Activities and Derivative Transactions TVA is exposed to various risks related to commodity prices, investment prices, interest rates, currency exchange rates, and inflation as well as counterparty credit and performance risks. To help manage certain of these risks, TVA has historically entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures. Other than certain derivative instruments in its trust investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. 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, and, as a result, the associated net derivative liabilities were derecognized at that time. 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. Overview of Accounting Treatment TVA recognizes certain of its derivative instruments as either assets or liabilities on its Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of these instruments depends on (1) whether TVA uses regulatory accounting to defer the derivative gains and losses, (2) whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and (3) if so, the type of hedge relationship (for example, cash flow hedge). The following tables summarize the accounting treatment that certain of TVA's financial derivative transactions receive: Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1) Amount of Mark-to-Market Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) For the years ended September 30 Derivatives in Cash Flow Hedging Relationship Objective of Hedge Transaction Accounting for Derivative Hedging Instrument 2021 2020 Currency swaps To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk) Unrealized gains and losses are recorded in AOCI and reclassified to Interest expense to the extent they are offset by gains and losses on the hedged transaction $ 126 $ ( 1 ) Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2) (1) Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest Expense For the years ended September 30 Derivatives in Cash Flow Hedging Relationship 2021 2020 Currency swaps $ 97 $ 38 Note (1) There were no amounts excluded from effectiveness testing for any of the periods presented. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $ 25 million of gains from AOCI to Interest expense within the next 12 months to offset amounts anticipated to be recorded in Interest expense related to exchange gain on the debt. 127 Table of Contents Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment Amount of Gain (Loss) Recognized in Income on Derivatives (1) For the years ended September 30 Derivative Type Objective of Derivative (2) Accounting for Derivative Instrument 2021 2020 Interest rate swaps To fix short-term debt variable rate to a fixed rate (interest rate risk) Mark-to-market gains and losses are recorded as regulatory assets or liabilities Realized gains and losses are recognized in Interest expense when incurred during the settlement period and are presented in operating cash flow $ ( 115 ) $ ( 97 ) Commodity contract derivatives To protect against fluctuations in market prices of purchased coal or natural gas (price risk) Mark-to-market gains and losses are recorded as regulatory assets or liabilities Realized gains and losses due to contract settlements are recognized in Fuel expense as incurred — ( 1 ) Notes (1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory assets and liabilities. As such, there were no related gains (losses) recognized in income for these unrealized gains (losses) for the years ended September 30, 2021 and 2020. (2) During the fourth quarter of 2020, TVA discontinued derivative accounting for forward coal contracts. Fair Values of TVA Derivatives At September 30 2021 2020 Derivatives That Receive Hedge Accounting Treatment: Balance Balance Sheet Presentation Balance Balance Sheet Presentation Currency swaps £200 million Sterling (1) $ — $ — $ ( 78 ) Accounts payable and accrued liabilities $( 78 ) £250 million Sterling ( 36 ) Accounts payable and accrued liabilities $( 4 ); Other long-term liabilities $( 32 ) ( 63 ) Accounts payable and accrued liabilities $( 5 ); Other long-term liabilities $( 58 ) £150 million Sterling ( 47 ) Accounts payable and accrued liabilities $( 3 ); Other long-term liabilities $( 44 ) ( 68 ) Accounts payable and accrued liabilities $( 3 ); Other long-term liabilities $( 65 ) Derivatives That Do Not Receive Hedge Accounting Treatment: Balance Balance Sheet Presentation Balance Balance Sheet Presentation Interest rate swaps $1.0 billion notional $ ( 1,182 ) Accounts payable and accrued liabilities $( 44 ); Accrued interest $( 37 ); Other long-term liabilities $( 1,101 ) $ ( 1,449 ) Accounts payable and accrued liabilities $( 43 ); Accrued interest $( 37 ); Other long-term liabilities $( 1,369 ) $476 million notional ( 455 ) Accounts payable and accrued liabilities $( 22 ); Accrued interest $( 10 ); Other long-term liabilities $( 423 ) ( 588 ) Accounts payable and accrued liabilities $( 22 ); Accrued interest $( 10 ); Other long-term liabilities $( 556 ) $42 million notional (2) ( 2 ) Accounts payable and accrued liabilities $( 1 ); Accrued interest $( 1 ) ( 4 ) Accounts payable and accrued liabilities $( 2 ); Other long-term liabilities $( 2 ) Commodity contract derivatives 247 Other current assets $ 210 ; Other long-term assets $ 40 ; Accounts payable and accrued liabilities $( 3 ) 46 Other current assets $ 26 ; Other long-term assets $ 23 ; Accounts payable and accrued liabilities $( 3 ) Notes (1) On June 7, 2021, the 1998 Series H Sterling Global bond matured, and the final payment was made on the related currency swap. (2) Represents two interest rate swaps with notional amounts of $ 28 million and $ 14 million. 128 Table of Contents Cash Flow Hedging Strategy for Currency Swaps To protect against exchange rate risk related to British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurred. TVA had the following currency swaps outstanding at September 30, 2021: Currency Swaps Outstanding Effective Date of Currency Swap Contract Associated TVA Bond Issues Currency Exposure Expiration Date of Swap Overall Effective Cost to TVA 2001 £ 250 million 2032 6.59 % 2003 £ 150 million 2043 4.96 % When the dollar strengthens against the British pound sterling, the exchange gain on the Bond liability and related accrued interest is offset by an equal amount of loss on the swap contract that is reclassified out of AOCI. Conversely, the exchange loss on the Bond liability and related accrued interest is offset by an equal amount of gain on the swap contract that is reclassified out of AOCI. All such exchange gains or losses on the Bond liability and related accrued interest are included in Long-term debt, net and Accrued interest, respectively. The offsetting exchange losses or gains on the swap contracts are recognized in AOCI. If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest expense. The values of the currency swap liabilities are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. Derivatives Not Receiving Hedge Accounting Treatment Interest Rate Derivatives . Generally TVA uses interest rate swaps to fix variable short-term debt to a fixed rate, and TVA uses regulatory accounting treatment to defer the MtM gains and losses on its interest rate swaps. The net deferred unrealized gains and losses are classified as regulatory assets or liabilities on TVA's Consolidated Balance Sheets and are included in the ratemaking formula when gains or losses are realized. The values of these derivatives are included in Accounts payable and accrued liabilities, Accrued interest, and Other long-term liabilities on the Consolidated Balance Sheets, and realized gains and losses, if any, are included on TVA's Consolidated Statements of Operations. For the years ended September 30, 2021 and 2020, the changes in fair market value of the interest rate swaps resulted in the deferral of unrealized gains of $ 402 million and unrealized losses of $ 272 million, respectively. TVA may hold short-term debt balances lower than the notional amount of the interest rate swaps from time to time due to changes in business conditions and other factors. While actual balances vary, TVA generally plans to maintain average balances of short-term debt equal to or in excess of the combined notional amount of the interest rate swaps. Commodity Derivatives . TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity. TVA marks to market natural gas contracts and defers the fair market values as regulatory assets or liabilities on a gross basis. At September 30, 2021, TVA's natural gas contract derivatives had terms of up to three years. Commodity Contract Derivatives At September 30 2021 2020 Number of Contracts Notional Amount Fair Value (MtM) Number of Contracts Notional Amount Fair Value ( MtM ) Natural gas contract derivatives 40 263 million mmBtu $ 247 42 302 million mmBtu $ 46 129 Table of Contents Offsetting of Derivative Assets and Liabilities The amounts of TVA's derivative instruments as reported on the Consolidated Balance Sheets are shown in the table below: Derivative Assets and Liabilities (1) (in millions) At September 30, 2021 At September 30, 2020 Assets Commodity derivatives not subject to master netting or similar arrangement $ 250 $ 49 Liabilities Currency swaps (2) $ 83 $ 209 Interest rate swaps (2) 1,639 2,041 Total derivatives subject to master netting or similar arrangement 1,722 2,250 Commodity derivatives not subject to master netting or similar arrangement 3 3 Total liabilities $ 1,725 $ 2,253 Notes (1) Offsetting a mounts primarily include counterparty netting of derivative contracts, margin account deposits for futures commission merchants transactions, and cash collateral received or paid in accordance with the accounting guidance for derivatives and hedging transactions. There were no material offsetting amounts on TVA's Consolidated Balance Sheets at either September 30, 2021 or 2020. (2) Letters of credit of approximately $ 1.2 billion and $ 1.5 billion were posted as collateral at September 30, 2021 and 2020, respectively, to partially secure the liability positions of one of the currency swaps and one of the interest rate swaps in accordance with the collateral requirements for these derivatives. Other Derivative Instruments Investment Fund Derivatives . Investment funds consist primarily of funds held in the NDT, ART, SERP, and DCP. See Note 17 — Fair Value Measurements — Investment Funds for a discussion of the trusts, plans, and types of investments. The NDT and ART may invest in derivative instruments which may include swaps, futures, options, forwards, and other instruments. At September 30, 2021 and 2020, the NDT held investments in forward contracts to purchase debt securities. The fair values of these derivatives were in net asset positions totaling $ 2 million and $ 13 million at September 30, 2021 and 2020, respectively. 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. At September 30, 2021, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $ 1.7 billion. TVA's collateral obligations at September 30, 2021, under these arrangements were approximately $ 1.1 billion, for which TVA had posted approximately $ 1.2 billion in letters of credit. These letters of credit reduce the available balance under the related credit facilities. TVA's assessment of the risk of its nonperformance includes a reduction in its exposure under the contract as a result of this posted collateral. For all of its derivative instruments with credit-risk related contingent features: • If TVA remains a majority-owned U.S. government entity but Standard & Poor's Financial Services, LLC ("S&P") or Moody's Investors Service, Inc. ("Moody's") downgrades TVA's credit rating to AA or Aa2, respectively, TVA's collateral obligations would likely increase by $ 22 million, and • If TVA ceases to be majority-owned by the U.S. government, TVA's credit rating would likely be downgraded and TVA would be required to post additional collateral. Counterparty Risk TVA may be exposed to certain risks when a counterparty has the potential to fail to meet its obligations in accordance with agreed terms. These risks may be related to credit, operational, or nonperformance matters. To mitigate certain counterparty risk, TVA analyzes the counterparty's financial condition prior to entering into an agreement, establishes credit limits, monitors the appropriateness of those limits, as well as any changes in the creditworthiness of the counterparty, on an ongoing basis, and when required, employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements. Customers . TVA is exposed to counterparty credit risk associated with trade accounts receivable from delivered power sales to LPCs, and from industries and federal agencies directly served, all located in the Tennessee Valley region. Of the $ 1.5 billion and $ 1.4 billion of receivables from power sales outstanding at September 30, 2021 and 2020, respectively, nearly all counterparties were rated investment grade. The obligations of customers that are not investment grade are secured by collateral. TVA is also exposed to risk from exchange power arrangements with a small number of investor-owned regional 130 Table of Contents utilities related to either delivered power or the replacement of open positions of longer-term purchased power or fuel agreements. TVA believes its policies and procedures for counterparty performance risk reviews have generally protected TVA against significant exposure related to market and economic conditions. See Note 1 — Summary of Significant Accounting Policies — Allowance for Uncollectible Accounts, Note 3 — Accounts Receivable, Net , and Note 9 — Other Long-Term Assets . TVA had revenue from two LPCs that collectively accounted for 17 percent of total operating revenues for both the years ended September 30, 2021 and 2020. Suppliers. TVA assesses potential supplier performance risks, including procurement of fuel, parts, and services. If suppliers are unable to perform under TVA's existing contracts or if TVA is unable to obtain similar services from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that may impact generation, maintenance, and capital programs. If one of TVA's fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract. In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power. 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. Natural Gas . TVA purchases its natural gas requirements from a variety of suppliers and delivers to its gas fleet under firm and non-firm transportation contracts on multiple interstate natural gas pipelines. TVA contracts for storage capacity that allows for operational flexibility and increased supply during peak gas demand scenarios or supply disruptions. TVA also maintains on-site, fuel oil backup to operate at a majority of the combustion turbine sites in the event of major supply disruptions. In the event of nonperformance by suppliers, TVA believes that it can obtain replacement natural gas. Coal . To help ensure a reliable supply of coal, TVA had coal contracts with multiple suppliers at September 30, 2021. The contracted supply of coal is sourced from multiple geographic regions of the U.S. and is to be delivered via various transportation methods (e.g., barge, rail, and truck). As a result of emerging technologies, environmental regulations, and lower gas prices on average over the past few years, coal suppliers are facing increased financial pressure, which has led to relatively poor credit ratings and bankruptcies, restructuring, mine closures, or other scenarios. A continued decline in demand for coal could result in further consolidations, additional bankruptcies, restructuring, mine closures, or other scenarios. Current market conditions indicate limited availability of spot market coal due to increased exports, utility demand, and mine capacity capability. Nuclear Fuel . Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services. The supply markets for uranium concentrates and certain nuclear fuel services are subject to price fluctuations and availability restrictions. Supply market conditions may make procurement contracts subject to credit risk related to the potential nonperformance of counterparties. In the event of nonperformance by these or other suppliers, TVA believes that replacement uranium concentrate and nuclear fuel services can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements. Purchased Power . TVA acquires power from a variety of power producers through long-term and short-term PPAs as well as through spot market purchases. In order to meet customer preferences and requirements for cleaner and greener energy, TVA has entered into certain PPAs with renewable resource providers. TVA also has a PPA that expires on March 31, 2032, with a supplier of electricity for 440 megawatts ("MW") of summer net capability from a lignite-fired generating plant. TVA has determined that the supplier has the equivalent of a non-investment grade credit rating; therefore, the supplier has provided credit assurance to TVA under the terms of the agreement. Other Suppliers . TVA has experienced minimal impacts due to force majeure events, with the exception of a manufacturing delay for a major turbine component. A mitigation strategy was developed by TVA and the vendor 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. In May 2021, TVA was notified of the Colonial Pipeline ransomware attack that shut down the pipeline for a period of time. The Colonial Pipeline delivers a portion of TVA’s refined products, such as gasoline and diesel fuel, among others. This event did not have a material impact on TVA business or operations. No alternative fuel supply sources or dispatch of alternative generation sources were necessary during this time, primarily as a result of having sufficient existing inventory. Derivative Counterparties . TVA has entered into physical and financial contracts that qualify as derivatives for hedging purposes, and TVA's NDT, ART, and qualified defined benefit pension plan have entered into derivative contracts for investment purposes. If a counterparty to one of the physical or financial derivative transactions defaults, TVA might incur substantial costs in connection with entering into a replacement transaction. If a counterparty to the derivative contracts into which the NDT, the ART, or the qualified pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless. TVA has concentrations of credit risk from the banking, coal, and gas industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. At 131 Table of Contents September 30, 2021, all of TVA's currency swaps and interest rate swaps as well as all of the derivatives in the NDT and ART were with banking counterparties whose Moody's credit ratings were A2 or higher. TVA classifies qualified forward natural gas contracts as derivatives. See Derivatives Not Receiving Hedge Accounting Treatment above. At September 30, 2021, the natural gas contracts were with counterparties whose ratings ranged from B1 to Aa2 . TVA recognizes the slowdown in demand and the impacts on the oil and gas industry as a result of the COVID-19 pandemic. TVA will continue to monitor the impacts and affected credit ratings and enforce contract performance assurance provisions when applicable. 17. Fair Value Measurements Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the asset or liability's principal market, or in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants. TVA uses market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. Valuation Techniques The measurement of fair value results in classification into a hierarchy by the inputs used to determine the fair value as follows: Level 1 — Unadjusted quoted prices in active markets accessible by the reporting entity for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing. Level 2 — Pricing inputs other than quoted market prices included in Level 1 that are based on observable market data and that are directly or indirectly observable for substantially the full term of the asset or liability. These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities and default rates observable at commonly quoted intervals, and inputs derived from observable market data by correlation or other means. Level 3 — Pricing inputs that are unobservable, or less observable, from objective sources. Unobservable inputs are only to be used to the extent observable inputs are not available. These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants. An entity should consider all market participant assumptions that are available without unreasonable cost and effort. These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available. A financial instrument's level within the fair value hierarchy (where Level 1 is the highest and Level 3 is the lowest) is based on the lowest level of input significant to the fair value measurement. The following sections describe the valuation methodologies TVA uses to measure different financial instruments at fair value. Except for gains and losses on SERP and DCP assets, all changes in fair value of these assets and liabilities have been recorded as changes in regulatory assets, regulatory liabilities, or AOCI on TVA's Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss). Except for gains and losses on SERP and DCP assets, there has been no impact to the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows related to these fair value measurements. Investment Funds At September 30, 2021, Investment funds were comprised of $ 4.1 billion of equity securities and debt securities classified as trading measured at fair value. Equity and trading debt securities are held in the NDT, ART, SERP, and DCP. The NDT holds funds for the ultimate decommissioning of TVA's nuclear power plants. The ART holds funds primarily for the costs related to the future closure and retirement of TVA's other long-lived assets. The balances in the NDT and ART were $ 2.8 billion and $ 1.1 billion, respectively, at September 30, 2021. TVA established a SERP to provide benefits to selected employees of TVA that are comparable to those provided by competing organizations. The DCP is designed to provide participants with the ability to defer compensation to future periods. The NDT, ART, SERP, and DCP funds are invested in portfolios of securities generally designed to achieve a return in line with overall equity and debt market performance. The NDT, ART, SERP, and DCP are composed of multiple types of investments and are managed by external institutional investment managers. Most U.S. and international equities, U.S. Treasury inflation-protected securities ("TIPS"), real estate investment trust securities, and cash securities and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations. Fixed-income investments, high-yield fixed-income 132 Table of Contents investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations. These measurements are based on market and income approaches with observable market inputs. 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 generally involve a three -to- four -year period where the investor contributes capital, followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, 10 years or longer. The NDT had unfunded commitments related to private equity limited partnerships of $ 221 million, private real assets of $ 96 million, and private credit of $ 44 million at September 30, 2021. The ART had unfunded commitments related to limited partnerships in private equity of $ 123 million, private real assets of $ 65 million, and private credit of $ 21 million at September 30, 2021. These investments have no redemption or limited redemption options and may also impose restrictions on the NDT's and ART's ability to liquidate their investments. 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. TVA's private equity limited partnerships, private real asset investments, and private credit investments are valued at net asset values ("NAV") as a practical expedient for fair value. TVA classifies its interest in these types of investments as investments measured at NAV in the fair value hierarchy. Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT, ART, SERP, and DCP consist of either a single class of securities, such as equity, debt, or foreign currency securities, or multiple classes of securities. All underlying positions in these commingled funds are either exchange traded or measured using observable inputs for similar instruments. The fair value of commingled funds is based on NAV per fund share (the unit of account), derived from the prices of the underlying securities in the funds. These commingled funds can be redeemed at the measurement date NAV and are classified as Commingled funds measured at NAV in the fair value hierarchy. Realized and unrealized gains and losses on equity and trading debt securities are recognized in current earnings and are based on average cost. The gains and losses of the NDT and ART are subsequently reclassified to a regulatory asset or liability account in accordance with TVA's regulatory accounting policy. See Note 1 — Summary of Significant Accounting Policies — Cost-Based Regulation and Note 10 — Regulatory Assets and Liabilities . TVA recorded unrealized gains and losses related to its equity and trading debt securities held during each period as follows: Unrealized Investment Gains (Losses) At or for the years ended September 30 Fund Financial Statement Presentation 2021 2020 NDT Regulatory asset $ 279 $ 37 ART Regulatory asset 145 32 SERP Other income (expense) 7 3 DCP Other income (expense) 1 2 Currency and Interest Rate Swap Derivatives See Note 16 — Risk Management Activities and Derivative Transactions — Cash Flow Hedging Strategy for Currency Swaps and Derivatives Not Receiving Hedge Accounting Treatment for a discussion of the nature, purpose, and contingent features of TVA's currency swaps and interest rate swaps. These swaps are classified as Level 2 valuations and are valued based on income approaches using observable market inputs for similar instruments. Commodity Contract Derivatives See Note 16 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment. Most of these contracts are valued based on market approaches which utilize short-term and mid-term market-quoted prices from an external industry brokerage service. Nonperformance Risk The assessment of nonperformance risk, which includes credit risk, 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 currency swaps, interest rate swaps, commodity contracts, and other derivatives which subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to mark the investment to market. Nonperformance risk 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 credit valuation adjustments ("CVAs"). TVA determines an appropriate CVA for each applicable financial instrument based on the term of the 133 Table of Contents 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 counterparty. 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. 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. Fair Value Measurements The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2021 and 2020. Financial assets and liabilities have been classified in their entirety based on the lowest level of input that is significant to the fair value measurement. TVA's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the determination of the fair value of the assets and liabilities and their classification in the fair value hierarchy levels. Fair Value Measurements At September 30, 2021 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets Investments Equity securities $ 634 $ — $ — $ 634 Government debt securities (1) 573 24 — 597 Corporate debt securities (2) — 411 — 411 Mortgage and asset-backed securities — 63 — 63 Institutional mutual funds 225 — — 225 Forward debt securities contracts — 2 — 2 Private equity funds measured at net asset value (3) — — — 357 Private real asset funds measured at net asset value (3) — — — 272 Private credit measured at net asset value (3) — — — 71 Commingled funds measured at net asset value (3) — — — 1,421 Total investments 1,432 500 — 4,053 Commodity contract derivatives — 250 — 250 Total $ 1,432 $ 750 $ — $ 4,303 Quoted Prices in Active Markets for Identical Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Liabilities Currency swaps (4) $ — $ 83 $ — $ 83 Interest rate swaps — 1,639 — 1,639 Commodity contract derivatives — 3 — 3 Total $ — $ 1,725 $ — $ 1,725 Notes (1) Includes government-sponsored entities, including $ 573 million of U.S. Treasury securities within Level 1 of the fair value hierarchy. (2) Includes both U.S. and foreign debt. (3) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheets. (4) TVA records currency swaps net of cash collateral received from or paid to the counterparty, to the extent such amount is not recorded in Accounts payable and accrued liabilities. See Note 16 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities . 134 Table of Contents Fair Value Measurements At September 30, 2020 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets Investments Equity securities $ 500 $ — $ — $ 500 Government debt securities (1) 485 40 — 525 Corporate debt securities (2) — 356 — 356 Mortgage and asset-backed securities — 27 — 27 Institutional mutual funds 188 — — 188 Forward debt securities contracts — 13 — 13 Private equity funds measured at net asset value (3) — — — 194 Private real asset funds measured at net asset value (3) — — — 168 Private credit measured at net asset value (3) — — — 53 Commingled funds measured at net asset value (3) — — — 1,174 Total investments 1,173 436 — 3,198 Commodity contract derivatives — 49 — 49 Total $ 1,173 $ 485 $ — $ 3,247 Quoted Prices in Active Markets for Identical Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Liabilities Currency swaps (4) $ — $ 209 $ — $ 209 Interest rate swaps — 2,041 — 2,041 Commodity contract derivatives — 3 — 3 Total $ — $ 2,253 $ — $ 2,253 Notes (1) Includes government-sponsored entities. (2) Includes both U.S. and foreign debt. (3) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheets. (4) TVA records currency swaps net of cash collateral received from or paid to the counterparty, to the extent such amount is not recorded in Accounts payable and accrued liabilities. See Note 16 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities . The following table presents a reconciliation of all commodity contract derivatives measured at fair value on a recurring basis using significant unobservable inputs (Level 3): Fair Value Measurements Using Significant Unobservable Inputs (in millions) Commodity Contract Derivatives (1) Balance at October 1, 2019 $ ( 4 ) Settlements ( 1 ) Change in net unrealized gains (losses) deferred as regulatory assets and liabilities 5 Balance at September 30, 2020 $ — Note (1) During the fourth quarter of 2020, TVA discontinued derivative accounting for forward coal contracts. Therefore, the fair value measurement using significant unobservable inputs was zero at September 30, 2020, and September 30, 2021. 135 Table of Contents Other Financial Instruments Not Recorded at Fair Value TVA uses the methods and assumptions described below to estimate the fair value of each significant class of financial instruments. The fair value of the financial instruments held at September 30, 2021 and 2020, may not be representative of the actual gains or losses that will be recorded when these instruments mature or are called or presented for early redemption. The estimated values of TVA's financial instruments not recorded at fair value at September 30, 2021 and 2020, were as follows: Estimated Values of Financial Instruments Not Recorded at Fair Value (in millions) At September 30, 2021 At September 30, 2020 Valuation Classification Carrying Amount Fair Value Carrying Amount Fair Value EnergyRight ® receivables, net (including current portion) Level 2 $ 72 $ 71 $ 87 $ 86 Loans and other long-term receivables, net (including current portion) Level 2 99 94 105 93 EnergyRight ® financing obligations (including current portion) Level 2 82 92 97 108 Unfunded loan commitments Level 2 — 3 — 2 Membership interests of VIEs subject to mandatory redemption (including current portion) Level 2 23 30 26 35 Long-term outstanding power bonds, net (including current maturities) Level 2 18,485 24,309 19,743 26,630 Long-term debt of VIEs, net (including current maturities) Level 2 1,049 1,307 1,089 1,419 The carrying value of Cash and cash equivalents, Restricted cash and cash equivalents, Accounts receivable, net, and Short-term debt, net approximate their fair values. The fair value for loans and other long-term receivables is estimated by determining the present value of future cash flows using a discount rate equal to lending rates for similar loans made to borrowers with similar credit ratings and for similar remaining maturities, where applicable. The fair value of long-term debt and membership interests of VIEs subject to mandatory redemption is estimated by determining the present value of future cash flows using current market rates for similar obligations, giving effect to credit ratings and remaining maturities. 18. Revenue Revenue from Sales of Electricity TVA's revenue from contracts with customers is primarily derived from the generation and sale of electricity to its customers and is included in Revenue from sales of electricity on the Consolidated Statements of Operations. Electricity is sold primarily to LPCs for distribution to their end-use customers. In addition, TVA sells electricity to directly served industrial companies, federal agencies, and others. 