Tennessee Valley Authority 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions except where noted) The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the Tennessee Valley Authority ("TVA"), its financial condition, results of operations, and cash flows, and its present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, TVA's consolidated financial statements and the accompanying notes thereto contained in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K for the fiscal year ended September 30, 2022 (the "Annual Report"). See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in TVA's Annual Report on Form 10-K for the year ended September 30, 2021, filed with the Securities and Exchange Commission ("SEC") on November 12, 2021, for a discussion of variance drivers for the year ended September 30, 2021, as compared to the year ended September 30, 2020. The MD&A includes the following sections: • Business and Mission — a general description of TVA's business, objectives, strategic priorities, and core capabilities; • Executive Overview — a general overview of TVA's activities and results of operations for 2022; • Results of Operations — an analysis of TVA's consolidated results of operations for 2021 and 2022; • Liquidity and Capital Resources — an analysis of cash flows, a description of aggregate contractual obligations, and an overview of financial position; • Key Initiatives and Challenges — an overview of current and future initiatives and challenges facing TVA; • Critical Accounting Estimates — a summary of significant estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes; • Legislative and Regulatory Matters — a summary of laws and regulations that may impact TVA; and • Risk Management Activities — a description of TVA's risk governance and exposure to various market risks. Business and Mission Business TVA operates the nation's largest public power system. At September 30, 2022, TVA had 58 directly served customers, which include seven federal agency customers, and 153 local power company customers ("LPCs") that serve approximately 10 million people in parts of seven southeastern states. TVA generates nearly all of its revenues from the sale of electricity, and in 2022 revenues from the sale of electricity totaled $12.4 billion. As a wholly-owned agency and instrumentality of the United States ("U.S."), however, TVA differs from other electric utilities in a number of ways: • TVA is a government corporation. • The area in which TVA sells power is limited by the Tennessee Valley Authority Act of 1933, as amended (the "TVA Act") under a provision known as the "fence"; however, another provision of federal law known as the Anti-Cherrypicking Amendment ("ACPA") generally protects TVA from being forced to provide access to its transmission lines to others for the purpose of delivering power to customers within substantially all of TVA's defined service area. • The rates TVA charges for power are set solely by the TVA Board of Directors ("TVA Board") and are not set or reviewed by another entity, such as a public utility commission. In setting rates, however, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power be sold at rates as low as feasible. 59 Table of Contents • TVA is not authorized to raise capital by issuing equity securities. TVA relies primarily on cash from operations and proceeds from power program borrowings to fund its operations and is authorized by the TVA Act to issue bonds, notes, or other evidences of indebtedness (collectively, "Bonds") in an amount not to exceed $30.0 billion outstanding at any given time. Although TVA's operations were originally funded primarily with appropriations from Congress, TVA has not received any appropriations from Congress for any activities since 1999 and, as directed by Congress, has funded essential stewardship activities primarily with power revenues. TVA's Mission of Service TVA was built for the people, created by federal legislation, and charged with a unique mission - to improve the quality of life in a seven-state region through the integrated management of the region's resources. TVA's mission focuses on three key areas: ENERGY ENVIRONMENT ECONOMIC DEVELOPMENT • Energy — Delivering reliable, low cost, clean energy; • Environment — Caring for the region's natural resources; and • Economic Development — Creating sustainable economic growth. 60 Table of Contents While TVA's mission has not changed since it was established in 1933, the climate in which TVA operates continues to evolve. The business and economic environment has become more challenging due to economic conditions; tougher environmental standards; and the need to diversify its power supply and adapt to changing customer usage behaviors, new technologies, and emerging, non-traditional competition. To continue to deliver its mission of service while evolving for future success, TVA must realize five strategic priorities, which are comprised of several strategic elements each: Accelerate the impact of inclusion with diversity within TVA and the communities TVA serves Nation’s top nuclear fleet by 2025 Deliver value to enhance prosperity in the Tennessee Valley Enhance TVA's role as a community leader and trusted partner Advance energy transformation in the Tennessee Valley through innovation Create an enterprise talent strategy that will bring TVA's business priorities to life Evolve TVA's reliable and clean energy supply into the energy system of the future Balance commitments and obligations Champion the unique value of the Tennessee Valley public power model Establish a focused innovation framework and mindset Cultivate a positive employee experience to heighten workforce engagement and performance as TVA works everywhere to serve Lead the industry in reliable, resilient, cost-effective carbon reduction Develop long-term business model Region’s top choice for business and industry Build the integrated and reliable grid of tomorrow Achieve sustainable debt level Meet resource and environmental stewardship commitments TVA's mission sets the stage for its strategic planning process that includes strategic objectives, initiatives, and scorecards for performance designed to provide clear direction for improving TVA's core business. Linking the Mission to Performance TVA has formulated key performance measures to support its strategic priorities. The intent of these measures is to align employees to TVA's mission by focusing its collective efforts on operational excellence, fiscal responsibility, economic development, and environmental stewardship. The measures are designed to promote teamwork, encourage high performance behaviors, and motivate TVA employees to achieve goals aligned with TVA's mission and values. The 2022 corporate results compared with targets for these key measures are reflected in the chart below, and the subsequent chart reflects the 2023 approved corporate measures. See Part III, Item 11, Executive Compensation — Compensation Discussion and Analysis for information regarding how the measures are calculated. 2022 Corporate Measure Weight Actual Threshold Target Stretch TVA total spending ($ millions) 40% $ 5,580 $ 6,482 $ 6,291 $ 6,100 Load not served (system minutes) 30% 4.5 4.5 3.9 3.2 Annualized nuclear online reliability loss factor (%) 15% 1.13 % 3.73 % 2.71 % 1.69 % Combined cycle equivalent availability factor (%) 10% 83.3 % 75.0 % 80.0 % 84.9 % Coal equivalent availability factor (%) 5% 74.9 % 58.2 % 63.2 % 69.6 % 61 Table of Contents 2023 Corporate Measure Weight Threshold Target Stretch TVA total spending ($ millions) 40% Budget Load not served (system minutes) 30% 4.5 3.9 3.2 Annualized nuclear online reliability loss factor (%) 15% 3.14 % 2.00 % 1.26 % Combined cycle equivalent availability factor (%) 10% 78.6 % 83.6 % 89.0 % Coal equivalent availability factor (%) 5% 58.8 % 63.8 % 73.3 % Executive Overview TVA's operating revenues were $12.5 billion and $10.5 billion for the years ended September 30, 2022 and 2021, respectively. Operating revenues increased for the year ended September 30, 2022 as compared to the prior year, primarily as a result of higher fuel cost recovery revenue. The higher fuel cost recovery revenue was driven by higher fuel rates as a result of higher natural gas, coal, and purchased power market prices. In addition, higher sales volume primarily due to economic growth in the Tennessee Valley region and an increase in cooling degree days contributed to the increase in operating revenue. In May and June 2022, TVA experienced multiple record-setting peak and daily energy records for these months, and the TVA power system was able to deliver energy reliably through these demands. Total operating expenses increased $2.5 billion for the year ended September 30, 2022 as compared to the prior year, primarily due to increases in Fuel expense, Purchased power expense, and Depreciation and amortization expense. Fuel and purchased power expense contributed to $1.8 billion of the increase primarily due to higher effective fuel rates and market prices of purchased power and less availability of lower cost TVA-operated generation due to the outage at Watts Bar Unit 2 for its steam generator replacement project and fewer significant rain events. Depreciation and amortization expense increased $521 million as compared to the prior year. This increase was primarily driven by the implementation of a new depreciation study during the first quarter of 2022, which included 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. In addition, increases in amortization expense of decommissioning costs recovered in rates and depreciation due to additions to completed plant also contributed to the increase. In the second quarter of 2022, the TVA Board approved a programmatic approach to exploring advanced nuclear technology (the "New Nuclear Program"). The New Nuclear Program provides a systematic roadmap for TVA’s exploration of advanced nuclear technology. It also coordinates TVA’s collaborative efforts with other utilities, government agencies, research institutions, and organizations on advanced nuclear technologies. In May 2022, Boone Dam was re-opened to the public, after a sinkhole was discovered near the base of the embankment in 2015, and the reservoir has now returned to normal operations. In July 2022, TVA returned Watts Bar Unit 2 to service after an outage to replace the originally installed steam generators was completed, which began in March 2022. The project included removal of all four original steam generators and installation of four new, more efficient steam generators that will support reliable, carbon-free generation in the Tennessee Valley. In addition, in 2022 TVA continued to make investments in and work on projects such as the new system operations center, energy management system, fiber optic network, and natural gas-fired units, among others. In 2022, TVA's economic development efforts, reliability, and competitive rates continued to help attract or expand businesses and industries in the Tennessee Valley. These companies announced projected capital investments of over $10.2 billion and are expected to create or retain approximately 66,500 jobs. TVA also continued to achieve 99.999 percent reliability in delivering energy to its customers during 2022. 62 Table of Contents Results of Operations Sales of Electricity Sales of electricity, which accounted for nearly all of TVA's operating revenues, were 162,608 million and 157,353 million kilowatt hours ("kWh") for 2022 and 2021, respectively. TVA sells power at wholesale rates to LPCs that then resell the power to their customers at retail rates. TVA also sells power to directly served customers, consisting primarily of federal agencies and customers with large or nonstandard loads. In addition, power exceeding TVA's system needs is sold under exchange power arrangements with certain other power systems. The following chart compares TVA's sales of electricity by customer type for the years ended September 30, 2022 and 2021: Sales of Electricity For the years ended September 30 (millions of kWh) The following charts show a breakdown of TVA's energy load: Note Information included in the charts above was derived from energy usage of directly served customers and customers served by LPCs during calendar year 2021, and these graphs will continue to be updated on a calendar year basis. 63 Table of Contents Weather affects both the demand for TVA power and the price for that power. TVA uses degree days to measure the impact of weather on its power operations. Degree days measure the extent to which the TVA system 23-station average temperatures vary from 65 degrees Fahrenheit. Degree Days Variation from Normal Change from Prior Period 2022 Normal Percent Variation 2021 Normal Percent Variation Percent Change Heating Degree Days 3,031 3,360 (9.8) % 3,216 3,360 (4.3) % (5.8) % Cooling Degree Days 1,974 1,686 17.1 % 1,611 1,686 (4.4) % 22.5 % Sales of electricity increased approximately three percent for the year ended September 30, 2022, as compared to the same period of the prior year. The increased sales volume was driven by both economic growth and weather impacts. TVA is seeing economic growth in the Tennessee Valley region primarily as a result of migration into the Tennessee Valley which has driven population growth and load growth. Cooling degree days increased approximately 23 percent for the year ended September 30, 2022, as compared to the same period of the prior year, also resulting in an increase in energy sales. In May and June 2022, TVA experienced multiple record-setting peak and daily energy records for these months. For LPCs, sales of electricity increased due to the weather impacts and also due to economic growth. For industries directly served, sales of electricity increased due to economic growth, as these industries directly served are not driven primarily by weather, but mainly from changes in the economy and respective industry sectors. Financial Results The following table compares operating results for 2022 and 2021: Summary Consolidated Statements of Operations For the years ended September 30 (in millions) 2022 2021 Change Percent Change Operating revenues $ 12,540 $ 10,503 $ 2,037 19.4 % Operating expenses 10,129 7,658 2,471 32.3 % Operating income 2,411 2,845 (434) (15.3) % Other income, net 7 13 (6) (46.2) % Other net periodic benefit cost 258 258 — — % Interest expense 1,052 1,088 (36) (3.3) % Net income $ 1,108 $ 1,512 $ (404) (26.7) % 64 Table of Contents Operating Revenues. Operating revenues for the years ended September 30, 2022 and 2021, were $12.5 billion and $10.5 billion, respectively. The following chart compares TVA's operating revenues for the periods indicated: TVA's two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES accounted for nine percent and eight percent, respectively, of TVA's total operating revenues during both the years ended September 30, 2022 and 2021. Certain LPCs, including MLGW, are evaluating options for future energy choices. TVA's rate structure uses pricing signals to indicate seasons and hours of higher cost to serve its customers and to capture a portion of TVA's fixed costs in fixed charges. The structure includes three base revenue components: time of use demand charges, time of use energy charges, and a grid access charge ("GAC"). The demand charges are based upon the customer's peak monthly usage and increase as the peak increases. The energy charges are based on time differentiated kWh used by the customer. Both of these components can be significantly impacted by weather. The GAC captures a portion of fixed costs and is offset by a corresponding reduction to the energy rates. The GAC also reduces the impact of weather variability to the overall rate structure. TVA has a Partnership Agreement option that better aligns the length of LPC power contracts with TVA's long-term commitments. Under the partnership arrangement, the LPC power contracts automatically renew each year and have a 20-year termination notice. The partnership arrangements can be terminated under certain circumstances, including TVA's failure to limit rate increases as provided for in the agreements going forward. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. As of November 14, 2022, 147 LPCs had signed the 20-year Partnership Agreement with TVA. In 2020, the TVA Board approved a Pandemic Relief Credit which was effective for 2021 as a 2.5 percent monthly base rate credit. In 2021, the TVA Board approved a 2.5 percent monthly base rate credit, the Pandemic Recovery Credit, which was effective for 2022. These pandemic credits apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. For the years ended September 30, 2022 and 2021, pandemic credits totaled $228 million and $221 million, respectively. In addition, 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, and on July 28, 2022, the TVA Board notationally approved increasing the credit from 1.5 percent to 2.5 percent. The 2023 credit is expected to approximate $230 million, and it will be administered in a manner similar to the Pandemic Recovery Credit. In addition to base revenues, the rate structure includes a separate fuel rate that includes the costs of natural gas, fuel oil, purchased power, coal, emission allowances, nuclear fuel, and other fuel-related commodities; realized gains and losses on derivatives purchased to hedge the costs of such commodities; and payments to states and counties in lieu of taxes ("tax equivalents") associated with the fuel cost adjustments. See Item 1, Business — Rates — Rate Methodology . 