Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
The risk factors described below, as well as the other information included in this Annual Report on Form 10-K for the fiscal year ended September 30, 2022 (the "Annual Report"), should be carefully considered. Risks and uncertainties described in these risk factors could cause future results of TVA operations to differ materially from historical results as well as from the results anticipated in forward-looking statements. Although the risk factors described below are the ones that TVA considers material, additional risk factors that are not presently known to TVA or that TVA presently does not consider material may also impact TVA's business operations. See Forward Looking Information above for a description of some matters that could affect the below risks or generate new risks. The occurrence of any of the following could have a material adverse effect on TVA's cash flows, results of operations, or financial condition.
For ease of reference, the risk factors are presented in nine categories: (1) operational risks; (2) regulatory, legislative, and legal risks; (3) cybersecurity risks; (4) financial, economic, and market risks; (5) human capital and management risks; (6) risks related to the environment and catastrophic events; (7) accounting and financial reporting risks; (8) COVID-19 related risks; and (9) general risk factors.
OPERATIONAL RISKS
TVA may incur delays and additional costs in its major projects or may be unable to obtain necessary regulatory approval for them.
Among other projects, TVA is seeking to improve the reliability and resiliency of its transmission system, undertaking repairs at certain hydroelectric facilities and dams, building natural gas-fired facilities, and closing some coal-fired plants and their supporting infrastructure. These activities involve risks of overruns in the cost of labor and materials, as well
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as potential delays, in beginning or completing these repairs, closures, or other projects. Further cancellation or delay of projects related to these activities may adversely affect TVA's cash flows, financial condition, and results of operations. Such cancellation or delays may result from, among other things, changes in market conditions, changes in laws or regulations, lack of productivity, human error, supply chain challenges, and the failure to schedule activities properly, TVA's inability to obtain the necessary regulatory approvals or licenses, TVA's decision to cancel construction of a facility or cancel another type of project, including due to delays, cost overruns, or changes in customer preferences, or changes in requirements applicable to how TVA conducts construction, repair, or closure activities.
Further, if projects are not completed according to specifications, TVA may suffer, among other things, delays in receiving licenses, reduced plant efficiency, reduced transmission system integrity and reliability, and higher operating costs.
TVA faces certain risks arising solely from its operation of nuclear units.
TVA has seven operating nuclear units. Unique risks associated with these units include the following:
Hazard Risks . Hazards exist with the use of radioactive material in energy production, including management, handling, storage, and disposal. Further, a nuclear incident at one of TVA's facilities could have significant consequences including loss of life, damage to the environment, damage to or loss of the facility, and damage to non-TVA property. Although TVA carries certain types of nuclear insurance, the amount that TVA is required to pay in connection with a nuclear incident could significantly exceed the amount of coverage provided by insurance. 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. In addition, following an incident TVA may have to pay retrospective insurance premiums, and may experience a reduction in the availability of nuclear insurance, an increase in the cost of nuclear insurance, an increase in the costs of operating nuclear units, or increased regulation or restrictions on the construction, operation, and decommissioning of nuclear facilities. Moreover, federal legislation could impose revenue-raising measures on the nuclear industry to pay claims exceeding the limit for a single incident under the Price-Anderson Act. Further, the availability or price of insurance may be impacted by TVA's acts or omissions, such as a failure to properly maintain a facility, or events outside of TVA's control, such as an equipment manufacturer's inability to meet a guideline, specification, or requirement.
Decommissioning Costs . TVA maintains a Nuclear Decommissioning Trust ("NDT") for the purpose of providing funds to decommission its nuclear facilities. The NDT is invested in securities generally designed to achieve a return in line with overall equity and debt market performance. See Note 16 — Fair Value Measurements — Investment Funds for the NDT balance at September 30, 2022 . TVA might have to make unplanned contributions to the NDT if, among other things:
• The value of the investments in the NDT declines significantly or the investments fail to achieve the assumed real rate of return;
• The decommissioning funding requirements are changed by law or regulation;
• The assumed real rate of return on plan assets, which is currently five percent, is lowered by the TVA Board or the actual real rate of return does not achieve the assumed rate;
• The actual costs of decommissioning are more than planned;
• Changes in technology and experience related to decommissioning cause decommissioning cost estimates to increase significantly;
• TVA is required to decommission a nuclear plant sooner than it anticipates; or
• The NRC guidelines for calculating the minimum amount of funds necessary for decommissioning activities are significantly changed.
If TVA were to have to make additional contributions to the NDT, the contributions may negatively affect TVA's cash flows, results of operations, and financial condition.
Increased Regulation . The NRC has broad authority to adopt regulations related to the licensing, operating, and decommissioning of nuclear generation facilities and may adopt regulations as a result of events that occur at nuclear facilities in the U.S. or throughout the world, such as the events that occurred at Fukushima in 2011. These regulations can result in significant restrictions or requirements on TVA. For example, supplementary NRC rulemaking has been developed to mitigate beyond-design basis flooding and seismic events. To comply with existing, new, or modified regulations, TVA may be required to make substantial capital expenditures at its nuclear plants or make substantial contributions to the NDT. In addition, if TVA were to fail to comply with requirements promulgated by the NRC, the NRC has the authority to impose fines, shut down units, or modify, suspend, or revoke TVA's operating licenses.
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Waste Disposal. TVA's nuclear operations produce various types of nuclear waste materials, including spent fuel. TVA has been storing the spent fuel in accordance with NRC regulations in anticipation that a final storage site for all such waste will be developed and put in operation by the U.S. government. If no such site is forthcoming or if no alternative disposal or reuse plan were developed, then TVA might be required to arrange for the safe and permanent disposal of the spent fuel itself. Such a requirement would cause TVA to incur substantial expense, including substantial capital expenditures, and could cause TVA to change how it operates its nuclear plants.
Availability of Components. Nuclear facilities require specialized components and access to intellectual property for operation. As the number of reliable suppliers of such components decreases and access to intellectual property is reduced, the availability of the components and access to the intellectual property also will likely decrease. If TVA were unable to secure either the original components, intellectual property, or replacements approved for use by the NRC, TVA might have to change how it conducts its operations, which may result in substantial expense. Further, limitations on global trade resulting from COVID-19 or limitations on global shipping could materially decrease the availability or increase the cost of necessary or desired equipment.
TVA may not be able to operate one or more of its nuclear power units.
If operating issues were to develop with certain TVA nuclear power units that were not correctable, TVA may choose to shut down one or more units or be ordered to do so by the NRC. Returning the unit(s) to operation could be a lengthy and expensive process, or might not be feasible depending on circumstances. In either case, TVA's cash flows, results of operations, financial condition, and reputation may be negatively affected. As discussed below, TVA may retire certain fossil fuel facilities to achieve carbon reduction aspirations, which will likely cause TVA to be more reliant on nuclear generation. Further, as discussed below, not being able to operate all of TVA's nuclear units may cause TVA to rely more on forms of generation that produce more carbon, thus making it more difficult for TVA to meet its carbon reduction aspirations or meet reliability goals.
TVA's management and operation of CCR facilities expose it to additional costs and risks.