136 Table of Contents LPC sales Approximately 92 percent of TVA's revenue from sales of electricity for the year ended September 30, 2021 was to LPCs, which then distribute the power to their customers using their own distribution systems. Power is delivered to each LPC at delivery points within the LPC's service territory. TVA recognizes revenue when the customer takes possession of the power at the delivery point. For power sales, the performance obligation to deliver power is satisfied in a series over time because the sales of electricity over the term of the customer contract are a series of distinct goods that are substantially the same and have the same pattern of transfer to the customer. TVA has no continuing performance obligations subsequent to delivery. Using the output method for revenue recognition provides a faithful depiction of the transfer of electricity as customers obtain control of the power and benefit from its use at delivery. Additionally, TVA has an enforceable right to consideration for energy delivered at any discrete point in time and will recognize revenue at an amount that reflects the consideration to which TVA is entitled for the energy delivered. The amount of revenue is based on contractual prices approved by the TVA Board. Customers are invoiced monthly for power delivered as measured by meters located at the delivery points. The net transaction price is offset by certain credits available to customers that are known at the time of billing. Credits are designed to achieve objectives of the TVA Act and include items such as hydro preference credits for residential customers of LPCs, economic development credits to promote growth in the Tennessee Valley, wholesale bill credits to maintain long-term partnerships with LPCs, pandemic credits created to support LPCs and strengthen the public power response to the COVID-19 pandemic, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. Payments are typically due within approximately one month of invoice issuance. Directly served customers Directly served customers, including industrial customers, federal agencies, and other customers, take power for their own consumption. Similar to LPCs, power is delivered to a delivery point, at which time the customer takes possession and TVA recognizes revenue. For all power sales, the performance obligation to deliver power is satisfied in a series over time since the sales of electricity over the term of the customer contract are a series of distinct goods that are substantially the same and have the same pattern of transfer to the customer. TVA has no continuing performance obligations subsequent to delivery. Using the output method for revenue recognition provides a faithful depiction of the transfer of electricity as customers obtain control of the power and benefit from its use at delivery. Additionally, TVA has an enforceable right to consideration for energy delivered at any discrete point in time and will recognize revenue at an amount that reflects the consideration to which TVA is entitled for the energy delivered. The amount of revenue is based on contractual prices approved by the TVA Board. Customers are invoiced monthly for power delivered as measured by meters located at the delivery points. The net transaction price is offset by certain credits available to customers that are known at the time of billing. Examples of credits include items such as economic development credits to promote growth in the Tennessee Valley, pandemic credits created to support directly served customers in response to the COVID-19 pandemic, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. Payments are typically due within approximately one month of invoice issuance. Other Revenue Other revenue consists primarily of wheeling and network transmission charges, sales of excess steam that is a by-product of power production, delivery point charges for interconnection points between TVA and the customer, and certain other ancillary goods or services. 137 Table of Contents Disaggregated Revenues During 2021, revenues generated from TVA's electricity sales were $ 10.4 billion and accounted for virtually all of TVA's revenues. TVA's operating revenues by state for each of the last three years are detailed in the table below: Operating Revenues By State For the years ended September 30 (in millions) 2021 2020 2019 Alabama $ 1,508 $ 1,439 $ 1,593 Georgia 254 249 270 Kentucky 655 624 691 Mississippi 984 941 1,063 North Carolina 66 65 74 Tennessee 6,841 6,740 7,419 Virginia 42 42 45 Subtotal 10,350 10,100 11,155 Off-system sales 7 4 4 Revenue from sales of electricity 10,357 10,104 11,159 Other revenue 146 145 159 Total operating revenues $ 10,503 $ 10,249 $ 11,318 TVA's operating revenues by customer type for each of the last three years are detailed in the table below: Operating Revenues by Customer Type For the years ended September 30 (in millions) 2021 2020 2019 Revenue from sales of electricity Local power companies $ 9,534 $ 9,406 $ 10,351 Industries directly served 707 588 686 Federal agencies and other 116 110 122 Revenue from sales of electricity 10,357 10,104 11,159 Other revenue 146 145 159 Total operating revenues $ 10,503 $ 10,249 $ 11,318 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. The total wholesale bill credits to LPCs participating in the long-term Partnership Agreement were $ 189 million, $ 163 million, and $ 14 million, respectively, for the years ended September 30, 2021, 2020, and 2019. 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. 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. 138 Table of Contents The number of LPCs by contract arrangement, the revenues derived from such arrangements for 2021, and the percentage those revenues comprised of TVA's total operating revenues for 2021, are summarized in the table below: TVA Local Power Company Contracts At or for the year ended September 30, 2021 Contract Arrangements (1) Number of LPCs Revenue from Sales of Electricity to LPCs (in millions) Percentage of Total Operating Revenues 20-year termination notice 145 $ 7,987 76.0 % 5-year termination notice 8 1,547 14.7 % Total 153 $ 9,534 90.7 % Note (1) Ordinarily, the LPCs and TVA have the same termination notice period; however, in a contract with one of the LPCs with a five-year termination notice, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority). Certain LPCs have five-year termination notices or a shorter period if any act of Congress, court decision, or regulatory change requires or permits that election. TVA's two largest LPCs — MLGW and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES accounted for nine percent and eight percent, respectively, of TVA's total operating revenues in 2021, 2020, and 2019. 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 account 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. Contract Balances Contract assets represent an entity's right to consideration in exchange for goods and services that the entity has transferred to customers. TVA does not have any material contract assets at September 30, 2021. Contract liabilities represent an entity's obligations to transfer goods or services to customers for which the entity has received consideration (or an amount of consideration is due) from the customers. These contract liabilities are primarily related to upfront consideration received prior to the satisfaction of the performance obligation. See Economic Development Incentives below. Economic Development Incentives. Under certain economic development programs TVA offers incentives to existing and potential power customers in targeted business sectors that make multi-year commitments to invest in the Tennessee Valley. TVA records those incentives as reductions of revenue. Incentives recorded as a reduction to revenue were $ 315 million, $ 318 million, and $ 310 million for 2021, 2020, and 2019, respectively. Incentives that have been approved but have not been paid are recorded in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. At September 30, 2021 and 2020, the outstanding unpaid incentives were $ 176 million and $ 172 million, respectively. Incentives that have been paid out may be subject to claw back if the customer fails to meet certain program requirements. In May 2020, TVA established flexibility provisions to support the continued operations and recovery of participating customers experiencing financial and operational hardships as a result of the COVID-19 pandemic and corresponding economic downturn. These provisions were made available through the December 2020 application period, which provided flexibility to customers through 2021. The provisions did not have a material impact to TVA. 139 Table of Contents 19. Proprietary Capital Appropriation Investment TVA's power program and stewardship (nonpower) programs were originally funded primarily by appropriations from Congress. In 1959, Congress passed an amendment to the TVA Act that required TVA's power program to be self-financing from power revenues and proceeds from power program financings. While TVA's power program did not directly receive appropriated funds after it became self-financing, TVA continued to receive appropriations for certain multipurpose and other nonpower mission-related activities as well as for its stewardship activities. TVA has not received any appropriations from Congress for any activities since 1999, and since that time, TVA has funded stewardship program activities primarily with power revenues. The 1959 amendment to the TVA Act also required TVA, beginning in 1961, to make annual payments to the U.S. Treasury from net power proceeds as a repayment of and as a return on the Power Program Appropriation Investment until a total of $ 1.0 billion of the Power Program Appropriation Investment has been repaid in accordance with the 1959 amendment. TVA fulfilled its requirement to repay $ 1.0 billion of the Power Program Appropriation Investment in 2014. The TVA Act requires TVA to continue making payments to the U.S. Treasury as a return on the remaining $ 258 million of the Power Program Appropriation Investment. The table below summarizes TVA's activities related to appropriated funds and retained earnings. Summary of Proprietary Capital Activity At or for the years ended September 30 2021 2020 Power Program Nonpower Programs Power Program Nonpower Programs Appropriation Investment $ 258 $ 4,351 $ 258 $ 4,351 Proprietary Capital Balance at beginning of year 12,177 ( 3,803 ) 10,823 ( 3,795 ) Net income (loss) for year 1,520 ( 8 ) 1,360 ( 8 ) Return on power program appropriation investment ( 4 ) — ( 6 ) — Implementation of new accounting standard (1) ( 4 ) — — — Balance at end of year 13,689 ( 3,811 ) 12,177 ( 3,803 ) Net proprietary capital at September 30 $ 13,947 $ 540 $ 12,435 $ 548 Note (1) See Note 2 — Impact of New Accounting Standards and Interpretations. Payments to the U.S. Treasury TVA paid the U.S. Treasury $ 4 million, $ 6 million, and $ 6 million in 2021, 2020, and 2019, respectively, as a return on the Power Program Appropriation Investment. The amount of the return on the Power Program Appropriation Investment is based on the Power Program Appropriation Investment balance at the beginning of that year and the computed average interest rate payable by the U.S. Treasury on its total marketable public obligations at the same date. The interest rates payable by TVA on the Power Program Appropriation Investment were 1.64 percent, 2.44 percent, and 2.37 percent for 2021, 2020, and 2019, respectively. Accumulated Other Comprehensive Income (Loss) The items included in AOCI consist of market valuation adjustments for certain derivative instruments. See Note 16 — Risk Management Activities and Derivative Transactions. TVA records exchange rate gains and losses on debt and related accrued interest in net income and marks its currency swap assets and liabilities to market through OCI. TVA recognized unrealized gains (losses) of $ 126 million and $( 1 ) million in 2021 and 2020, respectively, into AOCI on the MtM of currency swaps. TVA then reclassified an amount out of AOCI into net income, offsetting the gain/loss from recording the exchange gain/loss on the debt and related accrued interest. The amounts reclassified from OCI into net income resulted in increases (decreases) to net income of $ 97 million, $ 38 million, and $( 45 ) million in 2021, 2020, and 2019, respectively. These reclassifications, coupled with the recording of the exchange gain/loss on the debt and related accrued interest, did not have an impact on net income in 2021, 2020, and 2019. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $ 25 million of gains from AOCI to interest expense within the next 12 months to offset amounts anticipated to be recorded in interest expense related to exchange gain on the debt and related accrued interest. 140 Table of Contents 20. Other Income (Expense), Net Income and expenses not related to TVA's operating activities are summarized in the following table: Other Income (Expense), Net For the years ended September 30 2021 2020 2019 Bellefonte $ ( 28 ) $ — $ 21 Interest income 12 18 25 External services 13 12 13 Gains (losses) on investments 16 9 3 Miscellaneous — ( 3 ) — Total other income (expense), net $ 13 $ 36 $ 62 During 2021, TVA made 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 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 payment of compensated costs, along with prejudgment interest, which was fully paid 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. 21. Supplemental Cash Flow Information Interest paid was $ 1.1 billion, $ 1.1 billion, and $ 1.2 billion for 2021, 2020, and 2019, respectively. These amounts differ from interest expense in certain years due to the timing of payments. There was no interest capitalized in 2021, 2020, or 2019. Construction in progress and Nuclear fuel expenditures included in Accounts payable and accrued liabilities at September 30, 2021, 2020, and 2019 were $ 637 million, $ 398 million, and $ 324 million, respectively, and are excluded from the Statements of Consolidated Cash Flows for the years ended September 30, 2021, 2020, and 2019 as non-cash investing activities. Excluded from the Statements of Consolidated Cash Flows for the year ended September 30, 2021, were non-cash investing and financing activities of $ 233 million related primarily to an increase in lease assets and liabilities incurred for a finance lease that was amended in March 2021. Excluded from the Statement of Consolidated Cash Flows for the years ended September 30, 2020 and 2019, as non-cash financing activities were $ 394 million related to lease obligations incurred primarily in connection with a PPA and $ 10 million related to lease obligations incurred for leased equipment, respectively. See Note 8 — Leases for further information regarding TVA's finance leases. Also excluded from the Statement of Consolidated Cash Flows for the year ended September 30, 2020, were $ 80 million and $ 73 million as non-cash financing and investing activities, respectively, due to derecognition of the Paradise pipeline financing obligation and asset. Cash flows from swap contracts that are accounted for as hedges are classified in the same category as the item being hedged or on a basis consistent with the nature of the instrument. 