UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December 31, 2017~~June 30, 2019

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 000-52313

TENNESSEE VALLEY AUTHORITY

(Exact name of registrant as specified in its charter)



A corporate agency of the United States created by an act of Congress (State or other jurisdiction of incorporation or organization)			62-0474417 ~~(IRS~~(I.R.S. Employer Identification No.)

400 W. Summit Hill Drive Knoxville, Tennessee (Address of principal executive offices)			37902 (Zip Code)

(865) 632-2101

(~~Registrant’s~~Registrant's telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of ~~“large~~"large accelerated filer,~~” “accelerated~~" "accelerated filer,~~” “smaller~~" "smaller reporting company,”" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o

Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company o

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

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Table of Contents

	Page
GLOSSARY OF COMMON ACRONYMS......................................................................................................................................	3
FORWARD-LOOKING INFORMATION.........................................................................................................................................	5
GENERAL INFORMATION............................................................................................................................................................	6

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.............................................................................................................................................	7
Consolidated Statements of Operations (unaudited)............................................................................................................	7
Consolidated Statements of Comprehensive Income (Loss) (unaudited).............................................................................	7
Consolidated Balance Sheets (unaudited)............................................................................................................................	8
Consolidated Statements of Cash Flows (unaudited)...........................................................................................................	10
Consolidated Statements of Changes in Proprietary Capital (unaudited).............................................................................	11
Notes to Consolidated Financial Statements (unaudited).....................................................................................................	12

ITEM 2. ~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ~~OPERATIONS...~~ OPERATIONS...	4345
Executive Overview...............................................................................................................................................................	4345
Results of Operations............................................................................................................................................................	4446
Liquidity and Capital Resources............................................................................................................................................	4854
Key Initiatives and Challenges..............................................................................................................................................	5056
Environmental Matters..........................................................................................................................................................	5663
Legal Proceedings................................................................................................................................................................	5766
Off-Balance Sheet Arrangements.........................................................................................................................................	5766
Critical Accounting Policies and Estimates...........................................................................................................................	5766
New Accounting Standards and Interpretations....................................................................................................................	57
~~Corporate Governance..........................................................................................................................................................~~	5866
Legislative and Regulatory Matters.......................................................................................................................................	5866

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................................................	5866

ITEM 4. CONTROLS AND PROCEDURES..................................................................................................................................	5866
Disclosure Controls and Procedures.....................................................................................................................................	5866
Changes in Internal Control over Financial Reporting..........................................................................................................	5867

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS..................................................................................................................................................	5967

ITEM 1A. RISK FACTORS...........................................................................................................................................................	5967

ITEM 6. EXHIBITS.......................................................................................................................................................................	6068

SIGNATURES...............................................................................................................................................................................	6169

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GLOSSARY OF COMMON ACRONYMS
Following are definitions of terms or acronyms that may be used in this Quarterly Report on Form 10-Q for the quarter ended ~~December 31, 2017~~June 30, 2019 (the "Quarterly Report"):

Term or Acronym		Definition
AFUDC		Allowance for funds used during construction
AOCI		Accumulated other comprehensive income (loss)
ARO		Asset retirement obligation
ART		Asset Retirement Trust
ASLB		Atomic Safety and Licensing Board
BLEU		Blended low-enriched uranium
CAA		Clean Air Act
CAIR		Clean Air Interstate Rule
CCR		Coal combustion residuals
CME		Chicago Mercantile Exchange
CO₂		Carbon dioxide
COL		Combined construction and operating license
COLA		Cost-of-living adjustment
CSAPR		Cross-State Air Pollution Rule
CTs		Combustion turbine unit(s)
CVA		Credit valuation adjustment
CY		Calendar year
DCP		Deferred Compensation Plan
DER		Distributed energy resources
DOE		Department of Energy
EA		Environmental Assessments
EIS		Environmental Impact Statement
EPA		Environmental Protection Agency
EPU		Extended Power Update
ESPA		Early Site Permit Application
FASB		Financial Accounting Standards Board
FCM		Futures Commission Merchant
FERC		Federal Energy Regulatory Commission
FTP		Financial Trading Program
GAAP		Accounting principles generally accepted in the United States of America
GHG		Greenhouse gas
GWh		Gigawatt hour(s)
HAP		Hazardous Air Pollutants
IRP		Integrated Resource Plan
JSCCG		John Sevier Combined Cycle Generation LLC
KOC		Knoxville Office Complex
kWh		Kilowatt hour(s)
LPC		~~Local~~TVA's local power company customer ~~of TVA~~
MATS		Mercury and Air Toxics Standards
MD&A		~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations
mmBtu		Million British thermal unit(s)
MtM		Mark-to-market
MW		Megawatt
NAAQS		National Ambient Air Quality Standards
NAV		Net asset value

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NDT		Nuclear Decommissioning Trust
NEPA		National Environmental Policy Act
NERC		North American Electric Reliability Corporation
NO_x		Nitrogen oxide
NPDES		National Pollutant Discharge Elimination System

~~Table of Contents~~



NRC		Nuclear Regulatory Commission
NSR		New Source Review
OCI		Other comprehensive income (loss)
OCIP		Owner Controlled Insurance Program
PARRS		Putable Automatic Rate Reset Securities
PM		Particulate matter
QER		Quadrennial Energy Review
QTE		Qualified technological equipment and software
REIT		Real Estate Investment Trust
SCCG		Southaven Combined Cycle Generation LLC
SCRs		Selective catalytic reduction systems
SEC		Securities and Exchange Commission
SERP		Supplemental Executive Retirement Plan
SHLLC		Southaven Holdco LLC
SIPs		State implementation plans
SMR		Small modular reactor(s)
SO₂		Sulfur dioxide
TCWN		Tennessee Clean Water Network
TDEC		Tennessee Department of Environment & Conservation
TOU		Time-of-use
TVA Act		The Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee
TVARS		Tennessee Valley Authority Retirement System
U.S. Treasury		United States Department of the Treasury
VIE		Variable interest entity
XBRL		eXtensible Business Reporting Language

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FORWARD-LOOKING INFORMATION

This Quarterly Report contains forward-looking statements relating to future events and future performance. All statements other than those that are purely historical may be forward-looking statements. In certain cases, forward-looking statements can be identified by the use of words such as "may," "will," "should," "expect," "anticipate," "believe," "intend," ~~“project,”~~"project," "plan," ~~“predict,~~"predict," "assume," "forecast," "estimate," "objective,”" "possible," "probably," "likely," "potential," "speculate," or other similar expressions.

Although the Tennessee Valley Authority ("TVA") believes that the assumptions underlying the forward-looking statements are reasonable, TVA does not guarantee the accuracy of these statements. Numerous factors could cause actual results to differ materially from those in the forward-looking statements. These factors include, among other things:

New, amended, or existing laws, regulations, or administrative orders or interpretations, including those related to environmental matters, and the costs of complying with these laws, regulations, or administrative ~~orders;~~orders or interpretations;

The cost of complying with known, anticipated, or new emissions reduction requirements, some of which could render continued operation of many of TVA's aging coal-fired generation units not cost-effective ~~and~~or result in their removal from service, perhaps permanently;

Significant reductions in demand for electricity produced through non-renewable or centrally located generation sources ~~which~~that may result from, among other things, economic downturns, increased energy efficiency and conservation, increased utilization of distributed generation and microgrids, and improvements in alternative generation and energy storage technologies;

Changes in customer preferences for energy produced from cleaner generation sources;

Changes in technology;

Actions taken, or inaction, by the U.S. government relating to the national or TVA debt ceiling or automatic spending cuts in government programs;

Costs ~~and~~or liabilities that are not anticipated in TVA’s financial statements for third-party claims, natural resource damages, environmental ~~clean-up~~cleanup activities, or fines or penalties associated with unexpected events such as failures of a facility or infrastructure;

Addition or loss of customers by TVA or ~~the~~TVA's local power company customers ~~of TVA~~ ("LPCs");

Significant delays, cost increases, or cost overruns associated with the construction and maintenance of generation, transmission, navigation, flood control, or related assets;

Changes in the amount or timing ~~or amount~~ of funding obligations associated with TVA's pension ~~and~~plans, other post-retirement benefit plans, or health care ~~obligations and related funding;~~plans;

Increases in TVA's financial liabilities for decommissioning its nuclear facilities or retiring other assets;

Risks associated with the operation of nuclear facilities, or coal combustion residual ("CCR") facilities, or other facilities;

Physical attacks on TVA's assets;

Cyber attacks on TVA's assets or the assets of third parties upon which TVA relies;

The outcome of legal or administrative proceedings, including the CCR proceedings involving the Gallatin Fossil Plant ("Gallatin") as well as any other CCR proceedings that may be brought in the future;

The failure of TVA's generation, transmission, navigation, flood control, and related assets and infrastructure, including CCR facilities, to operate as anticipated, resulting in lost revenues, damages, ~~and~~or other costs that are not reflected in TVA’s financial statements or projections;

Differences between estimates of revenues and expenses and actual revenues earned and expenses incurred;

Weather conditions;

Catastrophic events such as fires, earthquakes, explosions, solar events, electromagnetic pulses ("EMP"), geomagnetic disturbances ("GMDs"), droughts, floods, hurricanes, tornadoes, or other casualty events or pandemics, wars, national emergencies, terrorist activities, ~~and~~or other similar events, especially if these events occur in or near TVA's service area;

Events at a TVA facility, which, among other things, could result in loss of life, damage to the environment, damage to or loss of the facility, and damage to the property of others;

Events or changes involving transmission lines, dams, and other facilities not operated by TVA, including those that affect the reliability of the interstate transmission grid of which TVA's transmission system is a part and those that increase flows across TVA's transmission grid;

Disruption of fuel supplies, which may result from, among other things, economic conditions, weather conditions, production or transportation difficulties, labor challenges, or environmental laws or regulations affecting TVA's fuel suppliers or transporters;

Purchased power price volatility and disruption of purchased power supplies;

Events which affect the supply of water for TVA's generation facilities;

Changes in TVA's determinations of the appropriate mix of generation assets;

Ineffectiveness of TVA's efforts at adapting its organization to an evolving marketplace and remaining cost competitive;

Inability to obtain, or loss of, regulatory approval for the construction or operation of assets;

Inability to use regulatory accounting or loss of regulatory accounting approval for certain costs;

The requirement or decision to make additional contributions to TVA's ~~pension or other post-retirement benefit plans or to TVA's~~ Nuclear Decommissioning Trust ("NDT") or, Asset Retirement Trust ("ART");, or pension plans;

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Limitations on TVA's ability to borrow money which may result from, among other things, TVA's approaching or substantially reaching the limit on bonds, notes, and other evidences of indebtedness specified in the Tennessee Valley Authority Act of 1933, as amended ~~16 U.S.C. §§ 831-831ee~~ (the “TVA Act”);

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An increase in TVA's cost of capital ~~which~~that may result from, among other things, changes in the market for TVA's debt securities, changes in the credit rating of TVA or the U.S. government, or, potentially, an increased reliance by TVA on alternative financing should TVA approach its debt limit;

Changes in the economy and volatility in financial markets;

Reliability ~~and~~or creditworthiness of counterparties;

Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, crude oil, construction materials, reagents, electricity, ~~and~~or emission allowances;

Changes in the market price of equity securities, debt securities, ~~and~~or other investments;

Changes in interest rates, currency exchange rates, ~~and~~or inflation rates;

Ineffectiveness of TVA's disclosure controls and procedures or its internal ~~controls~~control over financial reporting;

Inability to eliminate identified deficiencies in TVA's systems, standards, controls, or corporate culture;

Inability to attract or retain a skilled workforce;

Inability to respond quickly enough to current or potential customer demands or needs;

Events at a nuclear facility, whether or not operated by or licensed to TVA, which, among other things, could lead to increased regulation or restriction on the construction, ownership, operation, ~~and~~or decommissioning of nuclear facilities or on the storage of spent fuel, obligate TVA to pay retrospective insurance premiums, reduce the availability and affordability of insurance, increase the costs of operating TVA's existing nuclear units, ~~and~~or cause TVA to forego future construction at these or other facilities;

Loss of quorum of the TVA Board of Directors (the "TVA Board");

Changes in the ~~membership~~priorities of the TVA Board or TVA senior management; ~~and~~or

Other unforeseeable events.

See also Item 1A, Risk Factors, and Item 7, ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations in ~~TVA’s~~TVA's Annual Report on Form 10-K for the year ended September 30, ~~2017~~2018 (the ~~“Annual Report”~~"Annual Report"), and

Part I, Item 2, ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report for a discussion of factors that could cause actual results to differ materially from those in a forward-looking statement. New factors emerge from time to time, and it is not possible for TVA to predict all such factors or to assess the extent to which any factor or combination of factors may impact ~~TVA’s~~TVA's business or cause results to differ materially from those contained in any forward-looking statement. TVA undertakes no obligation to update any forward-looking statement to reflect developments that occur after the statement is made.

GENERAL INFORMATION

Fiscal Year

References to years ~~(2018, 2017,~~(2019, 2018, etc.) in this Quarterly Report are to ~~TVA’s~~TVA's fiscal years ending September 30. Years that are preceded by ~~“CY”~~"CY" are references to calendar years.

Notes

References to ~~“Notes”~~"Notes" are to the Notes to Consolidated Financial Statements contained in Part I, Item 1, Financial Statements in this Quarterly Report.

Available Information

TVA's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, ~~and~~ Current Reports on Form 8-K, ~~as well as~~and all amendments to those reports, are available on TVA's website, free of charge, as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). TVA's website is www.tva.gov. Information contained on ~~TVA’s~~TVA's website shall not be deemed to be incorporated into, or to be a part of, this Quarterly Report. All TVA SEC reports are available to the public without charge from the website maintained by the SEC at www.sec.gov.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TENNESSEE VALLEY AUTHORITY

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

~~Three Months Ended December 31~~

(in millions)


					Three Months Ended June 30				Nine Months Ended June 30
	2017		2016		2019		2018		2019		2018
Operating revenues
Revenue from sales of electricity	$	2,509	$	2,508	$	2,565	$	2,669	$	7,958	$	7,931
Other revenue	40		38		39		38		121		117
Total operating revenues	2,549		2,546		2,604		2,707		8,079		8,048
Operating expenses
Fuel	475		568		417		503		1,359		1,473
Purchased power	220		242		223		238		775		731
Operating and maintenance	709		741		744		603		2,289		1,881
Depreciation and amortization	423		437		576		404		1,387		1,263
Tax equivalents	124		129		128		129		396		379
Total operating expenses	1,951		2,117		2,088		1,877		6,206		5,727
Operating income	598		429		516		830		1,873		2,321
Other income (expense), net	12		12		14		11		52		34
Other net periodic benefit cost					65		65		194		193
Interest expense	322		339		300		306		902		942
Net income (loss)	$	288	$	102	$	165	$	470	$	829	$	1,220
The accompanying notes are an integral part of these consolidated financial statements.

TENNESSEE VALLEY AUTHORITY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

~~Three Months Ended December 31~~

(in millions)


							Three Months Ended June 30						Nine Months Ended June 30
	2017			2016			2019			2018			2019			2018
Net income (loss)	$	288		$	102		$	165		$	470		$	829		$	1,220
Other comprehensive income (loss)
Net unrealized gain (loss) on cash flow hedges	39			(8		)	(47		)	(65		)	(76		)	17
Reclassification to earnings from cash flow hedges	(3		)	38			13			43			17			13
Total other comprehensive income (loss)	36			30			(34		)	(22		)	(59		)	30
Total comprehensive income (loss)	$	324		$	132		$	131		$	448		$	770		$	1,250
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY

CONSOLIDATED BALANCE SHEETS (Unaudited)

~~(in~~(in millions)

													ASSETS
	December 31, 2017			September 30, 2017			June 30, 2019			September 30, 2018
Current assets
Cash and cash equivalents	$	300		$	300		$	300		$	299
Restricted cash	13			—
Accounts receivable, net	1,500			1,569			1,551			1,657
Inventories, net	1,047			1,065			1,051			961
Regulatory assets	455			447			183			414
Other current assets	95			65			87			86
Total current assets	3,410			3,446			3,172			3,417

Property, plant, and equipment
Completed plant	59,631			58,947			62,716			61,114
Less accumulated depreciation	(28,587		)	(28,404		)	(30,928		)	(29,335		)
Net completed plant	31,044			30,543			31,788			31,779
Construction in progress	2,459			2,842			1,783			1,999
Nuclear fuel	1,370			1,401			1,408			1,487
Capital leases	158			161			146			149
Total property, plant, and equipment, net	35,031			34,947			35,125			35,414

Investment funds	2,714			2,603			2,899			2,862

Regulatory and other long-term assets
Regulatory assets	8,492			8,698			6,755			6,612
Other long-term assets	330			323			324			362
Total regulatory and other long-term assets	8,822			9,021			7,079			6,974

Total assets	$	49,977		$	50,017		$	48,275		$	48,667
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY

CONSOLIDATED BALANCE SHEETS (Unaudited)

~~(in~~(in millions)

										LIABILITIES AND PROPRIETARY CAPITAL
	December 31, 2017		September 30, 2017		June 30, 2019			September 30, 2018
Current liabilities
Accounts payable and accrued liabilities	$	1,772	$	1,940	$	1,739		$	1,982
Accrued interest	317		346		287			305
Current portion of leaseback obligations	37		37		40			38
Current portion of energy prepayment obligations	85		100		—			10
Regulatory liabilities	159		163		161			187
Short-term debt, net	2,721		1,998		1,444			1,216
Current maturities of power bonds	2,031		1,728		1,030			1,032
Current maturities of long-term debt of variable interest entities	36		36		39			38
Current maturities of notes payable	52		53		23			46
Total current liabilities	7,210		6,401		4,763			4,854

Other liabilities
Post-retirement and post-employment benefit obligations	5,372		5,477		4,260			4,476
Asset retirement obligations	4,206		4,176		5,468			4,665
Other long-term liabilities	2,961		3,055		2,226			2,715
Leaseback obligations	301		302		223			263
Energy prepayment obligations	—		10
Regulatory liabilities	25		25		64			104
Total other liabilities	12,865		13,045		12,241			12,223