TVA operates coal-fired units which produce CCR as byproducts of the power production process. TVA contains its CCR in dedicated facilities operated by TVA. TVA has closed some of these facilities and is in the process of closing others. Many of these facilities do not have liners, as they were constructed prior to the requirement that such facilities be built with liners. TVA has been ordered by TDEC to undertake investigations at all CCR facilities in Tennessee. TVA has also been involved in litigation related to certain CCR facilities, and to resolve one such lawsuit, TVA agreed to remove or beneficially reuse some CCR material at Gallatin Fossil Plant ("Gallatin"). TVA could be subject to similar litigation or orders in the future and could be required to restrict or stop the use of some or all CCR facilities that were not required to be closed by the CCR Rule or relocate CCR material to lined facilities. Further, TVA has decided to move all CCR material at Allen Fossil Plant rather than closing the CCR facilities in place as originally planned, and moving the CCR material subjects TVA to additional costs and transportation-related risks. TVA may change its closure plans at other facilities depending on the particular facts of each situation, subject to the completion of any required environmental investigations or studies and any required approval of appropriate state regulators. The ultimate resolution of matters relating to CCR obligations could have a material adverse effect on TVA's cash flows, results of operation, and financial condition.
Physical attacks, threats, or other interference may damage or interfere with TVA's facilities and operations.
TVA has an extensive generation and transmission system and supporting infrastructure that includes, among other things, TVA's generation facilities and transmission infrastructure such as substations, towers, and control centers. Some of TVA's hydroelectric facilities include navigation locks for commerce along the Tennessee River system. TVA also operates flood control dams and supporting infrastructure. Because of TVA's status as a government corporation and TVA's role as predominantly the sole power provider for its service territory, individuals, groups, or nation states may target TVA with physical attacks or threats of such attacks. Although TVA's operations are protected by automated monitoring systems, designated TVA business units (TVA Police and Emergency Management), TVA employees, local law enforcement, or a combination thereof, it may not be possible to effectively deter or prevent such attacks. These attacks could pose health and safety risks, significantly disable or destroy TVA assets, interfere with TVA's operations, result in additional regulatory or security requirements, and otherwise negatively affect TVA's cash flows, results of operations, and financial condition.
TVA's assets or their supporting infrastructure may not operate as planned.
Many of TVA's assets, including generation, transmission, navigation, and flood control assets, have been operating for several decades and have been in nearly constant service since they were completed. As such, they require regular maintenance, repair, and replacement in order to continue uninterrupted operation. Additionally, certain of TVA's newer assets utilize advanced technology that could experience technical or operating issues. The failure of TVA's assets or supporting infrastructure, including information technology systems, to perform as planned may cause health, safety, or environmental problems and may even result in events such as the failure of a dam, the inability to maintain a reservoir
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at the normal or expected level, or an incident at a coal-fired, gas-fired, or nuclear plant or a CCR facility. If these assets or their supporting infrastructure were to fail to operate as planned, if necessary repairs or upgrades were delayed or could not be completed as quickly as anticipated, or if necessary spare parts were unavailable, TVA, among other things:
• May have to invest a significant amount of resources to repair or replace the assets or the supporting infrastructure;
• May have to remediate collateral damage caused by a failure of the assets or the supporting infrastructure;
• May not be able to maintain the integrity or reliability of the transmission system at normal levels;
• May have to operate less economical sources of power;
• May have to purchase replacement power on the open market at prices greater than its generation costs;
• May be required to invest substantially to meet more stringent reliability standards;
• May be unable to maintain insurance on affected facilities, may be required to pay higher premiums for coverage, or may have to make certain repairs or upgrades to maintain insurance or to avoid higher premiums;
• May be unable to operate the assets for a significant period of time; and/or
• May not be able to meet its contractual obligations to deliver power.
Any of these potential outcomes may negatively affect TVA's cash flows, results of operations, financial condition, and reputation.
TVA's operations present significant safety risks that are not able to be completely eliminated.
TVA's safety program, no matter how well designed and operated, may not completely prevent accidents. In addition to the potential human cost of accidents, which could include injury to employees or members of the public, significant accidents could impact TVA's ability to carry out operations, cause it to shut down facilities, subject it to additional regulatory scrutiny, expose it to litigation, damage its reputation, interfere with its ability to attract or retain a skilled workforce, or harm its financial condition.
TVA's service reliability could be affected by problems at other utilities or at TVA facilities, or by the increase in intermittent sources of power.
TVA's transmission facilities are directly interconnected with the transmission facilities of neighboring utilities and are thus part of the larger interstate power transmission grid. Certain of TVA's generation and transmission assets are critical to maintaining reliability of the transmission system. Additionally, TVA uses certain assets that belong to third parties to transmit power and maintain reliability. Accordingly, problems at other utilities as well as at TVA's facilities may cause interruptions in TVA's service to its customers, increase congestion on the transmission grid, or reduce service reliability. The increasing contribution of intermittent sources of power, such as wind and solar, as well as the retirement of coal-fired plants, may place additional strain on TVA's system, and additional transmission upgrades may be required to maintain reliability. Upgrades may include enhancements to existing lines and substations or new installations as necessary to provide adequate power transmission capacity, maintain voltage support, and ensure generating plant and transmission system stability.
TVA's supplies of fuel, purchased power, or other critical items may be disrupted or obtained at a higher cost than planned.
TVA purchases coal, uranium, natural gas, fuel oil, and electricity from a number of suppliers. TVA contracts for conversion of uranium into nuclear fuel and purchases other items, such as anhydrous ammonia, liquid oxygen, or replacement parts that are critical to the operation of certain generation assets. TVA also purchases power from other power producers when the purchase of such power is appropriate due to economic opportunities or operational concerns. TVA's reliance on purchased power may increase if the demand for power suddenly increases in TVA's service territory, and purchased power may become more costly, or perhaps be unavailable, if the demand for power also increases in surrounding service territories. The spike in natural gas prices in 2022 is a recent example of how external factors beyond TVA's control may significantly and unexpectedly increase the cost of an essential fuel resource. Examples of circumstances that may disrupt, or materially increase the cost of, the future delivery of fuel, purchased power, contracted services, or other critical supplies include but are not limited to physical attacks or cyber attacks; political developments, international trade restrictions or tariffs, or legal actions; mine closures or reduced mine production; increase in demand for power by other power systems which reduces the amount of power that is available for purchase by TVA; increases in fuel exports; environmental regulations affecting TVA's suppliers; or transportation or delivery constraints, including the failure of suppliers to timely deliver the services or supplies to TVA at budgeted costs due to force majeure events, shortages of raw materials, supply chain difficulties, increased cost of components and labor, availability of personnel being impacted by COVID-19, strikes, inflation, or similar events.
If one of TVA's suppliers were to fail to perform under the terms of its contract with TVA, TVA might have to purchase replacement fuel, power, or other critical supplies, perhaps at a significantly higher price than TVA is entitled to pay under the contract. In some circumstances, TVA may not be able to recover this difference from the supplier. In
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addition, any disruption of TVA's supplies could require TVA to operate higher cost generation assets, thereby negatively affecting TVA's cash flows, results of operations, and financial condition. Moreover, if TVA were unable to acquire enough replacement fuel, power, or supplies, or were to have insufficient reserves to offset the loss, TVA may not be able to operate certain assets in the manner TVA determines is in its best interests or provide enough power to meet demand. As a result, power curtailments, brownouts, or even blackouts could occur.
Circumstances may arise that result in TVA changing its mix of generation assets.