22. Benefit Plans TVA sponsors a qualified defined benefit plan ("pension plan") that covers most of its full-time employees hired prior to July 1, 2014, a qualified defined contribution plan ("401(k) plan") that covers most of its full-time employees, two unfunded post-retirement health care plans that provide for non-vested contributions toward the cost of eligible retirees' medical coverage, other post-employment benefits such as workers' compensation, and the SERP. The pension plan and the 401(k) plan are administered by a separate legal entity, the TVA Retirement System ("TVARS"), which is governed by its own board of directors (the "TVARS Board"). Overview of Plans and Benefits Retirement Plans. The participants in the pension plan receive either a traditional final average pay pension or a cash balance pension. The traditional pension benefit is based on the participant's creditable service, average monthly salary for their highest three consecutive years of eligible compensation, and a pension factor based on the participant's age and years of service, less a Social Security offset. The cash balance pension benefit is based on pay and interest credits accumulated in the participant's account and the participant's age. Participants in the pension plan are also eligible to receive 401(k) plan matching contributions, may be eligible to receive 401(k) plan non-elective contributions, and may be eligible to make after-tax contributions of up to $ 10,000 per year to 141 Table of Contents the pension plan, which at the election of the participant are invested in either the fixed fund, which receives a fixed interest rate set forth in the plan, or the variable fund, which receives a rate of return based on an S&P 500 index fund. Participants in the pension plan may also become eligible for a supplemental pension benefit based on age and years of service at retirement, which is provided to help offset the cost of retiree medical insurance. Employees first hired on or after July 1, 2014, are participants in the 401(k) plan only and receive both non-elective and matching contributions to their accounts in the 401(k) plan. 401(k) Plan . Under the 401(k) plan, the non-elective and matching contributions TVA makes to participant accounts depends on the employee's hire date, years of service, and individual elections. Non-elective employer contributions for eligible participants range from three percent to six percent and matching employer contributions range from 1.5 percent to six percent. TVA recognized 401(k) contribution costs of $ 92 million, $ 88 million, and $ 84 million during 2021, 2020, and 2019, respectively. The 2022 plan contribution costs are estimated to be approximately $ 97 million. Supplemental Executive Retirement Plan. TVA has established a SERP for certain executives in critical positions to provide supplemental pension benefits tied to compensation that exceeds limits imposed by IRS rules applicable to the qualified defined benefit pension plan. Other Post-Retirement Benefits. TVA sponsors two unfunded post-retirement benefit plans that provide for non-vested contributions toward the cost of certain eligible retirees' medical coverage. The first plan covers only certain retirees and surviving dependents who do not qualify for TVARS benefits, including the supplemental pension benefit. The second plan is designed to place a limit on the out-of-pocket amount certain eligible retirees pay for medical coverage and provides a credit based on years of TVA service and monthly base pension amount, reduced by any TVARS supplemental pension benefits or any TVA contribution from the first plan, described above. Effective January 2017, all Medicare-eligible retirees and spouses were provided Medicare supplement coverage through a private exchange. Transition to the exchange does not affect any TVARS supplemental benefits for eligible retirees, and the credit will continue to be calculated in the same manner as before. Other Post-Employment Benefits. TVA employees injured in work-related incidents are covered by the workers' compensation program for federal employees administered through the Department of Labor by the Office of Workers' Compensation Programs in accordance with the provisions of FECA. FECA provides compensation and medical benefits to federal employees for permanent and temporary disability due to employment-related injury or disease. Accounting Mechanisms Regulatory Accounting. TVA has classified all amounts related to unrecognized prior service costs/(credits), net actuarial gains or losses, and the funded status as regulatory assets or liabilities as such amounts are probable of collection in future rates. Additionally, TVA recognizes pension costs as regulatory assets or regulatory liabilities to the extent that the amount calculated under U.S. GAAP as pension expense differs from the amount TVA contributes to the pension plan as pension plan contributions. As a result of plan design changes, future contributions are expected to exceed the expense calculated under U.S. GAAP. Accordingly, TVA will discontinue this regulatory accounting practice once all such deferred costs have been recovered, at which time it will recognize pension costs in accordance with U.S. GAAP. Cost Method. TVA uses the projected unit credit cost method to determine the service cost and the projected benefit obligation for retirement, termination, and ancillary benefits. Under this method, a "projected accrued benefit" is calculated at the beginning of the year and at the end of the year for each benefit that may be payable in the future. The "projected accrued benefit" is based on the plan's accrual formula and upon service at the beginning or end of the year, but it uses final average compensation, social security benefits, and other relevant factors projected to the age at which the employee is assumed to leave active service. The projected benefit obligation is the actuarial present value of the "projected accrued benefits" at the beginning of the year for employed participants and is the actuarial present value of all benefits for other participants. The service cost is the actuarial present value of the difference between the "projected accrued benefits" at the beginning and end of the year. Amortization of Net Gain or Loss. TVA utilizes the corridor approach for gain/loss amortization. Differences between actuarial assumptions and actual plan results are deferred and amortized into periodic cost only when the accumulated differences exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If necessary, the excess is amortized over the average future expected working lifetime of participants expected to receive benefits, which is approximately 11 years for the pension plan and 12 years for the post-retirement plan. Amortization of Prior Service Cost/(Credit). Amortization of net prior service cost/(credit) resulting from a plan change is included as a component of period expense in the year first recognized and every year thereafter until it is fully amortized. The increase or decrease in the benefit obligation due to the plan change is amortized over the average remaining service period of participating employees expected to receive benefits under the plan. The pension and post-retirement plans currently have prior service costs/(credits) from plan changes made in 2009, 2016, 2018, 2019, and 2020 with remaining amortization periods ranging from one to eight years. However, when a plan change reduces the benefit obligation, existing positive prior service costs are reduced or eliminated starting with the earliest established before a new prior service credit base is established. 142 Table of Contents Asset Method . TVA's asset method calculates a market-related value of assets ("MRVA") that recognizes realized and unrealized investment gains and losses over a three-year smoothing period to decrease the volatility of annual net periodic pension benefit costs. The MRVA is used to determine the expected return on plan assets, a component of net periodic pension benefit cost. The difference in the expected return on the MRVA and the actual return on the fair value on plan assets is recognized as an actuarial (gain)/loss in the pension benefit obligation at September 30. However, the MRVA has no impact on the fair value of plan assets measured at September 30. Obligations and Funded Status The actuarial results provided reflect data and assumptions appropriate for the purpose of the measurement of plan obligations and funded status for the year ended. Effects of COVID-19 on the financial markets, regulations, and experience are uncertain and still evolving. The ultimate impact of the COVID-19 pandemic on the pension plan and other post-retirement plans depends on factors beyond TVA's knowledge or control, including the duration and severity of this outbreak, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on the country and region's economy. Therefore, TVA cannot estimate the potential impact to the pension plan and other post-retirement plans at this time. The changes in plan obligations, assets, and funded status for the years ended September 30, 2021 and 2020, were as follows: Obligations and Funded Status For the years ended September 30 911,000,000 Pension Benefits Other Post-Retirement Benefits 2021 2020 2021 2020 Change in benefit obligation Benefit obligation at beginning of year $ 13,675 $ 13,312 $ 544 $ 499 Service cost 57 55 18 16 Interest cost 368 415 16 16 Plan participants' contributions 5 6 — — Collections (1) — — 17 20 Actuarial (gain) loss ( 25 ) 614 ( 53 ) 39 Plan change — 2 — — Net transfers (to) from variable fund/401(k) plan 2 2 — — Expenses paid ( 6 ) ( 5 ) — — Benefits paid ( 728 ) ( 726 ) ( 44 ) ( 46 ) Benefit obligation at end of year 13,348 13,675 498 544 Change in plan assets Fair value of net plan assets at beginning of year 7,959 7,980 — — Actual return on plan assets 1,572 397 — — Plan participants' contributions 5 6 — — Collections (1) — — 17 20 Net transfers (to) from variable fund/401(k) plan 2 2 — — Employer contributions 306 305 27 26 Expenses paid ( 6 ) ( 5 ) — — Benefits paid ( 728 ) ( 726 ) ( 44 ) ( 46 ) Fair value of net plan assets at end of year 9,110 7,959 — — Funded status $ ( 4,238 ) $ ( 5,716 ) $ ( 498 ) $ ( 544 ) Note (1) Collections include retiree contributions as well as provider discounts and rebates. For 2021, the $ 25 million pension benefit obligation actuarial gain is primarily due to the increase in the discount rate from 2.75 percent to 2.90 percent, which decreased the liability by $ 248 million. This gain was partially offset by $ 104 million of actuarial losses due to demographic and plan experience, and an actuarial loss of $ 91 million due to higher COLA and higher interest crediting rates than previously assumed for CY 2022, and a $ 28 million actuarial loss due to updating to the latest mortality improvement scale. 143 Table of Contents For 2020, the $ 614 million pension benefit obligation actuarial loss is primarily due to the decrease in the discount rate from 3.20 percent to 2.75 percent, which increased the liability by $ 714 million. In addition, TVA recognized $ 74 million of actuarial losses due to demographic and plan experience, and an actuarial loss of $ 32 million due to the assumption change of elections for lump sum payments based upon an updated actuarial study. These actuarial losses were partially offset by a $ 137 million gain due to mortality assumption changes and a $ 69 million gain due to a lower COLA than previously assumed. The 2020 plan change of $ 2 million was due to the plan change in the interest rate and mortality basis used to determine SERP retirement payments. The other post-retirement actuarial gain for 2021 decreased the benefit obligation by $ 53 million. 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. In addition, TVA recognized a $7 million gain due to demographic and plan experience, partially offset by a $ 1 million loss due to updating to the latest mortality improvement scale. The other post-retirement actuarial loss for 2020 increased the benefit obligation by $ 39 million. TVA recognized a $ 30 million loss due to the updated plan assumptions related to the election rate for pre-Medicare retirees, assumed per capita claims costs, and expected retiree contributions to reflect observed and anticipated plan experience. In addition, TVA recognized a $20 million loss due to the decrease in the discount rate from 3.30 percent to 3.05 percent, and a $ 4 million loss due to actual experience different from assumed. These losses were partially offset by a gain of $ 15 million due to the updated post-Medicare trend rate assumption attributable to lower than expected premium increases on the private exchange. Amounts related to these benefit plans recognized on TVA's Consolidated Balance Sheets consist of regulatory assets and liabilities that have not been recognized as components of net periodic benefit cost at September 30, 2021 and 2020, and the funded status of TVA's benefit plans, which are included in Accounts payable and accrued liabilities and Post-retirement and post-employment benefit obligations: Amounts Recognized on TVA's Consolidated Balance Sheets At September 30 Pension Benefits Other Post-Retirement Benefits 2021 2020 2021 2020 Regulatory assets (liabilities) $ 3,636 $ 5,115 $ 32 $ 78 Accounts payable and accrued liabilities ( 7 ) ( 5 ) ( 24 ) ( 28 ) Pension and post-retirement benefit obligations (1) ( 4,231 ) ( 5,711 ) ( 474 ) ( 516 ) Note (1) The table above excludes $ 340 million and $ 390 million of post-employment benefit costs that are recorded in Post-retirement and post-employment benefit obligations on the Consolidated Balance Sheets at September 30, 2021 and 2020, respectively. Unrecognized amounts included in regulatory assets or liabilities yet to be recognized as components of accrued benefit cost at September 30, 2021 and 2020, consisted of the following: Post-Retirement Benefit Costs Deferred as Regulatory Assets (Liabilities) At September 30 Pension Benefits Other Post-Retirement Benefits 2021 2020 2021 2020 Unrecognized prior service credit $ ( 517 ) $ ( 615 ) $ ( 93 ) $ ( 112 ) Unrecognized net loss 4,062 5,620 125 190 Amount capitalized due to actions of regulator 91 110 — — Total regulatory assets (liabilities) $ 3,636 $ 5,115 $ 32 $ 78 Information for the pension projected benefit obligation ("PBO") in excess of plan assets and other post-retirement accumulated postretirement benefit obligation ("APBO") has been disclosed in the Obligations and Funded Status table above. The following table provides the pension plan accumulated benefit obligation ("ABO") in excess of plan assets. The other post-retirement plans are unfunded or have no plan assets. Accumulated Benefit Obligations in Excess of Plan Assets At September 30 2021 2020 Accumulated benefit obligation $ 13,299 $ 13,613 Fair value of net plan assets 9,110 7,959 144 Table of Contents The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the years ended September 30, 2021, 2020, and 2019 were as follows: Components of Net Periodic Benefit Cost For the years ended September 30 Pension Benefits Other Post-Retirement Benefits 2021 2020 2019 2021 2020 2019 Service cost $ 57 $ 55 $ 44 $ 18 $ 16 $ 11 Interest cost 368 415 499 16 16 18 Expected return on plan assets ( 493 ) ( 488 ) ( 477 ) — — — Amortization of prior service credit ( 97 ) ( 97 ) ( 99 ) ( 18 ) ( 24 ) ( 24 ) Recognized net actuarial loss 452 436 336 11 10 4 Total net periodic benefit cost as actuarially determined 287 321 303 27 18 9 Amount expensed (capitalized) due to actions of regulator 19 ( 15 ) 1 — — — Net periodic benefit cost $ 306 $ 306 $ 304 $ 27 $ 18 $ 9 Plan Assumptions Plan assumptions utilized to determine benefit obligations and net periodic benefit costs include discount rates, projected health care cost trend rates, expected long-term rate of return on plan assets, rate of increase in future compensation levels, retirement rates, expected timing and form of payments, and mortality rates, the most significant of which are noted below. 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. Actuarial Assumptions Utilized to Determine Benefit Obligations at September 30 Pension Benefits Other Post-Retirement Benefits 2021 2020 2021 2020 Discount rate 2.90 % 2.75 % 3.05 % 3.05 % Rate of compensation increase 3.37 % 3.43 % N/A N/A Weighted average interest crediting rate 5.15 % 5.15 % N/A N/A Cost of living adjustment (COLA) (1) 2.00 % 2.00 % 2.00 % 2.00 % Pre-Medicare eligible per capita claim costs Current health care cost trend rate N/A N/A 6.25 % 6.50 % Ultimate health care cost trend rate N/A N/A 5.00 % 5.00 % Year ultimate trend rate is reached N/A N/A 2027 2027 Pre-Medicare eligible per capita contributions (2) Current health care cost trend rate N/A N/A 8.51 % 11.93 % Ultimate health care cost trend rate N/A N/A 5.00 % 5.00 % Year ultimate trend rate is reached N/A N/A 2027 2027 Post-Medicare eligible Current health care cost trend rate N/A N/A — % — % Ultimate health care cost trend rate N/A N/A 4.00 % 4.00 % Year ultimate trend rate is reached N/A N/A 2024 2024 Notes (1) The COLA assumption is the ultimate long-term rate. The calendar year rate for 2022 is assumed to be 3.15 percent, and for years thereafter the ultimate is used. (2) In 2021 and 2020, due to the COVID-19 pandemic and premium experience, TVA reset the pre-Medicare eligible per capita contributions. The 2021 current trend rate remains at 8.51 percent for years 2022 through 2024, is 5.50 percent in 2025, and reaches the ultimate rate of 5.00 percent in 2027 . 