65 Table of Contents The changes in revenue components are summarized below: Changes in Revenue Components For the years ended September 30 (in millions) 2022 2021 Change Base revenue Energy revenue $ 4,885 $ 4,719 $ 166 Demand revenue 3,610 3,478 132 Grid access charge 590 596 (6) Long-term partnership credits for LPCs (199) (189) (10) Pandemic relief credits (228) (221) (7) Other charges and credits (1) (673) (631) (42) Total base revenue 7,985 7,752 233 Fuel cost recovery 4,379 2,601 1,778 Off-system sales 7 4 3 Revenue from sales of electricity 12,371 10,357 2,014 Other revenue 169 146 23 Total operating revenues $ 12,540 $ 10,503 $ 2,037 Note (1) Includes economic development credits to promote growth in the Tennessee Valley, hydro preference credits for residential customers of LPCs, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. See Note 17 — Revenue. Operating revenues increased $2.0 billion for the year ended September 30, 2022, as compared to the prior year, primarily due to a $1.8 billion increase in fuel cost recovery revenue. The $1.8 billion increase in fuel cost recovery revenue was driven by a $1.7 billion increase attributable to higher fuel rates and an $87 million increase attributable to higher sales volume during 2022. The higher fuel rates were primarily due to higher natural gas, coal, and purchased power market prices. In addition, there was a $233 million increase in base revenue driven by an increase of $259 million attributable to higher sales volume, partially offset by a decrease of $26 million attributable to lower effective rates. Sales volume increased due to economic growth in the Tennessee Valley region and an increase in cooling degree days in 2022. See Sales of Electricity above for further discussion of the change in the volume of sales of electricity and Operating Expenses below for further discussion of the change in fuel expense. Operating Expenses. Operating expense components as a percentage of total operating expenses for 2022 and 2021 consisted of the following: 66 Table of Contents Operating Expenses For the years ended September 30 (in millions) 2022 2021 Change Percent Change Operating expenses Fuel $ 2,567 $ 1,737 $ 830 47.8 % Purchased power 1,921 984 937 95.2 % Operating and maintenance 2,986 2,890 96 3.3 % Depreciation and amortization 2,054 1,533 521 34.0 % Tax equivalents 601 514 87 16.9 % Total operating expenses $ 10,129 $ 7,658 $ 2,471 32.3 % The following table summarizes TVA's expenses for various fuels for the years indicated: Fuel Expense for TVA-Operated Facilities (1) For the years ended September 30 Fuel Expense By Source Cost per kWh (4) 2022 2021 2022 2021 Coal (2) $ 627 $ 577 $ 2.97 $ 2.46 Natural gas and/or oil-fired (3) 1,590 841 4.37 2.52 Nuclear fuel 329 363 0.51 0.55 Total fuel $ 2,546 $ 1,781 $ 2.08 $ 1.44 Notes (1) Excludes effects of the fuel cost adjustment in the amounts of $21 million and $(44) million for the years ended September 30, 2022 and 2021, respectively. (2) Fuel expense related to oil consumed for startup at coal-fired facilities was $30 million and $18 million for the years ended September 30, 2022 and 2021, respectively. (3) Fuel expense related to oil consumed for generation at natural gas and/or oil-fired facilities was $2 million and $4 million for the years ended September 30, 2022 and 2021, respectively. (4) Total cost per kWh is based on a weighted average. Fuel expense increased $830 million for the year ended September 30, 2022, as compared to the prior year. This increase was primarily due to higher effective fuel rates of $810 million resulting from higher natural gas and coal prices, as well as an increase in fuel cost recovery of $66 million primarily due to higher natural gas prices toward the end of 2021 that were not included in fuel rates in the prior year but were recovered and expensed in the current year. Partially offsetting these increases was a decrease in fuel volume of $46 million driven primarily by less availability of lower cost TVA-operated generation. Purchased power expense increased $937 million for the year ended September 30, 2022, as compared to the prior year. This increase was primarily due to higher purchased power market prices, resulting in an increase of $458 million, and additional volume, resulting in an increase of $479 million. The volume impacts were driven primarily by less availability of lower cost TVA-operated generation due to the outage at Watts Bar Unit 2 for its steam generator replacement project, decreased coal generation due to fuel supply constraints, and fewer significant rain events. Operating and maintenance expense increased $96 million for the year ended September 30, 2022 as compared to the prior year. This increase was primarily due to $57 million of increased payroll and benefit costs primarily due to labor escalation for cost of living increases and additional headcount to support operational needs and work to support the company's strategic priorities, $21 million of increased costs in information technology primarily due to investments in new technology and an increase in contract labor to support modernization efforts and enterprise technology business needs, an $18 million net increase in inventory reserves and project write-offs for TVA's coal-fired plants, and $18 million of increased costs primarily related to natural gas, hydroelectric, and coal maintenance projects. Additionally, there was an increase in nuclear outage expense of $10 million driven by an increase in outage days. Partially offsetting these increases was a decrease of other post-employment benefit expense of $19 million primarily due to the increase in the discount rate assumption used in the actuarial valuation of the liability related to workers’ compensation claims and a reduction in capital write-offs of $30 million due to asset decisions made in the prior year. Depreciation and amortization expense increased $521 million for the year ended September 30, 2022, as compared to the prior year. Implementation of a new depreciation study during the first quarter of 2022 resulted in approximately $345 million more depreciation expense in 2022, as compared to 2021. The increase in depreciation expense as a result of the new depreciation study was primarily driven by 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. Amortization expense of decommissioning costs recovered in rates increased $65 million. Additionally, there was an increase due to depreciation of additions to completed plant. See Note 1 — Summary of Significant Accounting Policies — Property, Plant, and Equipment, and Depreciation — Depreciation . 67 Table of Contents Tax equivalents expense increased $87 million for the year ended September 30, 2022, as compared to the prior year. This change is primarily driven by an increase in the tax equivalents collected in the fuel cost recovery. Generating Sources. The following table shows TVA's generation and purchased power by generating source as a percentage of all electrical power generated and purchased (based on kWh) for the periods indicated: Total Power Supply by Generating Source For the years ended September 30 (millions of kWh) 2022 2021 Nuclear 64,475 39 % 66,265 41 % Natural gas and/or oil-fired 36,259 22 % 33,290 21 % Coal-fired 20,999 13 % 23,391 15 % Hydroelectric 13,934 8 % 16,354 10 % Total TVA-operated generation facilities (1)(2) 135,667 82 % 139,300 87 % Purchased power (natural gas and/or oil-fired) (3) 18,352 11 % 10,836 7 % Purchased power (other renewables) (4) 6,141 4 % 5,113 3 % Purchased power (hydroelectric) 2,543 1 % 2,156 2 % Purchased power (coal-fired) 2,753 2 % 2,373 1 % Total purchased power (2) 29,789 18 % 20,478 13 % Total power supply 165,456 100 % 159,778 100 % Notes (1) Generation from TVA-owned renewable resources (non-hydroelectric) is less than one percent for all periods shown and therefore is not represented in the table above. (2) Raccoon Mountain Pumped-Storage Plant net generation is allocated against each TVA-operated generation facility and purchased power type for both the year ended September 30, 2022, and the year ended September 30, 2021. See Item 1, Business — Power Supply and Load Management Resources — Raccoon Mountain Pumped-Storage Plant for a discussion of Raccoon Mountain Pumped-Storage Plant. (3) Purchased power (natural gas and/or oil-fired) includes generation from Caledonia CC, which is currently a leased facility operated by TVA. Generation from Caledonia CC was 4,797 million kWh and 4,255 million kWh for the years ended September 30, 2022 and 2021, respectively. (4) Purchased power (other renewables) includes purchased power from the following renewable sources: solar, wind, biomass, and renewable cogeneration. TVA sells the RECs resulting from some of this purchased power to certain customers. See Key Initiatives and Challenges — Optimum Energy Portfolio — Renewable Power Purchase Agreements . In addition to power supply sources included here, TVA offers energy efficiency programs that effectively reduced 2022 energy needs by about 2,200 GWh or 1.3%. Interest Expense . Interest expense and interest rates for 2022 and 2021 were as follows: Interest Expense and Rates For the years ended September 30 2022 2021 Percent Change Interest expense (1) $ 1,052 $ 1,088 (3.3) % Average blended debt balance (2) $ 20,596 $ 20,916 (1.5) % Average blended interest rate (3) 4.96 % 5.06 % (2.0) % Notes (1) Includes amortization of debt discounts, issuance, and reacquisition costs, net. (2) Includes average balances of long-term power bonds, debt of VIEs, and discount notes. (3) Includes interest on long-term power bonds, debt of VIEs, and discount notes. Total interest expense decreased $36 million for the year ended September 30, 2022, as compared to the prior year. This was primarily driven by a decrease of $22 million due to lower average debt balances, and the remaining decrease was primarily due to lower average long-term rates. Other Income, Net Other income, net decreased $6 million for the year ended September 30, 2022, as compared to the prior year. This decrease was primarily driven by market losses on TVA's Investment funds. Partially offsetting this decrease was the 2021 court directed payment of $28 million related to the sale of Bellefonte, and no such payments were made in 2022. See Note 21 — Commitments and Contingencies — Legal Proceedings — Case Involving Bellefonte Nuclear Plant for a discussion of the lawsuit filed by Nuclear Development, LLC. 68 Table of Contents Other Net Periodic Benefit Cost Other net periodic benefit cost for the year ended September 30, 2022, was the same as compared to the prior year. Other net periodic benefit cost is subject to significant economic assumptions, such as changes in the discount rate used to measure the benefit plans, that can materially impact TVA. However, TVA uses regulatory accounting to recognize other net periodic benefit cost as a regulatory asset to the extent that the amount calculated under accounting principles generally accepted in the United States of America ("GAAP") as pension expense differs from the amount TVA contributes to the pension plan as pension plan contributions. See Note 20 — Benefit Plans . Liquidity and Capital Resources Sources of Liquidity TVA depends on various sources of liquidity to meet cash needs and contingencies. TVA's primary sources of liquidity are cash from operations and proceeds from the issuance of short-term debt in the form of discount notes, along with periodic issuances of long-term debt. TVA's balance of short-term debt typically changes frequently as TVA issues discount notes to meet short-term cash needs and pay scheduled maturities of discount notes and long-term debt. TVA's next significant power bond maturity is $1.0 billion in September 2024. The periodic amounts of short-term debt issued are determined by near-term expectations for cash receipts, cash expenditures, and funding needs, while seeking to maintain a target range of cash and cash equivalents on hand. In addition to cash from operations and proceeds from the issuance of short-term and long-term debt, TVA's sources of liquidity include four long-term revolving credit facilities totaling approximately $2.7 billion, a $150 million credit facility with the United States Department of the Treasury ("U.S. Treasury"), and proceeds from other financings. See Note 14 — Debt and Other Obligations — Credit Facility Agreements. Other financing arrangements may include sales of receivables, loans, or other assets. The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30.0 billion outstanding at any time. Power bonds outstanding, excluding unamortized discounts and premiums and net exchange gains from foreign currency transactions, at September 30, 2022 and 2021, were $19.3 billion (including current maturities) and $19.4 billion (including current maturities), respectively. The balance of Bonds outstanding directly affects TVA's capacity to meet operational liquidity needs and to strategically use Bonds to fund certain capital investments as management and the TVA Board may deem desirable. Other options for financing not subject to the limit on Bonds, including lease financings (see Lease Financings below and Note 11 — Variable Interest Entities ), could provide supplementary funding if needed. Currently, TVA expects to have adequate capability to fund its ongoing operational liquidity needs and make planned capital investments over the next decade. See Lease Financings below, Note 11 — Variable Interest Entities , and Note 14 — Debt and Other Obligations for additional information. TVA may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for securities, in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, TVA's liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. TVA may hold higher cash balances from time to time in response to potential market volatility or other business conditions. In addition, cash balances may include collateral received from counterparties. TVA has maintained continued debt market access since the outbreak of the Coronavirus Disease 2019 (" COVID-19") pandemic. Debt Securities . TVA's Bonds are not obligations of the U.S., and the U.S. does not guarantee the payments of principal or interest on Bonds. TVA's Bonds consist of power bonds and discount notes. Power bonds have maturities of between one and 50 years. At September 30, 2022, the average maturity of long-term power bonds was 15.96 years, and the weighted average interest rate was 4.65 percent. Discount notes have maturities of less than one year. Power bonds and discount notes have a first priority and equal claim of payment out of net power proceeds. Net power proceeds are defined as the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein. In addition to power bonds and discount notes, TVA had long-term debt associated with certain VIEs outstanding at September 30, 2022. See Lease Financing below, Note 11 — Variable Interest Entities , and Note 14 — Debt and Other Obligations for additional information. Power bonds and discount notes are both issued pursuant to Section 15d of the TVA Act and pursuant to the Basic Tennessee Valley Authority Power Bond Resolution adopted by the TVA Board on October 6, 1960, as amended on September 28, 1976, October 17, 1989, and March 25, 1992 (the "Basic Resolution"). The TVA Act and the Basic Resolution each contain two bond tests: the rate test and the bondholder protection test. Under the rate test, TVA must charge rates for power which will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; tax equivalents; debt service on outstanding Bonds; payments 69 Table of Contents to the U.S. Treasury in repayment of and as a return on the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment"); and such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's power business, having due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. See Note 22 — Related Parties . TVA fulfilled its requirement to repay $1.0 billion of the Power Program Appropriation Investment in 2014; therefore, the repayment of this amount is no longer a component of rate setting. The rate test for the one-year period ended September 30, 2022, was calculated after the end of 2022, and TVA met the test's requirements. Under the bondholder protection test, TVA must, in successive five-year periods, use an amount of net power proceeds at least equal to the sum of the depreciation accruals and other charges representing the amortization of capital expenditures and the net proceeds from any disposition of power facilities, for either the reduction of its capital obligations (including Bonds and the Power Program Appropriation Investment) or investment in power assets. The bondholder protection test for the five-year period ended September 30, 2020, was calculated after the end of 2020, and TVA met the test's requirements. TVA must next meet the bondholder protection test for the five-year period ending September 30, 2025, and expects to meet the test. TVA uses proceeds from the issuance of discount notes, in addition to other sources of liquidity, to fund short-term cash needs and scheduled maturities of long-term debt. The following table