TVA has determined that its power generation assets should consist of a mix of nuclear, coal-fired, natural gas-fired, and renewable power sources, including hydroelectric. In making this determination, TVA took various factors into consideration, including the anticipated availability of its nuclear units, the availability of non-nuclear facilities, the forecasted cost of natural gas and coal, the forecasted demand for electricity, achievement of its carbon reduction aspirations, and environmental compliance including the expense of adding air pollution controls to its coal-fired units. If any of these assumptions materially change or are impacted by subsequent events, TVA's generation mix may not address its operational needs in the most efficient and cost-effective manner. Additionally, reallocating the mix of power generation assets from the planned mix may result in additional capital and operational expense. Furthermore, achieving TVA's carbon reduction aspirations may require TVA to make significant capital investments, including investments in new technologies. TVA may retire coal-fired and natural-gas fired generation facilities sooner than planned in order to meet carbon reduction aspirations, which also may require significant capital expenditures or additional power purchases, potentially causing an adverse effect on TVA's cash flows, results of operations, financial condition, and reputation.
TVA may not be able to meet its carbon reduction aspirations, which may result in additional capital expenditures or higher operating expense.
The achievement of TVA's carbon reduction aspirations is subject to numerous risks beyond TVA's control that are difficult to predict and may prevent TVA from timely achieving such aspirations. Occurrences that may prevent TVA from achieving its carbon reduction aspirations in a timely manner include, but are not limited to, the following:
• Federal law or policy could restrict TVA's ability use natural gas or nuclear power, which are each essential for TVA to reduce its carbon emissions.
• TVA may not receive timely approval from federal and state regulators for construction and operation of new natural gas assets and attendant infrastructure (e.g., pipelines).
• TVA may have difficulty obtaining resources or labor needed to complete projects on time and within budget.
• Legal challenges may slow or restrict TVA's ability to replace coal generation with cleaner forms of energy. These challenges may, for instance, come in the form of direct legal challenges to TVA projects or through challenges to TVA's attempts to obtain necessary licenses and permits.
• Potential delays in projects, along with now-anticipated load growth, may force TVA to rely on coal powered generation more heavily, or longer, than it had previously projected.
• As to TVA's longer term carbon reduction aspirations, the development of new technology necessary to meet these aspirations may not occur as quickly, feasibly, or cost-effectively as necessary.
• TVA's unique federal least-cost planning obligations may prevent TVA from moving forward with carbon-free generation as quickly as utilities that do not have the same requirements.
REGULATORY, LEGISLATIVE, AND LEGAL RISKS
Existing laws, regulations, and orders may negatively affect TVA's cash flows, results of operations, and financial condition, as well as the way TVA conducts its business.
TVA is required to comply with comprehensive and complex laws, regulations, and orders. The costs of complying with these laws, regulations, and orders are substantial, and costs could be significantly more than TVA anticipates, especially with respect to environmental and nuclear compliance. In addition, TVA is required to obtain numerous permits and approvals from governmental agencies that regulate its business, and TVA may be unable to obtain or maintain all desired regulatory approvals. If there were a delay in obtaining desired regulatory approvals or if TVA were to fail to obtain or maintain any approvals or to comply with any law, regulation, or order, TVA may have to change how it operates certain assets, may be unable to operate certain assets, or may have to pay fines or penalties for continuing to operate the assets.
TVA's quasi-governmental status may interfere with its ability to quickly respond to the needs of its current or potential customers or to act solely in the interest of its ratepayers.
As a quasi-governmental entity, TVA has certain legal requirements that prevent it from responding as quickly to potential changes in the market or requests from current or potential customers as might be desired or in comparison to other utilities. For example, TVA is required to comply with the National Environmental Policy Act ("NEPA"), which
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requires environmental reviews to be performed in connection with certain projects. The delay in responding to requests could damage relationships with current customers, deter potential customers from moving into TVA's service territory, or damage TVA's reputation.
TVA's nature as a quasi-governmental entity imposes additional pressures that most companies do not face, including most significantly the requirements to support economic development, simultaneously manage a river system for commerce, recreation, flood control, and power generation, and promote recreational opportunities within its service territory.
TVA funds these operations almost entirely from the sale of electricity. In addition, TVA must balance these obligations with the requirement to provide power at the lowest feasible rates. If TVA does not adequately communicate how it fulfills its various missions and the value it provides, its reputation may be harmed, which may result in political pressure to change its nature or operations as well as in the loss of public support.
TVA is involved in various legal and administrative proceedings, the outcomes of which may affect TVA's finances and operations.
TVA is involved in a wide range of legal and administrative proceedings and is likely to become involved in future additional proceedings in the ordinary course of business or as a result of, among other things, catastrophic events or environmental conditions arising from TVA property or areas where TVA has disposed of materials or property. The additional proceedings could involve, among other things, challenges to TVA’s CCR facilities, challenges to TVA's natural gas-fired plants and related pipelines, nuisance suits involving TVA’s coal-fired plants, challenges to the anti-cherrypicking provision, challenges under NEPA, and challenges to TVA’s authority to set rates and enter into contracts. Although TVA cannot predict the outcome of the individual matters in which TVA is involved or will become involved, the resolution of these matters could require TVA to make expenditures in excess of established reserves and in substantial amounts. Similarly, resolution of any such proceedings may require TVA to change its business practices or procedures, incur additional capital or operational expense, change how it operates its fossil-fueled units, cease construction of new natural gas-fired plants, reduce emissions to a greater extent than TVA had planned, close existing CCR facilities sooner than planned, build new CCR facilities sooner than planned, build new CCR facilities that were not planned, cease operation of some coal-fired units, adjust its rates, or terminate or modify contracts. These events individually or in the aggregate could also have a material adverse effect on TVA’s cash flows, results of operations, and financial condition. For a discussion of certain current material legal proceedings, see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges and Note 21 — Commitments and Contingencies — Legal Proceedings .
New laws, regulations, or administrative or executive orders, or congressional actions or inactions, may negatively affect TVA's cash flows, results of operations, and financial condition, as well as the way TVA conducts its business in ways that are different from most other utilities.
Because TVA is a corporate agency and instrumentality established by federal law, it may be affected by a variety of laws, regulations, and administrative or executive orders that do not directly apply to other electric utilities. For example, federal legislation may expand or reduce TVA's activities, change its governance structure, require TVA to sell some or all of the assets that it operates, require TVA to take certain other operational or regulatory actions, reduce or eliminate the United States' ownership of TVA, or even liquidate TVA. Congress could act, or fail to take action, on various issues that may impact TVA, including but not limited to action or inaction related to the national debt ceiling or automatic spending cuts in government programs. Furthermore, federal administrative or executive orders could induce TVA to change the way it conducts its business. See Item 1, Business — Environmental Matters — Climate Change — Executive Actions for a discussion of recent executive orders regarding climate change.
Although it is difficult to predict new laws, regulations, or administrative or executive orders or congressional action or inaction, or how such laws, regulation, orders, actions, or inactions may impact TVA, some of the possible effects are described below.
TVA may lose its protected service territory.