Long-term debt, net
Long-term power bonds, net	19,214		20,205		19,115			20,157
Long-term debt of variable interest entities, net	1,164		1,164		1,108			1,127
Long-term notes payable	68		69		—			23
Total long-term debt, net	20,446		21,438		20,223			21,307

Total liabilities	40,521		40,884		37,227			38,384

Commitments and contingencies
Commitments and contingencies (Note 19)

Proprietary capital
Power program appropriation investment	258		258		258			258
Power program retained earnings	8,571		8,282		10,234			9,404
Total power program proprietary capital	8,829		8,540		10,492			9,662
Nonpower programs appropriation investment, net	570		572		558			564
Accumulated other comprehensive income (loss)	57		21		(2		)	57
Total proprietary capital	9,456		9,133		11,048			10,283

Total liabilities and proprietary capital	$	49,977	$	50,017	$	48,275		$	48,667
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the ~~Three~~Nine Months Ended ~~December 31~~June 30

(in millions)


	2017			2016			2019			2018
Cash flows from operating activities
Net income (loss)	$	288		$	102		$	829		$	1,220
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization (including amortization of debt issuance costs and premiums/discounts)	433			449
Depreciation and amortization⁽¹⁾							1,402			1,285
Amortization of nuclear fuel cost	94			85			277			282
Non-cash retirement benefit expense	82			84			235			243
Prepayment credits applied to revenue	(25		)	(25		)	(10		)	(75		)
Fuel cost adjustment deferral	(12		)	57
Fuel cost tax equivalents	(5		)	2
Other regulatory amortization and deferrals							240			15
Changes in current assets and liabilities
Accounts receivable, net	70			299			149			(11		)
Inventories and other current assets, net	7			(61		)	(145		)	5
Accounts payable and accrued liabilities	(179		)	(209		)	(217		)	(68		)
Accrued interest	(24		)	(24		)	(21		)	(52		)
Regulatory assets costs	(11		)	(16		)
Pension contributions	(75		)	(75		)	(232		)	(229		)
Other, net	(30		)	(51		)	(28		)	(78		)
Net cash provided by operating activities	613			617			2,479			2,537

Cash flows from investing activities
Construction expenditures	(551		)	(625		)	(1,292		)	(1,354		)
Nuclear fuel expenditures	(71		)	(100		)	(223		)	(181		)
Loans and other receivables
Advances	(6		)	(3		)	(8		)	(12		)
Repayments	1			1			6			3
Other, net	(1		)	20			(16		)	(2		)
Net cash used in investing activities	(628		)	(707		)	(1,533		)	(1,546		)

Cash flows from financing activities
Long-term debt
Issues of power bonds							—			998
Redemptions and repurchases of power bonds	(698		)	(527		)	(1,034		)	(1,731		)
Redemptions of notes payable	(2		)	—			(46		)	(52		)
Redemptions of debt of variable interest entities							(19		)	(18		)
Short-term debt issues (redemptions), net	717			619			196			(133		)
Payments on leases and leasebacks	(1		)	(1		)	(41		)	(40		)
Payments to U.S. Treasury	(1		)	(1		)
Financing costs, net							—			(3		)
Other, net							(1		)	—
Net cash provided by (used in) financing activities	15			90			(945		)	(979		)
Net change in cash and cash equivalents	—			—
Cash and cash equivalents at beginning of period	300			300
Cash and cash equivalents at end of period	$	300		$	300
Net change in cash, cash equivalents, and restricted cash							1			12
Cash, cash equivalents, and restricted cash at beginning of period							322			300
Cash, cash equivalents, and restricted cash at end of period							$	323		$	312

Supplemental disclosures
Significant non-cash transactions
Accrued capital and nuclear fuel expenditures	$	294		$	336		$	266		$	315
Capital lease obligations incurred							6			—
The accompanying notes are an integral part of these consolidated financial statements.

Note

(1) Includes amortization of debt issuance costs and premiums/discounts.

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TENNESSEE VALLEY AUTHORITY

CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)

For the Three Months Ended ~~December 31, 2017~~June 30, 2019 and ~~2016~~2018

(in millions)


	Power Program Appropriation Investment		Power Program Retained Earnings			Nonpower Programs Appropriation Investment, Net			Accumulated Other Comprehensive Income (Loss) from Net Gains (Losses) on Cash Flow Hedges			Total			Power Program Appropriation Investment		Power Program Retained Earnings			Nonpower Programs Appropriation Investment, Net			Accumulated Other Comprehensive Income (Loss) from Net Gains (Losses) on Cash Flow Hedges			Total
Balance at September 30, 2016	$	258	$	7,594		$	580		$	(12	)	$	8,420
Balance at March 31, 2018															$	258	$	9,033		$	568		$	73		$	9,932
Net income (loss)	—		104			(2		)	—			102			—		472			(2		)	—			470
Total other comprehensive income (loss)	—		—			—			30			30			—		—			—			(22		)	(22		)
Return on power program appropriation investment	—		(1		)	—			—			(1		)	—		(1		)	—			—			(1		)
Balance at December 31, 2016	$	258	$	7,697		$	578		$	18		$	8,551
Balance at June 30, 2018															$	258	$	9,504		$	566		$	51		$	10,379

Balance at September 30, 2017	$	258	$	8,282		$	572		$	21		$	9,133
Balance at March 31, 2019															$	258	$	10,069		$	560		$	32		$	10,919
Net income (loss)	—		290			(2		)	—			288			—		167			(2		)	—			165
Total other comprehensive income (loss)	—		—			—			36			36			—		—			—			(34		)	(34		)
Return on power program appropriation investment	—		(1		)	—			—			(1		)	—		(2		)	—			—			(2		)
Balance at December 31, 2017	$	258	$	8,571		$	570		$	57		$	9,456
Balance at June 30, 2019															$	258	$	10,234		$	558		$	(2	)	$	11,048
The accompanying notes are an integral part of these consolidated financial statements.

TENNESSEE VALLEY AUTHORITY

CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)

For the Nine Months Ended June 30, 2019 and 2018

(in millions)



	Power Program Appropriation Investment		Power Program Retained Earnings			Nonpower Programs Appropriation Investment, Net			Accumulated Other Comprehensive Income (Loss) from Net Gains (Losses) on Cash Flow Hedges			Total
Balance at September 30, 2017	$	258	$	8,282		$	572		$	21		$	9,133
Net income (loss)	—		1,226			(6		)	—			1,220
Total other comprehensive income (loss)	—		—			—			30			30
Return on power program appropriation investment	—		(4		)	—			—			(4		)
Balance at June 30, 2018	$	258	$	9,504		$	566		$	51		$	10,379

Balance at September 30, 2018	$	258	$	9,404		$	564		$	57		$	10,283
Net income (loss)	—		835			(6		)	—			829
Total other comprehensive income (loss)	—		—			—			(59		)	(59		)
Return on power program appropriation investment	—		(5		)	—			—			(5		)
Balance at June 30, 2019	$	258	$	10,234		$	558		$	(2	)	$	11,048
The accompanying notes are an integral part of these consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions except where noted)


Note	Note		Page	Note		Page
1		Nature of Operations and Summary of Significant Accounting Policies	12		Nature of Operations and Summary of Significant Accounting Policies	12
2		Impact of New Accounting Standards and Interpretations	15		Impact of New Accounting Standards and Interpretations	15
3		Accounts Receivable, Net	17		Accounts Receivable, Net	18
4		Inventories, Net	17		Inventories, Net	18
5		Other Long-Term Assets	18		Plant Closures	18
6		Regulatory Assets and Liabilities	19		Other Long-Term Assets	19
7		Variable Interest Entities	20		Regulatory Assets and Liabilities	20
8		Gallatin Coal Combustion Residual Facilities	21		Variable Interest Entities	20
9		Other Long-Term Liabilities	23		Gallatin Coal Combustion Residual Facilities	22
10		Asset Retirement Obligations	23		Other Long-Term Liabilities	23
11		Debt and Other Obligations	24		Asset Retirement Obligations	24
12		Accumulated Other Comprehensive Income (Loss)	26		Debt and Other Obligations	25
13		Risk Management Activities and Derivative Transactions	26		Accumulated Other Comprehensive Income (Loss)	26
14		Fair Value Measurements	32		Risk Management Activities and Derivative Transactions	27
15		Other Income (Expense), Net	38		Fair Value Measurements	32
16		Benefit Plans	39		Revenue	37
17		Contingencies and Legal Proceedings	39		Other Income (Expense), Net	41
18					Benefit Plans	41
19					Contingencies and Legal Proceedings	42

1. Nature of Operations and Summary of Significant Accounting Policies

General

The Tennessee Valley Authority ("TVA") is a corporate agency and instrumentality of the United States ("U.S.") that was created in 1933 by federal legislation ~~enacted by the U.S. Congress~~ in response to a ~~request~~proposal by President Franklin D. Roosevelt. TVA was created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA's service area in the southeastern U.S., and sell the electricity generated at the facilities TVA operates.

Today, TVA operates the nation's largest public power system and supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of northern Georgia, western North Carolina, and southwestern Virginia to a population of ~~over nine~~nearly 10 million people.

TVA also manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity. Consistent with these primary purposes, TVA also manages the river system and public lands to provide recreational opportunities, adequate water supply, improved water quality, cultural and natural resource protection, and economic development.

The power program has historically been separate and distinct from the stewardship programs. It is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, or other evidences of indebtedness ("Bonds"). Although TVA does not currently receive congressional appropriations, it is required to make annual payments to the United States Department of the Treasury ("U.S. Treasury") as a return on the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment"). In the 1998 Energy and Water Development Appropriations Act, Congress directed TVA to fund essential stewardship activities related to its management of the Tennessee River system and nonpower or stewardship properties with power revenues in the event that there were insufficient appropriations or other available funds to pay for such activities in any fiscal year. Congress has not provided any appropriations to TVA to fund such activities since 1999. Consequently, during 2000, TVA began paying for essential stewardship activities primarily with power revenues, with the remainder funded with user fees and other forms of revenues derived in connection with those activities. The activities related to stewardship properties do not meet the criteria of an operating segment under accounting principles generally accepted in the United States of America ("GAAP"). Accordingly, these assets and properties are included as part of the power program, TVA's only operating segment.

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Power rates are established by the TVA Board of Directors (the "TVA Board") as authorized by the Tennessee Valley Authority Act of 1933, as amended ~~16 U.S.C. §§ 831-831ee~~(the ~~“TVA Act”~~"TVA Act"). The TVA Act requires TVA to charge rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; payments to states and counties in lieu of taxes ("tax equivalents"); debt service on outstanding indebtedness;

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payments to the U.S. Treasury in repayment of and as a return on the Power Program Appropriation Investment; and such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's power business. TVA fulfilled its obligation under the TVA Act to repay $1.0 billion of the Power Program Appropriation Investment with the 2014 payment, and therefore this item is no longer a component of rate setting. In setting TVA's rates, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. Rates set by the TVA Board are not subject to review or approval by any state or other federal regulatory body.

Fiscal Year

TVA's fiscal year ends September 30. Years (~~2018~~2019, ~~2017~~2018, etc.) refer to TVA's fiscal years unless they are preceded by ~~“CY,”~~"CY," in which case the references are to calendar years.

Cost-Based Regulation

Since the TVA Board is authorized by the TVA Act to set rates for power sold to its customers, TVA is self-regulated. Additionally, TVA's regulated rates are designed to recover its costs. Based on current projections, TVA believes that rates, set at levels that will recover TVA's costs, can be charged and collected. As a result of these factors, TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. TVA assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, potential legislation, and changes in technology. Based on these assessments, TVA believes the existing regulatory assets are probable of ~~future~~ recovery. This determination reflects the current regulatory and political environment and is subject to change in the future. If future recovery of regulatory assets ceases to be probable, or any of the other factors described above cease to be applicable, TVA would no longer be considered to be a regulated entity and would be required to write off these costs. All regulatory asset ~~write offs~~write-offs would be required to be recognized in earnings in the period in which future recovery ceases to be probable.

Basis of Presentation

TVA prepares its consolidated interim financial statements in conformity with GAAP for consolidated interim financial information. Accordingly, TVA's consolidated interim financial statements do not include all of the information and notes required by GAAP for annual financial statements. As such, they should be read in conjunction with the audited financial statements for the year ended September 30, ~~2017~~,2018, and the notes thereto, which are contained in TVA's Annual Report on Form 10-K for the year ended September 30, ~~2017~~2018 (the ~~“Annual Report”~~"Annual Report"). In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included in the consolidated interim financial statements.

The accompanying consolidated interim financial statements, which have been prepared in accordance with GAAP, include the accounts of TVA, wholly-owned direct subsidiaries, and variable interest entities ("VIE") of which TVA is the primary beneficiary. See Note 7.8. Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the consolidated financial statements. Although the consolidated financial statements are prepared in conformity with GAAP, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are considered critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial condition, results of operations, or cash flows.

Reclassifications

Certain historical amounts have been reclassified in the accompanying consolidated financial statements to the current presentation. TVA reclassified $65 million and $193 million of net periodic benefit costs from Operating and maintenance expense to Other net periodic benefit cost in the Consolidated Statements of Operations for the three and nine months ended June 30, 2018, respectively, as a result of the retrospective presentation of financing costs due to the implementation of the new

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accounting standard for defined benefit plan costs effective for TVA October 1, 2018. TVA also reclassified $13 million from Restricted cash and cash equivalents to Other long-term assets on the Consolidated Balance Sheet at September 30, 2018.

In the June 30, 2018 Consolidated Statements of Cash Flows, amounts previously reported as $(6) million Fuel cost adjustment deferral, $(8) million Fuel cost tax equivalents, and $29 million Other, net were consolidated and presented as $15 million Other regulatory amortization and deferrals. Additionally, $(20) million in cash flows from operating activities previously recorded as $(12) million Accounts payable and accrued liabilities and $(8) million Regulatory asset costs were reclassified to Other, net.

Cash, Cash Equivalents, and Restricted Cash

Cash includes cash on hand, non-interest bearing cash, and deposit accounts. All highly liquid investments with original maturities of three months or less are considered cash equivalents. Cash and cash equivalents that are restricted, as to withdrawal or use under the terms of certain contractual agreements, are recorded in Other long-term assets in the Consolidated Balance Sheets. Restricted cash ~~reflects amounts to be used primarily~~and cash equivalents includes cash held in trusts that are currently restricted for TVA economic development loans and for certain TVA environmental programs in accordance with agreements related to compliance with certain environmental regulations. See Note 1719 — Legal Proceedings —Environmental Agreements.

~~Table~~The following table provides a reconciliation of ~~Contents~~cash, cash equivalents, and restricted cash reported in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows:



Cash, Cash Equivalents, and Restricted Cash
	At June 30, 2019		At September 30, 2018
Cash and cash equivalents	$	300	$	299
Restricted cash and cash equivalents included in Other long-term assets	23		23
Total Cash, cash equivalents, and restricted cash	$	323	$	322

Revenues

TVA recognizes revenue from contracts with customers to depict the transfer of goods or services to customers in an amount to which the entity expects to be entitled in exchange for those goods or services. For the generation and transmission of electricity, this is generally at the time the power is delivered to a metered customer delivery point for the customer's consumption or distribution. As a result, revenues from power sales are recorded as electricity is delivered to customers. In addition to power sales invoiced and recorded during the month, TVA accrues estimated unbilled revenues for power sales provided to five customers whose billing date occurs prior to the end of the month. Exchange power sales are presented in the accompanying Consolidated Statements of Operations as a component of sales of electricity. Exchange power sales are sales of excess power after meeting TVA native load and directly served requirements. Native load refers to the customers on whose behalf a company, by statute, franchise, regulatory requirement, or contract, has undertaken an obligation to serve. TVA engages in other arrangements in addition to power sales. Certain other revenue from activities related to TVA’s overall mission are recorded in Other revenue. Revenues that are not related to the overall mission are recorded in Other income (expense), net.

From time to time, TVA may transfer fiber optic capacity on TVA’s network to telecommunications service carriers and TVA's local power company customers ("LPCs"). These transactions are structured as indefeasible rights of use ("IRUs"), which are the exclusive right to use a specified amount of fiber optic capacity for a specified term. TVA accounts for the consideration received on transfers of fiber optic capacity and on all of the other elements deliverable under an IRU as revenue ratably over the term of the agreement. TVA does not recognize revenue on any contemporaneous exchanges of its fiber optic capacity for an IRU of fiber optic capacity of the counterparty to the exchange.

Allowance for Uncollectible Accounts

The allowance for uncollectible accounts reflects TVA's estimate of probable losses inherent in its accounts and loans receivable balances. TVA determines the allowance based on known accounts, historical experience, and other currently available information including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements after 90 days. It also reflects TVA's corporate credit department's assessment of the financial condition of customers and the credit quality of the receivables.

The allowance for uncollectible accounts was less than $1 million at both ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017. TVA had~~2018, for accounts receivable. Additionally, loans receivable of ~~$127~~$125 million and ~~$118~~$138 million at ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017,~~

2018, respectively, are included in Accounts receivable, net and ~~these amounts~~Other long-term assets and are reported net of allowances for uncollectible accounts of less than $1 million at both ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017. The current portion~~2018.