provides additional information regarding TVA's short-term borrowings. Short-Term Borrowings (in millions) At September 30, 2022 For the year ended September 30, 2022 At September 30, 2021 For the year ended September 30, 2021 Gross Amount Outstanding (at End of Period) or Average Gross Amount Outstanding (During Period) Discount notes $ 1,173 $ 1,014 $ 780 $ 876 Maximum Month-End Gross Amount Outstanding (During Period) Discount notes N/A $ 2,062 N/A $ 1,598 Weighted Average Interest Rate Discount notes 2.93 % 0.83 % 0.03 % 0.03 % TVA ended the year at September 30, 2022, with a higher balance for both short-term debt and average short-term debt as compared to 2021. The increase was primarily due to the timing of cash flows in 2022 than 2021. TVA generally uses proceeds from the issuance of power bonds to refinance maturing power bonds or other financing obligations, as necessary, or for other power system purposes. The total balance of power bonds may decline in periods where redemptions of power bonds exceed issuance due to net positive cash flow from operating and investing activities. In 2020, TVA achieved and surpassed its strategic goal of reducing debt to $21.8 billion by 2023, and TVA made even further reductions in debt in 2021 and 2022. TVA anticipates the balance of Bonds and other financing obligations will increase in future years due to an expected increase in capital expenditures, consistent with TVA's strategic financial plan. TVA issued $500 million of power bonds during both 2022 and 2021. TVA redeemed $1.0 billion and $1.9 billion of Bonds during 2022 and 2021, respectively. For additional information about TVA debt issuance activity and debt instruments issued and outstanding at September 30, 2022 and 2021, including rates, maturities, outstanding principal amounts, and redemption features, see Note 14 — Debt and Other Obligations — Debt Securities Activity and Debt Outstanding . TVA Bonds are traded in the public bond markets and are listed on the New York Stock Exchange ("NYSE") except for TVA's discount notes, the 2009 Series B power bonds, and the power bonds issued under TVA's electronotes ® program. TVA's Putable Automatic Rate Reset Securities ("PARRS") are traded on the NYSE under the exchange symbols "TVC" and "TVE." Other bonds listed on the NYSE are assigned various symbols by the exchange, which are noted on the NYSE's website. TVA has also listed certain bonds on foreign exchanges from time to time, including the Luxembourg, Hong Kong, and Singapore Stock Exchanges. See Item 1A, Risk Factors — Financial, Economic, and Market Risks for additional information regarding the market for TVA's Bonds. 70 Table of Contents Although TVA Bonds are not obligations of the U.S., TVA, as a corporate agency and instrumentality of the U.S. government, may be impacted if the sovereign credit ratings of the U.S. are downgraded. Additionally, TVA may be impacted by how the U.S. government addresses situations of approaching its statutory debt limit. According to statements made by nationally recognized credit rating agencies, downward pressure on the ratings of the U.S. could eventually develop if there are no changes in current policies and budget deficits and the trajectory of debt continues to increase; additionally, current ratings factor in the prospect that debates over raising the debt ceiling of the U.S. government could continue to be protracted and difficult. The outlook on the ratings of the U.S. government and TVA is currently stable with all three agencies that provide ratings on TVA Bonds. TVA's rated senior unsecured Bonds are currently rated Aaa, AAA, and AA+. TVA's short-term discount notes are not rated. Lease Financings . TVA has entered into certain leasing transactions with special purpose entities ("SPEs") to obtain third-party financing for its facilities. These SPEs are sometimes identified as VIEs of which TVA is determined to be the primary beneficiary. TVA is required to account for these VIEs on a consolidated basis. In addition, TVA previously entered into leasing transactions to obtain third-party financing for 24 peaking combustion turbine units ("CTs") as well as certain qualified technological equipment and software ("QTE"). See Note 11 — Variable Interest Entities and Note 14 — Debt and Other Obligations for information about TVA's lease financing activities. Summary Cash Flows A major source of TVA's liquidity is operating cash flows resulting from the generation and sale of electricity. Cash, cash equivalents, and restricted cash totaled $520 million and $518 million at September 30, 2022 and 2021, respectively. A summary of cash flow components for the years ended September 30 follows: Cash provided by (used in): Operating Activities . TVA's cash flows from operations are primarily driven by sales of electricity, fuel expense, and operating and maintenance expense. The timing and level of cash flows from operations can be affected by the weather, changes in working capital, commodity price fluctuations, outages, and other project expenses. Net cash flows provided by operating activities decreased $308 million for the year ended September 30, 2022, as compared to 2021. The decrease was primarily due to increased fuel and purchased power payments as a result of higher natural gas, coal, and purchased power market prices coupled with an increase in fuel inventory; increased payroll and benefit costs due to labor escalation for cost of living increases; and higher cash used for asset retirement obligation ("ARO") settlements. These decreases were partially offset by a decrease in cash paid for interest. Investing Activities . The majority of TVA's investing cash flows are due to investments to acquire, upgrade, or maintain generating and transmission assets, including environmental projects and the purchase of nuclear fuel. Net cash flows used in investing activities increased $325 million for the year ended September 30, 2022, as compared to the prior year primarily driven by the Watts Bar Unit 2 steam generator replacement project and combustion turbine projects. See Key Initiatives and Challenges — Optimum Energy Portfolio — Natural Gas-Fired Units and Watts Bar Unit 2 . These increases were partially offset by decreased nuclear fuel expenditures for the year ended September 30, 2022, as compared to the prior year. Nuclear fuel expenditures vary depending on the number of outages and the prices and timing of purchases of uranium and enrichment services. Financing Activities . TVA's cash flows provided by or used in financing activities are primarily driven by the timing and level of cash flows provided by operating activities, cash flows used in investing activities, and net issuance and redemption of debt instruments to maintain a strategic balance of cash on hand. Net cash flows used in financing activities decreased $638 million for the year ended September 30, 2022, as compared to the prior year, primarily due to a reduction in net debt redemptions and payments on leaseback transactions. Despite lower 71 Table of Contents net cash flows from operating activities and higher net cash used in investing activities during the current year, TVA was able to maintain targeted cash balance levels without the need for additional net debt issuances. TVA may have a need to increase debt in the coming years as it continues to invest in power system assets, which may result in positive net cash flows provided by financing activities in future periods. Cash Requirements Actual capital expenditures and future planned capital expenditures for property, plant, and equipment additions, including environmental projects and new generation, and nuclear fuel are as follows: Capital Expenditures For the years ended September 30 (in millions) Actual Estimated Capital Expenditures (1) 2022 2023 2024 2025 2026 2027 Capacity expansion expenditures $ 802 $ 1,340 $ 2,190 $ 1,997 $ 1,465 $ 930 Environmental expenditures 79 132 75 36 5 — Nuclear fuel 274 263 284 252 387 321 Transmission expenditures 642 653 551 570 528 527 Other capital expenditures (2) 817 857 764 801 816 816 Total capital expenditures $ 2,614 (3) $ 3,245 $ 3,864 $ 3,656 $ 3,201 $ 2,594 Notes (1) TVA plans to fund these expenditures with cash from operations and proceeds from power program financings. Estimated capital expenditures only include expenditures that are currently planned. Additional expenditures may be required, among other things, for TVA to meet growth in demand for power in its service area or to comply with new environmental laws, regulations, or orders. (2) Other capital expenditures are primarily associated with short lead time construction projects aimed at the continued safe and reliable operation of generating assets. (3) The numbers above include the change in construction in progress and nuclear fuel expenditures included in Accounts payable and accrued liabilities of $30 million. TVA continually reviews its capital expenditures and financing programs. The amounts shown in the table above are forward-looking amounts based on a number of assumptions and are subject to various uncertainties. Amounts may differ materially based upon a number of factors, including, but not limited to, changes in assumptions about system load growth, environmental regulation, rates of inflation, total cost of major projects, and availability and cost of external sources of capital. See Forward-Looking Information and Part I, Item 1A, Risk Factors . TVA has certain obligations and commitments to make future payments, including contracts executed in connection with certain of the planned construction expenditures. TVA estimates total commitments and contingencies at September 30, 2022, are approximately $5.5 billion for the year ended September 30, 2023, and $45.6 billion for the years thereafter. Of these amounts, $3.6 billion and $21.6 billion of TVA's estimates for future payments are set forth in the table below. See Note 8 — Leases , Note 11 — Variable Interest Entities , Note 14 — Debt and Other Obligations , and Note 20 — Benefit Plans for the obligations and commitments attributable to leases, VIEs and membership interests of VIEs subject to mandatory redemption, debt and leaseback obligations, and the retirement plan, respectively, for remaining amounts. Other Commitments and Contingencies Payments due for the years ending September 30 (in millions) 2023 2024 2025 2026 2027 Thereafter Total Interest payments relating to debt (1) $ 958 $ 957 $ 927 $ 873 $ 812 $ 11,990 $ 16,517 Interest payments relating to debt of VIEs 47 45 44 42 40 323 541 Interest payments relating to membership interests of VIEs subject to mandatory redemption 1 1 1 1 1 4 9 Purchase obligations Power (2) 336 344 249 218 191 1,198 2,536 Fuel (3) 2,165 891 500 324 268 1,000 5,148 Other (4) 105 55 35 27 19 165 406 Flood response commitment to NRC — — — — — 27 27 Total $ 3,612 $ 2,293 $ 1,756 $ 1,485 $ 1,331 $ 14,707 $ 25,184 Notes (1) Includes the effects of interest rate derivatives employed to manage interest rate risk. (2) Includes commitments for energy and/or capacity under power purchase agreements ("PPAs") from coal-fired, hydroelectric, diesel, renewable, and gas-fired facilities, as well as transmission service agreements to support purchases of power from the market. Certain PPAs are accounted for as leases and have lease 72 Table of Contents and non-lease components. For these contracts, the lease component is included in lease obligations (see Note 8 — Leases ) and the non-lease component is included in power purchase obligations in the table above. For PPA contracts containing a lease component that have not commenced, the entire contract amount is included in the table above. (3) Includes commitments to purchase nuclear fuel, coal, and natural gas, as well as related transportation and storage services. (4) Primarily includes long-term service contracts, contracts that contain minimum purchase levels for the purchase of limestone along with related storage and transportation, and contractual obligations related to TVA's load control program. EnergyRight ® Program. TVA purchases certain loans receivable from its LPCs in association with the EnergyRight ® program. Depending on the nature of the energy-efficiency project, loans may have a maximum term of five years or 10 years. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loan receivable that has been in default for 180 days or more or that TVA has determined is uncollectible. At September 30, 2022, the total carrying amount of the loans receivable, net of discount, was $62 million. Such amounts are not reflected in the Other Commitments and Contingencies table above. The total carrying amount of the financing obligation was $72 million at September 30, 2022. See Note 9 — Other Long-Term Assets and Note 12 — Other Long-Term Liabilities for additional information. Off-Balance Sheet Arrangements At September 30, 2022, TVA had no off-balance sheet arrangements. Key Initiatives and Challenges Optimum Energy Portfolio TVA must continuously evaluate all generating assets to ensure an optimal energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. TVA is considering plans for additional generating facilities to replace retiring or expiring capacity and to support a low cost, reliable, flexible, and increasingly clean power system. As TVA continues to evaluate the impact of retiring its coal-fired fleet by 2035, it is also evaluating adding flexible lower carbon-emitting gas plants as a strategy to maintain reliability. TVA is making investments in its generating portfolio and its infrastructure to both modernize its fleet and ensure a flexible energy grid of the future. In addition, TVA is committed to investing in the future of nuclear with the evaluation of emerging advanced nuclear technologies, such as small modular reactors ("SMRs"), and is increasing its renewable energy portfolio by securing PPAs and developing projects such as TVA's Self-Directed Solar. TVA plans to initiate work no later than 2024 to develop a new Integrated Resource Plan ("IRP"). The IRP will be a comprehensive study, with extensive engagement from the public and stakeholders, and will provide TVA direction on how to best meet future electricity demands from now to 2050. The process to develop a new IRP, while complex, will be designed to be inclusive, transparent, and comprehensive. TVA anticipates the process will take approximately two years to complete. Coal-Fired Fleet. Based on results of assessments presented to the TVA Board in 2019, the retirement of Bull Run by December 2023 was approved. See Note 7 — Plant Closures . TVA is also evaluating the impact of retiring the balance of the coal-fired fleet by 2035. TVA will prepare environmental reviews pursuant to the National Environmental Policy Act ("NEPA") prior to making a decision on retiring or building any plant. Environmental reviews evaluating the potential retirement of the Cumberland Fossil Plant ("Cumberland") and Kingston Fossil Plant ("Kingston") and replacement with other generation are now underway. On April 25, 2022, TVA made available to the public a draft environmental impact statement ("EIS") to assess the impacts associated with the potential retirement of Cumberland and the construction and operation of facilities to replace part of that generation. TVA received public input on the draft EIS during the 45-day public comment period of April 29, 2022 through June 13, 2022. TVA is currently reviewing comments submitted on the draft EIS, and a final EIS is expected to be published in December 2022. In addition, on November 10, 2021, the TVA Board authorized the Chief Executive Officer to evaluate, decide upon, and complete, if necessary, the retirements of Cumberland and Kingston and replacement generation projects, subject to completing all required environmental reviews, periodically updating the TVA Board on plans and actions, and notifying the TVA Board before making final decisions. The TVA Board approved costs up to $3.5 billion for these projects to develop generation and transmission assets and complete required demolition activities. Natural Gas-Fired Units. During 2019, the TVA Board approved an expansion of approximately 1,500 MW of peaking gas replacement capacity at two combustion turbine gas facilities to coincide with the retirement of Allen CTs 1-20 and Johnsonville CTs 1-16, contingent on the successful completion of environmental reviews under NEPA and other applicable laws. In 2020, detailed design and engineering work began at TVA’s Paradise and Colbert sites to further scope out the projects and supply information needed for the NEPA review. In 2021, environmental reviews under NEPA and other applicable laws were complete, and TVA received the air permits for the Paradise and Colbert facilities. Each project is expected to increase combustion turbine generation capacity by 750 MW. As of September 30, 2022 , TVA had spent approximately $545 million on these expansions, and TVA expects to spend an additional $424 million. Both projects are anticipated to enter commercial operations by the end of CY 2023. A 500 MW aeroderivative CT project at TVA’s Johnsonville site has been approved for $599 million, contingent on the successful completion of environmental reviews under NEPA and other applicable laws. In 2020, detailed design and engineering work began to further scope out the project and