145 Table of Contents Actuarial Assumptions Utilized to Determine Net Periodic Benefit Cost for the Years Ended September 30 (1) Pension Benefits Other Post-Retirement Benefits 2021 2020 2019 2021 2020 2019 Discount rate 2.75 % 3.20 % 4.35 % 3.05 % 3.30 % 4.40 % Expected return on plan assets (2) 6.75 % 6.75 % 6.75 % N/A N/A N/A Weighted average interest crediting rate 5.15 % 5.15 % 5.16 % N/A N/A N/A Cost of living adjustment (COLA) (3) 2.00 % 2.00 % 2.00 % 2.00 % 2.00 % 2.00 % Rate of compensation increase 3.37 % 3.43 % 3.50 % N/A N/A N/A Pre-Medicare eligible per capita claims costs Current health care cost trend rate N/A N/A N/A 6.50 % 6.75 % 6.25 % Ultimate health care cost trend rate N/A N/A N/A 5.00 % 5.00 % 5.00 % Year ultimate trend rate is reached N/A N/A N/A 2027 2027 2024 Pre-Medicare eligible per capita contributions Current health care cost trend rate (4) N/A N/A N/A 11.93 % 6.75 % 6.25 % Ultimate health care cost trend rate N/A N/A N/A 5.00 % 5.00 % 5.00 % Year ultimate trend rate is reached N/A N/A N/A 2027 2027 2024 Post-Medicare eligible Current health care cost trend rate N/A N/A N/A — % — % — % Ultimate health care cost trend rate N/A N/A N/A 4.00 % 4.00 % 4.00 % Year ultimate trend rate is reached N/A N/A N/A 2024 2023 2021 Notes (1) The actuarial assumptions used to determine the benefit obligations at September 30 of each year are subsequently used to determine net periodic benefit cost for the following year except the rate of compensation increase assumption. (2) The actual return on assets for 2021, 2020, and 2019 were 20.30 percent, 5.11 percent, and 4.99 percent, respectively. (3) The COLA assumption is the ultimate rate. The actual calendar year rate is used in determining the expense, and for years thereafter the ultimate rate is used. (4) Due to the COVID-19 pandemic and premium experience, TVA temporarily reset the pre-Medicare eligible per capita contributions current trend rate to measure 2021 other post-retirement cost. Discount Rate. In selecting the assumed discount rate, TVA reviews market yields on high-quality corporate debt and endeavors to match, through the use of a hypothetical bond portfolio, instrument maturities with the maturities of its pension obligations in accordance with the prevailing accounting standards. The selected bond portfolio is derived from a universe of high quality corporate bonds of Aa-rated quality or higher. After the bond portfolio is selected, a single interest rate is determined that equates the present value of the plan's projected benefit payments discounted at this rate with the market value of the bonds selected. Expected Return on Plan Assets . The qualified defined benefit pension plan is the only plan that is funded with qualified plan assets. The expected rate of return is based on annual studies performed by third-party professional investment consultants. 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 investment expenses and impact of active management. Asset allocations are periodically updated using the pension plan asset/liability studies and are part of the determination of the estimates of long-term rates of return. The TVARS asset allocation policy diversifies plan assets across multiple asset classes so as to minimize the risk of large losses. The asset allocation policy is designed to be responsive to changes in the funded status of TVARS. During 2021, the TVARS Board decreased the expected return on plan assets assumption from 6.75 percent to 5.75 percent based upon review of the current plan's funding levels, 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. Compensation Increases . Assumptions related to compensation increases are based upon the latest TVA compensation experience study performed in 2018. Future compensation is assumed to likely increase at rates between 2.50 percent and 14.00 percent per year, depending upon the employee's age. The average assumed compensation increase used to determine benefit obligations and net periodic benefit cost is based upon the current active participants. Mortality. The mortality assumption is comprised of a base table that represents the current future life expectancy adjusted by an improvement scale to project future improvements in life expectancy. TVA's mortality assumptions are based upon actuarial projections in combination with studies of the actual mortality experience of TVA's pension and post-retirement benefit plan participants while taking into consideration the published Society of Actuaries ("SOA") mortality table and projection scale at September 30. In 2020, based upon the most recent mortality experience study, TVA adopted a modified version of the 146 Table of Contents 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 following mortality assumptions were used to determine the benefit obligations for the pension and other post-retirement benefit plans at September 30, 2021, 2020, and 2019. Assumptions used to determine year-end benefit obligations are the assumptions used to determine the subsequent year's net periodic benefit costs. Mortality Assumptions At September 30 2021 2020 2019 Mortality table PRI-2012 table (adjusted) PRI-2012 table (adjusted) RP-2014 table (adjusted) Improvement scale MP-2020 (modified) MP-2019 (modified) MP-2018 (modified) Health Care Cost Trends. The health care cost trend rates are assumptions about the annual rate of changes in the cost of health care benefits currently provided by the post-retirement benefit plan. In establishing health care cost trend rates, TVA reviews actual recent cost trends and projected future trends considering health care inflation, changes in health care utilization, and changes in plan benefits and premium experience. Cost of Living Adjustment. COLAs are an increase in the benefits for eligible retirees to help maintain the purchasing power of benefits as consumer prices increase. Eligible retirees receive a COLA on pension and supplemental benefits in January equal to the percentage change in the Consumer Price Index for All Urban Consumers ("CPI-U") following any year in which the 12-month average CPI-U exceeded by as much as one percent the 12-month average of the CPI-U for the preceding year in which a COLA was given. Increases in the COLA will be the percent increase in CPI-U over the preceding year less 0.25 percent, with a 6.00 percent cap for any one year. TVA's COLA assumption is derived from long-term expectations of the expected future rate of inflation, based upon capital market assumptions, economic forecasts, and the Federal Reserve policy. 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. The actual calendar year COLAs for 2021, 2020, and 2019 were 1.13 percent, 1.54 percent, and 2.21 percent, respectively. Sensitivity of Costs to Changes in Assumptions. The following chart reflects the sensitivity of pension cost to changes in certain actuarial assumptions: Sensitivity to Certain Changes in Pension Assumptions At September 30, 2021 Actuarial Assumption Change in Assumption Impact on 2021 Pension Cost Impact on 2021 Projected Benefit Obligation Discount rate ( 0.25 ) % $ 16 $ 396 Rate of return on plan assets ( 0.25 ) % 18 N/A Cost of living adjustments 0.25 % 29 258 Each fluctuation above assumes that the other components of the calculation are held constant and excludes any impact for unamortized actuarial gains or losses. Plan Investments In August 2021, a new asset allocation plan was put in place to reduce risk and volatility in the TVARS investment portfolio. 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. The qualified pension plan assets are invested across growth, defensive-growth, defensive, 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, the asset holdings of TVARS included the following: 147 Table of Contents Asset Holdings of TVARS At September 30 Plan Assets at September 30 Asset Category Target Allocation 2021 2020 Growth assets 17 % 18 % 44 % Defensive growth assets 38 % 35 % 20 % Defensive assets 20 % 20 % 18 % Inflation-sensitive assets 25 % 27 % 18 % Total 100 % 100 % 100 % 148 Table of Contents Fair Value Measurements The following table provides the fair value measurement amounts for assets held by TVARS at September 30, 2021: TVA Retirement System At September 30, 2021 Total (1)(2) Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Equity securities $ 992 $ 990 $ — $ 2 Preferred securities 9 2 6 1 Debt securities Corporate debt securities 1,360 — 1,359 1 Residential mortgage-backed securities 275 — 267 8 Debt securities issued by U.S. Treasury 741 741 — — Debt securities issued by foreign governments 204 — 200 4 Asset-backed securities 151 — 110 41 Debt securities issued by state/local governments 28 — 28 — Commercial mortgage-backed securities 168 — 151 17 Commingled funds measured at net asset value (3) Equity 619 — — — Debt 881 — — — Blended 105 — — — Institutional mutual funds 841 841 — — Cash equivalents and other short-term investments 710 323 387 — Private credit measured at net asset value (3) 324 — — — Private equity measured at net asset value (3) 1,333 — — — Private real assets measured at net asset value (3) 760 — — — Securities lending collateral 240 — 240 — Derivatives Futures 1 1 — — Swaps 6 — 6 — Foreign currency forward receivable 1 — 1 — Total assets $ 9,749 $ 2,898 $ 2,755 $ 74 Liabilities Derivatives Futures $ 4 $ 4 $ — $ — Foreign currency forward payable 1 — 1 — Swaps 23 — 23 — Securities sold under agreements to repurchase 108 — 108 — Total liabilities $ 136 $ 4 $ 132 $ — Notes (1) Excludes approximately $ 263 million in net payables associated with security purchases and sales and various other payables. (2) Excludes a $ 240 million payable for collateral on loaned securities in connection with TVARS's participation in securities lending programs. (3) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. 149 Table of Contents The following table provides the fair value measurement amounts for assets held by TVARS at September 30, 2020: TVA Retirement System At September 30, 2020 Total (1)(2) Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Equity securities $ 1,624 $ 1,621 $ — $ 3 Preferred securities 11 — 11 — Debt securities Corporate debt securities 1,421 — 1,418 3 Residential mortgage-backed securities 317 — 314 3 Debt securities issued by U.S. Treasury 701 701 — — Debt securities issued by foreign governments 231 — 179 52 Asset-backed securities 116 — 88 28 Debt securities issued by state/local governments 23 — 23 — Commercial mortgage-backed securities 91 — 86 5 Commingled funds measured at net asset value (3) Equity 931 — — — Debt 203 — — — Blended 102 — — — Institutional mutual funds 277 277 — — Cash equivalents and other short-term investments 338 77 261 — Private credit measured at net asset value (3) 166 — — — Private equity measured at net asset value (3) 1,003 — — — Private real assets measured at net asset value (3) 629 — — — Securities lending collateral 167 — 167 — Derivatives Futures 3 3 — — Swaps 10 — 10 — Options 2 — 2 — Foreign currency forward receivable 2 — 2 — Total assets $ 8,368 $ 2,679 $ 2,561 $ 94 Liabilities Derivatives Futures $ 1 $ 1 $ — $ — Foreign currency forward payable 3 — 3 — Swaps 6 — 6 — Options 2 — 2 — Securities sold under agreements to repurchase 123 — 123 — Total liabilities $ 135 $ 1 $ 134 $ — Notes (1) Excludes approximately $ 107 million in net payables associated with security purchases and sales and various other payables. (2) Excludes a $ 167 million payable for collateral on loaned securities in connection with TVARS's participation in securities lending programs. (3) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. 150 Table of Contents The following table provides a reconciliation of beginning and ending balances of pension plan assets measured at fair value on a recurring basis where the determination of fair value includes significant unobservable inputs (Level 3): Fair Value Measurements Using Significant Unobservable Inputs Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Balance at October 1, 2019 $ 42 Net realized/unrealized gains (losses) 46 Purchases, sales, issuances, and settlements (net) 11 Transfers in and/or out of Level 3 ( 5 ) Balance at September 30, 2020 94 Net realized/unrealized gains (losses) ( 48 ) Purchases, sales, issuances, and settlements (net) 32 Transfers in and/or out of Level 3 ( 4 ) Balance at September 30, 2021 $ 74 The following descriptions of the valuation methods and assumptions used by the pension plan to estimate the fair value of investments apply to investments held directly by the pension plan. Third-party pricing vendors provide valuations for investments held by the pension plan in most instances, except for commingled, private credit, private equity, and private real asset funds which are priced at NAVs established by the investment managers. In instances where pricing is determined to be based on unobservable inputs, a Level 3 classification has been assigned. Certain securities priced by the investment manager using a proprietary fair value model with unobservable inputs have been classified as Level 3. Equity and Preferred Securities. Investments listed on either a national or foreign securities exchange or traded in the over-the-counter National Market System are generally valued each business day at the official closing price (typically the last reported sale price) on the exchange on which the security is primarily traded and are classified as Level 1. Equity securities, including common stocks and preferred securities, classified as Level 2 may have been priced by dealer quote or using assumptions based on observable market data, such as yields on bonds from the same issuer or industry. Certain securities priced by the investment manager using unobservable inputs have been classified as Level 3. Corporate Debt Securities. Corporate bonds are valued based upon recent bid prices or the average of recent bid and asked prices when available (Level 2 inputs) and, if not available, they are valued through matrix pricing models. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). Certain securities priced by the investment manager using broker pricing or unobservable inputs have been classified as Level 3. Mortgage and Asset-Backed Securities. Residential mortgage-backed securities consist of collateralized mortgage obligations ("CMOs") and U.S. pass-through security pools related to government-sponsored enterprises. CMO pricing is typically based on either a volatility-driven, multidimensional, single-cash-flow stream model or an option-adjusted spread model. These models incorporate available market data such as trade information, dealer quotes, market color, spreads, bids, and offers. Pricing for government-sponsored enterprise securities, including the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association, is typically based on quotes from the To Be Announced ("TBA") market, which is highly liquid with multiple electronic platforms that facilitate the execution of trading between investors and broker/dealers. Prices from the TBA market are then compared against other live data feeds as well as input obtained directly from the dealer community. Most residential mortgage-backed securities are considered to be priced using Level 2 inputs because of the nature of their market-data-based pricing models. Certain securities priced by vendors using a single broker quote or unobservable inputs have been classified as Level 3. Debt Securities Issued by U.S. Treasury. For U.S. Treasury securities, fair values reflect the closing price reported in the active market in which the security is traded (Level 1 inputs). Debt Securities Issued by Foreign Governments. Foreign government bonds and foreign government inflation-linked securities are typically priced based on proprietary discounted cash flow models, incorporating option-adjusted spread features as appropriate. Debt securities issued by foreign governments are classified as Level 2 because of the nature of their market-data-based pricing models. Certain securities priced by the investment manager using broker quotes or unobservable input have been classified as Level 3. 