Table of loans receivable was $3 million at both December 31, 2017, and September 30, 2017 and is included in Accounts receivable, net. The long-term portions of loans receivable are included in Other long-term assets.Contents

Pre-Commercial Plant Operations

As part of the process of completing the construction of a generating unit, the electricity produced is used to serve the

demands of the electric system. TVA estimates revenue from such pre-commercial generation based on the guidance provided by Federal Energy Regulatory Commission ("FERC") regulations. Watts Bar Nuclear Plant ("Watts Bar") Unit 2 commenced pre-commercial plant operations on June 3, 2016, and commercial operations began on October 19, 2016. In addition, the Paradise Combined Cycle Plant commenced pre-commercial plant operations on October 10, 2016, and commercial operations began on April 7, 2017. Furthermore, theThe Allen Combined Cycle Plant ("Allen CC") began pre-commercial operations onin September ~~9, 2017. Estimated revenue of $1 million and $14 million primarily related to these projects was capitalized to offset project costs for the three months ended December 31,~~ 2017, and 2016, respectively. TVA also capitalized related fuel costs for these construction projects of approximately $2 million and $5 million during the three months ended December 31, 2017 and 2016, respectively. In addition to the projects above,began commercial operations in April 2018. Cogeneration capability at Johnsonville Combustion Turbine Unit 20 commenced pre-commercial plant operations in September 2017, and was placed in service during December 2017. Estimated revenue of less than $1 million and $11 million related to these projects was capitalized to offset project costs for the ~~first quarter~~three and nine months ended June 30, 2018, respectively. TVA also capitalized related fuel costs for these construction projects of ~~2018.~~approximately $5 million and $20 million during the three and nine months ended June 30, 2018, respectively. No such amounts were capitalized during the three and nine months ended June 30, 2019.

Depreciation

TVA accounts for depreciation of its properties using the composite depreciation convention of accounting. ~~Accordingly,~~Under the ~~original cost of property retired is charged to accumulated depreciation.~~composite method, assets with similar economic characteristics are grouped and depreciated as one asset. Depreciation is generally computed on a straight-line basis over the estimated service lives of the various classes of assets. The estimation of asset useful lives requires management judgment, supported by external depreciation studies of historical asset retirement experience. Depreciation rates are determined based on an external depreciation ~~study. TVA concluded and implemented a new depreciation study effective October 1, 2016. This study will be~~studies. These studies are updated at least every five years. Depreciation expense was ~~$319~~$536 million and ~~$336~~$301 million for the three months ended ~~December 31, 2017~~June 30, 2019 and ~~2016,~~2018, respectively.

~~Table~~ Depreciation expense was $1.3 billion and $950 million for the nine months ended June 30, 2019 and 2018, respectively. See Note 5 — Financial Impact for a discussion of ~~Contents~~

the impact of plant closures.

2. Impact of New Accounting Standards and Interpretations

The following are accounting standard updates issued by the Financial Accounting Standards Board ("FASB") that TVA adopted during ~~the first quarter of 2018.~~



~~Derivatives and Hedging - Contingent Put and Call Options in Debt Instruments~~
~~Description~~	This guidance clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call or put options solely in accordance with a four-step decision sequence. The standard includes interim periods within the fiscal year of adoption and requires a modified retrospective transition.
~~Effective Date for TVA~~	~~October 1, 2017~~
~~Effect on the Financial Statements or Other Significant Matters~~	TVA has two issues of Putable Automatic Rate Reset Securities ("PARRS") outstanding. After a fixed-rate period of five years, the coupon rate on the PARRS may automatically be reset downward under certain market conditions on an annual basis. The coupon rate reset on the PARRS is based on a calculation. If the coupon rate is going to be reset, holders may request, for a limited period of time, redemption of the PARRS at par value, with repayment of principal on the reset date. This put option is otherwise not available. For both series of PARRS, the coupon rate will reset downward on the reset date if the rate calculated is below the then-current coupon rate on the PARRS. TVA has determined under the new guidance that contingent put options that can accelerate the payment of principal on the PARRS are clearly and closely related to their debt hosts. The adoption of this standard did not have a material impact on TVA’s financial condition, results of operations, or cash flows.

~~Inventory Valuation~~
~~Description~~	This guidance changes the model used for the subsequent measurement of inventory from the previous lower of cost or market model to the lower of cost or net realizable value. The guidance applies only to inventory valued using methods other than last-in, first out or the retail inventory method (for example, first-in, first-out or average cost). This amendment is intended to simplify the subsequent measurement of inventory. The standard includes interim periods within the fiscal year of adoption and requires a prospective transition.
~~Effective Date for TVA~~	~~October 1, 2017~~
~~Effect on the Financial Statements or Other Significant Matters~~	~~The adoption of this standard did not have a material impact on TVA’s financial condition, results of operations, or cash flows.~~

~~The following accounting standards have been issued but as of December 31, 2017, were not effective and had not been adopted by TVA.~~2019:



Defined Benefit Costs
Description	This guidance changes how information about defined benefit costs for pension plans and other post-retirement benefit plans is presented in employer financial statements. The guidance requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and net periodic ~~postretirement~~post-retirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit and settlement and curtailment effects, are to be included in ~~nonoperating~~non-operating expenses. Additionally, the guidance stipulates that only the service cost component of net benefit cost is eligible for capitalization in assets. The guidance requires retrospective presentation of the service and non-service cost components in the Consolidated Statements of Operations.
Effective Date for TVA	~~The new standard is effective for TVA’s interim and annual reporting periods beginning~~ October 1, ~~2018. While early adoption is permitted, TVA does not currently plan to adopt the standard early.~~2018
Effect on the Financial Statements or Other Significant Matters	TVA ~~has evaluated the impact of adopting~~adopted this ~~guidance, and if the guidance had been effective for TVA~~standard on a retrospective basis for the ~~three~~prior period presented resulting in lower operating expenses and higher non-operating expenses in the Consolidated Statements of Operations of $194 million and $192 million for the nine months ended ~~December 31, 2017~~June 30, 2019 and 2016, TVA would have reclassified $63 million and $62 million, respectively, of net periodic benefit costs from Operating and maintenance expense to Other income (expense), net on the consolidated statements of operations.2018, respectively. There ~~will be~~was no impact on the ~~consolidated balance sheets~~Consolidated Balance Sheets because TVA has historically capitalized only the service cost component, which is consistent with the new guidance.

Financial Instruments
Description	This guidance applies to the recognition and measurement of financial assets and liabilities. The standard requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). The standard also amends presentation requirements related to certain changes in the fair value of a liability and eliminates certain disclosure requirements of significant assumptions for financial instruments measured at amortized cost on the balance sheet. Public entities must apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
Effective Date for TVA	~~The new standard is effective for TVA’s interim and annual reporting periods beginning~~ October 1, ~~2018. Early adoption is not permitted unless specific early adoption guidance is applied. TVA does not currently plan to adopt the standard early.~~

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	2018
Effect on the Financial Statements or Other Significant Matters	TVA currently measures all of its equity investments (other than those that result in the consolidation of the investee) at fair value, with changes in the fair value recognized through net ~~income.~~income, unless regulatory accounting is applied. The TVA Board has authorized the use of regulatory accounting for changes in fair value of certain equity investments, and as a result, those changes in fair value are deferred as regulatory assets or liabilities. TVA currently discloses significant assumptions around its estimates of fair value for financial instruments carried at amortized cost on its consolidated balance sheet. The adoption of this standard isdid not ~~expected to~~ have a material impact on TVA's financial condition, results of operations, or cash flows because ~~TVA holds no available-for-sale securities.~~changes in fair value accounting are recognized through regulatory accounting.

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Revenue ~~Recognition~~from Contracts with Customers
Description	This guidance, ~~related to revenue from contracts with customers,~~ including subsequent amendments, replaces the existing accounting standard and industry specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principle of the guidance is to recognize revenue related to the transfer of goods or services to customers at the amount expected to be collected. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within and across industries. The new standard also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and the related cash flows arising from contracts with customers. At adoption, companies must also select a transition method to be applied either retrospectively to each prior reporting period presented or retrospectively with a cumulative effect adjustment to retained earnings at the date of initial adoption.
Effective Date for TVA	~~The new standard is effective for TVA’s interim and annual reporting periods beginning~~ October 1, ~~2018. While early adoption is permitted, TVA will not adopt the standard early.~~2018
Effect on the Financial Statements or Other Significant Matters	~~While~~ TVA ~~expects most~~adopted this standard using the modified retrospective method with no material changes to the amount or timing of ~~its~~ revenue recognition. In accordance with the modified retrospective method, TVA’s previously issued financial statements have not been restated to ~~be included in the scope of~~comply with the new accounting standard. TVA recognizes revenue when it satisfies a performance obligation by transferring control to the customer. For the generation and transmission of electricity, this is generally at the time the power is delivered to a metered customer delivery point for a customer's consumption or distribution. As a result, revenues from power sales are recorded as electricity is delivered to customers. TVA utilized certain practical expedients including applying the guidance ~~it has not completed its evaluation~~to open contracts at the date of ~~all contracts with customers. TVA’s efforts~~adoption, applying the guidance to ~~date have focused on the scoping of revenue streams and evaluation~~a portfolio of contracts with ~~LPCs,~~similar characteristics, and recognizing revenue in the amount for which ~~represent~~it has the ~~majority~~right to invoice. As a result of TVA's revenues. TVA is also conducting ongoing evaluations of sales to directly served industrial customers, sales to federal agencies, purchase power agreements, fuel cost adjustments, other revenue streams and the effectiveness of internal control related to revenue recognition. In addition, the power and utilities industry is currently addressing certain industry-specific issues which have not yet been finalized. As the ultimate impactadoption of the ~~new~~ standard, ~~has~~TVA did not ~~yet been determined, TVA has not yet elected its transition method.~~have a cumulative-effect adjustment to proprietary capital.

Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
Description	This standard adds or clarifies guidance on the classification of certain cash receipts and payments on the statement of cash flows as follows: debt prepayment or extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and bank-owned life insurance policies, distributions received from equity method investees, beneficial interest in securitization transactions, and the application of the predominance principle to separately identifiable cash flows.
Effective Date for TVA	~~This standard is effective for TVA’s interim and annual reporting periods beginning~~ October 1, ~~2018. While early adoption is permitted, TVA does not currently plan to adopt the standard early. TVA will apply the standard using a retrospective transition method to each period presented.~~2018
Effect on the Financial Statements or Other Significant Matters	~~TVA’s~~TVA's previous treatment of the classification of certain cash receipts and cash payments is consistent with the new standard, and ~~will have~~adoption of the standard had no impact on ~~TVA’s~~TVA's financial condition, results of operations, or presentation or disclosure of cash flows.

Statement of Cash Flows - Restricted Cash
Description	This guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance does not provide a definition of restricted cash or restricted cash equivalents.
Effective Date for TVA	~~The new standard is effective for TVA’s interim and annual reporting periods beginning~~ October 1, ~~2018. While early adoption is permitted, TVA does not currently plan to adopt the standard~~ ~~early. TVA will apply the standard using a retrospective transition method to each period presented.~~ 2018
Effect on the Financial Statements or Other Significant Matters	Adoption of this standard ~~will result~~resulted in a change to the ~~amount of~~beginning-of-period and end-of-period cash and cash equivalents and restricted cash ~~explained when reconciling the beginning-of-period and end-of-period total~~ amounts shown on the ~~consolidated statement~~Consolidated Statements of ~~cash flows. For~~Cash Flows. TVA applied this standard on a retrospective basis for the three months ended December 31, 2017, TVA is reflecting $13 million in transfers of cash and cash equivalents to restricted cash within cash flows from operating activities in the consolidated statement of cash flows.prior periods presented.

The following accounting standards have been issued but as of June 30, 2019, were not effective and had not been adopted by TVA:



Derivatives and Hedging - Improvements to Accounting for Hedging Activities
Description	This guidance better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.
Effective Date for TVA	The new standard is effective for ~~TVA’s~~TVA's interim and annual reporting periods beginning October 1, 2019. While early adoption is permitted, TVA does not ~~currently~~ plan to adopt the standard early.
Effect on the Financial Statements or Other Significant Matters	TVA does not expect the adoption of this standard to have a material impact on ~~TVA’s~~TVA's financial condition, results of operations, or cash flows.

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Lease Accounting
Description	This guidance changes the provisions of recognition in both the lessee and lessor accounting models. The standard requires entities that lease assets ("lessees") to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance (similar to current capital leases) or operating lease. However, unlike current lease accounting rules, which require only capital leases to be recognized on the balance sheet, the new standard will require both types of leases to be recognized on the balance sheet. Operating leases will result in straight-line expense, while ~~finance~~financing leases will result in recognition of interest on the lease liability separate from amortization expense. The accounting for the owner of the assets leased by the lessee ("lessor accounting") will remain largely unchanged from current lease accounting rules. The standard allows for certain practical expedients to be elected related to lease term determination, separation of lease and non-lease elements, reassessment of existing leases, and short-term leases. When the standard becomes effective, it will include interim periods within ~~that~~the fiscal year of adoption and will be required to be applied using a modified retrospective transition.
Effective Date for TVA	The new standard is effective for ~~TVA’s~~TVA's interim and annual reporting periods beginning October 1, 2019. While early adoption is permitted, TVA does not ~~currently~~ plan to adopt the standard early.
Effect on the Financial Statements or Other Significant Matters	TVA is ~~currently~~ evaluating the potential impact of these changes on its consolidated financial statements and related disclosures. ~~TVA expects the new~~The standard is expected to impact financial position as adoption ~~is expected to~~will increase the amount of assets and liabilities recognized on TVA’s ~~consolidated balance sheets. TVA expects the new~~Consolidated Balance Sheets. The standard is not expected to have noa material impact on results of operations or cash ~~flows.~~flows as expense recognition is intended to be substantially the same as the existing standard. TVA plans to elect certain of the practical expedients included in the new standard. ~~Efforts~~TVA has selected a lease system solution and continues to ~~date have consisted of evaluating~~evaluate the completeness of ~~TVA’s~~the lease population, the effectiveness of internal control related to leases, and appropriate financial statement ~~disclosure, and selection of a lease system solution.~~disclosure. TVA is also continuing to monitor ~~unresolved~~ industry implementation ~~issues, including items related to renewables and purchased power agreements, easements, and rights-of-way,~~ and will analyze the related impacts to lease accounting.

Defined Benefit Plans - Disclosure Requirements
Description	This guidance applies to all employers that sponsor defined benefit pension or other post-retirement plans and modifies or clarifies the disclosure requirements for those plans. The amendments in this update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. Entities are required to apply the amendments retrospectively.
Effective Date for TVA	The new standard is effective for TVA's annual reporting periods beginning October 1, 2021. While early adoption is permitted, TVA does not plan to adopt the standard early.
Effect on the Financial Statements or Other Significant Matters	TVA is evaluating the potential impact of these changes on its consolidated financial statements and related disclosures.

Customer's Accounting for Implementation Costs in a Cloud Arrangement That Is a Service Contract
Description	This guidance relates to the accounting for a customer’s implementation costs in a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing those implementation costs with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The amendments also provide requirements for the classification of the capitalized costs and related expense and cash flows in the financial statements, the application of impairment guidance to the capitalized costs, and the application of abandonment guidance to the capitalized costs. Entities are required to apply the amendments either retrospectively or prospectively to all implementation costs incurred after the adoption date.
Effective Date for TVA	The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2020. Early adoption is permitted, and TVA plans to adopt this standard October 1, 2019, on a prospective basis.
Effect on the Financial Statements or Other Significant Matters	TVA does not expect any material impact on TVA's financial condition, results of operations, or cash flows after the adoption of this standard.

Financial Instruments - Credit Losses
Description	This guidance eliminates the probable initial recognition threshold in current GAAP and, instead, requires an allowance to be recorded for all expected credit losses for certain financial assets that are not measured at fair value. The allowance for credit losses is based on historical information, current conditions, and reasonable and supportable forecasts. The new standard also makes revisions to the other than temporary impairment model for available-for-sale debt securities. Disclosures of credit quality indicators in relation to the amortized cost of financing receivables are further disaggregated by year of origination.
Effective Date for TVA	The new standard is effective for TVA’s interim and annual reporting periods beginning October 1, 2020. While early adoption is permitted, TVA does not plan to adopt the standard early.
Effect on the Financial Statements or Other Significant Matters	TVA is evaluating the potential impact of these changes on its consolidated financial statements and related disclosures.

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Fair Value Measurement Disclosure
Description	The guidance changes certain disclosure requirements for fair value measurements. It removes certain disclosure requirements, such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of the transfers between levels; and the valuation processes for Level 3 fair value measurements. Some disclosure requirements are added, such as the change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
Effective Date for TVA	The new standard is effective for TVA’s interim and annual reporting periods beginning October 1, 2020. While early adoption is permitted, TVA does not plan to adopt the standard early.
Effect on the Financial Statements or Other Significant Matters	TVA does not expect the adoption of this standard to have a material impact on TVA’s financial condition, results of operations or cash flows. TVA is evaluating the potential impact on related disclosures.

3. Accounts Receivable, Net

Accounts receivable primarily consist of amounts due from customers for power sales. The table below summarizes the types and amounts of ~~TVA’s~~TVA's accounts receivable:


Accounts Receivable, Net	Accounts Receivable, Net						Accounts Receivable, Net
	At December 31, 2017			At September 30, 2017			At June 30, 2019		At September 30, 2018
Power receivables	$	1,373		$	1,441		$	1,436	$	1,570
Other receivables	128			129			115		87
Allowance for uncollectible accounts	(1		)	(1		)
Accounts receivable, net	$	1,500		$	1,569		$	1,551	1,657

Note

(1) Allowance for uncollectible accounts was less than $1 million at June 30, 2019 and September 30, 2018, and therefore is not represented in the table above.

4. Inventories, Net

The table below summarizes the types and amounts of ~~TVA’s~~TVA's inventories:


Inventories, Net	Inventories, Net						Inventories, Net
	At December 31, 2017			At September 30, 2017			At June 30, 2019			At September 30, 2018
Materials and supplies inventory	$	758		$	734		$	744		725
Fuel inventory	322			355			351			266
Renewable energy certificates/emission allowance inventory, net	12			15			18			14
Allowance for inventory obsolescence	(45		)	(39		)	(62		)	(44		)
Inventories, net	$	1,047		$	1,065		$	1,051		$	961

5. Plant Closures

Background

TVA must continuously evaluate all generating assets to ensure an optimum energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. During its August 2018 meeting, the TVA Board approved a plan to perform assessments of Bull Run Fossil Plant ("Bull Run") and Paradise Fossil Plant ("Paradise"). These assessments included resiliency studies for fuel and transmission and financial considerations. TVA also prepared Environmental Assessments ("EAs") pursuant to the National Environmental Policy Act ("NEPA"). Results of these assessments were presented to the TVA Board at its February 2019 meeting, and the Board approved the retirement of Paradise Unit 3 by December 2020 and Bull Run by December 2023. Subsequent to the Board approval, TVA determined that Paradise would not be restarted after January 2020 due to the plant's material condition.