TVA’s service area is defined primarily by provisions of law and long-term contracts. The fence limits the region in which TVA or LPCs that distribute TVA power may provide power. The anti-cherrypicking provision precludes FERC from ordering TVA to transmit power for others if that power would be consumed within the TVA service area. State service territory laws limit unregulated third parties’ ability to sell electricity to consumers. From time to time, there have been efforts to circumvent the protection of the anti-cherrypicking provision. For example, in 2021, four LPCs filed a complaint and petition with FERC to order TVA to provide transmission and interconnection service to the LPCs or other suppliers that want to serve them, although three of the four LPCs subsequently withdrew from the complaint and petition. See Note 21 — Commitments and Contingencies — Legal Proceedings — Challenge to Anti-Cherrypicking Amendment . In addition, the protections afforded by the anti-cherrypicking provision conceivably could be affected by future federal legislation. If FERC were to limit the application of the anti-cherrypicking provision or if federal legislation
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were to eliminate or limit the application of the anti-cherrypicking provision without corresponding legislative modifications to the territorial limitations imposed by the fence, TVA's ability to respond to any resulting customer attrition would be constrained. Because TVA's ability to expand its customer base is constrained by the fence, reductions in demand have to be offset by such actions as reducing TVA’s internal costs or increasing rates. Any failure of such measures to fully offset the reduced demand for power may negatively affect TVA’s cash flows, results of operations, and financial condition.
TVA may become subject to additional environmental regulation.
New environmental laws, regulations, or orders may become applicable to TVA or the facilities it operates, and existing environmental laws or regulations may be revised or reinterpreted in a way that adversely affects TVA, including substantially increasing TVA's cost of operations, prompting the early retirement of generation facilities, or requiring significant capital expenditures. Possible areas of future laws or regulations include, but are not limited to, GHGs, CCR, ELGs, water quality, renewable energy portfolio standards, and natural gas production and transmission. See Item 1, Business — Environmental Matters — Water Quality Control Developments for a discussion of the EPA's new effluent limitation guidelines, Item 1, Business — Environmental Matters — Cleanup of Solid and Hazardous Wastes — Coal Combustion Residuals for a discussion of recent revisions to the EPA's CCR rule, and Item 1, Business — Environmental Matters — Climate Change — Executive Actions for a discussion of recent executive orders regarding climate change. Litigation may affect the timing and requirements of new regulatory proposals or may indirectly affect TVA, potentially even when TVA is not involved. Failure to comply with environmental requirements can result in enforcement actions and litigation, which can lead to the imposition of significant civil liability, including fines and penalties, criminal sanctions, and/or temporary or permanent closure of non-compliant facilities.
TVA may become subject to additional NERC requirements.
TVA is subject to federal reliability standards that are set forth by NERC and approved by FERC. TVA recognizes that reliability standards and expectations continue to become more complex and stringent for transmission systems. Complying with these or additional requirements set forth by NERC may require significant capital expenditures and may negatively affect TVA's cash flows, results of operations, and financial condition.
TVA could become subject to other federal legislation aimed specifically at curtailing TVA’s activities.
In addition to potential adverse impacts from changes to more general laws and regulations, because of TVA’s federal-entity status, TVA could become subject to laws or other restraints specifically aimed at TVA, including but not limited to the following examples.
Divestment or Forced Sale of TVA Assets. From time to time, federal officials have suggested that the federal government should either divest TVA or require TVA to sell some or all of its assets, including its transmission system. Either event could trigger change of control provisions in certain material contracts or covenants in TVA’s bond documents that concern the sale or disposal of a substantial portion of TVA’s power properties. TVA may then, among other things, be required to pay off debt more quickly than anticipated, be unable to access credit facilities, or both. Additionally, the loss of the transmission system could interfere with TVA’s operations and require TVA to contract for the transmission of electricity to customers, likely at a higher cost. These factors could negatively affect TVA’s operations, change the way it conducts such operations, and increase costs.
Restriction on TVA Accessing or Controlling Its Funds. Other federal entities may attempt to restrict TVA’s ability to access or control its funds that are on deposit in TVA’s account in the U.S. Treasury. For example, should the U.S. Treasury approach its debt ceiling, the U.S. Treasury might, as part of an effort to control cash disbursements, attempt to require TVA to receive approval before disbursement of funds from TVA’s U.S. Treasury account. Additionally, the OMB might, in the event that automatic spending cuts go into effect, attempt to require TVA to reduce its budget by a specified percentage (although the legal applicability of such a situation to TVA would depend upon the specific legislation making the automatic spending cuts). Such attempts to restrict TVA’s ability to control or allocate funds could adversely affect TVA’s cash flows, results of operations, financial condition, business relationships, the way it conducts its business, and its reputation.
Loss of TVA’s Sole Authority to Set Rates. Under the TVA Act, the TVA Board has the sole authority to set the rates that TVA charges for electricity, and these rates are not subject to further regulation. This authority provides the TVA Board the flexibility to set rates at a level sufficient to generate adequate revenues to service TVA’s financial obligations, properly operate and maintain its assets, and provide for reinvestment in its power program. If the TVA Board were to lose this authority, or if such authority were to be restricted, such as through becoming subject to an external review process or other regulatory oversight, such an occurrence could result in material adverse impacts on TVA’s ability to meet financial obligations, operate its system in a manner that it considers most efficient or appropriate, and adapt its business to changing circumstances.
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Loss of TVA’s Authority to Manage the Tennessee River System. TVA’s management of the Tennessee River system helps TVA effectively operate its power system. TVA’s ability to integrate management of the Tennessee River system with power system operations increases power system reliability and reduces costs. Restrictions on how TVA manages the Tennessee River system could negatively affect its operations or increase costs.
Lowering of TVA’s Debt Ceiling . The TVA Act provides that TVA may issue Bonds in an amount not to exceed $30.0 billion outstanding at any time. On September 30, 2022, TVA had $19.3 billion of Bonds outstanding (not including non-cash items of foreign currency exchange gain of $150 million, unamortized debt issue costs of $42 million, and net discount on sale of Bonds of $82 million). Future federal legislation could lower TVA’s debt ceiling or broaden the types of financial instruments that are covered by the ceiling, thus inhibiting TVA’s ability to raise capital necessary for essential business functions or for investing in carbon free technologies.
Loss or Limitation of TVA’s Authority to Manage Real Property Currently Entrusted to TVA. TVA’s management of real property containing power generation and transmission structures, as well as that consisting of reservoir shorelines, is important for the effective operation of the power system. Restrictions on or the loss of the authority to manage these properties could negatively affect TVA’s operations or increase costs.
CYBERSECURITY RISKS
TVA’s facilities and information infrastructure may not operate as planned due to cyber threats to TVA’s assets and operations.
TVA’s operations are heavily computerized and include assets such as information technology and networking systems. As with all industries, the reliance on computerization and networking makes TVA a target for cyber attacks, and the risk of such attacks may increase as individual devices and equipment become accessible via the internet. TVA has been targeted by cyber attacks in the past and anticipates that it will be targeted in the future. These attacks may have been carried out, or in the future could be carried out, by individuals, groups, or nation states. Although TVA employs extensive cyber safeguards and works with industry specialists and relevant governmental authorities to deter, stop, or mitigate cyber attacks, it is possible that these measures might not prevent all attacks. Furthermore, as technology becomes more prevalent in energy infrastructure, TVA's infrastructure may be subject to increased cyber vulnerability in the future. Cyber attacks could come through one or more of a number of means, such as computer viruses, malicious or destructive code, phishing attacks, denial of service attacks, or ransomware. Cyber attacks may result in security breaches that may be detrimental to TVA operations, including third parties improperly accessing TVA's system and demanding ransom based on threats to expose sensitive data, including data from employees, customers, and financial parties, to gain operational control, or to expose security vulnerabilities specific to TVA’s facilities. In such a case, a cyber attack could compromise sensitive data, significantly disrupt operations, require additional expenditures for cybersecurity, negatively affect TVA’s cash flows, results of operations, financial condition, and reputation, and pose health and safety risks to TVA personnel and the customers and communities that TVA serves.