151 Table of Contents Debt Securities Issued by State and Local Governments . Debt securities issued by state and local governments are typically priced using market-data-based pricing models, and are therefore classified as Level 2. These pricing models incorporate market data such as quotes, trading levels, spread relationships, and yield curves, as applicable. Commercial Mortgage-Backed and Asset-Backed Securities . Commercial mortgage-backed and asset-backed securities are typically priced based on a single-cash-flow stream model, which incorporates available market data such as trade information, dealer quotes, market color, spreads, bids, and offers. Because of the market-data-based nature of such pricing models, these securities are typically classified as Level 2. Certain securities priced by investment managers using broker pricing or unobservable inputs have been classified as Level 3. Commingled Funds . The pension plan invests in commingled funds, which include collective trusts, unit investment trusts, and similar investment funds that predominantly hold debt and/or equity securities as underlying assets. The pension plan's ownership consists of a pro rata share and not a direct ownership of an underlying investment. These commingled funds are valued at their closing NAVs (or unit value) per share as reported by the managers of the commingled funds and as supported by the unit prices of actual purchases and sale transactions occurring as of or close to the financial statement date. These funds have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015. The pension plan is invested in equity commingled funds, which can be categorized as either passively managed index funds or actively managed funds. The equity index funds seek to track the performance of a particular index by replicating its capitalization and characteristics. Passive fund benchmark indices include the Russell 1000 index and MSCI ACWI ex-U.S. index. The actively managed equity funds seek to outperform certain equity benchmarks through a combination of fundamental and technical analysis. Active funds select portfolio positions based upon their research. The pension plan is invested in debt commingled funds, which can be categorized as either passively managed index funds or actively managed funds. The pension plan's debt index fund invests in a diversified portfolio of fixed-income securities and derivatives of varying maturities to replicate the characteristics of the Bloomberg Barclays Capital TIPS. The fund seeks to track the total return of the Bloomberg Barclays Capital U.S. TIPS index. The actively managed debt funds seek to outperform certain fixed-income benchmarks through fundamental research and analysis. The funds invest in a diversified portfolio of fixed income securities and derivatives of varying maturities. Varying by strategy, fund objectives include achieving a positive relative total return through active credit selection and providing risk management through desired strategic exposures. The pension plan is invested in commingled funds, which invest across multiple asset classes that can be categorized as blended. These funds seek to outperform a passive benchmark through active security selection. The funds invest in securities across equity, fixed income, currency, and commodities. The portfolios employ fundamental, quantitative, and technical analysis. The pension plan's investments in equity, debt, blended, and commodity commingled funds can generally be redeemed upon notification of the investment managers, with required notice periods varying from same-day to monthly. These investments do not have unfunded commitments. Institutional Mutual Funds . Investments in institutional mutual funds are valued at prices based on their NAV. Institutional mutual funds have daily published market prices that represent their NAV (or unit value) per share and are classified as Level 1. Cash Equivalents and Other Short-Term Investments and Certificates of Deposit . Cash equivalents and other short-term investments are highly liquid securities with maturities of less than three months and 12 months, respectively. These consist primarily of discount securities such as commercial paper, repurchase agreements, U.S. Treasury bills, and certain agency securities. These securities, as well as certificates of deposit, may be priced at cost, which approximates fair value due to the short-term nature of the instruments. Model based pricing which incorporates observable inputs may also be utilized. These securities are classified as Level 2. Active market pricing may be utilized for U.S. Treasury bills, which are classified as Level 1. Private Credit Funds . Private credit limited partnerships are reported at NAVs provided by the fund managers. These funds have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015. The private credit limited partnerships invest across direct lending, opportunistic credit, and distressed debt strategies. The limited partnerships generally make investments of senior secured first-lien loans, second-lien secured loans, asset-based loans, unitranche loans, and distressed debt opportunities to middle market private companies. The limited partnerships generally seek to obtain financial returns through high income potential and occasional equity upside. The limited partnerships generally have a term life of five to eight years and are diversified by sector and industry. Private Equity Funds. Private equity limited partnerships are reported at NAVs provided by the fund managers. These funds have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015. 152 Table of Contents The private equity limited partnerships typically make longer-term investments in private companies and seek to obtain financial returns through long-term appreciation based on corporate stewardship, improved operating processes, and financial restructuring which may involve a merger or acquisition. Significant investment strategies include venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, energy infrastructure, and special situations. Venture capital partnerships consist of two main groupings. Early-stage venture capital partnerships invest in businesses still in the conceptual stage where products may not be fully developed and where revenues and/or profits may be several years away. Later-stage venture capital partnerships invest in more mature companies in need of growth or expansion capital. Buyout partnerships provide the equity capital for acquisition transactions either from a private seller or the public, which may represent the purchase of the entire company or a refinancing or recapitalization transaction where equity is invested. Mezzanine or subordinated debt partnerships provide the intermediate capital between equity and senior debt in a buyout or refinancing transaction and typically own a security in the company that carries current interest payments as well as a potential equity interest in the company. Restructuring or distressed debt partnerships purchase opportunities generated by overleveraged or poorly managed companies. Special situation partnerships include organizations with a specific industry focus not covered by the other private equity subclasses or unique opportunities that fall outside the regular subclasses. The private equity funds have no investment withdrawal provisions prior to the termination of the partnership. Partnerships generally continue 10 to 14 years after the inception of the fund. The partnerships are generally subject to two to three one-year extensions at the discretion of the General Partner. Partnerships can generally be dissolved by an 80 percent vote in interest by all limited partners, with some funds requiring the occurrence of a specific event. Private Real Asset Investments. The pension plan's ownership in private real asset investments consists of a pro rata share and not a direct ownership of the underlying investments. The fair values of the pension plan's private real asset investments are estimated utilizing NAVs provided by the investment managers. These investments have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015. The investment strategies and methodologies utilized by the investment managers to calculate their NAVs are summarized as follows: The pension plan is invested in limited partnerships that invest in real estate securities, real estate partnerships, and direct real estate properties. This includes investments in office, multifamily, industrial, and retail investment properties in the U.S. and international markets. The investment strategy focuses on distressed, opportunistic, and value-added opportunities. Partnership investments also include mortgage and/or real estate-related fixed-income instruments and related securities. Investments are diversified by property type and geographic location. The pension plan is invested in a commingled fund that develops, renovates, and re-leases real estate properties to create value. Investments are predominantly in top tier real estate markets that offer deep liquidity. Property types include residential, office, industrial, hotel, retail, and land. Properties are diversified by geographic region within the U.S. domestic market. The plan is invested in a second commingled fund that invests primarily in core, well-leased, operating real estate properties with a focus on income generation. Investments are diversified by property type with a focus on office, industrial, apartment, and retail. Properties are diversified within the U.S. with an overweight to major market and coastal regions. Fair value estimates of the underlying investments in these limited partnerships and commingled fund investments are primarily based upon property appraisal reports prepared by independent real estate appraisers within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The appraisals are based on one or a combination of three methodologies: cost of reproduction analysis, discounted cash flow analysis, and sales comparison analysis. Pricing for certain investments in mortgage-backed and asset-backed securities is typically based on models that incorporate observable inputs. The pension plan is invested in energy infrastructure partnerships which acquire essential, long-lived real assets in three main groupings. Upstream assets include oil and gas exploration, drilling, and acquisition. Midstream assets include storage, pipelines, gathering, processing, and transportation of energy commodities. Downstream assets include generation, distribution, and transmission facilities. Additionally, the pension plan is invested in infrastructure partnerships that target mid-sized operating infrastructure companies and/or assets with limited development and construction risk primarily in the energy, transportation and logistics, environmental, telecommunications, and social industries. The partnerships use one or more valuation techniques (e.g., the market approach, the income approach, or the cost approach) for which sufficient and reliable data is available. The use of the market approach generally consists of using comparable market transactions, while the use of the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market, and/or other risk factors. The pension plan is invested in a private real asset investment trust formed to make direct or indirect investments in commercial timberland properties. Pricing for these types of investments is based on comprehensive appraisals that are conducted shortly after initial purchase of properties and at three-year intervals thereafter. All appraisals are conducted by third-party timberland appraisal firms. Appraisals are based on either a sales comparison analysis or a discounted cash flow analysis. Securities Lending Collateral . Collateral held under securities lending arrangements are invested in highly liquid short-term securities, primarily repurchase agreements. The securities are often priced at cost, which approximates fair value due to the short-term nature of the instruments. These securities are classified as Level 2. 153 Table of Contents Derivatives. The pension plan invests in a variety of derivative instruments. The valuation methodologies for these instruments are as follows: Futures . The pension plan enters into futures. The futures contracts are listed on either a national or foreign securities exchange and are generally valued each business day at the official closing price (typically the last reported sales price) on the exchange on which the security is primarily traded. The pricing is performed by third-party vendors. Since futures are priced by an exchange in an active market, they are classified as Level 1. Options . The pension plan enters into purchased and written options. Options that are listed on either a national or foreign securities exchange are generally valued each business day at the official closing price (typically the last reported sales price) on the exchange on which the security is primarily traded. These options are classified as Level 1. Options traded over the counter and not on exchanges are priced by third-party vendors and are classified as Level 2. Swaps . The pension plan enters into various types of swaps. Credit default swaps are priced at market using models that consider cash flows, credit curves, recovery rates, and other factors. The pricing is performed by third-party vendors, and in some cases by clearing exchanges. Interest rate swap contracts are priced at market using forward rates derived from the swap curve, and the pricing is also performed by third-party vendors, and in some cases by clearing exchanges. Other swaps such as equity index swaps and variance swaps are priced by third-party vendors using market inputs such as spot rates, yield curves, and volatility. The pension plan's swaps are generally classified as Level 2 based on the observable nature of their pricing inputs. Foreign currency forwards . The pension plan enters into foreign currency forwards. All commitments are marked to market daily at the applicable translation rates, and any resulting unrealized gains or losses are recorded. Foreign currency forwards are priced by third-party vendors and are classified as Level 2. Securities Sold Under Agreements to Repurchase . The pension plan enters into contracts to sell securities to a counterparty at a specified price with an agreement to purchase the same or substantially the same security from the same counterparty at a fixed or determinable price at a future date. Securities sold under agreements to repurchase are presented at their contract price which approximates fair value due to their short-term nature. These securities are classified as Level 2. In connection with sales of securities under agreements to repurchase, the counterparties require the pension plan to maintain collateral securities with a fair value that approximates or exceeds the contract amount of the repurchase agreement. These securities are held in government inflation-linked bonds and classified as government debt securities. The valuation methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the pension plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Cash Flows Estimated Future Benefit Payments. The following table sets forth the estimated future benefit payments under the benefit plans. Estimated Future Benefits Payments At September 30, 2021 Pension Benefits (1) Other Post-Retirement Benefits 2022 $ 790 $ 24 2023 786 23 2024 782 21 2025 781 20 2026 776 20 2027 - 2031 3,772 107 Note (1) Participants are assumed to receive the Fixed Fund in a lump sum in lieu of available annuity options allowed for certain grandfathered participants resulting in higher estimated pension benefits payments. Contributions . TVA made contributions to the pension plan of $ 300 million for 2021 and 2020. TVA has committed to make a minimum contribution of $ 300 million per year through 2036 or until the plan has reached and remained at 100 percent funded status under the actuarial rules applicable to TVARS. TVA made SERP contributions of $ 6 million and $ 5 million for 2021 and 2020, respectively. TVA made cash contributions to the other post-retirement benefit plans of $ 25 million (net of $ 5 million in rebates) for both 2021 and 2020. TVA expects to contribute $ 300 million to TVARS, $ 7 million to the SERP, and $ 24 million to the other post-retirement benefit plans in 2022 . 154 Table of Contents Other Post-Employment Benefits Post-employment benefit cost estimates are revised to properly reflect changes in actuarial assumptions made at the end of each year. TVA utilizes a discount rate determined by reference to the U.S. Treasury Constant Maturities corresponding to the calculated average durations of TVA's future estimated post-employment claims payments. The use of a 1.52 percent discount rate resulted in the recognition of $ 20 million in expenses in 2021 and an unpaid benefit obligation of $ 340 million at September 30, 2021. The use of a 0.69 percent discount rate resulted in the recognition of approximately $ 45 million in expenses in 2020 and an unpaid benefit obligation of $ 390 million at September 30, 2020. The use of a 1.68 percent discount rate resulted in the recognition of approximately $ 59 million in expenses in 2019 and an unpaid benefit obligation of $ 419 million at September 30, 2019. The U.S. Department of Labor ("DOL") administers TVA's worker compensation program and invoices TVA annually for claims processed. The decrease in the unpaid obligation at September 30, 2021, compared to the prior year is due primarily to the increase in the discount rate from 0.69 percent in 2020 to 1.52 percent in 2021, decreases in loss experience, and fewer claims partially attributable to delayed medical treatments as a result of the COVID-19 pandemic. TVA paid $31 million for 2021 claims to the DOL in September 2021. TVA estimated losses for 2022 are $31 million. The decrease in the unpaid obligation when comparing 2020 to 2019 is due to the timing of the payment of workers compensation claims to the DOL in September 2020 compared to the prior year claims paid in October 2019. TVA paid $ 74 million in claims during 2020 (for both 2020 and 2019 claims experience) compared to $ 39 million in 2019 (for 2018 claims experience). Overall, the decrease in the discount rate from 1.68 percent in 2019 to 0.69 percent in 2020 increased the long-term portion of the unpaid benefit obligation. This increase was offset by a decrease in loss experience and fewer claims partially attributable to delayed medical treatments as a result of the COVID-19 pandemic. The ultimate impact of the COVID-19 pandemic on post-employment benefit costs and claims experience depends on factors beyond TVA's knowledge or control, including the duration and severity of this outbreak, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on the country and region's economy. The current portion which represents unpaid losses and administrative fees due are in Accounts payable and accrued liabilities. The long-term portion is recognized in Post-retirement and post-employment benefit obligations. Amounts Recognized on TVA's Consolidated Balance Sheets At September 30 2021 2020 Accounts payable and accrued liabilities (1) $ — $ — Post-retirement and post-employment benefit obligations 340 390 Note (1) DOL invoices were paid prior to year end in both 2021 and 2020. 