Financial Impact

As a result of TVA’s decision to accelerate the retirements of Paradise and Bull Run, certain construction projects at these locations were identified as probable of abandonment or were no longer expected to be in service for greater than one year prior to the plants' retirement dates. The write-off of these projects resulted in $20 million and $144 million of Operating and maintenance expense during the three and nine months ended June 30, 2019, respectively. TVA also recognized losses of $5 million and $16 million in Operating and maintenance expense related to additional materials and supplies inventory reserves and write-offs identified at Paradise during the three and nine months ended June 30, 2019, respectively.

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TVA’s policy is to adjust depreciation rates to reflect the most current assumptions, ensuring units will be fully depreciated by the applicable retirement dates. As a result of TVA's decision to accelerate the retirement of Paradise and Bull Run, TVA recognized an additional $225 million and $341 million of accelerated depreciation for the three and nine months ended June 30, 2019, respectively.

5.6. Other Long-Term Assets

The table below summarizes the types and amounts of ~~TVA’s~~TVA's other long-term assets:


Other Long-Term Assets	Other Long-Term Assets				Other Long-Term Assets
	At December 31, 2017		At September 30, 2017		At June 30, 2019		At September 30, 2018
Loans and other long-term receivables, net(1)	$	124	$	115	$	120	$	125
EnergyRight^® receivables	98		100		82		90
Prepaid capacity payments	32		34		21		27
Restricted cash and cash equivalents⁽¹⁾					23		23
Commodity contract derivative assets	6		2		6		31
Currency swap asset, net	5		—
Other	65		72		72		66
Other long-term assets	$	330	$	323	$	324	$	362

Note

(1) Certain historical amounts have been reclassified to conform with current year presentation of Restricted cash and cash equivalents.

In association with the EnergyRight^® Solutions program, ~~local power company customers of TVA ("LPCs")~~LPCs offer financing to end-use customers for the purchase of energy-efficient equipment. Depending on the nature of the energy-efficiency project, loans may have a maximum term of five years or ~~ten~~10 years. TVA purchases the resulting loans receivable from ~~its~~ LPCs. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any ~~loan~~loans receivable that ~~has~~have been in default for 180 days or more or that TVA has determined isare uncollectible. Given this continuing involvement, TVA accounts for the transfer of the loans receivable as secured borrowings. The current and long-term portions of the loans receivable are reported in Accounts receivable, net and Other long-term assets, respectively, on ~~TVA’s consolidated balance sheets.~~TVA's Consolidated Balance Sheets. As of ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017,~~2018, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately ~~$24~~$21 million and ~~$25~~$22 million, respectively. See Note 910 for information regarding the associated financing obligation.

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6.7. Regulatory Assets and Liabilities

Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or ~~deferrals~~deferral of gains that will be credited to customers in future periods. Components of regulatory assets and regulatory liabilities are summarized in the table below:


Regulatory Assets and Liabilities	Regulatory Assets and Liabilities				Regulatory Assets and Liabilities
	At December 31, 2017		At September 30, 2017		At June 30, 2019		At September 30, 2018
Current regulatory assets
Deferred nuclear generating units	$	237	$	237
Gallatin coal combustion residual facilities⁽¹⁾					$	—	$	38
Unrealized losses on interest rate derivatives	89		93		85		73
Unrealized losses on commodity derivatives	57		68
Environmental agreements					—		3
Unrealized losses on commodity contracts					33		4
Environmental cleanup costs - Kingston ash spill					65		266
Fuel cost adjustment receivable	12		1		—		30
Environmental agreements	3		2
Environmental cleanup costs - Kingston ash spill	44		44
Gallatin coal combustion residual facilities	10		—
Other current regulatory assets	3		2
Total current regulatory assets	455		447		183		414

Non-current regulatory assets
Deferred pension costs and other post-retirement benefits costs	3,945		4,009		2,940		3,119
Non-nuclear decommissioning costs⁽¹⁾					1,761		1,019
Gallatin coal combustion residuals facilities⁽¹⁾					—		861
Nuclear decommissioning costs					847		784
Unrealized losses on interest rate derivatives	957		982		1,049		692
Gallatin coal combustion residual facilities	889		899
Nuclear decommissioning costs	771		823
Deferred nuclear generating units	703		759
Non-nuclear decommissioning costs	692		703
Environmental cleanup costs - Kingston ash spill	253		263
Unrealized losses on commodity derivatives	35		9
Environmental agreements	12		13		12		11
Unrealized losses on commodity contracts					9		8
Other non-current regulatory assets	235		238		137		118
Total non-current regulatory assets	8,492		8,698		6,755		6,612
Total regulatory assets	$	8,947	$	9,145	$	6,938	$	7,026

Current regulatory liabilities
Fuel cost adjustment tax equivalents	$	149	$	153	$	138	$	146
Fuel cost adjustment	—		2		10		—
Unrealized gains on commodity derivatives	10		8		13		41
Total current regulatory liabilities	159		163		161		187

Non-current regulatory liabilities
Deferred other post-retirement benefits cost	19		23		58		73
Unrealized gains on commodity derivatives	6		2		6		31
Total non-current regulatory liabilities	25		25		64		104
Total regulatory liabilities	$	184	$	188	$	225	$	291

Note

(1) See Note 9.

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7.8. Variable Interest Entities

A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional

subordinated financial support or (ii) has equity investors who lack the characteristics of owning a controlling financial interest.

When TVA determines that it has a variable interest in a VIE, a qualitative evaluation is performed to assess which interest

holders have the power to direct the activities that most significantly impact the economic performance of the entity and have the

obligation to absorb losses or receive benefits that could be significant to the entity. The evaluation considers the purpose and

design of the business, the risks that the business was designed to create and pass along to other entities, the activities of the

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business that can be directed and which party can direct them, and the expected relative impact of those activities on the

economic performance of the business through its life. TVA has the power to direct the activities of an entity when it has the

ability to make key operating and financing decisions, including, but not limited to, capital investment and the issuance of debt.

Based on the evaluation of these criteria, TVA has determined it is the primary beneficiary of certain entities and as such is

required to account for the VIEs on a consolidated basis.

John Sevier VIEs

In 2012, TVA entered into a $1.0 billion construction management agreement and lease financing arrangement with John Sevier Combined Cycle Generation LLC ("JSCCG") for the completion and lease by TVA of the John Sevier Combined Cycle Facility ("John Sevier CCF"). JSCCG is a special single-purpose limited liability company formed in January 2012 to finance the John Sevier CCF through a $900 million secured note issuance (the ~~“JSCCG notes”~~"JSCCG notes") and the issuance of $100 million of membership interests subject to mandatory redemption. The membership interests were purchased by John Sevier Holdco LLC ("Holdco"). Holdco is a special single-purpose entity, also formed in January 2012, established to acquire and hold the membership interests in JSCCG. A non-controlling interest in Holdco is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows are allocated.

The membership interests held by Holdco in JSCCG were purchased with proceeds from the issuance of $100 million of secured notes (the ~~“Holdco~~"Holdco notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each January 15 and July 15, with a final payment due in January 2042. The payment dates for the mandatorily redeemable membership interests are the same as those of the Holdco notes. The sale of the JSCCG notes, the membership interests in JSCCG, and the Holdco notes closed in January 2012. The JSCCG notes are secured by ~~TVA’s~~TVA's lease payments, and the Holdco notes are secured by Holdco's investment in, and amounts receivable from, JSCCG. ~~TVA’s~~TVA's lease payments to JSCCG are equal to and payable on the same dates as ~~JSCCG’s~~JSCCG's and ~~Holdco’s~~Holdco's semi-annual debt service payments. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by JSCCG and Holdco. Certain agreements related to this transaction contain default and acceleration provisions.

Due to its participation in the design, business conduct, and credit and financial support of JSCCG and Holdco, TVA

has determined that it has a variable interest in each of these entities. Based on its analysis, TVA has concluded that it is the

primary beneficiary of JSCCG and Holdco and, as such, is required to account for the VIEs on a consolidated basis. Holdco's

membership interests in JSCCG are eliminated in consolidation.

Southaven VIE

In 2013, TVA entered into a $400 million lease financing arrangement with Southaven Combined Cycle Generation LLC ("SCCG") for the lease by TVA of the Southaven Combined Cycle Facility ("Southaven CCF"). SCCG is a special single-purpose limited liability company formed in June 2013 to finance the Southaven CCF through a $360 million secured notes issuance (the ~~“SCCG notes”~~"SCCG notes") and the issuance of $40 million of membership interests subject to mandatory redemption. The membership interests were purchased by Southaven Holdco LLC ("SHLLC"). SHLLC is a special single-purpose entity, also formed in June 2013, established to acquire and hold the membership interests in SCCG. A non-controlling interest in SHLLC is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows of SHLLC are allocated.

The membership interests held by SHLLC were purchased with proceeds from the issuance of $40 million of secured notes (the "SHLLC notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each February 15 and August 15, with a final payment due on August 15, 2033. The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes, and the payment amounts are sufficient to provide returns on, as well as returns of, capital until the investment has been repaid to SHLLC in full. The rate of return on investment to SHLLC is 7.0 percent, which is reflected as interest expense in the ~~consolidated statements~~Consolidated Statements of ~~operations.~~Operations. SHLLC is required to pay a pre-determined portion of the return on investment to Seven States Southaven, LLC ("SSSL") on each lease payment date as agreed in SHLLC's formation documents (the "Seven States Return"). The current and long-term portions of the Membership interests of VIE subject to mandatory redemption are included in Accounts payable and accrued liabilities and Other long-term liabilities, respectively.

The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes. The SCCG notes are secured by ~~TVA’s~~TVA's lease payments, and the SHLLC notes are secured by ~~SHLLC’s~~SHLLC's investment in, and amounts receivable from, SCCG. ~~TVA’s~~TVA's lease payments to SCCG are payable on the same dates as ~~SCCG’s~~SCCG's and ~~SHLLC’s~~SHLLC's semi-annual debt service payments and are equal to the sum of (i) the amount of ~~SCCG’s~~SCCG's semi-annual debt service payments,

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(ii) the amount of ~~SHLLC’s~~SHLLC's semi-annual debt service payments, and (iii) the amount of the Seven States Return. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by SCCG and SHLLC. Certain agreements related to this transaction contain default and acceleration provisions.

In the event that TVA were to choose to exercise an early buy out feature of the Southaven facility lease, in part or in whole, TVA must pay to SCCG amounts sufficient for SCCG to repay or partially repay on a pro rata basis the membership interests held by SHLLC, including any outstanding investment amount plus accrued but unpaid return. TVA also has the right,

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at any time and without any early redemption of the other portions of the Southaven facility lease payments due to SCCG, to fully repay SHLLC's investment, upon which repayment SHLLC will transfer the membership interests to a designee of TVA.

TVA participated in the design, business conduct, and financial support of SCCG and has determined that it has a direct

variable interest in SCCG resulting from risk associated with the value of the Southaven CCF at the end of the lease term.

Based on its analysis, TVA has determined that it is the primary beneficiary of SCCG and, as such, is required to account for the

VIE on a consolidated basis.

Impact on Consolidated Financial Statements

The financial statement items attributable to carrying amounts and classifications of JSCCG, Holdco, and SCCG as of ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017,~~2018, as reflected in the Consolidated Balance Sheets are as follows:

									Summary of Impact of VIEs on Consolidated Balance Sheets
	At December 31, 2017		At September 30, 2017		At June 30, 2019		At September 30, 2018
Current liabilities
Accrued interest	$	26	$	11	25		$	11
Accounts payable and accrued liabilities	2		2		2		2
Current maturities of long-term debt of variable interest entities	36		36		39		38
Total current liabilities	64		49		66		51
Other liabilities
Other long-term liabilities	30		30		27		28
Long-term debt, net
Long-term debt of variable interest entities, net	1,164		1,164		1,108		1,127
Total liabilities	$	1,258	$	1,243	$	1,201	$	1,206

Interest expense of ~~$15~~$14 million for both the three months ended June 30, 2019 and 2018, and $42 million and $43 million for the nine months ended June 30, 2019 and 2018, respectively, is included in the Consolidated Statements of Operations related to debt of VIEs and membership interests of ~~variable interest entity~~VIEs subject to mandatory ~~redemption is included in the Consolidated Statements of Operations for the three months ended both December 31, 2017 and 2016.~~redemption.

Creditors of the VIEs have no recourse to the general credit of TVA. TVA does not have any obligations to provide financial support to the VIEs other than as prescribed in the terms of the agreements related to these transactions.

8.9. Gallatin Coal Combustion Residual Facilities

Background

TVA is planning to close wet CCR impoundments in accordance with federal and applicable state requirements when (1) coal-fired plants are converted to dry CCR processes and dry storage landfills become operational or (2) the related plant operations cease. Closure project schedules and costs are driven by the selected closure technology. The impoundments at Gallatin are pending additional studies to determine the final closure methodology and schedule. While plans are currently being formulated for the CCR closure methodology for Gallatin, TVA is involved in two lawsuits relating to alleged discharges of pollutants from the CCR facilities at Gallatin.

Lawsuit Brought by TDEC. In January 2015, the Tennessee Department of Environment and Conservation ("TDEC") filed a lawsuit against TVA in the Chancery Court for Davidson County, ~~Tennessee. The lawsuit alleges~~Tennessee, alleging that pollutants from Gallatin have been discharged ~~into waters of the State from CCR facilities at Gallatin~~ in violation of the Tennessee Water Quality Control Act and the Tennessee Solid Waste Disposal Act. TDEC seeks injunctive relief, which could include an order requiring TVA to relocate the CCR facilities. TDEC also requested civil penalties of up to $17,000 per day for each day TVA is found to have violated the statutes. In February 2015, the court issued an order allowingThe Tennessee Scenic Rivers Association ("TSRA") and Tennessee Clean Water Network ("TCWN") are also plaintiffs. On June 13, 2019, the parties filed a consent decree with the Court to ~~intervene in~~resolve this matter, which the ~~case,~~Court approved and ~~in January 2016,~~entered on July 24, 2019. Under the ~~court ordered~~consent decree, TVA ~~among other things,~~agreed to ~~develop~~close the existing wet ash disposal impoundments by removal, either to an onsite landfill or to an offsite facility, which will be determined after appropriate environmental reviews. TVA may also submit a plan that allows for beneficial reuse of the CCR material. Under the consent decree, TVA must submit a removal and ~~submit~~closure plan to TDEC and must remove the CCR material within 20 years of TDEC’s approval of the plan. The consent decree does not contain penalties or any admission of fault or liability. In addition to the consent decree, TDEC entered an ~~environmental~~administrative order providing for ongoing investigation ~~plan~~ and ~~an environmental assessment report. On August 4, 2017,~~monitoring related to a closed legacy impoundment at the site. After a five-year study period, TDEC ~~filed an amended complaint adding new facts, claims,~~ and ~~causes of action. Consequently, on August 10, 2017,~~ TVA ~~removed the case from state court to federal court. The case is now in the United States District Court~~will determine whether any additional corrective action and/or closure activities are necessary for the legacy impoundment.

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~~Middle District of Tennessee. The plaintiffs have filed motions requesting that the case be remanded to state court and briefing on the motions has been completed.~~

Lawsuit Brought by TSRA and TCWN. In April 2015, TSRA and ~~the~~ TCWN filed a lawsuit against TVA in the ~~United States~~U.S. District Court for the Middle District of Tennessee alleging that pollutants have been discharged into the Cumberland River from CCR facilities at Gallatin in violation of the Clean Water Act ~~("CWA"~~(“CWA”). The plaintiffs ~~are seeking~~sought injunctive relief, including an order requiring TVA to relocate the CCR facilities, civil penalties of up to $37,500 per violation per day, and attorneys’ fees.

~~Trial in this action began on January 30, 2017, and concluded February 2, 2017.~~ On August 4, 2017, the court issued a decision ~~largely in favor of the plaintiffs~~ (the ~~“August~~"August 2017 ~~Order”~~Order")~~, finding~~ that found TVA had discharged pollutants into the Cumberland River in the past and that the discharge was likely ongoing. The court ordered TVA to excavate the CCR

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materials and move them to a lined facility. ~~The court further required TVA to file within 30 days a timetable for excavating and removing the material.~~ The court did not assess any monetary penalties against TVA for the CWA violations, citing the fact that its order to relocate the CCR ~~material~~materials would cause TVA to incur significant costs.

On ~~September 5,~~October 2, 2017, TVA ~~submitted~~appealed the ~~required timetable, which assumes~~August 2017 Order to the United States Court of Appeals for the Sixth Circuit ("Sixth Circuit"). On September 24, 2018, a panel of the Sixth Circuit reversed the district court decision and held that the district court erred by imposing CWA liability against TVA and that, therefore, the imposition of injunctive relief was an abuse of discretion. On October 22, 2018, the plaintiffs filed a petition requesting that the full Sixth Circuit rehear the case. On January 17, 2019, the Sixth Circuit denied the petition. On April 15, 2019, the plaintiffs requested review by the United States Supreme Court.