supply information needed for the NEPA review. In July 2022, 73 Table of Contents environmental reviews under NEPA and other applicable laws were complete, and TVA received the air permits for the Johnsonville facility. As of September 30, 2022, TVA had spent approximately $325 million on this project. TVA expects to spend an additional $274 million on this project and anticipates the project to enter commercial operations by the end of CY 2024. Watts Bar Unit 2. During 2014, the TVA Board approved a project for the replacement of the steam generators at Watts Bar Unit 2. During the refueling outage in 2021, TVA identified degraded steam generator conditions on Watts Bar Unit 2. Watts Bar Unit 2 remained at or below 95 percent of rated thermal output until the outage to replace the originally installed steam generators was completed, which began in March 2022. Watts Bar Unit 2 was returned to service in July 2022. As of September 30, 2022, TVA had spent $572 million related to this project and expects to spend less than $1 million in 2023. Renewable Power Purchase Agreements . In recent years, TVA has issued requests for proposals ("RFPs") in order to meet customer preferences and requirements for cleaner energy. TVA will procure the renewable energy and sell the resulting Renewable Energy Certificates ("RECs") to specific customers, allowing TVA to increase its renewable energy portfolio without additional costs to other TVA customers. These agreements help to align the core values of TVA and the public power model with the desire of TVA's customers for renewable energy. Additionally, TVA issued an RFP during 2021 for up to 200 MW of new renewable energy and anticipates making selections in the first quarter of 2023. Mounting solar supply chain constraints, commodity price increases, and the recent trade policy investigation into solar panel imports have created challenges for the U.S. solar industry, threatening project delays, cancellations, and price increases. These challenges are affecting contracted PPAs from previous RFPs that are not yet online and were reflected in submissions to TVA's 2021 RFP. TVA issued a carbon-free RFP in July 2022 for up to 5,000 MW of carbon-free and renewable energy projects. This RFP includes a broad range of potential generation sources, including nuclear, green gas, solar, storage, and wind, among others. TVA anticipates making selections for the carbon-free RFP in the second half of 2023. Self-Directed Solar. During 2019, the TVA Board approved the opportunity for TVA to explore being directly involved in the development of a utility-scale solar project, contingent on the successful completion of environmental reviews under the NEPA and other applicable laws. In 2021, TVA purchased land for this development. In 2022, environmental reviews were complete. As of September 30, 2022, TVA had spent approximately $27 million on the project and expects to spend an additional $290 million. The mounting solar supply chain constraints affecting TVA’s RFPs are also being seen in TVA’s Self-Directed Solar project. This has resulted in a delay in the estimated completion, with the project now expected to be complete in 2025. Project cost increases are also anticipated due to cost escalations from the state of global supply chains. In November 2022, the TVA Board approved the opportunity for TVA to explore the development of an additional utility-scale solar project, contingent on the successful completion of environmental reviews under the NEPA and other applicable laws, including state permits. The project would utilize TVA-owned land, deploying a solar cap system on the closed coal ash management unit at the TVA Shawnee Fossil Plant in Paducah, Kentucky. The project is in early project development stage and is approved for $216 million. Small Modular Reactors . In December 2019, TVA became the first utility in the nation to successfully obtain approval for an early site permit from the Nuclear Regulatory Commission ("NRC") to potentially construct and operate SMRs at TVA’s Clinch River Nuclear Site. The permit is valid through 2039 and therefore provides TVA a great deal of flexibility to make new nuclear decisions based on energy needs and economic factors. In 2021, TVA initiated a Programmatic EIS ("PEIS") that evaluates a variety of alternatives for a proposed advanced nuclear technology park at the Clinch River Nuclear Site and will provide additional flexibility for future decision making. The PEIS was issued for public comment in March 2022 and the Record of Decision was signed in September 2022. In 2022, the TVA Board approved the New Nuclear Program and approved up to $200 million to explore advanced reactor technology options. Of this amount, TVA had spent approximately $13 million as of September 30, 2022. The New Nuclear Program provides a systematic roadmap for TVA’s exploration of advanced nuclear technology. Collaboration with other interested parties will be an important aspect of this program, and TVA has entered into several agreements with technology progressive organizations that allow for mutual collaboration to explore advanced reactor designs as a next-generation nuclear technology. One of the first tasks the New Nuclear Program is pursuing is a project to develop an NRC construction permit application at the Clinch River Nuclear Site. In addition, while evaluating alternatives for potential advanced nuclear at the Clinch River Nuclear Site, TVA is exploring the feasibility of applying a similar approach that could deploy additional SMRs. The decision to potentially build SMRs continues to be part of the ongoing discussion as part of the asset strategy for TVA’s future generation portfolio, and any future decision to construct any reactor, advanced or otherwise, would require approval by the TVA Board and the NRC. As of September 30, 2022, TVA had spent $104 million on work regarding SMRs, including work to complete the early site permit application for the Clinch River Nuclear Site and work associated with the New Nuclear Program above. Of these amounts, DOE had reimbursed TVA $29 million. Additional expenditures will be determined based on future project development. Fiber Optic Network . In 2017, the TVA Board authorized up to $300 million to be spent over the next 10 years, subject 74 Table of Contents to annual budget availability and necessary environmental reviews, to build an enhanced fiber optic network that will better connect TVA's operational assets. Fiber is a vital part of TVA's modern communication infrastructure. The new fiber optic lines will improve the reliability and resiliency of the generation and transmission system while enabling the system to better accommodate DER as they enter the market. As of September 30, 2022 , TVA had spent $197 million on installation of the fiber optic lines and expects to spend an additional $103 million through 2027. System Operations Center . A new system operations center has been approved for $297 million. The new secured facility is being built to accommodate a new energy management system and adapt to new regulatory requirements, and will improve reliability, have improved physical security from the previous center, and be flexible to help accommodate operational growth requirements, including future renewables. The facility is expected to be constructed by the end of CY 2023 and fully operational in 2025. As of September 30, 2022, TVA had spent approximately $167 million on the project and expects to spend an additional $130 million. Energy Management System. A new energy management system has been approved for $90 million. As the current energy management system is nearing the end of its life cycle, this project will replace the existing analog system with a digital system. The new digital system will have higher capacity and speed, for communications with the TVA grid and for inputs from monitoring equipment, which will also network the new control center with existing locations and enable better remote visibility and control to help mitigate reliability implications of climate change. The system is expected to be complete in 2026. As of September 30, 2022, TVA had spent approximately $44 million on the project and expects to spend an additional $46 million. Automated Energy Exchange Platform. In October 2021, an automated energy exchange, the Southeast Energy Exchange Market ("SEEM"), took effect. The exchange was created to facilitate more short-term power exchanges and will be an enhancement to the existing market. TVA’s participation is subject to certain TVA Board approvals and the completion of appropriate environmental reviews. TVA has completed the appropriate environmental reviews and during the third quarter of 2022, the TVA Board approved the creation of a zero-cost, non-firm transmission service to allow TVA to participate in SEEM and authorized the Chief Executive Officer ("CEO") to amend the TVA Transmission Service Guidelines to offer the zero-cost, non-firm transmission service and to develop a methodology for calculating a loss rate for SEEM transactions. In September 2022, the CEO amended the TVA Transmission Service Guidelines to offer the service, and a methodology for calculating a loss rate for SEEM transactions was developed. In November 2022, the SEEM market began transacting. Inflation Reduction Act. On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 ("Inflation Reduction Act"). Among other things, the Inflation Reduction Act makes certain tax-exempt entities, including TVA, eligible for a direct-pay option for certain tax credits that encourage investment in clean energy. In addition, on September 12, 2022, President Biden issued Executive Order 14082, Implementation of the Energy and Infrastructure Provisions of the Inflation Reduction Act of 2022, which provides policy guidance to federal agencies on implementation and prioritization of the Inflation Reduction Act, establishes a new office within the White House charged with implementing the energy and infrastructure provisions of the Inflation Reduction Act, and makes a series of edits to previous executive orders to implement personnel and policy changes. TVA is currently evaluating the Inflation Reduction Act to determine whether it will be able to benefit from any these tax credits. Electric Vehicles TVA is partnering with LPCs and others to support the electrification of transportation in the Tennessee Valley in a multi-year electric vehicle ("EV") initiative. The initiative focuses on reducing or eliminating EV market barriers by setting EV policies, improving charging infrastructure availability, expanding EV availability and offerings, and spreading EV consumer awareness. In 2021, the TVA Board approved new policies and an optional wholesale EV rate aimed at encouraging the development of charging infrastructure in the Tennessee Valley. The updated policies enable LPC investment in public charging infrastructure and allow for the conditional resale of electricity, for transportation purposes only, by any charging developer on a $/kWh basis. The optional wholesale rate was developed with high power EV charging in mind and provides a stable option for those developing charging infrastructure. TVA is also working with LPCs, state agencies, and third-party charging developers to create the Fast Charge Network. This will be a foundational network of public fast charging stations at least every 50 miles along interstates and major highways across its seven-state service area. In 2021, TVA began a partnership with the State of Tennessee for the development and funding of Fast Charge Tennessee, the portion of the Fast Charge Network that covers Tennessee, and in 2022 TVA launched the Fast Charge Network. As of September 30, 2022, four sites were complete and operational with 28 additional sites under contract for development. TVA had spent less than $1 million on fast charging network charging stations as of September 30, 2022. TVA also plans to electrify 100% of its light-duty and 50% of its medium-duty vehicles in the TVA fleet. The adoption of EVs in the Tennessee Valley continues to grow, and TVA is working to ensure that the benefits of this rapid growth are secured, while also helping LPCs proactively avoid issues in their distribution systems. Also in 2021, TVA and five other major utilities formed the Electric Highway Coalition to develop a network of fast charging stations along all major highway routes within their service area. Since formation, the Electric Highway Coalition has gained significant interest from additional utilities and other EV collaboratives. In 2022, the Electric Highway Coalition merged with the Midwest Electric Vehicle Charging Infrastructure Collaboration to create the National Electric Highway Coalition with members committed to coordinate the development of EV charging infrastructure across the central U.S. 75 Table of Contents Sustainability and Social Responsibility Sustainability has been and continues to be a focus in support of TVA's mission to deliver affordable and reliable energy, steward the environment, and create sustainable economic growth. TVA has a Chief Sustainability Officer (“CSO”) who oversees an Enterprise Wide Environmental Executive Council, a Sustainability Steering Committee, and a Sustainability Working Group, which together are responsible for the governance of sustainability at TVA. The CSO is also a member of TVA’s Risk Management Steering Committee. TVA’s sustainability work is categorized into four areas: • Economic Impact — Partnering to build the region’s clean energy economy • Environment — Stewarding the region’s resources • Social — Serving people and communities across the region • Governance — Driving progress through accountability and transparency Economic Impact Environment Social Governance Energy affordability Climate change and resilience Health and safety Transparency Reliability and resiliency Air quality Environmental justice Board and executive diversity Jobs created and retained Water quality and availability Community vitality and engagement Systemic risk management Flood and drought management Waste management Reservoir and stewardship benefits Ethics Energy innovations Habitat and biodiversity protection Local power company partnerships Cyber and physical security Renewable energy Cultural resource management Diversity and inclusion Sustainable financing framework Investor relations Labor relations Supplier partners Recruitment, development, and retention Skilled workforce availability In 2021, TVA highlighted its sustainability efforts with issuances of its Corporate Sustainability Report, a supplemental Carbon Report, and an Edison Electric Institute Environmental, Social, Governance ("EEI ESG") Sustainability Report, among others. TVA continued to highlight its sustainability efforts in 2022 and released its 2021 Corporate Sustainability Report in May 2022 and its 2021 EEI ESG Sustainability Report in September 2022. In 2022, TVA also issued its first Diversity, Equity, Inclusion and Accessibility ("DEIA") Report. The report highlights the actions TVA has taken in the DEIA area, the results achieved, and the plans to continue to focus and improve. Operational Challenges Coal Supply. Coal supply challenges continued in 2022 as a result of supply limitation and transportation constraints, and are anticipated to continue into 2023. Total system coal inventories were lower than planned throughout 2022 primarily as a result of higher than forecasted coal generation and continued constraints on fuel supply. Coal inventory increased at September 30, 2022, as compared to September 30, 2021, due to higher costs of fuel, including transportation costs, coal conservation efforts, and an increase in inventory levels in preparation for winter inventory needs. The increased inventory levels will help mitigate expected constraints on fuel supply and continued natural gas price volatility which may cause coal to be a more favorable economic fuel choice during that period. Supply constraints are driven by both domestic and export demand, limited production capacity, and market volatility. Rail service continues to limit TVA’s ability to receive contracted supply due primarily to continued crew and congestion issues; however, TVA is actively working to acquire alternate routes and arrangements for transport. TVA is also monitoring potential strikes that could affect rail transportation should they occur. In addition, TVA is seeing significant supply constraints and price increases for reagents, diesel fuel, and fuel surcharges associated with coal transport, which are also expected to continue. TVA is seeking additional reagent sources to diversify the supply base and improve resiliency. TVA will continue to monitor the coal supply challenges and utilize its contracting strategy and diverse generation portfolio to balance needs and ensure adequate fuel supplies. 