Because the investigation of any cybersecurity breach is inherently unpredictable and would require substantial time to complete, TVA may not be able to quickly remediate the consequences of any breach, which may increase the costs and enhance the negative consequences associated with a breach. Additionally, the theft, damage, or improper disclosure of sensitive data may subject TVA to penalties and claims from third parties or increased government oversight.
Cyber attacks on third parties could interfere with or harm TVA.
Many third parties on which TVA relies for services, including for transferring funds to non-TVA entities or receiving delivery of products in the ordinary course of business, are heavily computerized and use assets such as information technology and networking systems. If these third parties were to experience interferences from cyber attacks, which attacks have occurred and may continue to occur, the services they provide TVA could be disrupted. This disruption could interfere with TVA’s ability to perform its obligations to others, transfer funds, obtain fuel or critical parts, supplies, or services, or make payments, which in turn could negatively affect TVA’s cash flow, results of operation, financial condition, and reputation. Additionally, the theft, damage, or improper disclosure of sensitive data held by these third parties may subject TVA to further harm. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Safeguarding Assets — Cybersecurity for a discussion of recent cyber attacks on third parties.
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FINANCIAL, ECONOMIC, AND MARKET RISKS
TVA may have to make significant future contributions to fund its qualified pension plan.
On September 30, 2022, TVA's qualified pension plan had assets of approximately $8.1 billion compared to liabilities of approximately $10.5 billion. The plan is mature with approximately 22,000 retirees and beneficiaries receiving benefits of over $700 million per year. The costs of providing benefits depend upon a number of factors, including, but not limited to, provisions of the plan; changing experience and assumptions related to terminations, retirements, and mortality; rates of increase in compensation levels; rates of return on plan assets; discount rates used in determining future benefit obligations and required funding levels; optional forms of benefit payments selected; future government regulation; and levels of contributions made to the plan.
The pension plan covers substantially all of TVA's full-time annual employees hired prior to July 1, 2014. Although the plan has been frozen to new participants since July 1, 2014, TVA's payment obligation under the pension plan is substantial and changes in any one or more of these factors could cause TVA's benefit expenditures under the plan to increase and significantly exceed TVA's planned contributions. Unfavorable financial market conditions, including those arising from the COVID-19 pandemic, may cause lower-than expected rates of return on plan assets, loss in value of the investments, and lower discount rates used in determining future benefit obligations. These changes would negatively impact the funded status of the plan and may require TVA to make contributions in excess of the amounts planned. Additional contributions to the plan and absorption of additional costs would negatively affect TVA's cash flows, results of operations, and financial condition.
TVA’s reliance on debt markets may make TVA more vulnerable to being unable to meet cash requirements than private utilities that can issue equity securities.
TVA uses cash provided by operations together with proceeds from power system financings to fund its current cash requirements. TVA's power system financings consist primarily of the sale of Bonds and secondarily of alternative forms of financing, such as lease arrangements. It is critical that TVA continues to have access to the debt markets in order to meet its cash requirements. The importance of having access to the debt markets is enhanced by the fact that TVA, unlike most utilities, relies almost entirely on debt capital, since as a governmental instrumentality, TVA cannot issue equity securities. TVA’s access to the debt markets could be negatively impacted by market disruptions, including disruptions that result from systemic risks to the banking system and the financial markets. Moreover, disruptions resulting from rapid increases in interest rates or expectations for future increases could impact TVA’s ability to raise funds to finance its cash requirements.
TVA's debt ceiling could limit TVA's ability to carry out its business in the event that TVA were to approach or reach it.
Approaching or reaching the debt ceiling may negatively affect TVA's business by limiting TVA's ability to access capital markets and by increasing the amount of debt TVA must service without new debt capital. This occurrence may restrict TVA's ability to raise debt capital to acquire new power program assets or maintain existing ones, to carry out upgrades or improvements to existing assets or build new ones, to purchase power under long-term power purchase agreements, or to meet regulatory requirements. In addition, approaching or reaching the debt ceiling may lead to increased legislative or regulatory oversight of TVA's activities and could lead to negative rating actions by credit rating agencies.
TVA, together with owners of TVA securities, may be impacted by downgrades of TVA's credit ratings.
TVA’s current credit ratings are not based solely on its underlying business or financial condition but are based to a large extent on the legislation that defines TVA’s business structure. Key characteristics of TVA’s business defined by legislation include (1) the TVA Board's ratemaking authority; (2) the current competitive environment, which is defined by the fence and the anti-cherrypicking provision; and (3) TVA’s status as a corporate agency and instrumentality of the United States. If Congress takes any action that effectively alters any of these characteristics, TVA's credit ratings could be downgraded. Although TVA Bonds are not obligations of the United States, TVA, as a corporate agency and instrumentality of the United States, may be impacted by a downgrade of the United States’ sovereign credit ratings. Such a downgrade could, among other things, lead to a downgrade of TVA’s credit rating. Additionally, future events that may negatively impact TVA’s financial condition or reputation, including those discussed elsewhere in these Risk Factors, may lead to downgrades of TVA’s credit ratings, and the criteria used by the credit rating agencies to assign ratings could be changed at any time, which could result in changes to TVA’s ratings.
Downgrades of TVA’s credit ratings may have material adverse effects on TVA’s cash flows, results of operations, and financial condition, as well as on investors in TVA securities. Among other things, a downgrade could increase TVA’s interest expense by increasing the interest rates that TVA pays on new debt securities that it issues. Such an increase may reduce the amount of cash available for other purposes, which may require TVA to borrow more, to reduce other expenses or capital investments, or to increase power rates. A downgrade may also result in TVA’s having to post collateral under certain physical and financial contracts that contain ratings triggers. A downgrade below a contractual threshold may specifically prevent TVA from borrowing under four credit facilities totaling $2.7 billion or posting letters of
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credit as collateral under these facilities. As of September 30, 2022, there were $704 million of letters of credit outstanding under these facilities. If TVA were no longer able to post letters of credit as collateral, TVA would likely have to post cash as collateral, which would negatively affect TVA’s liquidity.
Further, a downgrade may lower the price of TVA securities in the secondary market, thereby negatively impacting investors who sell TVA securities after the downgrade and diminishing the attractiveness and marketability of TVA securities in the secondary market and for new TVA debt securities.
TVA relies on certain assumptions about the future that may turn out to be inaccurate.
TVA uses certain assumptions that are presently justifiable in order to develop its plans for the future. Such assumptions include economic forecasts, anticipated energy and commodity prices, cost estimates, construction schedules, power demand forecasts, the appropriate generation mix to meet demand, and potential regulatory environments. Should these assumptions be inaccurate, or be superseded by subsequent events, TVA's plans may not be effective in achieving the intended results. This situation could negatively affect cash flows, results of operations, and financial condition, as well as TVA's ability to meet electricity demand and the way TVA conducts its business.
Demand for electricity may significantly decline or change, negatively affecting TVA's cash flows, results of operations, and financial condition.
The fence limits the area in which TVA or LPCs that distribute TVA power may provide power. Accordingly, TVA is limited in its ability to replace or attract new customers to offset reduced demand for electricity among its existing customers. Some of the factors that could reduce or change the demand for electricity include, but are not limited to, the following:
Economic Downturns or Recessions . The economic wake of the COVID-19 pandemic, as well as geopolitical developments involving Russia and/or China, could have adverse effects on the U.S. and global economies that may indirectly impact TVA’s financial condition and results of operations due to the nature of TVA’s business.