Financial Impact

Based on the August 2017 Order and the assumptions that a new lined facility ~~can~~would be permitted and ~~built~~constructed on the Gallatin ~~site. The process of obtaining~~site and all existing CCR materials at Gallatin would be moved to this site, TVA estimated the ~~necessary permits, constructing the facility, and moving all~~costs of the ~~CCR materials is estimated~~project to ~~take~~be approximately ~~24 years. Under current regulations, TVA would be required to monitor~~$900 million, which reflected the ~~existing facilities and~~expected costs of inflation over the ~~new facility for 30 years after closure. The estimated cost~~duration of the ~~potential Gallatin CCR~~ project ~~is approximately $900 million.~~but was not discounted to a present value amount given the nature of the obligation. At ~~December 31, 2017,~~September 30, 2018, related liabilities of ~~$875~~$862 million and ~~$23~~$30 million were recorded in Other long-term liabilities and Accounts payable and accrued liabilities, respectively. ~~Prior to~~

As a result of the ~~court’s~~subsequent decision ~~TVA had anticipated spending approximately $200 million to cap and close the existing CCR facilities. On October 2, 2017, TVA appealed the court’s decision to the United States Court of Appeals for~~in TVA's favor by the Sixth Circuit, ~~("Sixth Circuit").~~

~~Financial Impact~~

~~In August 2017, TVA began using regulatory accounting treatment to defer~~as well as the June 2019 consent decree filed in the case brought by TDEC, amounts previously recorded as Other long-term liabilities on an undiscounted basis have been reversed and an ARO in the amount of $667 million has been recorded for the discounted cash flows expected ~~future costs of compliance with orders or settlements~~for the closure and post-closure activities related to ~~lawsuits involving the~~ Gallatin CCR facilities. The TVA Board approved a plan to amortize these costs over the anticipated duration of the Gallatin CCR facilities project (excluding post-closure care), beginning October 1, 2018 as amounts are included in rates or paid out. TVA has estimated these costs to be approximately $900 million. These costs include, among other things, environmental studies concerning the existing and new facilities, the licensing activitiesSee Note 11 for the new facility, design and construction of the new facility, relocating the material from the existing facilities to the new facility, closing the existing facilities, monitoring activities, and an amount of additional costs reflecting the expected impacts of inflation given the anticipated duration of the project. The costs do not include such items as any additional order or penalty arising from the TDEC lawsuit, which cannot be reasonably estimated at this time. TVA has not discounted this environmental obligation to a present value amount. TVA also committed in its timetable to complete capital projects related to construction of a permanent bottom ash dewatering facility and wastewater process ponds. These capital projects, which are not included in the estimate for cleanup costs above, are estimated to cost approximately $91 million and be completed by 2020.

It is reasonably possible that TVA will not be able to obtain the necessary permits to build the facility on the Gallatin site and will be required to move the CCR materials offsite. Offsite relocation would materially increase both the cost and the time to comply with the August 2017 Order. TVA has estimated that if it is required to relocate the materials to a facility off the Gallatin site, TVA may incur up to $2.0 billion in expenses. These costs include, among other things, environmental studies concerning the existing and new facilities, the licensing activities for the new facility, design and construction of the new facility, relocating the material from the existing facilities to the new facility, closing the existing facilities, monitoring activities, and an amount of additional costs reflecting the expected impacts of inflation given the anticipated duration of the project. The process of obtaining the necessary permits for offsite disposal, locating or constructing an offsite facility, and moving all of the CCR materials offsite is estimated to take approximately 40 years. TVA would also be required to monitor the existing facilities and the offsite facility for 30 years after the facilities are closed, based on current regulations.details.

The ultimate cost of the removal project will depend on actual timing and results of ongoing litigation, environmental studies, licensing, permitting, site subsurface conditions, contractor availability, weather, equipment, available material resources, and other contingency factors. These contingency factors could cause the project cost estimate to change materially in the near term. TVA updates its estimate for project costs as changes in these factors are determined to be probable of occurring.

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10. Other Long-Term Liabilities

Other long-term liabilities consist primarily of liabilities related to certain derivative agreements, liabilities for environmental remediation, and liabilities under agreements related to compliance with certain environmental regulations. ~~See Note 17 —~~ ~~Legal Proceedings — Environmental Agreements~~. The table below summarizes the types and amounts of Other long-term liabilities:

									Other Long-Term Liabilities
	At December 31, 2017		At September 30, 2017		At June 30, 2019		At September 30, 2018
Interest rate swap liabilities	$	1,364	$	1,418	$	1,454	$	1,122
Gallatin coal combustion residual facilities liability	875		880		—		862
Capital lease obligations	181		182		181		178
EnergyRight® financing obligation	112		115
Currency swap liabilities	59		92		157		81
Commodity contract derivative liabilities	35		9
Membership interests of VIE subject to mandatory redemption	30		30
Environmental agreements liability	12		13
Other	293		316
EnergyRight^® financing obligation					92		102
Paradise pipeline financing obligation⁽¹⁾					80		80
Accrued long-term service agreement⁽¹⁾					69		74
Other⁽¹⁾					193		216
Total other long-term liabilities	$	2,961	$	3,055	$	2,226	$	2,715

Note

(1) Certain amounts have been reclassified to conform with current year presentation.

Interest Rate Swap Liabilities. TVA uses interest rate swaps to fix variable short-term debt to a fixed rate. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the ~~consolidated balance sheets.~~Consolidated Balance Sheets. As of ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017,~~2018, the carrying amount of the interest rate swap liabilities reported in Accounts payable and accrued liabilities was approximately ~~$90~~$84 million and ~~$93~~$77 million, respectively. See Note 1314 —Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivatives for information regarding the ~~associated~~ interest rate swap liabilities. As of June 30, 2019, Interest rate swap liabilities increased $332 million as compared to September 30, 2018, primarily due to decreases in forecasted future interest rates resulting in higher mark-to-market values on future expected net cash flows.

Gallatin Coal Combustion Residual Facilities Liability. ~~The~~As of September 30, 2018, the estimated cost of the potential Gallatin CCR project ~~is approximately~~was $900 million. The current and long-term portions of the resulting obligation ~~are~~were reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on ~~TVA’s consolidated balance sheets.~~TVA's Consolidated Balance Sheets. As of ~~December 31, 2017, and~~

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September 30, ~~2017,~~2018, related liabilities of ~~$23~~$30 million ~~and $19 million, respectively,~~ were recorded in Accounts payable and accrued liabilities. As a result of the subsequent decision in TVA’s favor by the Sixth Circuit, as well as the June 2019 consent decree filed in the case brought by TDEC, Gallatin CCR project costs are now recorded in Asset retirement obligations. See Note 89 for information regarding the Gallatin CCR ~~facilities.~~facilities and Note 11 for information regarding Asset retirement obligations.

EnergyRight^®Financing Obligation. TVA purchases certain loans receivable from ~~its~~ LPCs in association with the EnergyRight^® Solutions program. The current and long-term portions of the resulting financing obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on ~~TVA’s consolidated balance sheets. As of December 31, 2017, and September 30, 2017, the~~TVA's Consolidated Balance Sheets. The carrying amount of the financing obligation reported in Accounts payable and accrued liabilities for June 30, 2019, and September 30, 2018, was approximately ~~$28~~$23 million and ~~$29~~$25 million, respectively. See Note 56 for information regarding the associated loans ~~receivable~~receivable.

Paradise Pipeline Financing Obligation. TVA reserves firm pipeline capacity on an approximately 19 mile pipeline owned by Texas Gas, which serves TVA’s Paradise Combined Cycle Plant. The capacity contract contains a lease component due to TVA’s exclusive right to use the pipeline. TVA accounts for this lease component as a financing transaction. The current and long-term portions of the resulting financing obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. As of both June 30, 2019, and September 30, 2018, related liabilities of less than $1 million were recorded in Accounts payable and accrued liabilities.

Accrued Long-Term Service Agreement. TVA has entered into various long-term service agreements for major maintenance activities at certain of its combined cycle plants. TVA uses the direct expense method of accounting for these arrangements. TVA accrues for parts when it takes ownership and for ~~details regarding~~contractor services when they are rendered. Under certain of these agreements, parts received and services rendered exceed payments made. The current and long-term portions of the ~~EnergyRight~~^® ~~Solutions program.~~resulting obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. As of June 30, 2019, and September 30, 2018, related liabilities of $16 million and $30 million, respectively, were recorded in Accounts payable and accrued liabilities.

~~10.~~11. Asset Retirement Obligations

During the ~~three~~nine months ended ~~December 31, 2017~~,June 30, 2019, TVA's total asset retirement ~~obligation~~obligations ("ARO") liability increased ~~$61~~$853 million as a result of recording an ARO for the Gallatin CCR facilities, additions to obligations, revisions in estimates and periodic accretion, partially offset by settlement activity from ongoing ARO projects ~~that were conducted during this period. The revisions in estimate are primarily related to changes in strategy of asset retirements~~ at ~~certain~~ TVA facilities. The nuclear and non-nuclear accretion ~~expenses~~amounts were deferred as regulatory assets. During the ~~three~~nine months ended ~~December 31, 2017, $36~~June 30, 2019, $108 million of the related non-nuclear regulatory assets were amortized into expense as these amounts were collected in rates. See Note 6.7. TVA maintains investment trusts to help fund its decommissioning obligations. See Note 1415 —Investment Funds and Note 1719 — Contingencies— Decommissioning Costs for a discussion of the trusts' objectives and the current balances of the trusts.

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Asset Retirement Obligation Activity⁽¹⁾	Asset Retirement Obligation Activity⁽¹⁾								Asset Retirement Obligation Activity⁽¹⁾
	Nuclear		Non-Nuclear			Total			Nuclear			Non-Nuclear			Total
Balance at September 30, 2017	$	2,859	$	1,445		$	4,304
Balance at September 30, 2018									$	2,989		$	1,790		$	4,779
Settlements	—		(25		)	(25		)	(2		)	(56		)	(58		)
Revisions in estimate	—		46			46			—			89			89
Additional obligation									18			—			18
Gallatin CCR									—			667			667
Accretion (recorded as regulatory asset)	32		8			40			102			35			137
Balance at December 31, 2017	$	2,891	$	1,474		$	4,365
Balance at June 30, 2019									$	3,107		$	2,525		$	5,632

Note

(1) The current portion of ARO in the amount of ~~$159~~$164 million and ~~$128~~$115 million is included in Accounts payable and accrued liabilities at ~~December 31, 2017~~June 30, 2019, and September 30, ~~2017,~~2018, respectively.

The revisions in non-nuclear estimates increased $89 million for the nine months ended June 30, 2019. As a result of recent experience in completing settlements at certain facilities, costs for asbestos abatement activities across TVA's fossil fleet increased $114 million. TVA also approved a change in the preferred closure method for the Allen West Impoundment from closure-in-place to closure-by-removal, which resulted in a cost increase of $33 million. Partially offsetting these increases was a $57 million decrease in costs for Paradise closure projects.

Additionally, as a result of the decision in TVA’s favor by the Sixth Circuit in the lawsuit brought by TSRA and TCWN, as well as the June 2019 consent decree filed in the case brought by TDEC, Gallatin discounted cash flows related to CCR closure and post-closure costs of $667 million have been recorded as Asset retirement obligations. The obligation is based upon the assumptions outlined in the consent decree, including a new lined facility will be permitted and constructed on the Gallatin site and existing CCR materials in the existing wet ash disposal impoundments at Gallatin will be moved to this new facility over a 20 year period. See Note 9 for additional details.

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~~11.~~12. Debt and Other Obligations

Debt Outstanding

Total debt outstanding at ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017,~~2018, consisted of the following:


Debt Outstanding	Debt Outstanding						Debt Outstanding
	At December 31, 2017			At September 30, 2017			At June 30, 2019			At September 30, 2018
Short-term debt
Short-term debt, net	$	2,721		$	1,998		$	1,444		$	1,216
Current maturities of power bonds	2,031			1,728			1,030			1,032
Current maturities of long-term debt of variable interest entities	36			36			39			38
Current maturities of notes payable	52			53			23			46
Total current debt outstanding, net	4,840			3,815			2,536			2,332
Long-term debt
Long-term power bonds⁽¹⁾	19,362			20,357			19,249			20,300
Long-term debt of variable interest entities	1,175			1,175
Long-term debt of variable interest entities, net							1,108			1,127
Long-term notes payable	68			69			—			23
Unamortized discounts, premiums, issue costs, and other	(159		)	(163		)	(134		)	(143		)
Total long-term debt, net	20,446			21,438			20,223			21,307
Total outstanding debt	$	25,286		$	25,253		$	22,759		$	23,639

Note

(1) Includes net exchange gain from currency transactions of ~~$118~~$167 million and $147 million at ~~December 31, 2017,~~June 30, 2019, and ~~$125 million at~~ September 30, ~~2017.~~

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2018, respectively.

Debt Securities Activity

The table below summarizes the long-term debt securities activity for the period from October 1, ~~2017,~~2018, to ~~December 31, 2017~~June 30, 2019:

											Debt Securities Activity
	Date	Amount⁽¹⁾		Interest Rate		Date	Amount⁽¹⁾		Interest Rate
Redemptions/Maturities
electronotes^®	First Quarter 2018	$	47	4.10	%	First Quarter 2019	$	1	2.65	%
1997 Series E	December 2017	650		6.25	%
electronotes^®						Second Quarter 2019	1		3.48	%
electronotes^®						Third Quarter 2019	2		2.89	%
2013 Series A						October 2018	1,000		1.75	%
2009 Series B						December 2018	1		3.77	%
2009 Series B	December 2017	1		3.77	%	June 2019	29		3.77	%
Total redemptions/maturities of power bonds		698					1,034
Notes payable	November 2017	2		1.64	%		46		1.27	%
Debt of variable interest entities							19		4.31	%
Total redemptions/maturities of debt		$	700				$	1,099

Note

(1) All redemptions were at 100 percent of par.

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Credit Facility Agreements

TVA and the U.S. Treasury, pursuant to the TVA Act, have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $~~150~~$150 million credit facility. This credit facility was renewed ~~for~~in 2018 with a maturity date of September 30, ~~2018.~~2019. Access to this credit facility or other similar financing arrangements with the U.S. Treasury has been available to TVA since the 1960s. TVA can borrow under the U.S. Treasury credit facility only if it cannot issue Bonds in the market on reasonable terms, and TVA considers the U.S. Treasury credit facility a secondary source of liquidity. The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the ~~United States~~U.S. with maturities from date of issue of one year or less. There were no outstanding borrowings under the facility at ~~December 31, 2017.~~June 30, 2019. The availability of this credit facility may be impacted by how the U.S. government addresses the possibility of approaching its debt limit.

TVA also has funding available under four long-term revolving credit facilities totaling $2.7 billion: a $150 million credit facility that matures on December ~~12, 2019,~~11, 2021, a $500 million credit facility that matures on February 1, ~~2021,~~2022, a $1.0 billion credit facility that matures on June ~~2, 2020,~~13, 2023, and a $1.0 billion credit facility that matures on September ~~30, 2020.~~28, 2023. The interest rate on any borrowing under these facilities varies based on market factors and the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.7 billion that TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. At ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017,~~2018, there were approximately ~~$1.0~~$1.1 billion and ~~$1.2 billion,~~$921 million, respectively, of letters of credit outstanding under ~~the~~these facilities, and there were no borrowings outstanding. See Note 1314 — Other Derivative Instruments — Collateral.

The following table provides additional information regarding TVA's funding available under the four long-term revolving credit facilities:

Summary of Long-Term Credit Facilities
At December 31, 2017
Maturity Date Facility Limit Letters of Credit Outstanding Cash Borrowings Availability
December 2019 $ 150
$ 37
$ —
$ 113
February 2021 500
500
—
—
June 2020 1,000
268
—
732
September 2020 1,000
224
—
776
Total $ 2,650
$ 1,029
$ —
$ 1,621

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Summary of Long-Term Credit Facilities At June 30, 2019
	Facility Limit		Letters of Credit Outstanding		Cash Borrowings		Availability
Maturity Date
December 2021	$	150	$	38	$	—	$	112
February 2022	500		500		—		—
June 2023	1,000		242		—		758
September 2023	1,000		310		—		690
Total	$	2,650	$	1,090	$	—	$	1,560

Lease/Leasebacks

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 (collectively, ~~“QTE”~~"QTE"). Due to ~~TVA’s~~TVA's continuing involvement with the combustion turbine facilities and the QTE during the leaseback term, TVA accounted for the lease proceeds as financing obligations. ~~On September 20, 2017, TVA acquired 100 percent of the equity interests in~~ ~~two special purpose entities ("SPEs")~~ At June 30, 2019~~created for the purpose of facilitating a portion~~ of the leaseback arrangements. As a result of the acquisition, TVA effectively settled $70 million of its leaseback obligations related to eight CTs. On July 20, 2016, TVA acquired 100 percent of the equity interests in two SPEs created for the purpose of facilitating lease/leaseback arrangements. As a result of the acquisition, TVA effectively settled $70 million of its leaseback obligations related to eight CTs. At both December 31, 2017,, and September 30, ~~2017,~~2018, the outstanding leaseback obligations related to the remaining CTs and QTE were ~~$338 million.~~$263 million and $301 million, respectively. In March 2019, TVA made final rent payments under lease/leaseback transactions involving eight CTs, and TVA had previously acquired the equity interests related to these transactions. These transactions were terminated in July 2019. Final rent payments are scheduled to be made under the remaining CT lease/leaseback transactions on various dates from May 2020 to January 2022. TVA has already acquired the equity interests related to transactions involving eight of these CTs and will have the option to acquire the equity interests related to transactions involving the remaining eight CTs for additional amounts.

~~12.~~13. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) ("AOCI") represents market valuation adjustments related to ~~TVA’s~~TVA's currency swaps. The currency swaps are cash flow hedges and are the only derivatives in ~~TVA’s~~TVA's portfolio that have been designated and qualify for hedge accounting treatment. TVA records exchange rate gains and losses on its foreign currency-denominated debt and any related accrued interest in net income and marks its currency swap assets and liabilities to market through other comprehensive income (loss) ("OCI"). TVA then reclassifies an amount out of AOCI into net income, offsetting the exchange gain/loss recorded on the debt. During the three months ended ~~December 31, 2017~~June 30, 2019 and ~~2016,~~2018, TVA reclassified $3$13 million ~~of gains~~ and ~~$38~~$43 million of losses, respectively, related to its cash flow hedges from AOCI to Interest expense. During the nine months ended June 30, 2019 and 2018, TVA reclassified $17 million and $13 million of losses, respectively, related to its cash flow hedges from AOCI to Interest expense.