76 Table of Contents Aquatic Vegetation. In 2020, the unprecedented growth and breakaway of aquatic vegetation in Wheeler Reservoir challenged the Browns Ferry intake structures and impacted the source of cooling water for the plant. Two units were removed from operation and power was reduced on the third unit to accommodate the decreased capability of the cooling systems. Nuclear safety was not challenged during the event. Breakaway of aquatic vegetation will continue to be a concern until a permanent solution is finalized. However, mitigation solutions have been identified to reduce marine biofouling of the plant intake system, and permanent design solutions are expected to be implemented by the end of CY 2025. Thermal Compliance . TVA is subject to requirements of the Clean Water Act ("CWA") for maintaining discharge water temperatures and pollutant concentrations below certain limits. In the latter part of June 2022 and beginning of July 2022, TVA experienced abnormally high air temperatures, which, combined with fewer significant rain events during this time as compared to previous years, caused river temperatures to warm. This sustained heat, along with lower rainfall, can create a challenge for TVA’s plants which depend on water from the river systems for cooling while maintaining compliance with thermal requirements. TVA has had and will continue to have temporary reductions of generation at affected plants to ensure compliance with thermal requirements and anticipates water temperature will continue to pose a risk during times of higher air temperatures and fewer significant rain events. See Item 1A, Risk Factors – Risks Related to the Environmental and Catastrophic Events – 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 . Extreme Flooding Preparedness. Updates to the TVA analytical hydrology model completed in 2009 indicated that under "probable maximum flood" conditions, some of TVA's dams might not have been capable of regulating the higher flood waters. A "probable maximum flood" is an extremely unlikely event; however, TVA has a responsibility to provide protection for its nuclear plants against such events. As a result, TVA installed a series of modifications at four dams. Since 2009, TVA has performed further hydrology modeling of portions of the TVA watershed using updated modeling tools. The revised hydrology models were reviewed and approved by the NRC for Watts Bar Nuclear Plant ("Watts Bar") Units 1 and 2. However, TVA identified an error in the modeling that will require the models for Watts Bar Units 1 and 2 to be resubmitted. TVA plans to resubmit models for Watts Bar Units 1 and 2 in 2023. In addition, TVA submitted models for Sequoyah Nuclear Plant ("Sequoyah") Units 1 and 2 in 2020. As a result of the recently identified necessary changes to dam stability assumptions, TVA will submit a revision to the Sequoyah model in 2023. TVA will subsequently address conditions at Browns Ferry Nuclear Plant ("Browns Ferry") as needed. As of September 30, 2022, TVA had spent $155 million on the modifications and improvements related to extreme flooding preparedness. TVA is deferring the decision on the need for additional modifications until after the modeling work is complete. Dam Remediation . In 2015, a sinkhole was discovered near the base of the earthen embankment at Boone Dam, and a small amount of water and sediment was found seeping from the river bank below the dam. TVA identified underground pathways contributing to the seepage and prepared a plan to repair the dam, which consists of the construction of a composite seepage barrier wall in the dam's earthen embankment. The site was re-opened to the public in May 2022, and the reservoir has returned to normal operations. As of September 30, 2022, TVA had spent $325 million related to this project and expects to spend an additional $1 million in 2023. In addition, reassessments of Pickwick Landing Dam ("Pickwick") found low safety factors for post-earthquake stability indicating that the dam is at significant risk for slope stability failure following a seismic event in portions of the south embankment. Slope stability failure could lead to a breach of the south embankment and loss of the reservoir, resulting in loss of life and damage to property downstream, disruption to navigation, and loss of generation and recreation. The remaining remediation work is estimated to be complete by the third quarter of 2023. As of September 30, 2022, TVA had spent $127 million related to this project and expects to spend an additional $1 million in 2023. Decarbonization TVA's decarbonization initiative is aimed at understanding and applying clean resources to support the reduction of carbon emissions from its power supply. Related to its carbon reduction efforts, TVA has established six guiding principles which are as follows: • Prioritize the needs of Tennessee Valley stakeholders as TVA works to achieve its goals by maintaining low rates and high reliability, and attracting new jobs in the Tennessee Valley. • Use best-available science and support research and policies that further carbon-free dispatchable technologies. • Partner with long-term LPCs and other customers and communities to support economy-wide decarbonization efforts and the strategic electrification of other sectors, such as transportation. • Maintain nuclear generation, hydro generation, and a strong transmission grid as key enabling assets. • Be transparent with stakeholders in measuring and sharing TVA's progress, and listen and work effectively with all its stakeholders to understand their priorities and needs. 77 Table of Contents • Adapt to new technologies and changing policies, and be willing and open to changing TVA's plans and projects to achieve deep carbon reduction. As part of the decarbonization efforts, in 2022, the TVA Board approved a programmatic approach to exploring advanced nuclear technology, which is one of several technologies TVA is exploring. Other decarbonization technologies TVA is exploring in addition to advanced nuclear include battery storage, carbon capture, carbon sequestration and utilization, new hydroelectric pumped storage, electrification, and hydrogen. TVA also is increasing its renewable energy portfolio to work towards carbon emission reductions and meet customer preferences by investing in existing assets, encouraging renewable power through various current programs and offerings, and securing renewable PPAs through RFPs, among others. See Optimum Energy Portfolio above, Item 1, Business — Power Supply and Load Management Resources — Renewable Energy Resources , and Item 1, Business — Research and Development for further discussion. See also Item 1, Business — Environmental Matters — Climate Change for a discussion on the impact of executive actions and climate-related regulations on TVA. Coal Combustion Residuals Coal Combustion Residuals Facilities . TVA has committed to a programmatic approach for the elimination of wet storage of coal combustion residuals ("CCR") within the TVA service area. Under this program ("CCR Program"), TVA performed stability remediation, completed the conversion of all operational coal-fired plants to dry CCR storage, and is now closing all remaining wet storage facilities. Dry generation and dewatering projects . TVA has accomplished the conversion from wet to dry handling of CCR materials at all operating coal plants with the completion of dry generation and/or dewatering projects at Bull Run, Cumberland, Gallatin Fossil Plant ("Gallatin"), Kingston, and Shawnee Fossil Plant ("Shawnee"). Landfills . TVA has made strategic decisions to build and maintain lined and permitted dry storage facilities on TVA-owned property at some TVA locations, allowing these facilities to operate beyond existing dry storage capacity. Lined and permitted landfills are operational at Bull Run, Gallatin, Kingston, and Shawnee; TVA received the permit for the construction of a new lined landfill at Gallatin and construction started in 2022; and TVA continues to work through the permitting process for a new landfill at Cumberland and expects construction to begin in 2023. Construction of additional lined and dry permitted storage facilities may occur to support future business requirements . CCR facilities closures . TVA is working to close CCR facilities in accordance with federal and state requirements. Closure project schedules and costs are driven by the selected closure methodology (such as closure-in-place or closure-by-removal). Closure initiation dates are driven by environmental regulations. TVA's predominant closure methodology is closure-in-place, with exceptions at certain facilities. TVA issued an EIS in June 2016 that addresses the closure of CCR impoundments at TVA's coal-fired plants. TVA issued its associated Record of Decision in July 2016. Although the EIS was designed to be programmatic in order to address the mode of impoundment closures, it specifically addressed closure methods at 10 impoundments. TVA subsequently decided to close those impoundments. The method of final closure for each of these facilities will depend on various factors, including approval by appropriate state regulators and applicable closure requirements of state and federal regulations. Additional site-specific NEPA studies will be conducted as other facilities are designated for closure. See Note 13 — Asset Retirement Obligations . Groundwater monitoring . Compliance with the Environmental Protection Agency's ("EPA's") CCR rule ("CCR Rule") required implementation of a groundwater monitoring program, additional engineering, and ongoing analysis. As further analyses are performed, including evaluation of monitoring results and possible remedies, there is the potential for additional costs for investigation and/or remediation. These costs cannot reasonably be predicted until investigations and evaluations are complete and a final remedy is selected where required. The final Part A revision to the CCR Rule became effective September 28, 2020. Among other things, the final Part A rule requires unlined CCR surface impoundments to stop receiving CCR and non-CCR waste streams and to initiate closure or retrofit by no later than April 11, 2021. TVA ceased sending CCR and non-CCR waste streams to, and initiated closure of, unlined CCR surface impoundments by the specified deadline. In compliance with the CCR Rule, TVA published the results of 2021 groundwater testing at its CCR facilities during the second quarter of 2022. Similar to prior years, the tests identified several CCR units with constituents at statistically significant levels above site-specific groundwater protection standards. TVA has completed an assessment of corrective measures (“ACM”), which analyzes the effectiveness of potential corrective actions, and has published ACM reports to its CCR Rule Compliance Data and Information website. Based on the results of the ACM, TVA is required to select a remedy as soon as feasible. TVA continues to investigate and evaluate remedies and will continue posting semi-annual progress reports on the status of remedy selection until the final remedy is selected. The cost of these final remedies cannot reasonably be predicted until investigations and evaluations are complete and remedial methods are selected. As of September 30, 2022, TVA had spent approximately $2.6 billion on its CCR Program. Through 2027, TVA expects to spend an additional $900 million on the CCR Program. Estimates for these amounts and costs after 2027 may change 78 Table of Contents depending on the final closure method selected for each facility. While the conversion portion of the CCR Program is completed, TVA will continue to undertake CCR closure and storage projects, including building new landfill cells under existing permits and closing existing cells once they reach capacity. TVA was involved in two lawsuits concerning the CCR facilities at Gallatin. One of these cases was decided in TVA's favor by the Sixth Circuit, and the other case was resolved by the entry of a consent order and agreement in Davidson County Chancery Court that became effective July 24, 2019. Under the consent order, TVA agreed to close the existing ash facility by removal, either to an onsite landfill or to an offsite facility. TVA may also consider options for beneficial reuse of the CCR. TVA has submitted the removal plan for approval to the Tennessee Department of Environment and Conservation ("TDEC") and other applicable parties pursuant to the consent order. See Note 13 — Asset Retirement Obligations . In October 2019, TDEC released amendments to its regulations which govern solid waste disposal facilities, including TVA's active CCR facilities covered by a solid waste disposal permit and those which closed pursuant to a TDEC approved closure plan. Such facilities are generally subject to a 30-year post-closure care period during which the owner or operator must undertake certain activities, including monitoring and maintaining the facility. The amendments, among other things, add an additional 50-year period after the end of the post-closure care period, require TVA to submit recommendations as to what activities must be performed during this 50-year period to protect human health and the environment, and require TVA to submit revised closure plans every 10 years. Allen Groundwater Investigation . The CCR Rule required TVA to implement a comprehensive groundwater monitoring program at units subject to the rule. As a result of this groundwater monitoring program, TVA reported to TDEC in 2017 elevated levels of arsenic, lead, and fluoride in groundwater samples collected from two shallow-aquifer groundwater monitoring wells around the Allen East Ash Disposal Area. TVA, under the oversight of TDEC, conducted a remedial investigation into the nature and extent of the contamination. The remedial investigation confirmed that the high arsenic, fluoride, and lead concentrations are limited to the shallow alluvial aquifer in the north and south areas of the Allen East Ash Disposal Area. These areas are not adversely impacting the Memphis aquifer, which is the source of the public drinking water supply. All samples taken from the Memphis aquifer through TVA production wells were within the EPA drinking water standards. As the result of a pumping test conducted on TVA production wells at the nearby Allen Combined Cycle Plant ("Allen CC") by the United States Geological Survey and the University of Memphis, TVA has committed to not using these production wells until additional data is generated that supports safe use. TVA constructed water tanks on site and is purchasing cooling water from MLGW in lieu of utilizing the projection wells. Purchasing cooling water in combination with the use of water tanks, rather than wells, could impose some operational limitations, such as limitations on capacity, on the Allen CC due to lower availability of cooling water. Pursuant to a remedial action plan that has been approved by TDEC, TVA has begun installing a groundwater extraction system and treatment system at the East Ash Disposal Area. In addition, TVA is taking steps to close both the East Ash Disposal Area and the nearby West Ash Disposal Area. On November 29, 2021, after obtaining the necessary approvals from TDEC, TVA began removing CCR materials to an offsite, lined landfill, and removal activities are expected to continue through 2029. Potential Liability Associated with Workers' Exposure to CCR Materials. In response to the 2008 ash spill at Kingston, TVA hired Jacobs Engineering Group, Inc. ("Jacobs") to oversee 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 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 also alleged that exposure to the fly ash caused significant illnesses, including in some cases death. In 2018, a jury found in favor of the plaintiffs regarding general causation, including 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 variety of employee medical conditions. Currently, the Eastern District has stayed all proceedings in the case pending the Tennessee Supreme Court's review of four questions from the Eastern District. An oral argument on these questions was held on June 1, 2022. If the litigation proceeds to a damages phase, the principal question for resolution will be whether Jacobs's breaches were the specific medical cause of the plaintiffs' alleged injuries and damages. Other contractor employees and family members also 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 against Jacobs. While TVA is not a party to any of these lawsuits, TVA may potentially have an indemnity obligation to reimburse Jacobs in some circumstances. TVA does not expect any potential liability to have a material adverse impact on its results of operations or financial condition. See Note 21 — Commitments and Contingencies — Contingencies . Real Property Portfolio TVA continues to study its real property portfolio as part of the Strategic Real Estate Plan, which is aimed at reducing cost, right-sizing the portfolio, and aligning real estate holdings with TVA's strategic direction. In addition, as TVA continues to explore a hybrid work environment for those whose physical presence is not required, it is also assessing and 79 Table of Contents reviewing long-term impacts to and plans for its current real estate holdings. The Knoxville regional consolidation, including consolidation of the centralized field offices in Norris, Tennessee, and Greenway Transmission Service Center, has been completed. As part of TVA's initiative to ensure appropriate workspaces for employees to carry out their mission of service now and into the future, TVA has signed a lease for office space in a building located near downtown Nashville. Occupancy is expected for early 2024. In addition, TVA is continuing to evaluate its real property