• Renewed economic downturns or a recession in TVA’s service area or other parts of the United States could reduce overall demand for power and thus reduce TVA’s power sales and cash flows, especially if TVA’s industrial customers were to reduce their operations and thus their consumption of power.
• TVA could be further adversely affected by a downturn in the economy and financial markets, including differences in the recovery of specific economic sectors or regions of the Tennessee Valley and continued volatility in interest rates, commodity prices, investment performance, and foreign currency exchange rates.
• An extended slowdown in the recovery of the United States’ economic growth, changes in the demand for commodities, or material changes in governmental policy could result in lower economic growth and thus lower demand for electricity in TVA’s key markets.
• Contractual counterparties could be impaired in their ability to perform their obligations to TVA, or may choose to abandon contracts, which could result in more costly operation of TVA’s facilities.
Loss of Customers . TVA could lose customers, particularly LPCs, if customers were to choose another utility to meet some or all of their power needs where available, pursue self-generation to meet some or all of their power needs, or move their operations outside of TVA's service territory. As of November 14, 2022, TVA had wholesale power contracts with 153 LPCs, and 80 LPCs had entered into Power Supply Flexibility Agreements with TVA that allow the LPCs to locally generate or purchase up to approximately five percent of their average total hourly energy sales over a certain time period in order to meet their individual customers' needs. A significant portion of TVA's total operating revenues is concentrated in a small number of these LPCs. In May 2020, MLGW, which is TVA's largest LPC and accounts for nine percent of total operating revenues, published a draft Integrated Resource Plan to guide energy choices in the future, the outcome of which is uncertain. In addition, certain other LPCs are evaluating options for future energy choices. The loss of customers could have a material adverse effect on TVA's cash flows, results of operations, or financial condition, and could result in higher rates, especially because of the difficulty in replacing customers due to the fence. A significant loss of customers could also impact investor confidence, resulting in TVA paying higher rates on its securities.
Change in Demand for Electricity Generated from Renewable Sources . TVA has been adapting its generation mix to account for the growing preference for electricity generated by renewable sources, such as solar or wind. Demand by customers for power that is largely or exclusively generated from renewable sources may currently or in the future exceed TVA's ability to produce such power, and TVA might be compelled to change how it operates and may incur additional expense in meeting this demand.
Increased Utilization of DER . As the amount of DER grows on the TVA system, the need for TVA's traditional generation resources may be reduced, and the ability of the system to reliably and economically operate in conjunction with these DER may become more challenging. If TVA were unable to compensate for the resulting
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decrease in demand for TVA electricity, TVA's cash flows, results of operations, and financial condition could be negatively impacted, likely resulting in higher rates and changes to TVA's operations.
Increased Energy Efficiency and Conservation . Increasingly efficient use of energy as well as conservation efforts and DER may reduce the demand for power supplied by TVA. Reductions, if TVA is unable to compensate for them by reducing its cost of production of electricity or by increasing rates, could negatively affect TVA's cash flows, results of operations, and financial condition and could result in changes to TVA's operations, especially if the reductions occur during an economic downturn or a period of slow economic growth. In addition, higher rates may lead to further reduced demand through increased conservation efforts and DER.
Changes in technology could affect relationships with customers, require TVA to change how it conducts its operations, or impact TVA's financial condition.
TVA's primary business is to sell power it produces, for the most part, from large facilities such as nuclear power plants, hydroelectric facilities, natural gas-fired facilities, and coal-fired units. TVA sells power to LPCs and directly served customers. Research and development activities are ongoing to improve existing and alternative technologies to produce or store electricity, including large-scale energy storage, gas or wind turbines, fuel cells, microturbines, solar cells, and distributed energy or storage resources. Advances in these or other alternative technologies could reduce the costs of such production methods to a level that will enable these technologies to compete effectively with traditional power plants such as those used by TVA. These technologies could be more appealing to customers and could lead them to pressure TVA to modify power contracts to allow customers to generate some of their own power requirements or purchase power from other suppliers. Other customers might also cease purchasing power from TVA altogether. To the extent that sales to such customers are reduced or eliminated, TVA's cash flows, results of operations, and financial condition could be negatively affected. TVA could also be required to modify how it operates its traditional plants or further modify its generation mix to reduce reliance on these facilities. Additionally, demand could change in terms of amount or timing as more devices and equipment become connected to the internet, allowing for real-time adjustments in consumption of power. Such increased control over power consumption could, among other things, affect how TVA operates its facilities or dispatches power, or require TVA to change its pricing structure or rates.
TVA is subject to a variety of market risks that may negatively affect TVA's cash flows, results of operations, and financial condition.
TVA is subject to a variety of market risks, including but not limited to the following:
Commodity Price Risk . TVA's rates may increase if prices of commodities critical to operations, including coal, uranium, natural gas, fuel oil, crude oil, construction materials, or emission allowances, were to increase. An increase in rates may reduce demand and negatively impact TVA's cash flows, results of operations, and financial condition.
Investment Price Risk . TVA is exposed to investment price risk in its NDT, Asset Retirement Trust ("ART"), Supplemental Executive Retirement Plan ("SERP"), Deferred Compensation Plan ("DCP"), and pension plan. If the value of the investments held in the NDT or the pension fund were to either decrease or fail to increase in accordance with assumed rates of return, TVA may be required to make substantial contributions to these funds. In addition, although TVA is not required to make contributions to the ART, it may choose to do so, particularly if TVA's estimates of its non-nuclear asset retirement obligation liabilities were to increase. TVA may also choose to make contributions to the SERP and DCP from time to time.
Interest Rate Risk . Changes in interest rates may, variably, increase the amount of interest that TVA pays on new Bonds that it issues, decrease the return that TVA receives on short-term investments, decrease the value of the investments in the NDT, ART, pension fund, SERP, and DCP, increase the amount of collateral that TVA is required to post in connection with certain of its derivative transactions, increase the losses on the mark-to-market valuation of certain derivative transactions into which TVA has entered, or some combination of these.
Counterparty Credit and Performance Risk . TVA is exposed to the risk that its counterparties will not be able to perform their contractual obligations. If TVA's counterparties were to fail to perform their obligations, TVA's cash flows, results of operations, and financial condition may be adversely affected. In addition, the failure of a counterparty to perform may make it difficult for TVA to perform its obligations, particularly if the counterparty were a supplier of electricity or fuel.
Currency Exchange Rate Risk . Over the next several years, TVA expects to spend a significant amount of capital on various projects. A portion of this amount may be spent on contracts that are denominated in one or more foreign currencies. TVA's two issues of Bonds denominated in British pounds sterling are hedged by currency swap agreements. The value of the U.S. dollar compared with other currencies has fluctuated widely in recent years, including fluctuations in the U.S. dollar to British pound sterling exchange rate primarily driven by the
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"BREXIT" vote for the United Kingdom to leave the European Union. If not effectively managed, foreign currency exposure could negatively impact TVA's counterparty risk, cash flows, results of operations, and financial condition.
The market for TVA Bonds might be limited.
Although many TVA Bonds are listed on stock exchanges, there can be no assurances that any market will develop or continue to exist for any Bonds. Additionally, no assurances can be made as to the ability of the holders to sell their Bonds or as to the price at which holders will be able to sell their Bonds. Future trading prices of Bonds will depend on many factors, including prevailing interest rates, the then-current ratings assigned to the Bonds, the amount of Bonds outstanding, the time remaining until the maturity of the Bonds, the redemption features of the Bonds, the market for similar securities, and the level, direction, and volatility of interest rates generally, as well as the liquidity of the markets for those securities.