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TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. As such, certain items that would generally be reported in AOCI or that would impact the statements of operations are recorded as regulatory assets or regulatory liabilities. See Note 67 for a schedule of regulatory assets and liabilities. See Note 1314 for a discussion of the recognition in AOCI of gains and losses associated with certain derivative contracts. See Note 1415 for a discussion of the recognition of certain investment fund gains and losses as regulatory assets and liabilities. See Note 1618 for a discussion of the regulatory accounting related to components of ~~TVA’s~~TVA's benefit plans.

~~13.~~14. Risk Management Activities and Derivative Transactions

TVA is exposed to various risks. These include risks related to commodity prices, investment prices, interest rates, currency exchange rates, and inflation as well as counterparty credit and performance risks. To help manage certain of these risks, TVA has historically entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures. Other than certain derivative instruments in its trust investment funds, it is TVA’s policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. TVA has suspended its Financial Trading Program ("FTP") and no longer uses financial instruments to hedge risks related to commodity prices; however, TVA plans to continue to manage fuel price volatility through other methods and to periodically reevaluate its suspended FTP program for future use of financial instruments.

Overview of Accounting Treatment

TVA recognizes certain of its derivative instruments as either assets or liabilities on its ~~consolidated balance sheets~~Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of these instruments depends on (1) whether TVA uses regulatory accounting to defer the derivative gains and losses, (2) whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and (3) if so, the type of hedge relationship (for example, cash flow hedge).

The following tables summarize the accounting treatment that certain of TVA's financial derivative transactions receive:

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1)
Amount of Mark-to-Market Gain (Loss) Recognized in OCI
Three Months Ended
December 31,
Derivatives in Cash Flow Hedging Relationship Objective of Hedge Transaction
Accounting for Derivative
Hedging Instrument
2017 2016
Currency swaps To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk) Unrealized gains and losses are recorded in AOCI and reclassified to interest expense to the extent they are offset by gains and losses on the hedged transaction. $ 39
$ (8 )

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Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1) Amount of Mark-to-Market Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss)
			Three Months Ended June 30						Nine Months Ended June 30
Derivatives in Cash Flow Hedging Relationship	Objective of Hedge Transaction	Accounting for Derivative Hedging Instrument	2019			2018			2019			2018
Currency swaps	To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)	Unrealized gains and losses are recorded in AOCI and reclassified to interest expense to the extent they are offset by gains and losses on the hedged transaction	$	(47	)	$	(65	)	$	(76	)	$	17


Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)⁽¹⁾ Amount of Gain (Loss) Reclassified from OCI to Interest Expense
Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2) Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income to Interest Expense⁽¹⁾						Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2) Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income to Interest Expense⁽¹⁾
	Three Months Ended December 31,						Three Months Ended June 30						Nine Months Ended June 30
Derivatives in Cash Flow Hedging Relationship	2017		2016				2019			2018			2019			2018
Currency swaps	$	3	$	(38	)		$	(13	)	$	(43	)	$	(17	)	$	(13	)

Note

(1) There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $1$36 million of ~~losses~~gains from AOCI to interest expense within the next ~~twelve~~12 months to offset amounts anticipated to be recorded in interest expense related to net exchange gain on the debt.

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Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment⁽¹⁾
Amount of Gain (Loss) Recognized in Income on Derivatives

Three Months Ended
December 31,
Derivative Type Objective of Derivative Accounting for Derivative Instrument 2017 2016
Interest rate swaps To fix short-term debt variable rate to a fixed rate (interest rate risk) Mark-to-market gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses are recognized in interest expense when incurred during the settlement period. $ (24 ) $ (26 )

Commodity contract derivatives To protect against fluctuations in market prices of purchased coal or natural gas (price risk) Mark-to-market gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses due to contract settlements are recognized in fuel expense as incurred. 3
(2 )

Commodity derivatives
under FTP
To protect against fluctuations in market prices of purchased commodities (price risk) Mark-to-market gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses are recognized in fuel expense or purchased power expense when the related commodity is used in production. 8
(14 )



Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment Amount of Gain (Loss) Recognized in Income on Derivatives⁽¹⁾
			Three Months Ended June 30						Nine Months Ended June 30
Derivative Type	Objective of Derivative	Accounting for Derivative Instrument	2019			2018			2019			2018
Interest rate swaps	To fix short-term debt variable rate to a fixed rate (interest rate risk)	Mark-to-market gains and losses are recorded as regulatory assets or liabilities Realized gains and losses are recognized in interest expense when incurred during the settlement period	$	(19	)	$	(21	)	$	(59	)	$	(68	)

Commodity derivatives under FTP	To protect against fluctuations in market prices of purchased commodities (price risk)	Mark-to-market gains and losses are recorded as regulatory assets or liabilities Realized gains and losses are recognized in fuel expense or purchased power expense when the related commodity is used in production	—			—			—			(8		)

Note

(1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income

but instead are deferred as regulatory assets and liabilities. As such, there was no related gain (loss) recognized in income for these unrealized gains (losses) for the three and nine months ended ~~December 31, 2017~~June 30, 2019 and ~~2016.~~2018.



Fair Values of TVA Derivatives
	At June 30, 2019				At September 30, 2018
Derivatives That Receive Hedge Accounting Treatment:
	Balance			Balance Sheet Presentation	Balance			Balance Sheet Presentation
Currency swaps
£200 million Sterling	$	(80	)	Accounts payable and accrued liabilities $(5); Other long-term liabilities $(75)	$	(67	)	Accounts payable and accrued liabilities $(5); Other long-term liabilities $(62)
£250 million Sterling	(44		)	Accounts payable and accrued liabilities $(5); Other long-term liabilities $(39)	(12		)	Accounts payable and accrued liabilities $(5); Other long-term liabilities $(7)
£150 million Sterling	(46		)	Accounts payable and accrued liabilities $(3); Other long-term liabilities $(43)	(15		)	Accounts payable and accrued liabilities $(3); Other long-term liabilities $(12)

Derivatives That Do Not Receive Hedge Accounting Treatment:
	Balance			Balance Sheet Presentation	Balance			Balance Sheet Presentation
Interest rate swaps								��
$1.0 billion notional	$	(1,107	)	Accounts payable and accrued liabilities $(60); Other long-term liabilities $(1,047)	$	(878	)	Accounts payable and accrued liabilities $(56); Other long-term liabilities $(822)
$476 million notional	(425		)	Accounts payable and accrued liabilities $(22); Other long-term liabilities $(403)	(317		)	Accounts payable and accrued liabilities $(20); Other long-term liabilities $(297)
$42 million notional	(6		)	Accounts payable and accrued liabilities $(2); Other long-term liabilities $(4)	(4		)	Accounts payable and accrued liabilities $(1); Other long-term liabilities $(3)
Commodity contract derivatives	(22		)	Other current assets $14; Other long-term assets $6; Other long-term liabilities $(9); Accounts payable and accrued liabilities $(33)	60			Other current assets $41; Other long-term assets $31; Other long-term liabilities $(8); Accounts payable and accrued liabilities $(4)

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Fair Values of TVA Derivatives
At December 31, 2017 At September 30, 2017
Derivatives That Receive Hedge Accounting Treatment Balance Balance Sheet Presentation Balance Balance Sheet Presentation
Currency swaps
£200 million Sterling $ (59 ) Accounts payable and accrued liabilities $(4); Other long-term liabilities $(55) $ (67 ) Accounts payable and
accrued liabilities $(5);
Other long-term liabilities
$(62)
£250 million Sterling 1
Accounts payable and accrued liabilities $(4); Other long-term assets $5 (15 ) Accounts payable and
accrued liabilities $(4);
Other long-term liabilities
$(11)
£150 million Sterling (7 ) Accounts payable and accrued liabilities $(3); Other long-term liabilities $(4) (21 ) Accounts payable and
accrued liabilities $(2);
Other long-term liabilities
$(19)

At December 31, 2017 At September 30, 2017
Derivatives That Do Not Receive Hedge Accounting Treatment Balance Balance Sheet Presentation Balance Balance Sheet Presentation
Interest rate swaps
$1.0 billion notional (1,052 ) Accounts payable and
accrued liabilities $(64);
Other long-term liabilities
$(988) (1,093 ) Accounts payable and
accrued liabilities $(66);
Other long-term liabilities
$(1,027)
$476 million notional (394 ) Accounts payable and
accrued liabilities $(24);
Other long-term liabilities
$(370) (410 ) Accounts payable and
accrued liabilities $(25);
Other long-term liabilities
$(385)
$42 million notional (8 ) Accounts payable and
accrued liabilities $(2); Other long-term liabilities $(6) (8 ) Accounts payable and
accrued liabilities $(2); Other long-term liabilities $(6)
Commodity contract derivatives (77 ) Other current assets $10; Other long-term assets $6; Other long-term liabilities $(35); Accounts payable and accrued liabilities $(58) (60 ) Other current assets $8; Other long-term assets $2; Other long-term liabilities $(9); Accounts payable and accrued liabilities $(61)
FTP
Derivatives under FTP⁽¹⁾
—

(5 ) Other current assets $(4); Accounts payable and accrued liabilities $(1)

~~Note~~

~~(1) Fair values of certain derivatives under the FTP that were in net liability positions totaling $4 million at~~ ~~September 30, 2017~~, were recorded in TVA's margin cash accounts in Other current assets. These derivatives were transacted with futures commission merchants, and cash deposits have been posted to the margin cash accounts held with each futures commission merchant to offset the net liability positions in full. At December 31, 2017, TVA had no derivatives under the FTP in net liability positions.

Cash Flow Hedging Strategy for Currency Swaps

To protect against exchange rate risk related to three British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions ~~occurred.~~occurred. TVA had three currency swaps outstanding as of ~~December 31, 2017,~~June 30, 2019, with total currency exposure of £600 million and expiration dates ranging from 2021 to 2043.

When the dollar strengthens against the British pound sterling, the exchange gain on the Bond liability and related accrued interest is offset by an

equal amount of loss on the swap contract that is reclassified out of AOCI. Conversely, the exchange loss on the Bond liability and related accrued interest is

offset by an equal amount of gain on the swap contract that is reclassified out of AOCI. All such exchange gains or losses on the

Bond liability and related accrued interest are included in Long-term debt, ~~net.~~net and Accounts payable and accrued liabilities, respectively. The offsetting exchange losses or gains on the swap contracts are recognized

in AOCI. If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the

resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest

expense. The values of the currency swap ~~asset and~~ liabilities are included in ~~Other long-term assets,~~ Accounts payable and accrued liabilities and Other long-term liabilities on the ~~consolidated balance sheets.~~

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Consolidated Balance Sheets.

Derivatives Not Receiving Hedge Accounting Treatment

Interest Rate Derivatives. Generally TVA uses interest rate swaps to fix variable short-term debt to a fixed rate, and TVA uses regulatory accounting treatment to defer the ~~MtM~~mark-to-market ("MtM") gains and losses on its interest rate swaps. The net deferred unrealized gains and losses are classified as regulatory assets or liabilities on TVA's ~~consolidated balance sheets~~Consolidated Balance Sheets and are included in the ratemaking formula when gains or losses are realized. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the ~~consolidated balance sheets,~~Consolidated Balance Sheets, and realized gains and losses, if any, are included in TVA's ~~consolidated statements~~Consolidated Statements of ~~operations.~~Operations. For the three months ended ~~December 31, 2017~~June 30, 2019 and ~~2016,~~2018, the changes in fair market value of the interest rate swaps resulted in ~~deferred~~the deferral of unrealized losses of $159 million and unrealized gains of ~~$28~~$56 million, respectively. For the nine months ended June 30, 2019 and 2018, the changes in fair market value of the interest rate swaps resulted in the deferral of unrealized losses of $369 million and ~~$441~~unrealized gains of $227 million, respectively.

Commodity Derivatives. TVA enters into certain derivative contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. TVA marks to market all such contracts and defers the fair market values as regulatory assets or liabilities on a gross basis. At ~~December 31, 2017,~~June 30, 2019, TVA's coal and natural gas contract derivatives both had terms of up to three ~~years and natural gas contract derivatives had terms of up to four~~ years.


Commodity Contract Derivatives	Commodity Contract Derivatives										Commodity Contract Derivatives
	At December 31, 2017					At September 30, 2017					At June 30, 2019					At September 30, 2018
	Number of Contracts	Notional Amount	Fair Value (MtM)			Number of Contracts	Notional Amount	Fair Value (MtM)			Number of Contracts	Notional Amount	Fair Value (MtM)			Number of Contracts	Notional Amount	Fair Value (MtM)
Coal contract derivatives	11	23 million tons	$	(73	)	20	17 million tons	$	(67	)	8	12 million tons	$	19		13	20 million tons	$	58
Natural gas contract derivatives	46	253 million mmBtu	$	(4	)	53	271 million mmBtu	$	7		48	359 million mmBtu	$	(41	)	61	359 million mmBtu	$	2

Derivatives Under FTP. TVA has suspended its FTP and no longer uses financial instruments to ~~hedge~~hedge risks

related to commodity prices. ~~At December 31, 2017, TVA had no open commodity derivatives under the FTP.~~

Derivatives Under Financial Trading Program⁽¹⁾
At December 31, 2017 At September 30, 2017

Notional Amount (in mmBtu)

Fair Value (MtM)
(in millions)

Notional Amount (in mmBtu)

Fair Value (MtM)
(in millions)
Natural gas
Swap contracts —
$ —
2,800,000
$ (5 )

~~Note~~

~~(1) Fair value amounts presented are based on the net commodity position with the counterparty. Notional amounts disclosed represent the net value of contractual amounts.~~

Prior to the suspension of the FTP, TVA deferred all FTP unrealized gains (losses) as regulatory liabilities (assets) and recorded only realized gains or losses to match the delivery period of the underlying commodity. TVA ~~experienced the following~~did not experience any unrealized ~~and realized~~ gains and losses related to the FTP at June 30, 2019 or September 30, 2018. TVA experienced the ~~dates and~~following realized losses related to the FTP during the periods ~~as applicable,~~ set forth in the ~~tables~~table below:

Financial Trading Program Unrealized Gains (Losses)
At December 31,
2017 At September 30, 2017
FTP unrealized gains (losses) deferred as regulatory liabilities (assets)
Natural gas $ —
$ (5 )

																Financial Trading Program Realized Gains (Losses)
	Three Months Ended December 31,						Three Months Ended June 30				Nine Months Ended June 30
	2017			2016			2019		2018		2019		2018
Decrease (increase) in fuel expense
Natural gas	$	(6	)	$	(11	)	$	—	$	—	$	—	$	(6	)
Decrease (increase) in purchased power expense
Natural gas	(2		)	(3		)	—		—		—		(2		)

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Offsetting of Derivative Assets and Liabilities

The amounts of TVA's derivative instruments as reported in the ~~consolidated balance sheets~~Consolidated Balance Sheets at ~~December 31, 2017~~June 30, 2019, and September 30, ~~2017~~2018, are shown in the table below:

														Derivative Assets and Liabilities
	At December 31, 2017							At June 30, 2019
	Gross Amounts of Recognized Assets/Liabilities		Gross Amounts Offset in the Balance Sheet ⁽¹⁾			Net Amounts of Assets/Liabilities Presented in the Balance Sheet ⁽²⁾		Gross Amounts of Recognized Assets/Liabilities		Gross Amounts Offset in the Balance Sheet⁽¹⁾		Net Amounts of Assets/Liabilities Presented in the Balance Sheet⁽²⁾
Assets
Currency swaps⁽³⁾	$	1	$	—		$	1
Commodity derivatives not subject to master netting or similar arrangement	$	16	$	—		$	16	$	20	$	—	$	20

Total assets	$	17	$	—		$	17

Liabilities
Currency swaps⁽³⁾	$	66	$	—		$	66	$	170	$	—	$	170
Interest rate swaps⁽³⁾	1,454		—			1,454		1,538		—		1,538
Total derivatives subject to master netting or similar arrangement	1,520		—			1,520		1,708		—		1,708
Commodity derivatives not subject to master netting or similar arrangement	93		—			93		42		—		42

Total liabilities	$	1,613	$	—		$	1,613	$	1,750	$	—	$	1,750

	At September 30, 2017							At September 30, 2018
	Gross Amounts of Recognized Assets/Liabilities		Gross Amounts Offset in the Balance Sheet⁽¹⁾			Net Amounts of Assets/Liabilities Presented in the Balance Sheet⁽²⁾		Gross Amounts of Recognized Assets/Liabilities		Gross Amounts Offset in the Balance Sheet⁽¹⁾		Net Amounts of Assets/Liabilities Presented in the Balance Sheet⁽²⁾
Assets
Commodity derivatives not subject to master netting or similar arrangement	$	10	$	—		$	10	$	72	$	—	$	72

Liabilities
Currency swaps⁽³⁾	$	103	$	—		$	103	$	94	$	—	$	94
Interest rate swaps⁽³⁾	1,511		—			1,511		1,199		—		1,199
Commodity derivatives under FTP	5		(4		)	1
Total derivatives subject to master netting or similar arrangement	1,619		(4		)	1,615		1,293		—		1,293
Commodity derivatives not subject to master netting or similar arrangement	70		—			70		12		—		12

Total liabilities	$	1,689	$	(4	)	$	1,685	$	1,305	$	—	$	1,305

Notes

(1) Amounts primarily include counterparty netting of derivative contracts, margin account deposits for futures commission merchants transactions, and cash collateral received or paid in accordance with the accounting guidance for derivatives and hedging transactions.

(2) There are no derivative contracts subject to a master netting arrangement or similar agreement that are not offset in the ~~consolidated balance sheets.~~Consolidated Balance Sheets.