portfolio, including the Chattanooga Office Complex. Supply Chain and Inflation Pressures TVA has experienced an increase in supplier impacts as a result of COVID-19 and the state of global supply chains and the economy, such as project delays, limited availability of supplies, and price increases. Russia's invasion of Ukraine has further intensified the state of global supply chains and inflationary pressures. TVA is actively managing costs to mitigate inflationary pressures; however, broader inflationary pressures are expected to persist in 2023. TVA is also managing supplier impacts through existing contracts and increased lead times and communications with suppliers. TVA has been able to manage these challenges with limited business disruptions at this time; however, should pressures continue long-term, TVA could experience more significant disruptions. Board Quorum The terms of John L. Ryder and Kenneth E. Allen as members of the TVA Board ended January 3, 2022, with the adjournment of the most recent session of Congress. There are currently five TVA Board members; however, the terms of two additional TVA Board members – Jeff W. Smith and A.D. Frazier – expired on May 18, 2022, although they are permitted under the TVA Act to remain in office until the earlier of the end of the current session of Congress or the date a successor takes office. Under the TVA Act, a quorum of the TVA Board is five members. The TVA 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, 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. See Item 1A, Risk Factors — Human Capital and Management Risks — Loss of a quorum of the TVA Board could limit TVA’s ability to adapt to meet changing business conditions . Safeguarding Assets Physical Security — Non-Nuclear Asset Protection. TVA utilizes a variety of security technologies, security awareness activities, and security personnel to prevent sabotage, vandalism, and thefts. Any of these activities could negatively impact the ability of TVA to generate, transmit, and deliver power to its customers. TVA's Police and Emergency Management personnel are active participants with numerous professional and peer physical security organizations in both the electric industry and law enforcement communities. TVA works with the North American Electric Reliability Corporation ("NERC"), the SERC Reliability Corporation, the North American Transmission Forum, and other utilities to implement industry approved recommendations and standards. Nuclear Security . Nuclear security is carried out in accordance with federal regulations as set forth by the NRC. These regulations are designed for the protection of TVA's nuclear power plants, the public, and employees from the threat of radiological sabotage and other nuclear-related terrorist threats. TVA has security forces to guard against such threats. Cybersecurity. TVA operates in a highly regulated environment with respect to cybersecurity. TVA's cybersecurity program aligns or complies with the Federal Information Security Management Act, the NERC Critical Infrastructure Protection requirements, and the NRC requirements for cybersecurity, as well as industry best practices. As part of the U.S. government, TVA coordinates with and works closely with the U.S. Department of Homeland Security's Cybersecurity and Infrastructure Security Agency ("CISA") and the U.S. Computer Emergency Readiness Team ("US-CERT"). CISA serves as the agency assisting other federal entities in defending against threats and securing critical infrastructure. US-CERT functions as a liaison between the U.S. Department of Homeland Security and the public and private sectors to coordinate responses to security threats. The risk of cybersecurity events such as malicious code attacks, unauthorized access attempts, and social engineering attempts continues to intensify across all industries, including the energy sector. Over the last few years, TVA has observed a significant increase in malicious activity including phishing campaigns, malicious websites, distributed denial of service attacks, and activity specific to the COVID-19 pandemic, among others. These types of malicious activity have also been observed by TVA's external vendors, stakeholders, and partners, which has caused the need for heightened awareness and preparedness. In addition, TVA has increased cybersecurity efforts as a precautionary measure due to Russia's invasion of Ukraine. TVA has also observed an increase in activity from Russia. On May 12, 2021, President Biden signed EO 14028, "Improving the Nation's Cybersecurity." This EO is intended to improve the nation's cybersecurity posture and protect federal government networks by improving information-sharing between the U.S. government and the private sector on cyber issues and strengthening the United States' ability to respond to incidents 80 Table of Contents when they occur. This EO is focused on specific goals and requirements including actions for zero trust architectures; cloud services; FedRAMP programs; supply chain and contracts; secure software development; endpoint detection and response, standardized vulnerability, and incident response operational plans; threat and vulnerability analysis; assessment and threat-hunting; event logging, monitoring, and retention; and information sharing. TVA continues to evaluate and respond to the EO, associated Office of Management and Budget memorandums, and other emerging requirements in alignment with the order. TVA has submitted all reports as required, established response teams and an oversight structure, and initiated projects as necessary to address the required actions. In December 2021, TVA was notified of a potential cyber vulnerability, known as Log4j, that had the ability to impact many applications and services. TVA immediately responded and through its vulnerability and patch management program, implemented remediations and mitigations to address potential impact. TVA is continuing to work with vendors to ensure all services and applications are secure. At this time, this event has not impacted TVA’s ability to operate as planned. TVA is leveraging federal and other partners to better identify, detect, protect, and respond to these potential attacks. TVA also has a vulnerability and patch management program in place; when vulnerabilities are identified, the program is utilized to identify and prioritize remediation and mitigation activities to reduce the risk to TVA. While TVA and its third-party vendors and service providers have been, and will likely continue to be, subjected to such attacks and attempts to disrupt operations, to date the attacks have not had a significant or material impact on business or operations and have not impacted TVA's ability to operate as planned. See Item 1A, Risk Factors — Cybersecurity Risks — TVA's facilities and information infrastructure may not operate as planned due to cyber threats to TVA's assets and operations . Critical Accounting Estimates TVA's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which require management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change also would materially impact TVA's financial condition, results of operations, or cash flows. TVA's critical accounting policies are discussed in Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. TVA believes that its most critical accounting estimates relate to AROs, fair value measurements, and pension and other post-retirement benefits. Management has discussed the development, selection, and disclosure of critical accounting estimates with the Audit, Finance, Risk, and Cybersecurity Committee of the TVA Board. While TVA's estimates and assumptions are based on its knowledge of current events and actions it may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Asset Retirement Obligations TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets. These obligations relate to TVA's generating facilities, including coal-fired, nuclear, hydroelectric, and natural gas and/or oil-fired. They also pertain to coal ash impoundments, transmission facilities, and other property-related assets. Activities involved with the retirement of these assets could include decontamination and demolition of structures, removal and disposal of wastes, and site restoration. TVA periodically reviews its estimated ARO liabilities. Revisions to the ARO estimates are made whenever factors indicate that the timing or amounts of estimated cash flows have changed. Any change to an ARO liability is recognized prospectively as an equivalent increase or decrease in the carrying value of the capitalized asset. Any accretion or depreciation expense related to these liabilities and assets is charged to a regulatory asset. See Note 10 — Regulatory Assets and Liabilities — Nuclear Decommissioning Costs and Non-Nuclear Decommissioning Costs and Note 13 — Asset Retirement Obligations for explanations of changes in estimates. The initial obligation is measured at its estimated fair value using various judgments and assumptions. Fair value is developed using an expected present value technique that is based on assumptions of market participants and that considers estimated retirement costs in current period dollars that are inflated to the anticipated decommissioning date and then discounted back to the date the ARO was incurred. Changes in assumptions and estimates included within the calculations of the value of the AROs could result in different results than those identified and recorded in the financial statements, including amortization of the regulatory assets. Nuclear Decommissioning . Decommissioning cost studies are updated for each of TVA's nuclear units long-lived assets at least every five years. At September 30, 2022, the estimated future nuclear decommissioning cost recognized in the financial statements was $3.6 billion and was included in AROs, and the unamortized regulatory asset related to nuclear decommissioning ARO costs of $821 million was included in Regulatory assets. 81 Table of Contents The following key assumptions can have a significant effect on estimates related to the nuclear decommissioning costs reported in TVA's nuclear ARO liability: Timing and Method – In projecting decommissioning costs, two assumptions must be made to estimate the timing of plant decommissioning. First, the date of the plant's retirement must be estimated. At Browns Ferry and Sequoyah, the estimated retirement date is based on the unit with the longest license period remaining. At Watts Bar, the estimated retirement date is based on each unit's license period. Second, an assumption must be made on the timing of the decommissioning. TVA has ascribed probabilities to two different decommissioning methods related to its nuclear decommissioning obligation estimate: the DECON method and the SAFSTOR method. The DECON method requires that radioactive contamination be removed from a site and safely disposed of or decontaminated to a level that permits the site to be released for unrestricted use shortly after it ceases operation. The SAFSTOR method allows nuclear facilities to be placed and maintained in a condition that allows the facilities to be safely stored and subsequently decontaminated to levels that permit release for unrestricted use. TVA bases its nuclear decommissioning estimates on site-specific cost studies, which are updated for each of TVA's nuclear units at least every five years. TVA completed new cost studies in 2022. The studies were approved and implemented in September 2022. An increase of $58 million was recorded to the nuclear AROs as a result of the updates. Changes in probabilities ascribed to the assumptions or the timing of decommissioning can significantly change the present value of TVA's obligations. Cost Estimates – There is limited experience with actual decommissioning of large nuclear facilities. Changes in technology and experience as well as changes in regulations regarding nuclear decommissioning could cause cost estimates to change significantly. TVA's cost studies assume current technology and regulations. Cost Escalation Rate – TVA uses expected inflation rates over the remaining timeframe until the costs are expected to be incurred to estimate the amount of future cash flows required to satisfy TVA's decommissioning obligations. Discount Rate – TVA uses its incremental borrowing rate over a period consistent with the remaining timeframe until the costs are expected to be incurred to calculate the present value of the weighted estimated cash flows required to satisfy TVA's decommissioning obligations. The actual decommissioning costs may vary from the derived estimates because of changes in current assumptions, such as the assumed dates of decommissioning, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. A 10 percent change in TVA's forecasted costs for nuclear decommissioning activities at September 30, 2022, would have affected the liability by approximately $364 million. Non-Nuclear Decommissioning. At September 30, 2022, the estimated future non-nuclear decommissioning cost recognized in the financial statements was $3.5 billion and was included in AROs, and the unamortized regulatory asset related to non-nuclear decommissioning ARO costs of $2.9 billion was included in Regulatory assets. This decommissioning cost estimate involves estimating the amount and timing of future expenditures and making judgments concerning whether or not such costs are considered a legal obligation. Estimating the amount and timing of future expenditures includes, among other things, making projections of the timing and duration of the asset retirement process and predicting how costs will escalate with inflation. These costs are predominantly CCR closure, CCR post-closure care and monitoring, and plant powerhouse asbestos removal. CCR closure estimates are primarily closure-in-place except for specific ponds located at Allen and Gallatin, which are closure-by-removal. CCR post-closure care and monitoring primarily includes costs for grounds maintenance, cover system and mechanical maintenance, inspections, and groundwater monitoring costs. Asbestos removal is based on cost per square foot to remove and dispose of asbestos-containing materials. TVA revises estimates of CCR closure on a project by project basis when updated cost information becomes available that causes management's expectation of cost to change materially. The following key assumptions can have a significant effect on estimates related to the non-nuclear decommissioning costs: Timing and Method – In projecting non-nuclear decommissioning costs, the date of the asset's retirement must be estimated. In instances where the retirement of a specific asset will precede the retirement of the generating plant, the anticipated retirement date of the specific asset is used. Additionally, TVA expects to incur certain ongoing costs subsequent to the initial asset retirement. TVA develops its cost estimates based on likelihood of decommissioning method where options exist in fulfilling legal obligations (e.g. closure-in-place or closure-by-removal for coal ash impoundments). The decommissioning method is determined based on several factors including available technologies, environmental studies, cost factors, resource availability, and timing requirements. As these factors are considered and decommissioning methods are determined, the detailed project schedules and estimates are adjusted. Non-nuclear decommissioning cost estimates, including CCR post-closure care and monitoring costs and asbestos removal, are studied for revision at least every five years, but revised more frequently if updated cost information becomes available that causes management's expectation of cost to change materially. See Note 10 — Regulatory Assets and Liabilities — Non-Nuclear Decommissioning Costs . TVA implemented revised depreciation rates during the first quarter of 2022 applicable to its completed plant as a result of the completion of a new depreciation study. The study includes a decline in the service life estimates of TVA’s coal-fired plants 82 Table of Contents 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 were recorded in 2022. Technology and Regulation – Changes in technology and experience as well as changes in regulations regarding non-nuclear decommissioning could cause cost estimates to change significantly. TVA's cost estimates generally assume current technology and regulations. In April 2015, the EPA published its final rule governing CCR, which regulates landfill and impoundment location, design, and operations; dictates certain pond-closure conditions; and establishes groundwater monitoring and closure and post-closure standards. As a result of this ruling, in 2015 TVA made revisions to the assumptions and estimates used to calculate its CCR AROs. TVA continues to evaluate the impact of the rule on its operations, including cost and timing estimates of related projects. As a result, further adjustments to its ARO liabilities may be required as estimates are refined. Cost Escalation Rate – TVA uses expected inflation rates over the remaining timeframe until the costs are expected to be incurred to estimate the amount of future cash flows required to satisfy TVA's decommissioning obligations. Discount Rate – TVA uses its incremental borrowing rate over a period consistent with the remaining timeframe until the costs