When a particular series of Bonds is offered through underwriters, those underwriters may attempt to make a market in the Bonds. Dealers other than underwriters may also make a market in TVA Bonds. However, the underwriters and dealers are not obligated to make a market in any TVA Bonds and may terminate any market-making activities at any time without notice.
Further, certain investors and underwriters use the environmental impact or sustainability of a company or industry as a criterion for deciding whether to invest in that company or industry. TVA's use of fossil fuels, among other things, could lead such investors or underwriters to not purchase TVA Bonds or reduce the attractiveness of TVA Bonds as compared to other investments, thereby limiting the market for TVA Bonds.
In addition, legal limitations may affect the ability of banks and others to invest in Bonds. For example, national banks may purchase TVA Bonds for their own accounts in an amount not to exceed 10 percent of unimpaired capital and surplus. Also, TVA Bonds are "obligations of a corporation which is an instrumentality of the United States" within the meaning of Section 7701(a)(19)(C)(ii) of the Internal Revenue Code for purposes of the 60 percent of assets limitation applicable to U.S. building and loan associations. These limitations on TVA Bond investors also may limit the market for TVA Bonds.
Payment of principal and interest on TVA securities is not guaranteed by the U.S government.
Although TVA is a corporate agency and instrumentality of the U.S. government, TVA securities are not backed by the full faith and credit of the United States. Principal and interest on TVA securities are payable solely from TVA's net power proceeds. Net power proceeds are the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein. If TVA were to experience extreme financial difficulty and were unable to make payments of principal or interest on its Bonds, the federal government would not be legally obligated to prevent TVA from defaulting on its obligations. An inability to pay some or all of the principal or interest owed on a TVA security would likely have a negative impact on the market for TVA Bonds generally and TVA's financial condition, reputation, and relationship with the investment community, and could result in cross-defaults in other financial arrangements.
HUMAN CAPITAL AND MANAGEMENT RISKS
Failure to attract and retain an appropriately qualified, diverse, and inclusive workforce may negatively affect TVA's results of operations.
TVA's business depends on its ability to recruit and retain key executive officers as well as skilled professional and technical employees. Labor is subject to external factors that are beyond TVA's control, including the highly competitive market for skilled workers and leaders, inflation, the COVID-19 pandemic, and workforce participation rates. The inability to attract and retain an appropriately qualified, diverse, and inclusive workforce could adversely affect TVA's ability to, among other things, operate and maintain generation and transmission facilities, complete large construction projects, and successfully implement its continuous improvement initiatives. If Congress were to reduce the salary of TVA's CEO or otherwise amend TVA's compensation philosophy, TVA's ability to attract and retain key executives or other employees may be compromised.
Loss of a quorum of the TVA Board could limit TVA's ability to adapt to meet changing business conditions.
Under the TVA Act, a quorum of the TVA Board is five members. Becoming a member of the TVA Board requires confirmation by the U.S. Senate following appointment by the President. This process has and could again in the future be subject to extended delays. The President may remove TVA Board members, and the TVA Board members may resign or otherwise leave office before a successor is commissioned. As a result, a delay in the appointment or confirmation of directors, or the removal of directors by the President, can threaten the TVA Board's quorum. The TVA
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Board is responsible for, among other things, establishing the rates TVA charges for power as well as TVA's long-term objectives, policies, and plans. Accordingly, the loss of a quorum for an extended period of time would impair TVA's ability to change rates and to modify these objectives, policies, and plans. Such an impairment would likely have a negative impact on TVA's ability to respond to significant changes in technology, the regulatory environment, or the industry overall and, in turn, negatively affect TVA's cash flows, results of operations, financial condition, and reputation. The TVA Board currently has five members.
Changes in the membership of the TVA Board and TVA senior management could impact how TVA operates.
The TVA Board is comprised of up to nine part-time members serving staggered, five-year terms. One to two Board members' terms typically expire each year. In addition, there is always the possibility that one or more members of TVA's senior management may retire or otherwise leave TVA. The individuals filling either the TVA Board or senior management positions may wish to change how TVA operates in whole or in part. If the changes were not successful or TVA were unable to adapt properly to such changes, TVA's financial condition, results of operations, reputation, and relationship with customers could be negatively affected.
RISKS RELATED TO THE ENVIRONMENT AND CATASTROPHIC EVENTS
Weather conditions may hamper TVA's ability to supply power or negatively impact net revenue, and weather conditions may cause customers' demands for power to exceed TVA's then-present power supply capabilities.
Weather may have a material adverse effect on TVA’s cash flows, results of operations, and financial condition, including through the following non-exclusive foreseeable scenarios:
• Extreme temperatures may increase the demand for power and require TVA to purchase power at high prices to meet customer demand, whereas unusually mild weather may result in decreased demand for power and lead to reduced electricity sales.
• In periods of below-normal rainfall or drought, TVA's low-cost hydroelectric generation may be reduced, requiring TVA to purchase power or use more costly means of producing power.
• Periods of either high or low levels of rainfall may impede river traffic, impacting barge deliveries of critical items such as coal and equipment for power facilities.
• High river water temperatures in the summer may limit TVA's ability to use water from the Tennessee or Cumberland River systems for cooling at certain of TVA's generating facilities, thereby limiting its ability to operate these generating facilities. This situation would be aggravated during periods of reduced rainfall or drought.
• Changes in the climate may make, or may be making, such shifts in weather more common or extreme. Climate change may cause catastrophic events like droughts, floods, wildfires, and snow or ice storms to occur more frequently in the Tennessee Valley region. In response, TVA may be required to, among other things, change its generation mix or change how it conducts its operations.
Events that affect the supply or quality of water from the Tennessee River system and Cumberland River system, or elsewhere, may interfere with TVA's ability to generate power.
An inadequate supply of water in the Tennessee River system and Cumberland River system could negatively impact TVA's cash flows, results of operations, and financial condition, including potentially reducing generation at TVA's hydroelectric plants, which may require TVA to increase reliance on more expensive generation sources or purchase more energy in the market likely at higher costs; negatively affecting generation at coal-fired and nuclear plants, which depend on water from the river systems near which they are located for cooling and for use in boilers where water is converted into steam to drive turbines; or negatively affecting generation at TVA's gas-fired facilities not located near a river, which nonetheless require alternative sources of water, such as from wells or local utility companies.
Further, the water for these purposes must be of a particular quality for use in TVA's equipment. When the available water is not of sufficient quality for TVA's use, TVA must either treat the water or obtain alternate sources. An inadequate supply of quality water could result, among other things, from periods of low rainfall or drought, the withdrawal of water from the river systems by governmental entities or others, incidents affecting bodies of water not managed by TVA, supply issues that affect water providers, or intrusive aquatic plants and animals such as eel grass, algae, and mussels that block cooling water intake pipes or otherwise interfere with the operation of TVA's generation facilities. While TVA manages the Tennessee River and a large portion of its tributary system to provide much of the water necessary for the operation of its power plants, the USACE operates and manages other bodies of water upon which some of TVA's facilities rely. Events at these bodies of water or their associated hydroelectric facilities may interfere with the flow of water and may result in TVA's having insufficient water quality to meet the needs of some of its generating plants. If TVA were to have insufficient water supply of the quality necessary to meet the needs of its plants, TVA may be required to reduce generation at its affected facilities to levels compatible with the available supply of quality water, or take additional steps that change how TVA conducts its operations or that otherwise cause TVA to incur additional expense.