(3) Letters of credit of approximately ~~$1.0~~$1.1 billion and ~~$1.2 billion~~$921 million were posted as collateral at ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017,~~2018, respectively, to partially secure the liability positions of one of the currency swaps and one of the interest rate swaps in accordance with the collateral requirements for these derivatives.

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Other Derivative Instruments

Investment Fund Derivatives. Investment funds consist primarily of funds held in the Nuclear Decommissioning Trust ("NDT"), the Asset Retirement Trust ("ART"), the Supplemental Executive Retirement Plan ("SERP"), and the TVA Deferred Compensation Plan ("DCP"). ~~All securities in these trusts and plans are classified as trading.~~ See Note 1415 — Investment Funds for a discussion of the trusts, ~~and~~ plans, and ~~the~~ types of ~~investments that they hold.~~investments. The NDT and ART may invest in derivative instruments which may include swaps, futures, options, forwards, and other instruments. At ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017,~~2018, the NDT held investments in forward contracts to purchase debt securities. The fair values of these derivatives were in net asset positions totaling ~~$37~~$25 million and ~~$19~~$45 million at ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017,~~2018, respectively.

Collateral. TVA's interest rate swaps and currency swaps contain contract provisions that require a party to post collateral (in a form such as cash or a letter of credit) when the party's liability balance under the agreement exceeds a certain threshold. At ~~December 31, 2017,~~June 30, 2019, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was ~~$1.5~~$1.7 billion. TVA's collateral obligations at ~~December 31, 2017,~~June 30, 2019, under these arrangements were approximately $1$1.1 billion, for which TVA had posted approximately $1$1.1 billion in letters of credit. These letters of credit reduce

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the available balance under the related credit facilities. TVA's assessment of the risk of its nonperformance includes a reduction in its exposure under the contract as a result of this posted collateral.

For all of its derivative instruments with credit-risk related contingent features:

If TVA remains a majority-owned U.S. government entity but Standard & Poor's Financial Services, LLC ("S&P") or Moody's Investors Service, Inc. ("Moody's") downgrades TVA's credit rating to AA or Aa2, respectively, TVA's collateral obligations would likely increase by $22 million, and

If TVA ceases to be majority-owned by the U.S. government, TVA's credit rating would likely be downgraded and TVA would be required to post additional collateral.

Counterparty Risk

TVA may be exposed to certain risks when a counterparty has the potential to fail to meet its obligations in accordance with agreed terms. These risks may be related to credit, operational, or nonperformance matters. To mitigate certain counterparty risk, TVA analyzes the counterparty’s financial condition prior to entering into an agreement, establishes credit limits, monitors the appropriateness of those limits, as well as any changes in the creditworthiness of the counterparty, on an ongoing basis, and when required, employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements, to mitigate credit risk.

Customers. TVA is exposed to counterparty credit risk associated with trade accounts receivable from delivered power sales to LPCs, and from industries and federal agencies directly served, all located in the Tennessee Valley region. ~~TVA~~TVA is also exposed to risk from exchange power arrangements with a small number of investor-owned regional utilities related to either delivered power or the replacement of open positions of longer-term purchased power or fuel agreements.See Note 1 — Allowance for Uncollectible Accounts and Note 3.

Suppliers. If one of TVA's fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract. In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power. Nuclear fuel requirements, including uranium mining and milling, conversion services, enrichment services, and fabrication services, are met from various suppliers, depending on the type of service. TVA purchases the majority of its natural gas requirements from a variety of suppliers under short-term contracts.

To help ensure a reliable supply of coal, TVA had coal contracts with multiple suppliers at ~~December 31, 2017.~~ June 30, 2019. The contracted supply of coal is sourced from multiple geographic regions of the United States and is to be delivered via various transportation methods ~~(i.e.~~(e.g., barge, rail, and truck). Emerging technologies, environmental regulations, and low natural gas prices have contributed to weak demand for coal. As a result, coal suppliers are facing increased financial pressure, which has led to relatively poor credit ratings and bankruptcies. Continued difficulties by coal suppliers could result in consolidations, additional bankruptcies, ~~restructurings,~~restructuring, contract renegotiations, or other scenarios. Under these scenarios and TVA’s potential available responses, TVA does not anticipate a significant financial impact in obtaining continued fuel supply for its coal-fired generation.

~~On March 29, 2017, one of TVA’s suppliers, Westinghouse Electric Company (“Westinghouse”), filed~~Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services. The supply markets for protection under Chapter 11 of the United States Bankruptcy Code. On January 4, 2018, Brookfield Business Partners L.P. ("Brookfield Business Partners"), together with institutional partners, announced that they have entered into an agreement to acquire 100% of Westinghouse, which is currently owned by Toshiba Corp. Brookfield Business Partners is listed on the New Yorkuranium concentrates and ~~Toronto stock exchanges and is the flagship listed business~~certain nuclear fuel services ~~and industrials company of Brookfield Asset Management~~

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~~Inc., a leading global alternative asset manager with over $265 billion of assets under management, of which approximately $141 billion~~ are ~~in the U.S. Closing of the transaction remains~~ subject to ~~Bankruptcy Court approval~~price fluctuations and ~~customary closing~~availability restrictions. Supply market conditions ~~including, among others, regulatory approvals. Closing is expected~~may make procurement contracts subject to ~~occur in~~credit risk related to the ~~fourth quarter~~potential nonperformance of ~~2018.~~counterparties. In the event of nonperformance by these or other suppliers, TVA believes that replacement uranium concentrate can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements.

TVA has a power purchase agreement that expires on March 31, 2032, with a supplier of electricity for 440 megawatts ("MW") of summer net capability from a lignite-fired generating plant. TVA has determined that the supplier has the equivalent of a non-investment grade credit rating; therefore, the supplier has provided credit assurance to TVA under the terms of the agreement.

Derivative Counterparties. TVA has entered into physical and financial contracts that qualify as derivatives for hedging purposes, and TVA's NDT fund, ~~has~~ART fund, and qualified defined benefit pension plan have entered into derivative contracts for investment purposes. If a counterparty to one of ~~TVA's hedging~~the physical or financial derivative transactions defaults, TVA might incur substantial costs in connection with entering into a replacement ~~hedging~~ transaction. If a counterparty to the derivative contracts into which the NDT fund, ~~has~~the ART fund, and the qualified pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless. TVA has concentrations of credit risk from the banking and coal industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. At ~~December 31, 2017,~~June 30, 2019, all of TVA's currency swaps and interest rate swaps as well as all of the derivatives in the NDT and the ART were with banking counterparties whose Moody's credit ratings were A3 or higher.

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TVA classifies qualified forward coal and natural gas contracts as derivatives. See Derivatives Not Receiving Hedge Accounting Treatment above. At ~~December 31, 2017,~~June 30, 2019, the coal ~~derivative~~ contracts were with counterparties whose Moody's credit rating, or TVA’s internal analysis when such information was unavailable, ranged from ~~C, or~~ D ~~respectively,~~ to Ba3. At ~~December 31, 2017,~~June 30, 2019, the natural gas ~~derivative~~ contracts were with counterparties whose ~~Moody's~~ ratings ranged from B1 to ~~A2.~~A1. See Suppliers above for discussion of challenges facing the coal industry. TVA's total value for derivative contracts with coal and natural gas counterparties in an asset position as of ~~December 31, 2017,~~June 30, 2019, was approximately ~~$16~~$20 million.

TVA previously utilized two futures commission merchants ("FCMs") to clear commodity contracts, including futures, options, and similar financial derivatives. These transactions were executed under the FTP by the FCMs on exchanges on behalf of TVA. TVA maintained margin cash accounts with the FCMs. TVA made deposits to the margin cash accounts to adequately cover any net liability positions on its derivatives transacted with the FCMs. At December 31, 2017, TVA had no positions under the FTP. See the note to the ~~Fair Values of TVA Derivatives~~ ~~table above.~~

~~14.~~15. Fair Value Measurements

Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the asset or liability's principal market, or in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants. TVA uses market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.

Valuation Techniques

The measurement of fair value results in classification into a hierarchy by the inputs used to determine the fair value as follows:



Level 1	—	Unadjusted quoted prices in active markets accessible by the reporting entity for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing.
Level 2	—	Pricing inputs other than quoted market prices included in Level 1 that are based on observable market data and that are directly or indirectly observable for substantially the full term of the asset or liability. These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities and default rates observable at commonly quoted intervals, and inputs derived from observable market data by correlation or other means.
Level 3	—	Pricing inputs that are unobservable, or less observable, from objective sources. Unobservable inputs are only to be used to the extent observable inputs are not available. These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants. An entity should consider all market participant assumptions that are available without unreasonable cost and effort. These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available.

A financial instrument's level within the fair value hierarchy (where Level 1 is the highest and Level 3 is the lowest) is based on the lowest level of input significant to the fair value measurement.

The following sections describe the valuation methodologies TVA uses to measure different financial instruments at fair value. Except for gains and losses on SERP and DCP assets, all changes in fair value of these assets and liabilities have

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been recorded as changes in regulatory assets, regulatory liabilities, or AOCI on TVA's ~~consolidated balance sheets~~Consolidated Balance Sheets and ~~consolidated statements~~Consolidated Statements of ~~comprehensive income (loss)~~Comprehensive Income (Loss). Except for gains and losses on SERP and DCP assets, there has been no impact to the ~~consolidated statements~~Consolidated Statements of ~~operations~~Operations or the ~~consolidated statements~~Consolidated Statements of ~~cash flows~~Cash Flows related to these fair value measurements.

Investment Funds

At ~~December 31, 2017,~~June 30, 2019, Investment funds were composed of ~~$2.7~~$2.9 billion of equity securities and debt securities classified as trading ~~and~~ measured at fair value. ~~Trading~~Equity and trading debt securities are held in the NDT, ART, SERP, and DCP. The NDT holds funds for the ultimate decommissioning of TVA's nuclear power plants. The ART holds funds primarily for the costs related to the future closure and retirement of TVA's other long-lived assets. The balances in the NDT and ART were ~~$1.9~~$2.1 billion and ~~$655~~$717 million, respectively, at ~~December 31, 2017.~~June 30, 2019.

TVA established a SERP to provide benefits to selected employees of TVA which are comparable to those provided by competing organizations. The DCP is designed to provide participants with the ability to defer compensation until employment with TVA ends. The NDT, ~~and~~ART, SERP, ~~funds are invested in portfolios of securities generally designed to achieve a return in line with overall equity market performance, and ART~~ and DCP funds are invested in portfolios of securities generally designed to achieve a return in line with overall ~~debt~~equity and ~~equity~~debt market performance.

The NDT, ART, SERP, and DCP are composed of multiple types of investments and are managed by external institutional investment managers. Most U.S. and international equities, U.S. Treasury inflation-protected securities, real estate investment trust securities, and cash securities and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations. Fixed-income investments, high-yield fixed-income investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations. These measurements are based on market and income approaches with observable market inputs.

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Private equity limited partnerships, ~~and~~ private real estate investments, and private credit investments may include holdings of investments in private real estate, venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations through funds managed by third-party investment managers. These investments generally involve a three-to-four-year period where the investor contributes capital, followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, 10 years or longer. The NDT had unfunded commitments related to private equity limited partnerships of ~~$49~~$185 million, ~~and~~ unfunded commitments related to private real estate of $5$35 million, and unfunded commitments related to private credit of $4 million at ~~December 31, 2017.~~June 30, 2019. The ART had unfunded commitments related to private equity limited partnerships of $95 million, unfunded commitments related to private real estate of $16 million, and unfunded commitments related to private credit of $2 million at June 30, 2019. These investments have no redemption or limited redemption options and may also impose restrictions on the ~~NDT’s~~NDT's and ART's ability to liquidate ~~its~~their investments. There are no readily available quoted exchange prices for these investments. The fair value of ~~the~~these investments is based on ~~TVA’s ownership percentage of the fair value of the underlying investments as~~information provided by the investment managers. These investments are ~~typically~~ valued on a quarterly basis. ~~TVA’s~~TVA's private equity limited partnerships, ~~and~~ private real estate investments, and private credit investments are valued at net asset values ("NAV") as a practical expedient for fair value. TVA classifies its interest in these types of investments as investments measured at net asset value in the fair value hierarchy.

Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT, ART, SERP, and DCP consist of either a single class of securities, such as equity, debt, or foreign currency securities, or multiple classes of securities. All underlying positions in these commingled funds are either exchange traded or measured using observable inputs for similar instruments. The fair value of commingled funds is based on NAV per fund share (the unit of account), derived from the prices of the underlying securities in the funds. These commingled funds can be redeemed at the measurement date NAV and are classified as Commingled funds measured at net asset value in the fair value hierarchy.

Realized and unrealized gains and losses on equity and trading debt securities are recognized in current earnings and are based on average cost. The gains and losses of the NDT and ART are subsequently reclassified to a regulatory asset or liability account in accordance with TVA's regulatory accounting policy. See Note 1 — Cost-Based Regulation. TVA recorded unrealized gains and losses related to its equity and trading debt securities held during each period as follows:

Unrealized Investment Gains (Losses)
Three Months Ended
December 31,
Fund Financial Statement Presentation 2017 2016
SERP Other income (expense) $ 1
$ —
NDT Regulatory asset 47
(7 )
ART Regulatory asset 20
3

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Unrealized Investment Gains (Losses)
		Three Months Ended June 30					Nine Months Ended June 30
Fund	Financial Statement Presentation	2019			2018		2019			2018
SERP	Other income (expense)	$	1		$	—	$	—		$	—
DCP	Other income (expense)	1			—		(1		)	—
NDT	Regulatory asset	(37		)	9		(84		)	(19		)
ART	Regulatory asset	(6		)	1		(58		)	7

Currency and Interest Rate Derivatives

See Note 1314 — Cash Flow Hedging Strategy for Currency Swaps and Derivatives Not Receiving Hedge Accounting Treatment for a discussion of the nature, purpose, and contingent features of TVA's currency swaps and interest rate swaps. These swaps are classified as Level 2 valuations and are valued based on income approaches using observable market inputs for similar instruments.

Commodity Contract Derivatives

Most of these contracts are valued based on market approaches which utilize short- and mid-term market-quoted prices from an external industry brokerage service. A small number of these contracts are valued based on a pricing model using long-term price estimates from TVA's coal price forecast. To value the volume option component of applicable coal contracts, TVA uses a Black-Scholes pricing model which includes inputs from the forecast, contract-specific terms, and other market inputs. These contracts are classified as Level 3 valuations.

Nonperformance Risk

The assessment of nonperformance risk, which includes credit risk, considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements. TVA is a counterparty to currency swaps, interest rate swaps, commodity contracts, and other derivatives which subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to mark the investment to market.

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Nonperformance risk for most of TVA's derivative instruments is an adjustment to the initial asset/liability fair value. TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying credit valuation adjustments ("CVAs"). TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA's or the counterparty's credit rating as obtained from Moody's. For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the counterparty. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY ~~2017)~~2018) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. The application of CVAs resulted in a less than $1 million decrease in the fair value of assets and a $1 million decrease in the fair value of liabilities at ~~December 31, 2017.~~June 30, 2019.

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Fair Value Measurements

The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis as of ~~December 31, 2017~~June 30, 2019, and September 30, ~~2017~~2018. Financial assets and liabilities have been classified in their entirety based on the lowest level of input that is significant to the fair value measurement. TVA's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the determination of the fair value of the assets and liabilities and their classification in the fair value hierarchy levels.


Fair Value Measurements At December 31, 2017
Fair Value Measurements At June 30, 2019									Fair Value Measurements At June 30, 2019
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Investments
Equity securities	$	233	$	—	$	—	$	233	$	330	$	—	$	—	$	330
Government debt securities	78		69		—		147		235		60		—		295
Corporate debt securities	—		393		—		393		—		430		—		430
Mortgage and asset-backed securities	—		50		—		50		—		35		—		35
Institutional mutual funds	96		—		—		96		245		—		—		245
Forward debt securities contracts	—		37		—		37		—		25		—		25
Private credit funds measured at net asset value⁽¹⁾									—		—		—		30
Private equity funds measured at net asset value⁽¹⁾	—		—		—		137		—		—		—		135
Private real estate funds measured at net asset value⁽¹⁾	—		—		—		115		—		—		—		131
Commingled funds measured at net asset value⁽¹⁾	—		—		—		1,506		—		—		—		1,243
Total investments	407		549		—		2,714		810		550		—		2,899
Currency swaps⁽²⁾	—		1		—		1
Commodity contract derivatives	—		7		9		16		—		1		19		20
Total	$	407	$	557	$	9	$	2,731	$	810	$	551	$	19	$	2,919

	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Liabilities
Currency swaps⁽²⁾	$	—	$	66	$	—	$	66	$	—	$	170	$	—	$	170
Interest rate swaps	—		1,454		—		1,454		—		1,538		—		1,538
Commodity contract derivatives	—		11		82		93		—		42		—		42
Total	$	—	$	1,531	$	82	$	1,613	$	—	$	1,750	$	—	$	1,750

Notes

(1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the ~~consolidated balance sheets.~~Consolidated Balance Sheets.

(2) TVA records currency swaps net of cash collateral received from or paid to the counterparty, to the extent such amount is not recorded in Accounts payable and accrued liabilities. See Note 1314 — Offsetting of Derivative Assets and Liabilities.