are expected to be incurred to calculate the present value of the weighted estimated cash flows required to satisfy TVA's decommissioning obligations. The actual decommissioning costs may vary from the derived estimates because of changes in current assumptions, such as the assumed dates of decommissioning, changes in the discount or escalation rates, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. A 10 percent change in TVA's forecasted costs for non-nuclear decommissioning activities at September 30, 2022, would have affected the liability by approximately $352 million. Fair Value Measurements Investments. Investment funds are comprised of equity securities and debt securities and are classified as trading. These securities are held in the Nuclear Decommissioning Trust ("NDT"), Asset Retirement Trust ("ART"), Supplemental Executive Retirement Plan ("SERP"), Deferred Compensation Plan ("DCP"), and qualified benefit pension plan. Investment Funds . The assets in the NDT, ART, SERP, and DCP are generally measured at fair value based on quoted market prices or other observable market data such as interest rate indices. These investments are primarily U.S. and international equities, real estate investment trusts, fixed income investments, high-yield fixed income investments, U.S. Treasury Inflation-Protected Securities ("TIPS"), treasuries, currencies, derivative instruments, and other investments. TVA has classified all of these trading securities as either Level 1, Level 2, or Investments measured at net asset value ("NAV"). Private equity limited partnerships, private real asset investments, and private credit investments may include holdings of investments in private real estate, venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations through funds managed by third-party investment managers. These investments are valued at NAV as a practical expedient for fair value. There are no readily available quoted exchange prices for these investments. The fair value of these investments is based on information provided by the investment managers. These investments are valued on a quarterly basis. See Note 16 — Fair Value Measurements — Valuation Techniques for a discussion of valuation levels of the investments. Plan Investments . TVA's qualified benefit pension plan is funded with qualified plan assets. These investments are primarily global public equities, private equities, fixed income securities, public real assets, and private real assets. See Note 20 — Benefit Plans — Fair Value Measurements for disclosure of fair value measurements for investments held by the TVA Retirement System ("TVARS") that support TVA's qualified defined benefit pension plan. Pricing . Prices provided by third-parties for the assets in investment funds and plan investments are subjected to automated tolerance checks by the investment portfolio trustee to identify and avoid, where possible, the use of inaccurate prices. Any such prices identified as outside the tolerance thresholds are reported to the vendor that provided the price. If the prices are validated, the primary pricing source is used. If not, a secondary source price that has passed the applicable tolerance check is used (or queried with the vendor if it is out of tolerance), resulting in either the use of a secondary price, where validated, or the last reported default price, as in the case of a missing price. For monthly valued accounts, where secondary price sources are available, an automated inter-source tolerance report identifies prices with an inter-vendor pricing variance of over two percent at an asset class level. For daily valued accounts, each security is assigned, where possible, an indicative major market index, against which daily price movements are automatically compared. Tolerance thresholds are established by asset class. Prices found to be outside of the applicable tolerance threshold are reported and queried with vendors as described above. For investment funds, TVA additionally performs its own analytical testing on the change in fair value measurements each period to ensure the valuations are reasonable based on changes in general market assumptions. TVA also performs pricing tests on various portfolios comprised of securities classified in Levels 1 and 2 on a quarterly basis to confirm accuracy of 83 Table of Contents the values received from the investment portfolio trustee. For plan investments, TVARS reviews the trustee's Service Organization Controls report and the pricing policies of the trustee's largest pricing vendor. Derivatives. TVA has historically entered into various derivative transactions, including commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures, to manage various market risks. Other than certain derivative instruments included in investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. See Note 10 — Regulatory Assets and Liabilities and Note 15 — Risk Management Activities and Derivative Transactions for explanations of changes in estimates. Currency and Interest Rate Derivatives . TVA has two currency swaps and two "fixed for floating" interest rate swaps. The currency swaps protect against changes in cash flows caused by volatility in exchange rates related to outstanding Bonds denominated in British pounds sterling. TVA uses interest rate swaps to fix variable short-term debt to a fixed rate. The currency and interest rate swaps are classified as Level 2 valuations as the rate curves and interest rates affecting the fair value of the contracts are based on observable data. Commodity Derivatives . TVA enters into commodity contracts for natural gas that require physical delivery of the contracted quantity of the commodity. The natural gas derivative contracts are classified as Level 2 valuations based on market approaches which utilize short-term and mid-term market-quoted prices from an external industry brokerage firm. TVA maintains policies and procedures to value commodity contracts using what is believed to be the best and most relevant data available. In addition, TVA's risk management group reviews valuations and pricing data. Commodity Derivatives under the Financial Hedging Program ("FHP") . In November 2021, the TVA Board approved the elimination of the Value at Risk aggregate transaction limit for the FHP 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 FHP. In December 2021, TVA reinstated the FHP, and hedging activity began under the program in the second quarter of 2022. The commodity derivatives under the FHP are classified as Level 2 valuations based on market approaches which utilize short-term and mid-term market-quoted prices from an external industry brokerage firm. Fair Value Considerations. In determining the fair value of its financial instruments, TVA considers the source of observable market data inputs, liquidity of the instrument, credit risk, and risk of nonperformance of itself or the counterparty to the contract. The conditions and criteria used to assess these factors are described below. Sources of Market Assumptions. TVA derives its financial instrument market assumptions from market data sources (e.g., Chicago Mercantile Exchange and Moody's Investors Service, Inc. ("Moody's")). In some cases, where market data is not readily available, TVA uses comparable market sources and empirical evidence to derive market assumptions and determine a financial instrument's fair value. Market Liquidity . Market liquidity is assessed by TVA based on criteria as to whether the financial instrument trades in an active or inactive market. A financial instrument is considered to be in an active market if the prices are fully transparent to the market participants, the prices can be measured by market bid and ask quotes, the market has a relatively high trading volume, and the market has a significant number of market participants that will allow the market to rapidly absorb the quantity of the assets traded without significantly affecting the market price. Other factors TVA considers when determining whether a market is active or inactive include the presence of government or regulatory control over pricing that could make it difficult to establish a market-based price upon entering into a transaction. Nonperformance Risk . In determining the potential impact of nonperformance risk, which includes credit risk, TVA considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements. TVA is a counterparty to derivative instruments that subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to value the investment. Nonperformance risk for most of TVA's derivative instruments is an adjustment to the initial asset/liability fair value. TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying a CVA. TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA's or the counterparty's credit rating as obtained from Moody's. For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the company. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2021) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. All derivative instruments are analyzed individually and are subject to unique risk exposures. The application of CVAs resulted in a $2 million decrease in the fair value of assets and a $2 million decrease in the fair value of liabilities at September 30, 2022. 84 Table of Contents Collateral. TVA's interest rate swaps, currency swaps, and commodity derivatives under the Financial Hedging Program ("FHP") contain contract provisions that require a party to post collateral (in a form such as cash or a letter of credit) when the party's liability balance under the agreement exceeds a certain threshold. See Note 15 — Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral for a discussion of collateral related to TVA's derivative liabilities. Pension and Other Post-Retirement Benefits TVA sponsors a defined benefit pension plan that is qualified under section 401(a) of the Internal Revenue Code and covers substantially all of its full-time annual employees hired prior to July 1, 2014. TVARS, a separate legal entity governed by its own board of directors (the "TVARS Board"), administers the qualified defined benefit pension plan. TVA also provides a SERP to certain executives in critical positions, which provides supplemental pension benefits tied to compensation levels that exceed limits imposed by IRS rules applicable to the qualified defined benefit pension plan. Additionally, TVA provides post-retirement health care benefits for most of its full-time employees who reach retirement age while still working for TVA. TVA's pension and other post-retirement benefits contain uncertainties because they require management to make certain assumptions related to TVA's cost to provide these benefits. Numerous factors are considered including the provisions of the plans, changing employee demographics, various actuarial calculations, assumptions, and accounting mechanisms. Effects of the COVID-19 pandemic on the financial markets, regulations, and experience are uncertain and still evolving, creating an additional degree of complexity associated with the future occurrence or outcome of events and conditions underlying the significant accounting assumptions discussed below. Certain key actuarial assumptions critical to the pension and postretirement accounting estimates include expected long-term rate of return on plan assets, discount rates, projected health care cost trend rates, cost of living adjustments ("COLA"), and mortality rates. Every five years, a formal actuarial experience study that compares assumptions to the actual experience is conducted. Additional ad-hoc experience studies are performed as needed to review recent experience and validate recommended changes to the actuarial assumptions used based upon TVA's last experience study in 2018. See Note 20 — Benefit Plans for explanations of changes in assumptions and estimates. Expected Return on Plan Assets . The qualified defined benefit pension plan is the only plan that is funded with qualified plan assets. In determining the expected long-term rate of return on pension plan assets, TVA uses a process that incorporates actual historical asset class returns and an assessment of expected future performance and takes into consideration external actuarial advice, the current outlook on capital markets, the asset allocation policy, and the anticipated impact of active management. During 2022, the TVARS Board increased the expected return on plan assets assumptions from 5.75 percent to 6.50 percent based upon review of the current plan's funding levels and asset target allocation mix, capital market outlooks, and the most recent studies. In 2022, TVA management adopted the 6.50 percent expected long-term rate of return on plan assets assumption, which will be used to calculate the 2023 net periodic pension cost. TVA recognizes the impact of asset performance on pension expense over a three-year phase-in period through a market-related value of assets ("MRVA") calculation. The MRVA recognizes investment gains and losses over a three-year period and is used in calculating the expected return on assets and the recognized net actuarial loss components of pension net periodic benefit cost. A higher expected rate of return assumption decreases the net periodic pension benefit costs, whereas a lower expected rate of return assumption increases the net periodic pension benefit cost. The plan's actual rate of return for 2022 was (6.64) percent compared to the assumption of 5.75 percent. The difference between the expected and actual return on plan assets resulted in an actuarial loss of $1.0 billion that is recognized as an increase in the related regulatory asset and an increase in the pension benefit obligation at September 30, 2022. Discount Rate. TVA's discount rates are derived by identifying a theoretical settlement portfolio of high quality corporate bonds of Aa quality or higher sufficient to provide for the projected benefit payments. The model matches the present value of the projected benefit payments to the market value of the theoretical settlement bond portfolio with any resulting excess funds presumed to be reinvested and used to meet successive year benefit payments. A single equivalent discount rate is determined to align the present value of the required cash flow with the value of the bond portfolio. The resulting discount rates are reflective of both the current interest rate and the distinct liability of the pension and post-retirement benefit plans. The discount rate is somewhat volatile because it is determined based upon the prevailing rate of long-term corporate bonds as of the measurement date. A higher discount rate decreases the plan obligations and correspondingly decreases the net periodic pension and net post-retirement benefit costs for those plans where actuarial losses are being amortized. Alternatively, a lower discount rate increases net periodic pension and net periodic post-retirement benefit costs. The discount rates used to determine the pension and post-retirement benefit obligations were 5.60 percent and 5.65 percent, respectively, at September 30, 2022. Health Care Cost Trends. In establishing health care cost trend rates for the post-retirement obligation, TVA reviews actual recent cost trends and projected future trends considering health care inflation, changes in health care utilization, and 85 Table of Contents changes in plan benefits and premium experience. The pre-Medicare eligible per capita claims costs trend rate is 7.00 percent, declining 0.25 percent per year until it reaches the ultimate trend rate of 5.00 percent in 2031. The pre-Medicare eligible per capita contributions trend rate and ultimate rate is 5.00 percent, which was reached in 2022. The post-Medicare current health care cost trend rate is zero percent for years 2023 through 2025, reaching the ultimate rate of 4.00 percent in 2026. During 2022, TVA recognized a $67 million actuarial loss due to pre-Medicare higher claim costs and lower expected future pre-Medicare contributions than previously assumed. This was partially offset by a $31 million actuarial gain from delaying the ultimate post-Medicare trend rate assumption two years due to favorable premium rates. Cost of Living Adjustments. Cost of living adjustments ("COLAs") are an increase in the benefits for eligible retirees to help maintain the purchasing power of benefits as consumer prices increase. This assumption is based on the long-term expected future rate of inflation, which is based on the capital market outlooks, economic forecasts, and the Federal Reserve policy. See Note 20 — Benefit Plans — Plan Assumptions — Cost of Living Adjustment for further discussion on the calculation of the COLA. The actual COLA for CY 2022 was 3.50 percent. The CY 2023 COLA and CY 2024 COLA are assumed to be 6.00 percent and 3.15 percent, respectively, and for years thereafter the COLA is assumed to be 2.00 percent . A higher COLA increases the pension benefit obligation whereas a lower COLA assumption decreases the obligation. The actual calendar year COLA and the long-term COLA assumption are used to determine the benefit obligation at September 30 and the net periodic benefit costs for the following fiscal year. Mortality . TVA's mortality assumptions are based upon actuarial projections in combination with actuarial studies of the actual mortality experience of TVARS's