23. Commitments and Contingencies Commitments Power Purchase Obligations. TVA has contracted with various independent power producers and LPCs for additional capacity to be made available to TVA. Several of these agreements have contractual minimum payments and are accounted for as either finance or operating leases. In total, these agreements provide 2,455 MW of summer net capability. The remaining terms of the agreements range up to 14 years. Additionally, TVA has contracted with regional transmission organizations to reserve 2,450 MW of transmission service to support purchases from the market and wind PPAs. The remaining terms of these agreements range up to 4 years. Excluding lease-related costs, TVA incurred $ 202 million, $ 202 million, and $ 195 million of expense under these power purchase and transmission service agreements during 2021, 2020, and 2019, respectively. TVA has one power purchase agreement that meets the definition of an unconditional purchase obligation. At September 30, 2021, the non-lease portion of the commitment for each of the next five years are shown below: 2022 2023 2024 2025 2026 Thereafter Unconditional purchase obligation $ 138 $ 138 $ 138 $ 138 $ 137 $ 754 Under federal law, TVA is obligated to purchase power from qualifying facilities (cogenerators and small power producers). As of September 30, 2021, there was a combined qualifying facility capacity of 270 MW from 369 different generation sources, from which TVA purchased power under this law. Unfunded Loan Commitments . At September 30, 2021, TVA's commitments under unfunded loan commitments were $ 4 million for 2022. TVA has no commitments under unfunded loan commitments for 2023 through 2026. 155 Table of Contents Other Commitments. 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, leaseback obligations, and the retirement plan, respectively. Contingencies Nuclear Insurance . Section 170 of the Atomic Energy Act, commonly known as the Price-Anderson Act, provides a layered framework of financial protection to compensate for liability claims of members of the public for personal injury and property damages arising from a nuclear incident in the U.S. This financial protection consists of two layers of coverage: • The primary level is private insurance underwritten by American Nuclear Insurers ("ANI") and provides public liability insurance coverage of $ 450 million for each nuclear power plant licensed to operate. If this amount is not sufficient to cover claims arising from a nuclear incident, the second level, Secondary Financial Protection, applies. • Within the Secondary Financial Protection level, the licensee of each nuclear reactor has a contingent obligation to pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, regardless of proximity to the incident of fault, up to a maximum of approximately $ 138 million per reactor per incident. With TVA's seven reactors, the maximum total contingent obligation per incident is $ 963 million. This retrospective premium is payable at a maximum rate currently set at approximately $ 20 million per year per incident per reactor. Currently, 95 reactors are participating in the Secondary Financial Protection program. In the event that a nuclear incident results in public liability claims, the primary level provided by ANI combined with the Secondary Financial Protection should provide up to approximately $ 13.5 billion in coverage. Federal law requires that each NRC power reactor licensee obtain property insurance from private sources to cover the cost of stabilizing and decontaminating a reactor and its station site after an accident. TVA carries property, decommissioning liability, and decontamination liability insurance from Nuclear Electric Insurance Limited ("NEIL") and European Mutual Association for Nuclear Insurance. The limits for each site vary depending on the site and range from up to $ 2.1 billion to $ 2.8 billion available for a loss at TVA's three sites. Some of this insurance may require the payment of retrospective premiums up to a maximum of approximately $ 128 million. TVA purchases accidental outage (business interruption) insurance for TVA's nuclear sites from NEIL. In the event that an accident covered by this policy takes a nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA, after a waiting period, an indemnity (a set dollar amount per week) with a maximum indemnity of $ 490 million per unit. This insurance policy may require the payment of retrospective premiums up to a maximum of approximately $ 43 million, but only to the extent the retrospective premium is deemed necessary by the NEIL Board of Directors to pay losses unable to be covered by NEIL's surplus. Decommissioning Costs. TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets related primarily to nuclear generating plants, coal-fired generating plants, hydroelectric generating plants/dams, transmission structures, and other property-related assets. See Note 13 — Asset Retirement Obligations . Nuclear Decommissioning . Provision for decommissioning costs of nuclear generating units is based on options prescribed by the NRC procedures to dismantle and decontaminate the facilities to meet the NRC criteria for license termination. At September 30, 2021, $ 3.4 billion, representing the discounted value of future estimated decommissioning costs, was included in AROs. The actual decommissioning costs may vary from the derived estimates because of, among other things, 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. Utilities that own and operate nuclear plants are required to use different procedures in calculating nuclear decommissioning costs under GAAP than those that are used in calculating nuclear decommissioning costs when reporting to the NRC. The two sets of procedures produce different estimates for the costs of decommissioning primarily because of differences in the underlying assumptions. Decommissioning costs studies are updated for each of TVA's nuclear units at least every five years. TVA maintains an NDT to provide funding for the ultimate decommissioning of its nuclear power plants. See Note 17 — Fair Value Measurements — Investment Funds . TVA monitors the value of its NDT and believes that, over the long term and before cessation of nuclear plant operations and commencement of decommissioning activities, adequate funds from investments and additional contributions, if necessary, will be available to support decommissioning. TVA's operating nuclear power units are licensed through various dates between 2033 - 2055, depending on the unit. It may be possible to extend the operating life of some of the units with approval from the NRC. See Note 10 — Regulatory Assets and Liabilities — Nuclear Decommissioning Costs and Note 13 — Asset Retirement Obligations . Non-Nuclear Decommissioning . At September 30, 2021 , $ 3.6 billion, representing the discounted value of future estimated decommissioning costs, was included in AROs. 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 156 Table of Contents 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 how costs will escalate with inflation. 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. TVA updates its underlying assumptions for non-nuclear decommissioning AROs at least every five years. However, material changes in underlying assumptions that impact the amount and timing of undiscounted cash flows are continuously monitored and incorporated into ARO balances in the period identified. TVA maintains an ART to help fund the ultimate decommissioning of its non-nuclear power assets. See Note 17 — Fair Value Measurements — Investment Funds . Estimates involved in determining if additional funding will be made to the ART include inflation rate, rate of return projections on the fund investments, and the planned use of other sources to fund decommissioning costs. See Note 10 — Regulatory Assets and Liabilities — Non-Nuclear Decommissioning Costs and Note 13 — Asset Retirement Obligations . Environmental Matters. TVA's power generation activities, like those across the utility industry and in other industrial sectors, are subject to federal, state, and local environmental laws and regulations. Major areas of regulation affecting TVA's activities include air quality control, greenhouse gas ("GHG") emissions, water quality control, and management and disposal of solid and hazardous wastes. In the future, regulations in all of these areas are expected to become more stringent. Regulations are also expected to have a particular emphasis on climate change, renewable generation, and energy efficiency. TVA has incurred, and expects to continue to incur, substantial capital and operating and maintenance costs to comply with evolving environmental requirements primarily associated with, but not limited to, the operation of TVA's coal-fired and natural gas-fired generating units in general. Environmental requirements placed on the operation of TVA's coal-fired and other generating units will likely continue to become more restrictive over time. Failure to comply with environmental and safety requirements can result in TVA being subject to enforcement actions, which can lead to the imposition of significant civil liability, including fines and penalties, criminal sanctions, and/or the shutting down of non-compliant facilities . From 1970 to 2021, TVA spent approximately $ 6.8 billion to reduce emissions from its power plants, including $ 17 million, $ 19 million, and $ 17 million in 2021, 2020, and 2019, respectively, on clean air controls. TVA estimates that compliance with existing and future Clean Air Act ("CAA") requirements (excluding GHG requirements) could lead to costs of $ 159 million from 2022 to 2026, which include existing controls capital projects and air operations and maintenance projects. TVA also estimates additional expenditures of approximately $ 789 million from 2022 to 2026 relating to TVA's CCR Conversion Program, as well as expenditures of approximately $ 148 million from 2022 to 2024 relating to compliance with Clean Water Act ("CWA") requirements. Future costs could differ from these estimates if new environmental laws or regulations become applicable to TVA or the facilities it operates, or if existing environmental laws or regulations are revised or reinterpreted. There could also be costs that cannot reasonably be predicted at this time, due to uncertainty of actions, that could increase these estimates. Compliance with the EPA's 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. Liability for releases and cleanup of hazardous substances is primarily regulated by the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), and other federal and parallel state statutes. In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years. TVA operations at some facilities have resulted in releases of contaminants that TVA has addressed or is addressing consistent with state and federal requirements. At September 30, 2021 and 2020, TVA's estimated liability for required cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate was approximately $ 18 million and $ 14 million, respectively, on a non-discounted basis, and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. Additionally, the potential inclusion of new hazardous substances under CERCLA and RCRA jurisdiction may significantly affect TVA's future liability for remediating historical releases. Potential Liability Associated with Workers' Exposure to CCR Materials. In response to the 2008 ash spill at Kingston Fossil Plant ("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. 157 Table of Contents 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. Legal Proceedings From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting TVA's activities, as a result of a catastrophic event or otherwise. General. At September 30, 2021, TVA had accrued $ 13 million of probable losses with respect to Legal Proceedings. Of the accrued amount, $ 12 million is included in Other long-term liabilities and $ 1 million is included in Accounts payable and accrued liabilities. 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. Environmental Agreements . In April 2011, TVA entered into two substantively similar agreements, one with the EPA and the other with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental Agreements"). Under the Environmental Agreements, TVA committed to, among other things, take actions regarding coal units that have been completed. TVA also agreed to invest $ 290 million in certain TVA environmental projects of which TVA had spent approximately $ 281 million as of September 30, 2021. Additionally, TVA holds restricted cash in an interest earning trust to fund the remaining project commitments. Any interest earned through the trust must also be spent on agreed upon environmental projects. The total remaining committed spend, including interest earned through the trust, was approximately $ 10 million as of September 30, 2021. In exchange for these commitments, most past claims against TVA based on alleged New Source Review ("NSR") and associated violations were waived and cannot be brought against TVA. Future claims, including those for sulfuric acid mist and GHG emissions, can still be brought against TVA. The liabilities related to the Environmental Agreements are included in Accounts payable and accrued liabilities and Other long-term liabilities on the September 30, 2021, Consolidated Balance Sheets. In conjunction with the approval of the Environmental Agreements, the TVA Board determined that it was appropriate to record TVA's obligations under the Environmental Agreements as regulatory assets, and they are included as such on the September 30, 2021, Consolidated Balance Sheets and will be recovered in rates in future periods. Case Involving Kingston Fossil Plant. On August 12, 2021, an individual landowner and resident of Roane County, Tennessee, filed a lawsuit against TVA and Jacobs in the U.S. District Court for the Eastern District of Tennessee. The complaint asserts claims for damage to property and personal injuries as a result of the 2008 ash spill at Kingston Fossil Plant and the resulting cleanup activities and from continuing operations at Kingston Fossil Plant. The complaint seeks compensatory damages of $ 8 million and punitive damages of $ 10 million. It also requests the court to order TVA to release certain information, to remediate alleged damages to the plaintiff's property, and to stop alleged migration of coal ash onto the plaintiff's property. Case Involving Bull Run Fossil Plant. On August 3, 2021, four residents of Anderson County, Tennessee filed a lawsuit against TVA in the U.S. District Court for the Eastern District of Tennessee. The complaint alleges that the plaintiffs live near Bull Run Fossil Plant ("Bull Run") and asserts claims for personal injuries resulting from exposures to coal combustion residuals ("CCR") that migrated from Bull Run to their home and from second-hand exposures to CCR from a family member who worked with CCR. The complaint also asserts claims for damage to property resulting from the migration of CCR from Bull Run to their home. Plaintiffs seek monetary damages in an unspecified amount as compensation for their injuries and an award of punitive damages in an unspecified amount. The plaintiffs previously filed a similar lawsuit in the U.S. District Court for the Eastern District of Tennessee that had been dismissed without prejudice on August 4, 