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Catastrophic events may negatively affect TVA's cash flows, results of operations, and financial condition.
TVA's cash flows, results of operations, and financial condition may be adversely affected, either directly or indirectly, by catastrophic events such as fires, earthquakes, explosions, solar events, electromagnetic pulses ("EMPs"), geomagnetic disturbances, droughts, floods, hurricanes, tornadoes, polar vortexes, icing events, or other casualty events, wars, national emergencies, terrorist activities, pandemics, or other similar destructive or disruptive events. These events, the frequency and severity of which are unpredictable, may, among other things, limit or disrupt TVA's ability to generate and transmit power; lead to legislative or regulatory changes that affect the construction, operation, and decommissioning of nuclear units and the storage of spent fuel; limit or disrupt TVA's ability to provide flood control and river management; reduce the demand for power; disrupt fuel or other supplies; require TVA to produce additional tritium; cause or exacerbate an economic downturn; require TVA to make substantial capital investments for repairs, improvements, or modifications; or cause or exacerbate instability in the financial markets.
These destructive or disruptive events may present special risks to TVA’s nuclear plants. If public opposition to nuclear power were to make operating nuclear plants less feasible as a result of any of these events, TVA may be forced to shut down its nuclear plants. This would make it substantially more difficult for TVA to obtain greater amounts of its power supply from low or zero carbon emitting resources and to replace its generation capacity when faced with retiring or idling certain coal-fired units. Additionally, some studies have predicted that climate change may cause catastrophic events, such as droughts and floods, to occur more frequently or with greater intensity in the Tennessee Valley region, which could adversely impact TVA.
ACCOUNTING AND FINANCIAL REPORTING RISKS
TVA may be unable to use regulatory accounting for some or all costs.
TVA uses regulatory accounting to defer certain costs. To qualify for regulatory accounting, costs must meet certain accounting criteria and be approved for regulatory accounting treatment by the TVA Board in its capacity as TVA's regulator. When costs do not meet, or cease to meet, these criteria, or if the TVA Board were to disallow the treatment or were to cease to be TVA's sole regulator in such areas, TVA may not be able to defer those costs. Such an inability to defer costs would likely have a substantial impact on TVA's financial condition and results of operations and could impact the timing and amounts of TVA's rate recovery. For a discussion of regulatory accounting, see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates .
TVA's financial control system cannot guarantee that all control issues and instances of fraud or errors will be detected.
No financial control system, no matter how well designed and operated, can provide absolute assurance that the objectives of the control system will be met, and no evaluation of financial controls can provide absolute assurance that all control issues and instances of fraud or errors can or will be detected. The design of any system of financial controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
COVID-19 RELATED RISKS
The COVID-19 pandemic has adversely affected, and may continue to adversely affect, TVA's business, financial condition, and results of operations.
The extent to which the COVID-19 pandemic will impact TVA's business, financial condition, cash flows, and results of operations in the future is uncertain and will depend on numerous evolving factors beyond TVA's control including, among other things, the duration and severity of the pandemic, actions taken to contain its spread and mitigate its effects, including vaccination programs, and the broader impact of the COVID-19 pandemic on the country, the region's economy, and global trade. However, TVA reasonably anticipates that any of a prolonged outbreak, impacts of variants of COVID-19, and resulting commercial or social restrictions could have a material adverse impact on its business, financial condition, and results of operations, and could require TVA to change how it conducts certain operations, takes power under certain agreements, or dispatches its own facilities.
The economic wake of the COVID-19 pandemic could adversely impact TVA’s ability to develop, construct, and operate facilities; could delay or prevent the completion of projects; or could lead to impairments of TVA’s long-lived assets and accounts or loans receivable. Examples of potential impacts include delivery of force majeure notices from contractual counterparties, closure or reduced operation of global ports, or limitations on shipping key equipment as anticipated or at budgeted costs. These impacts could cause delays in construction projects or the performance of necessary maintenance to TVA’s generation or transmission facilities, which could impact the availability of TVA’s facilities for their intended operations.
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GENERAL RISK FACTORS
TVA may not be able to implement its business strategy successfully.
TVA's financial condition and results of operations are largely dependent on the extent to which it can implement its business strategy successfully. TVA's strategy includes maintaining low rates, aligning operations and maintenance spending with revenues, being responsible stewards, living within its means, meeting reliability expectations, and providing a balanced portfolio, in light of TVA's strategic priorities. The strategic priorities are powerful partnerships, people advantage, operational excellence, igniting innovation, and financial strength. This strategy is subject to business, economic, and competitive uncertainties and contingencies, many of which are beyond TVA’s control. Such uncertainties include customer energy-efficiency programs that are designed to reduce energy demand; energy-efficiency efforts by customers not related to TVA’s energy-efficiency programs; increased customer use of DER, such as solar panels and other technologies, as well as the use of energy storage technologies; and macroeconomic factors impacting economic growth or contraction within TVA’s service territory, which could affect energy demand. If TVA is unable to successfully implement its business strategy, TVA’s financial condition and results of operations could be negatively affected. See Item 1, Business — Environmental Matters and Human Capital Management , Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges , and Part III, Item 11, Executive Compensation — C ompensation Discussion and Analysis for additional information regarding TVA's strategic objectives.
TVA's organizational structure may not adequately support TVA's anticipated business needs or enable it to meet the needs of its current or potential customers.
TVA has been modifying its organizational structure to better adapt to the forecasted economic environment. If TVA's assumptions about either its forecasts or the proper internal structure of the company to meet the expected environment are inaccurate or if this structure does not adequately support TVA's needs, TVA could face operational or financial challenges that could adversely affect its cash flows, results of operations, and financial condition as well as TVA's ability to attract or retain a skilled workforce and to meet the needs of its current or potential customers.
TVA may have difficulty adapting its business model to changes in the utility industry and customer preferences.
The traditional business model for power production, selling power from centrally located plants, is facing pressure from a variety of sources, including the potential for self-generation by current or potential customers, new technologies such as energy storage, and increased energy efficiency. These pressures may reduce the demand for TVA power. If TVA does not or cannot adapt to this pressure by adequately changing its business model, TVA's financial condition and results of operations could be negatively affected.
TVA's reputation may be negatively impacted.
As with any company, TVA's reputation is a vital element of its ability to effectively conduct its business. TVA's reputation could be harmed by a variety of factors, including: failure of a generating asset or supporting infrastructure; failure to effectively manage land and other natural resources entrusted to TVA; real or perceived violations of environmental regulations, including those related to climate change; real or perceived issues with TVA's safety culture or work environment; inability to meet its human capital management goals; inability to keep its electricity rates stable; involvement in a class-action or other high-profile lawsuit; significant delays in construction projects; occurrence of or responses to cyber attacks or security vulnerabilities; acts or omissions of TVA management or acts or omissions of a contractor or other third-party working with or for TVA, which actually or perceivably reflect negatively on TVA; measures taken to offset reductions in demand or to supply rising demand; or a significant dispute with one of TVA's customers.
Any deterioration in TVA's reputation may harm TVA's relationships with its customers and stakeholders, may increase its cost of doing business, may interfere with its ability to attract and retain a qualified, inclusive, and diverse workforce, may impact TVA's ability to raise debt capital, and may potentially lead to the enactment of new laws and regulations, or the modification of existing laws and regulations, that negatively affect the way TVA conducts its business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.