pension and post-retirement benefit plan participants taking into consideration the Society of Actuaries ("SOA") mortality table and projection scales as of September 30, 2022. TVA continues to monitor the availability of updates to mortality tables, longevity improvement scales, and mortality reviews and experience studies to consider whether these updates should be reflected in the current year mortality assumption. In 2022, based upon the most recent mortality experience study, TVA adopted a modified version of the SOA PRI-2012 Upper Quartile mortality table and updated to the latest mortality improvement scale at September 30, 2022. The change in TVA's mortality assumptions resulted in a $527 million increase in the pension obligation and an $18 million increase in the post-retirement obligation at September 30, 2022. The following tables illustrate the estimated effects of changing certain of the critical actuarial assumptions discussed above, while holding all other assumptions constant and excluding any impact for unamortized actuarial gains and losses: Sensitivity to Certain Changes in Pension Assumptions Actuarial Assumption Actual Assumption Change in Assumption Impact Effect on 2022 pension expense: Discount rate 2.90 % (0.25) % $ 16 Expected return on assets 5.75 % (0.25) % 19 COLA 2.00 % 0.25 % 29 Effect on benefit obligation at September 30, 2022: Discount rate 5.60 % (0.25) % 257 COLA 2.00 % 0.25 % 179 Sensitivity to Changes in Assumed Health Care Cost Trend Rates 1% Increase 1% Decrease Effect on total of service and interest cost components for 2022 $ 4 $ (4) Effect on end-of-year accumulated post-retirement benefit obligation at September 30, 2022 40 (49) New Accounting Standards and Interpretations See Note 2 — Impact of New Accounting Standards and Interpretations for a discussion of recent accounting standards and pronouncements that were issued by the Financial Accounting Standards Board ("FASB"), became effective for TVA, or were adopted by TVA during the presented periods. Legislative and Regulatory Matters For additional discussion on legislative and regulatory matters, including a discussion of environmental legislation and regulation, see Part I, Item 1, Business — Environmental Matters, Part I, Item 1, Business — Regulation, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges. TVA does not engage, and does not control any entity that is engaged, in any activity listed under Section 13(r) of the Securities Exchange Act of 1934 (the "Exchange Act"), which requires certain issuers to disclose certain activities relating to Iran 86 Table of Contents involving the issuer and its affiliates. Based on information supplied by each such person, none of TVA's directors and executive officers are involved in any such activities. While TVA is an agency and instrumentality of the U.S., TVA does not believe its disclosure obligations, if any, under Section 13(r) extend to the activities of any other departments, divisions, or agencies of the U.S. Environmental Matters See Part I, Item 1, Business — Environmental Matters, which discussion is incorporated by reference into this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Legal Proceedings From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting its activities, as a result of catastrophic events or otherwise. As of September 30, 2022, TVA had accrued approximately $11 million with respect to Legal Proceedings. No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected. For a discussion of certain current material Legal Proceedings, see Note 21 — Commitments and Contingencies — Legal Proceedings , which discussions are incorporated into this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations . Risk Management Activities TVA is exposed to various market risks. These market risks include risks related to commodity prices, investment prices, interest rates, currency exchange rates, inflation, and counterparty credit and performance risk. To help manage certain of these risks, TVA has entered into various derivative transactions, including commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures. Other than certain derivative instruments in its trust investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. See Note 15 — Risk Management Activities and Derivative Transactions . Risk Governance The Enterprise Risk Council ("ERC") is responsible for the highest level of risk oversight at TVA and is also responsible for communicating enterprise-wide risks with policy implications to the TVA Board or a designated TVA Board committee. The ERC is comprised of the Enterprise Leadership Team ("ELT") and the Chief Risk Officer ("CRO") who acts as Chair. ERC members may invite additional attendees to meetings as non-voting participants. The ERC has also established subordinate committees, consisting of business unit leaders, to assist in the oversight of fuel and power procurement, DER programs and products, and general risk management. TVA has a designated Enterprise Risk Management ("ERM") organization within its Financial Services organization responsible for (1) establishing enterprise risk management policies and guidelines, (2) developing an enterprise risk profile aligned with TVA's strategic objectives, (3) performing annual risk assessments across all TVA business units, (4) monitoring and reporting on identified enterprise risks and emerging risks, (5) facilitating enterprise risk discussions with the risk subject matter experts across the organization and at the ERC and TVA Board levels, and (6) developing and improving TVA's risk awareness culture. TVA has cataloged major short-term and long-term enterprise level risks across the organization. A discussion of significant risks is presented in Item 1A, Risk Factors. Commodity Price Risk TVA is exposed to effects of market fluctuations in the price of commodities that are critical to its operations, including electricity, coal, and natural gas. The magnitude of exposure to these risks is influenced by many factors including contract terms and market liquidity. TVA's commodity price risk is substantially mitigated by its cost-based rates, including its total fuel cost adjustment, and long-term fixed price commodity contracts. Commodity Derivatives. TVA manages risk with commodity contracts for natural gas that require physical delivery of the contracted quantity. An immediate 10 percent decline in the market price of natural gas on September 30, 2022 and 2021, would have resulted in decreases of approximately $18 million and $49 million, respectively, in the fair value of TVA's natural gas derivative instruments at these dates. Commodity Derivatives under the FHP. TVA manages risk with commodity derivatives under the FHP by hedging exposure to the price of natural gas. An immediate 10 percent decline in the market price of natural gas on September 30, 2022 would have resulted in a decrease of approximately $133 million in the fair value of TVA's natural gas derivative instruments under the FHP. 87 Table of Contents Investment Price Risk TVA's investment price risk relates primarily to investments in TVA's NDT, ART, pension fund, SERP, and DCP. Nuclear Decommissioning Trust. The NDT is generally designed to achieve a return in line with overall equity and debt market performance. The assets of the trust are invested in debt and equity securities, private partnerships, and certain derivative instruments including forwards, futures, options, and swaps, and through these investments the trust has exposure to U.S. equities, international equities, real estate investment trusts, natural resource equities, high-yield debt, domestic debt, U.S. TIPS, treasuries, private real assets, private equity, and private credit strategies. At September 30, 2022 and 2021, an immediate 10 percent decrease in the price of the investments in the trust would have reduced the value of the trust by $252 million and $281 million, respectively. Asset Retirement Trust. The ART is presently invested to achieve a return in line with overall equity and debt market performance. The assets of the trust are invested in debt and equity securities, private partnerships, and certain derivative instruments including options, and through these investments the trust has exposure to U.S. equities, real estate investment trusts, natural resource equities, high-yield debt, domestic debt, TIPS, treasuries, private real assets, private equity, and private credit strategies. At September 30, 2022 and 2021, an immediate 10 percent decrease in the price of the investments in the trust would have reduced the value of the trust by $106 million and $113 million, respectively. Qualified Pension Plan . In 2021, a new asset allocation plan was put in place to reduce risk and volatility in the TVARS investment portfolio. The TVARS asset allocation policy for qualified pension plan assets has targets of 17 percent growth assets, 38 percent defensive growth assets, 20 percent defensive assets, and 25 percent inflation-sensitive assets. Pursuant to the TVARS Rules and Regulations, any proposed changes in asset allocation that would change TVARS's assumed rate of investment return are subject to the review and veto of the TVA Board. As set forth above, the qualified pension plan assets are invested across growth assets, defensive growth assets, defensive assets, and inflation-sensitive assets. The TVARS asset allocation policy includes permissible deviations from target allocations, and action can be taken, as appropriate, to rebalance the plan's assets consistent with the asset allocation policy. At September 30, 2022 and 2021, an immediate 10 percent decrease in the value of the net assets of the fund would have reduced the value of the fund by approximately $809 million and $911 million, respectively. Supplemental Executive Retirement Plan . The SERP is a non-qualified defined benefit pension plan similar to those typically found in other companies in TVA's peer group and is provided to selected employees of TVA. TVA's SERP was created to recruit and retain key executives. The plan is designed to provide a competitive level of retirement benefits in excess of the limitations on contributions and benefits imposed by TVA's qualified defined benefit plan and Internal Revenue Code Section 415 limits on qualified retirement plans. The SERP currently targets an asset allocation policy for its plan assets of 64 percent equity securities, which includes U.S. and non-U.S. equities, and 36 percent fixed income securities. The SERP plan assets are presently invested to achieve a return in line with overall equity and debt market performance. At September 30, 2022 and 2021, an immediate 10 percent decrease in the value of the SERP investments would have reduced the value of the investments by $7 million and $8 million, respectively. Deferred Compensation Plan. The DCP is designed to provide participants with the ability to defer compensation to future periods. The plan assists in the recruitment of top executive talent for TVA. As in other corporations, deferred compensation can be an integral part of a total compensation package. Assets currently include deferral balances. The default return on investment of the accounts is interest calculated based on the composite rate of all marketable U.S. Treasury issues. Executives may alternatively choose to have their balances adjusted based on the return of certain mutual funds. At both September 30, 2022 and 2021, an immediate 10 percent decrease in the value of the deferred compensation accounts would have reduced the value of the accounts by $2 million. Interest Rate Risk TVA's interest rate risk is related primarily to its short-term investments, short-term debt, long-term debt, and interest rate derivatives. Investments. At September 30, 2022, TVA had $500 million of cash and cash equivalents, and the average balance of cash and cash equivalents for 2022 was $675 million. The average interest rate that TVA received on its short-term investments during 2022 was slightly less than one percent. If the rates of interest that TVA received on its short-term investments during 2022 were zero percent, TVA would have received approximately $4 million less in interest from its short-term investments. At September 30, 2021, TVA had $499 million of cash and cash equivalents, and the average balance of cash and cash equivalents for 2021 was $657 million. The average interest rate that TVA received on its short-term investments during 2021 was only slightly higher than zero percent. If the rates that TVA received on its short-term investments during 2021 were exactly zero percent, TVA would have received a minimal amount less in interest from its short-term investments. In addition to affecting the amount of interest that TVA receives from its short-term investments, changes in interest rates could affect the value of the investments in its pension plan, ART, NDT, SERP, and DCP. See Risk Management Activities — Investment Price Risk above. 88 Table of Contents Short-Term Debt . At September 30, 2022, TVA's short-term borrowings were $1.2 billion, and the current maturities of long-term debt were $68 million. Based on TVA's interest rate exposure at September 30, 2022, an immediate one percentage point increase in interest rates would have resulted in an increase of $12 million in TVA's short-term interest expense. At September 30, 2021, TVA's short-term borrowings were $780 million, and the current maturities of long-term debt were $1.1 billion. Based on TVA's interest rate exposure at September 30, 2021, an immediate one percentage point increase in interest rates would have resulted in an increase of $19 million in TVA's short-term interest expense. Long-Term Debt. At September 30, 2022 and 2021, the interest rates on all of TVA's outstanding long-term debt were fixed (or subject only to downward adjustment under certain conditions). Accordingly, an immediate one percentage point increase in interest rates would not have affected TVA's interest expense associated with its long-term debt. When TVA's long-term debt matures or is redeemed, however, TVA typically refinances debt in whole or in part by issuing additional debt. Accordingly, if interest rates are high when TVA issues this additional debt, TVA's cash flows, results of operations, and financial condition may be adversely affected. This risk is somewhat mitigated by the fact that TVA's debt portfolio is diversified in terms of maturities and has a long average life. At September 30, 2022 and 2021, the average life of TVA's debt portfolio was 15.96 years and 15.69 years, respectively. At September 30, 2022 and 2021, the average interest rate of TVA's debt portfolio was 4.65 percent and 4.51 percent, respectively. See Note 14 — Debt and Other Obligations — Debt Outstanding for a schedule of TVA's debt maturities. Interest Rate Derivatives. Changes in interest rates also affect the mark-to-market ("MtM") valuation of TVA's interest rate derivatives. See Note 15 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivatives . TVA had two and four interest rate swaps outstanding at September 30, 2022 and 2021, respectively. In 2022, final payments were made on two interest rate swaps. Net unrealized gains and losses on the remaining instruments are reflected on TVA's Consolidated Balance Sheets in a regulatory liability or asset account, and realized gains and losses are reflected in earnings. Based on TVA's interest rate exposure at September 30, 2022 and 2021, an immediate one-half percentage point decrease in interest rates would have increased the interest rate swap liabilities by $122 million and $260 million, respectively. London Interbank Offered Rate ("LIBOR") . TVA had interest rate swap contracts that totaled a notional value of $1.5 billion at December 31, 2021, that were indexed to LIBOR. TVA adopted the International Swaps and Derivative Association’s ("ISDA’s") LIBOR fallback protocol for interest rate swaps prior to December 31, 2021. Under this protocol, U.S. dollar LIBOR transactions would fall back to the Secured Overnight Financing Rates upon cessation of the related LIBOR publication. The interest rate swap contracts did not receive hedge accounting treatment, and therefore TVA did not elect any optional expedients for this modification. TVA does not have any other significant contracts, including lease agreements, that include payments indexed to LIBOR. Therefore, the change of reference rate did not have a material impact on TVA’s financial condition, results of operations, or cash flows. Currency Exchange Rate Risk Over the next several years, TVA plans to spend a significant amount of capital on clean air projects, capacity expansion, and other projects. A portion of this amount may be spent on contracts that are denominated in one or more foreign currencies. Additionally, TVA's two issues of Bonds denominated in British pounds sterling are hedged by currency swap agreements. The value of the U.S. dollar compared with other currencies has fluctuated widely in recent years, including fluctuations in the U.S. dollar to British pound sterling exchange rate primarily driven by the "BREXIT" vote for the United Kingdom to leave the European Union. If not effectively managed, foreign currency exposure could negatively impact TVA's counterparty risk, cash flows, results of operations, and financial condition.