2020. Case Involving Tennessee River Boat Accident . In July 2015, plaintiffs filed suit in the U.S. District Court for the Northern District of Alabama ("Northern District"), seeking recovery for personal injuries sustained when the plaintiffs' boat struck a TVA transmission line that was being raised from the Tennessee River during a repair operation. The Northern District 158 Table of Contents dismissed the case, finding that TVA's exercise of its discretion as a governmental entity in deciding how to carry out the operation barred any liability for negligence. In August 2017, the U.S. Court of Appeals for the Eleventh Circuit ("Eleventh Circuit") affirmed the decision. The plaintiffs petitioned the Supreme Court for review of the decision, arguing that the provision of the TVA Act that allows suit to be brought against TVA does not allow TVA to claim immunity for discretionary actions. In April 2019, the Supreme Court issued its opinion reversing the judgment of the Eleventh Circuit and remanding the case to the Eleventh Circuit. In July 2019, the Eleventh Circuit remanded the case to the district court for further proceedings consistent with the Supreme Court's opinion. TVA filed a motion for summary judgment on all of the plaintiffs’ claims on November 23, 2020, and the plaintiffs filed a motion for partial summary judgment. The court cancelled the trial scheduled for February 16, 2021, and stated that the trial would be rescheduled, if necessary, following the court’s ruling on the parties’ summary judgment motions. On April 9, 2021, the court issued a memorandum opinion and order granting in part and denying in part TVA’s summary judgment motion. The court denied in full the plaintiffs’ summary judgment motion. On June 15, 2021, through judicially hosted mediation, the parties agreed to settle the remaining claims. The parties filed a stipulation of dismissal on July 2, 2021, and on July 7, 2021, the court dismissed the case with prejudice. Case Involving Bellefonte Nuclear Plant. In November 2018, Nuclear Development filed suit against TVA in the U.S. District Court for the Northern District of Alabama. Nuclear Development alleged that TVA breached its agreement to sell Bellefonte Nuclear Plant ("Bellefonte"). As a remedy, Nuclear Development sought, among other things, (1) an injunction requiring TVA to maintain Bellefonte and the associated NRC permits until the case concluded; (2) an order compelling TVA to complete the sale of Bellefonte; and (3) if the court does not order TVA to complete the sale, monetary damages in excess of $ 30 million. On September 23, 2020, the parties filed competing motions for summary judgment. On March 31, 2021, the court denied both parties' summary judgment motions; however, the court ruled as a matter of law that it would have been illegal under Section 101 of the Atomic Energy Act for TVA to close the sale, relying on past NRC precedent to reach that conclusion. Notwithstanding the legal rulings, the court held that there were disputed issues of material fact as to whether TVA satisfied its contractual obligations to use commercially reasonable best efforts and to cooperate with Nuclear Development in effectuating the close of the sale. Trial took place in May 2021, and the parties filed post-trial briefs on June 9, 2021. Nuclear Development also filed a motion for judgment on partial findings and to reconsider the court's March 31 ruling. The court held closing arguments on July 1, 2021, and on August 26, 2021, the court issued its decision and final judgment. The court held that TVA did not breach its obligations to use commercially reasonable best efforts and to cooperate with Nuclear Development in effectuating the close of the sale. As a result, Nuclear Development is not entitled to specific performance or damages on that claim, and TVA retains full possession and control of the Bellefonte site; however, the court found that, under the contract's termination provision, Nuclear Development was entitled to have TVA return Nuclear Development's $ 22 million down payment and pay approximately $ 1 million of compensated costs, along with 7.5% prejudgment interest. Including post-judgment interest, TVA paid approximately $ 28 million to the court in September 2021 to satisfy the judgment. Post-trial motions have been filed by both parties and are currently pending. Case Involving Rate Changes . On June 9, 2020, a proposed class action lawsuit was filed against TVA and one of its LPCs, Bristol Virginia Utilities Authority ("BVUA"), in federal court in Abingdon, Virginia, by a LPC customer, asserting claims for breach of contract and violation of the Administrative Procedure Act. The lawsuit alleges that the customers of TVA's LPCs are third-party beneficiaries under TVA's wholesale power contracts with its LPCs and that TVA’s rate changes dating back to 2010 violate Section 11 of the TVA Act. Section 11 of the TVA Act establishes the broad policy that TVA power projects shall be considered primarily for the benefit of the people of the Tennessee Valley and that service to industry is a secondary purpose to be used principally to secure a sufficiently high load factor and revenue returns to permit domestic and rural use at the lowest possible rates. The remedies requested include an injunction prohibiting TVA rate changes that violate Section 11, monetary damages, and repayment of rates charged in violation of Section 11. TVA and BVUA filed motions to dismiss the case on November 9, 2020, and filed supplemental motions to dismiss on December 21, 2020, in response to an amended complaint filed by the plaintiff. Oral argument on the motions was held on February 18, 2021, and on March 19, 2021, the court granted TVA’s and BVUA's motions to dismiss. The plaintiff appealed the district court's judgment to the U.S. Court of Appeals for the Fourth Circuit ("Fourth Circuit") on April 15, 2021. The parties filed their briefs with the Fourth Circuit and are waiting for the court to inform them whether it will request oral argument or will decide the appeal based on the briefs. Case Involving Long-Term Agreements . On August 17, 2020, the Southern Environmental Law Center ("SELC") filed a lawsuit in the United States District Court for the Western District of Tennessee on behalf of three environmental groups alleging that, beginning in August 2019, TVA violated the National Environmental Policy Act ("NEPA") and Section 10 of the TVA Act by offering a Long-Term Agreement ("LTA") to its LPCs. The environmental groups represented by SELC are Protect Our Aquifer, Energy Alabama, and Appalachian Voices. The environmental groups claim that TVA violated NEPA because (1) TVA failed to perform an environmental review of the LTAs, which harmed the groups' advocacy efforts and their ability to participate in and to inform TVA's decision, and (2) the LTAs will have a negative effect on the environment by increasing TVA's reliance on coal and gas and impeding TVA's customers' efforts to institute renewable energy options. The groups also claim that the LTAs violate Section 10 of the TVA Act, which authorizes TVA to enter into power contracts "for a term not exceeding twenty years," because, the groups allege, the twenty-year rolling contract with a twenty-year notice of termination requirement makes the LTAs effectively "never ending." The environmental groups request the federal court to (1) declare that TVA's entry into long-term power agreements without preparing an environmental review violated NEPA and the TVA Act, (2) vacate the long-term contracts, and (3) enjoin TVA 159 Table of Contents from implementing "system-wide energy contract programs that significantly affect the environment." TVA filed a motion to dismiss the case on October 20, 2020, and filed a supplemental motion to dismiss on December 4, 2020, in response to an amended complaint filed by the plaintiffs. Oral argument on the motion was held on February 26, 2021, and the court denied TVA's motion to dismiss on August 12, 2021. TVA filed the administrative record of the challenged decisions, and the plaintiffs filed a motion to complete the administrative record. Oral argument on that motion was held on August 13, 2021. Challenge to Anti-Cherrypicking Amendment. On January 11, 2021, Athens Utilities Board, Gibson Electric Membership Corporation, Joe Wheeler EMC, and Volunteer Energy Cooperative filed a complaint and petition with FERC asking FERC to order TVA to provide transmission and interconnection service to the LPCs or other suppliers that want to serve them. The petitioners seek to avoid the limitations of the Anti-Cherrypicking Amendment ("ACPA") to the Federal Power Act ("FPA"), which prohibits FERC from ordering TVA to wheel power from another supplier if the power will be consumed within the TVA service territory. The petitioners argue that section 211A of the FPA, which gives FERC limited jurisdiction over the rates, terms, and conditions of transmission service provided by unregulated transmitting utilities such as TVA, provides an alternate grant of authority to enable FERC to order TVA to wheel power inside its service area unrestricted by the application of the ACPA. The petitioners also argue that the public power model is antiquated and TVA’s refusal to wheel power is not in the public interest because it stifles competition. On August 31, 2021, Joe Wheeler EMC notified FERC of its withdrawal from the complaint and petition. On October 21, 2021, FERC denied the petition. Any aggrieved party will have 30 days to request a rehearing. 24. Related Parties TVA is a wholly-owned corporate agency of the federal government, and because of this relationship, TVA's revenues and expenses are included as part of the federal budget as a revolving fund. TVA's purpose and responsibilities as an agency are described under the "Other Agencies" section of the federal budget. TVA currently receives no appropriations from Congress and funds its business using power system revenues, power financings, and other revenues. TVA is a source of cash to the federal government. TVA will indefinitely continue to pay the U.S. Treasury a return on the outstanding $ 258 million of the Power Program Appropriation Investment. See Note 19 — Proprietary Capital — Appropriation Investment. TVA also has access to a financing arrangement with the U.S. Treasury pursuant to the TVA Act. TVA and the U.S. Treasury entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $ 150 million credit facility. This credit facility has a maturity date of September 30, 2022, and is typically renewed annually. Access to this credit facility or other similar financing arrangements has been available to TVA since the 1960s. See Note 14 — Debt and Other Obligations — Credit Facility Agreements. In the normal course of business, TVA contracts with other federal agencies for sales of electricity and other services. Transactions with agencies of the federal government were as follows: Related Party Transactions At or for the years ended September 30 2021 2020 2019 Revenue from sales of electricity $ 109 $ 105 $ 118 Other income 280 260 258 Expenditures Operating expenses 214 224 222 Additions to property, plant, and equipment 10 9 10 Cash and cash equivalents 30 31 45 Accounts receivable, net 65 94 76 Investment funds 573 485 279 Long-term accounts receivable 31 27 53 Accounts payable and accrued liabilities 15 39 69 Long-term power bonds, net 1 1 — Return on power program appropriation investment 4 6 6 160 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors of Tennessee Valley Authority Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Tennessee Valley Authority (the Company) as of September 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in proprietary capital and cash flows for each of the three years in the period ended September 30, 2021, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 12, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit, Finance, Risk, and Cybersecurity Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Valuation of Pension and Other Post-Retirement Benefit Obligations Description of the Matter At September 30, 2021, the Company’s pension benefit obligation was $4.2 billion and the Company’s other post-retirement benefit obligation was $498 million. The Company updates certain actuarial assumptions used to measure the pension benefit and other post-retirement benefit obligations at September 30 or upon a remeasurement event, as more fully described in Note 22 to the consolidated financial statements. Auditing the pension benefit and other post-retirement benefit obligations was complex due to the judgmental nature of the assumptions, including the discount rates, future compensation levels, mortality rates, healthcare cost trends, and cost of living adjustment, used in the Company’s measurement process. These assumptions have a significant effect on the projected benefit obligations. 161 Table of Contents How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the measurement of pension benefit and other post-retirement benefit obligations. For example, we tested controls over management’s review of the pension benefit obligation and other post-retirement benefit obligation calculations, the relevant data inputs and the significant actuarial assumptions described above. To test the pension benefit and other post-retirement benefit obligations, our audit procedures included, among others, evaluating the methodologies used, the significant actuarial assumptions described above, and the underlying data used by the Company. We compared the actuarial assumptions used by the Company to historical trends and evaluated the pension benefit and other post-retirement benefit obligations. In addition, we involved an actuarial specialist to assist with our procedures. We evaluated the Company’s methodology for determining the discount rates that reflect the maturity and duration of the benefit payments and used to measure the pension benefit and other post-retirement benefit obligations. To evaluate the future compensation levels, mortality rates, healthcare cost trends and cost of living adjustment, we assessed whether the information is consistent with publicly available information, and whether any market data adjusted for entity-specific adjustments was applied. We also tested the completeness and accuracy of the underlying data, including the participant data, used in the determination of the projected benefit obligations. Composite Depreciation Rates Description of the Matter At September 30, 2021, the net book value of the Company’s completed plant was $31.7 billion and depreciation expense for the year then ended was $1.4 billion. As discussed in Note 1 of the consolidated financial statements, the composite method aggregates assets with similar economic characteristics into groups and depreciates each of these groups as one asset. When using the composite method, an underlying assumption is that each group of assets, as a whole, is used and depreciated to the end of the group’s recoverable life. Under the composite method, a depreciation study is completed to review an asset’s service life, salvage value, accumulated depreciation and other factors. A depreciation study is performed at least every five years, with the most recent study performed in 2021. These rates will be the basis of depreciation expense, and therefore will have a significant effect on depreciation expense beginning on October 1, 2021. Auditing the 2021 depreciation study rates for assets subject to the composite method was complex due to the nature of the methods used in the depreciation study to determine the useful service lives and salvage values of the Company’s assets. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process related to the depreciation study, including controls over management’s review of the inputs and methods used in the depreciation study. To test the estimated service lives and salvage values of the Company’s group-life assets, we performed audit procedures that included, among others, obtaining the depreciation study provided by the Company’s third-party engineers and assessing the completeness and accuracy of the data provided to and used by the third-party. We also involved our specialist to evaluate the study. Specifically, our specialist assessed the adequacy and relevance of the data; the nature and basis for the adjustments and calculations used in the study; and the methods and assumptions used by the Company’s third-party specialist and management in determining the service lives and salvage values of assets to perform the depreciation study. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2007 Chattanooga, Tennessee November 12, 2021 162 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.