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Fair Value Measurements At September 30, 2017
Fair Value Measurements At September 30, 2018									Fair Value Measurements At September 30, 2018
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Investments
Equity securities	$	226	$	—	$	—	$	226	$	220	$	—	$	—	$	220
Government debt securities	100		42		—		142		199		37		—		236
Corporate debt securities	—		373		—		373		—		499		—		499
Mortgage and asset-backed securities	—		49		—		49		—		50		—		50
Institutional mutual funds	94		—		—		94		126		—		—		126
Forward debt securities contracts	—		19		—		19		—		45		—		45
Private equity funds measured at net asset value⁽¹⁾	—		—		—		136		—		—		—		132
Private real estate funds measured at net asset value⁽¹⁾	—		—		—		113		—		—		—		124
Commingled funds measured at net asset value⁽¹⁾	—		—		—		1,451		—		—		—		1,430
Total investments	420		483		—		2,603		545		631		—		2,862
Commodity contract derivatives	—		8		2		10		—		13		59		72
Total	$	420	$	491	$	2	$	2,613	$	545	$	644	$	59	$	2,934

									Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Liabilities
Currency swaps⁽²⁾	$	—	$	103	$	—	$	103	$	—	$	94	$	—	$	94
Interest rate swaps	—		1,511		—		1,511		—		1,199		—		1,199
Commodity contract derivatives	—		1		69		70		—		11		1		12
Commodity derivatives under FTP⁽²⁾
Swap contracts	—		1		—		1
Total	$	—	$	1,616	$	69	$	1,685	$	—	$	1,304	$	1	$	1,305

Notes

(2) Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the counterparty or FCM. Deposits are made to TVA's margin cash accounts held with each FCM to offset any net liability positions in full for derivatives that are transacted with FCMs. TVA records currency swaps net of cash collateral received from or paid to the counterparty, to the extent such amount is not recorded in Accounts payable and accrued liabilities. See Note 1314 — Offsetting of Derivative Assets and Liabilities.

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TVA uses internal valuation specialists for the calculation of its commodity contract derivatives fair value measurements classified as Level 3. Analytical testing is performed on the change in fair value measurements each period to ensure the valuation is reasonable based on changes in general market assumptions. Significant changes to the estimated data used for unobservable inputs, in isolation or combination, may result in significant variations to the fair value measurement reported.

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The following table presents a reconciliation of all commodity contract derivatives measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

Fair Value Measurements Using Significant Unobservable Inputs
Commodity Contract Derivatives
Balance at October 1, 2016 $ (127 )
Change in net unrealized gains (losses) deferred as regulatory assets and liabilities 23
Balance at December 31, 2016 $ (104 )

Balance at October 1, 2017 $ (67 )
Change in net unrealized gains (losses) deferred as regulatory assets and liabilities (6 )
Balance at December 31, 2017 $ (73 )



Fair Value Measurements Using Significant Unobservable Inputs
	Commodity Contract Derivatives
	Three Months Ended June 30			Nine Months Ended June 30
Balance at beginning of period	$	(52	)	$	(67	)
Change in net unrealized gains (losses) deferred as regulatory assets and liabilities	57			72
Balance at June 30, 2018	$	5		$	5

Balance at beginning of period	$	38		$	58
Change in net unrealized gains (losses) deferred as regulatory assets and liabilities	(19		)	(39		)
Balance at June 30, 2019	$	19		$	19

The following table presents quantitative information related to the significant unobservable inputs used in the measurement of fair value of TVA's assets and liabilities classified as Level 3 in the fair value hierarchy:

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at December 31,
2017

Valuation Technique(s)

Unobservable Inputs

Range

Fair Value at June 30,
2019

Valuation Technique(s)

Unobservable Inputs

Range

Assets

Commodity contract derivatives

Pricing model

Coal supply and demand

0.6 - 0.7 billion tons/year

Pricing model

Coal supply and demand

0.6 - 0.8 billion tons/year

Long-term market prices

$12.15 - $112.81/ton

Long-term market prices

$12.20 - $106.35/ton

Liabilities

Commodity contract derivatives

Pricing model

Coal supply and demand

0.6 - 0.7 billion tons/year

Long-term market prices

$12.15 - $112.81/ton

There were no commodity contract derivatives in liability positions at June 30, 2019.

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at September 30, 2017

Valuation Technique(s)

Unobservable Inputs

Range

Fair Value at September 30, 2018

Valuation Technique(s)

Unobservable Inputs

Range

Assets

Commodity contract derivatives

Pricing model

Coal supply and demand

0.6 - 0.7 billion tons/year

Pricing model

Coal supply and demand

0.7 - 0.8 billion tons/year

Long-term market prices

$11.40 - $112.23/ton

Long-term market prices

$12.25 - $112.24/ton

Liabilities

Commodity contract derivatives

Pricing model

Coal supply and demand

0.6 - 0.7 billion tons/year

Pricing model

Coal supply and demand

0.7 - 0.8 billion tons/year

Long-term market prices

$11.40 - $112.23/ton

Long-term market prices

$12.25 - $112.24/ton

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Other Financial Instruments Not Recorded at Fair Value

TVA uses the methods and assumptions described below to estimate the fair value of each significant class of financial instrument. The fair value of the financial instruments held at ~~December 31, 2017~~June 30, 2019, and September 30, ~~2017~~2018, may not be representative of the actual gains or losses that will be recorded when these instruments mature or are called or presented for early redemption. The estimated values of TVA's financial instruments not recorded at fair value at ~~December 31, 2017~~June 30, 2019, and September 30, ~~2017~~2018, were as follows:

																			Estimated Values of Financial Instruments Not Recorded at Fair Value
		At December 31, 2017				At September 30, 2017					At June 30, 2019				At September 30, 2018
	Valuation Classification	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Valuation Classification	Carrying Amount		Fair Value		Carrying Amount		Fair Value
EnergyRight^®receivables (including current portion)	Level 2	$	122	$	123	$	125	$	127	Level 2	$	103	$	102	$	112	$	112

Loans and other long-term receivables, net (including current portion)	Level 2	$	127	$	113	$	118	$	107	Level 2	$	125	$	111	$	138	$	123

EnergyRight^®financing obligation (including current portion)	Level 2	$	140	$	156	$	144	$	161	Level 2	$	115	$	129	$	127	$	143

Unfunded loan commitments	Level 2	$	—	$	18	$	—	$	18	Level 2	$	—	$	9	$	—	$	3

Membership interest of variable interest entity subject to mandatory redemption (including current portion)	Level 2	$	32	$	41	$	32	$	41
Membership interest of variable interest entities subject to mandatory redemption (including current portion)										Level 2	$	29	$	37	$	30	$	37

Long-term outstanding power bonds (including current maturities), net	Level 2	$	21,245	$	26,134	$	21,933	$	26,857	Level 2	$	20,145	$	24,846	$	21,189	$	23,896

Long-term debt of variable interest entities (including current maturities), net	Level 2	$	1,200	$	1,366	$	1,200	$	1,356	Level 2	$	1,147	$	1,351	$	1,165	$	1,256

Long-term notes payable (including current maturities)	Level 2	$	120	$	119	$	122	$	121	Level 2	$	23	$	23	$	69	$	68

~~Due to the short-term maturity~~The carrying value of Cash and cash equivalents, Restricted cash and ~~investments,~~cash equivalents, and Short-term debt, net ~~(each considered a Level 1 valuation classification), the carrying amounts of these instruments~~ approximate their fair values.

The fair value for loans and other long-term receivables is estimated by determining the present value of future cash flows using a discount rate equal to lending rates for similar loans made to borrowers with similar credit ratings and for similar remaining maturities, where applicable.

The fair value of long-term debt ~~traded in the public market is determined by multiplying the par value of the debt by the indicative market price at the balance sheet date. The fair value of other long-term debt~~ and membership interests of ~~variable interest entities~~VIE subject to mandatory redemption is estimated by determining the present value of future cash flows using current market rates for similar obligations, giving effect to credit ratings and remaining maturities.

~~15.~~16. Revenue

As described in Note 2, TVA adopted Revenue from Contracts with Customers effective October 1, 2018, using the modified retrospective method of adoption, which does not require restatement of prior year reported results. As a result of the adoption of this standard, no cumulative effect adjustment was recorded. Additionally, comparative disclosures for 2018 operating results with the previous revenue recognition rules are not applicable as TVA’s revenue recognition has not materially changed as a result of the new standard.

Revenue from Sales of Electricity

TVA’s revenue from contracts with customers is primarily derived from the generation and sale of electricity to its customers and is included in Revenue from sales of electricity on the Consolidated Statements of Operations. Electricity is sold primarily to LPCs for distribution to their end-use customers. In addition, TVA sells electricity to directly served industrial companies, federal agencies, and others.

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LPC sales	Approximately 92 percent of TVA’s revenue from sales of electricity is to LPCs, which then distribute the power to their customers using their own distribution systems. Power is delivered to each LPC at delivery points within the LPC's service territory. TVA recognizes revenue when the customer takes possession of the power at the delivery point. For power sales, the performance obligation to deliver power is satisfied in a series over time because the sales of electricity over the term of the customer contract are a series of distinct goods that are substantially the same and have the same pattern of transfer to the customer. TVA has no continuing performance obligations subsequent to delivery. Using the output method for revenue recognition provides a faithful depiction of the transfer of electricity as customers obtain control of the power and benefit from its use at delivery. Additionally, TVA has an enforceable right to consideration for energy delivered at any discrete point in time and will recognize revenue at an amount that reflects the consideration to which TVA is entitled for the energy delivered. The amount of revenue is based on contractual prices approved by the TVA Board. Customers are invoiced monthly for power delivered as measured by meters located at the delivery points. The net transaction price is offset by certain credits available to customers that are known at the time of billing. Credits are designed to achieve objectives of the TVA Act and include items such as hydro preference credits for residential customers of LPCs, economic development credits to promote growth in the Tennessee Valley, and interruptible credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. Payments are typically due within approximately one month of invoice issuance.

Directly served customers	Directly served customers, including industrial customers, federal agencies, and other customers, take power for their own consumption. Similar to LPCs, power is delivered to a delivery point, at which time the customer takes possession and TVA recognizes revenue. For all power sales, the performance obligation to deliver power is satisfied in a series over time since the sales of electricity over the term of the customer contract are a series of distinct goods that are substantially the same and have the same pattern of transfer to the customer. TVA has no continuing performance obligations subsequent to delivery. Using the output method for revenue recognition provides a faithful depiction of the transfer of electricity as customers obtain control of the power and benefit from its use at delivery. Additionally, TVA has an enforceable right to consideration for energy delivered at any discrete point in time and will recognize revenue at an amount that reflects the consideration to which TVA is entitled for the energy delivered. The amount of revenue is based on contractual prices approved by the TVA Board. Customers are invoiced monthly for power delivered as measured by meters located at the delivery points. The net transaction price is offset by certain credits available to customers that are known at the time of billing. Examples of credits include items such as economic development credits to promote growth in the Tennessee Valley and interruptible credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. Payments are typically due within approximately one month of invoice issuance.

Other Revenue

Other revenue consists primarily of wheeling and network transmission charges, sales of excess steam that is a by-product of power production, delivery point charges for interconnection points between TVA and the customer, and certain other ancillary goods or services.

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Disaggregated Revenue

During the three and nine months ended June 30, 2019, revenues generated from TVA’s electricity sales were $2.6 billion and $8.0 billion, respectively, and accounted for virtually all of TVA’s revenues. TVA’s revenues by state for the three and nine months ended June 30, 2019 and 2018 are detailed in the table below:



Operating Revenues By State (in millions)
	Three Months Ended June 30				Nine Months Ended June 30
	2019		2018		2019		2018
Alabama	$	367	$	383	$	1,146	$	1,152
Georgia	59		59		196		196
Kentucky	157		171		498		504
Mississippi	250		258		751		746
North Carolina	15		14		56		49
Tennessee	1,705		1,771		5,273		5,252
Virginia	10		11		35		37
Subtotal	2,563		2,667		7,955		7,936
Off-system sales	2		2		3		6
Revenue capitalized during pre-commercial plant operations⁽¹⁾	—		—		—		(11		)
Revenue from sales of electricity	2,565		2,669		7,958		7,931
Other revenues	39		38		121		117
Total operating revenues	$	2,604	$	2,707	$	8,079	$	8,048

Note

(1) Represents revenue capitalized during pre-commercial operations of less than $1 million and $11 million for the three and nine months ended June 30, 2018, respectively. See Note 1 — Pre-Commercial Plant Operations.

TVA’s revenues by customer type for the three and nine months ended June 30, 2019 and 2018 are detailed in the table below:



Operating Revenues by Customer Type (in millions)
	Three Months Ended June 30				Nine Months Ended June 30
	2019		2018		2019		2018
Revenue from sales of electricity
Local power companies	$	2,366	$	2,464	$	7,347	$	7,344
Industries directly served	168		172		521		506
Federal agencies and other	31		33		90		92
Revenue capitalized during pre-commercial plant operations⁽¹⁾	—		—		—		(11		)
Revenue from sales of electricity	2,565		2,669		7,958		7,931
Other revenues	39		38		121		117
Total operating revenues	$	2,604	$	2,707	$	8,079	$	8,048

Note

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The number of LPCs with the contract arrangements described below, the revenues derived from such arrangements for the three and nine months ended June 30, 2019, and the percentage of TVA’s total operating revenues for the three and nine months ended June 30, 2019 represented by these revenues are summarized in the tables below:



TVA Local Power Company Contracts At June 30, 2019
Contract Arrangements⁽¹⁾	Number of LPCs	Sales to LPCs in the Three Months Ended June 30, 2019 (in millions)		Percentage of Total Operating Revenues in the Three Months Ended June 30, 2019
20-year termination notice	3	$	28	1.1	%
15-year termination notice	11	112		4.3	%
12-year termination notice	1	6		0.2	%
10-year termination notice	52	822		31.6	%
6-year termination notice	1	11		0.4	%
5-year termination notice	86	1,387		53.3	%
Total	154	$	2,366	90.9	%

Note

(1) Ordinarily, the LPCs and TVA have the same termination notice period; however, in contracts with five of the LPCs with five-year termination notices, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority). Two of the LPCs have five-year termination notices or a shorter period if any act of Congress, court decision, or regulatory change requires or permits that election.



TVA Local Power Company Contracts At June 30, 2019
Contract Arrangements⁽¹⁾	Number of LPCs	Sales to LPCs in the Nine Months Ended June 30, 2019 (in millions)		Percentage of Total Operating Revenues in the Nine Months Ended June 30, 2019
20-year termination notice	3	$	96	1.2	%
15-year termination notice	11	362		4.5	%
12-year termination notice	1	19		0.2	%
10-year termination notice	52	2,536		31.4	%
6-year termination notice	1	36		0.4	%
5-year termination notice	86	4,298		53.2	%
Total	154	$	7,347	90.9	%

Note

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 10-year termination notice period, respectively. Sales to MLGW and NES each accounted for 8 percent of TVA’s total operating revenues during the nine months ended June 30, 2019.

Contract Balances

Contract assets represent an entity’s right to consideration in exchange for goods and services that the entity has transferred to customers. TVA does not have any material contract assets as of June 30, 2019.

Contract liabilities represent an entity’s obligations to transfer goods or services to customers for which the entity has received consideration (or an amount of consideration is due) from the customers. These contract liabilities are primarily related to upfront consideration received prior to the satisfaction of the performance obligation.

Energy Prepayment Obligations. In 2004, TVA and its largest customer, Memphis Light, Gas and Water Division ("MLGW"), entered into an energy prepayment agreement under which MLGW prepaid TVA $1.5 billion for the future costs of electricity to be delivered by TVA to MLGW over a period of 15 years. TVA accounted for the prepayment as unearned revenue and reported the obligation to deliver power under this arrangement as Energy prepayment obligations and Current portion of energy prepayment obligations on the September 30, 2018, Consolidated Balance Sheets. TVA recognized approximately $100 million of noncash revenue in each year of the arrangement as electricity was delivered to MLGW based on the ratio of units of kilowatt hours delivered to total units of kilowatt hours under contract. At June 30, 2019, $1.5 billion had been recognized as

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noncash revenue on a cumulative basis during the life of the agreement, $25 million of which was recognized as noncash revenue and a corresponding reduction in the balance of Energy prepayment obligations during the three months ended June 30, 2018. There was no recognized noncash revenue during the three months ended June 30, 2019. During the nine months ended June 30, 2019 and 2018, $10 million and $75 million, respectively, were recognized as noncash revenue and a corresponding reduction in the balance of Energy prepayment obligations. Discounts to account for the time value of money, which were recorded as a reduction to electricity sales, amounted to $12 million for the three months ended June 30, 2018. There were no discounts to account for the time value of money during the three months ended June 30, 2019. Discounts to account for the time value of money, which were recorded as a reduction to electricity sales, amounted to $4 million and $34 million for the nine months ended June 30, 2019 and 2018, respectively.

Economic Development Incentives. Under certain economic development programs, TVA offers incentives to existing and potential power customers in certain business sectors that make multi-year commitments to invest in the Tennessee Valley. TVA records those incentives as reductions of revenue. Incentives recorded as a reduction to revenue were $76 million and $70 million during the three months ended June 30, 2019, and 2018, respectively. Incentives recorded as a reduction to revenue were $231 million and $206 million during the nine months ended June 30, 2019, and 2018, respectively. Incentives that have been approved but have not been paid are recorded in Accounts payable and accrued liabilities and Other long-term liabilities in the Consolidated Balance Sheets. At June 30, 2019 and September 30, 2018, the outstanding unpaid incentives were $154 million and $145 million, respectively. These incentives may be subject to clawback provisions if the customers fail to meet certain program requirements.

17. Other Income (Expense), Net

Income and expenses not related to ~~TVA’s~~TVA's operating activities are summarized in the following table:

Other Income (Expense), Net
Three Months Ended
December 31,
2017 2016
Interest income $ 6
$ 6
External services 4
3
Gains (losses) on investments 2
—
Miscellaneous —
3
Total other income (expense), net $ 12
$ 12

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Other Income (Expense), Net
	Three Months Ended June 30				Nine Months Ended June 30
	2019		2018		2019		2018
Bellefonte deposit	$	—	$	—	$	21	$	—
Interest income	7		6		19		17
External services	3		2		9		10
Gains (losses) on investments	3		1		2		4
Miscellaneous	1		2		1		3
Total Other income (expense), net	$	14	$	11	$	52	$	34

During the three months ended June 30, 2019, Other income (expense), net increased $3 million primarily driven by $2 million of unrealized gains on the SERP and DCP investments and an increase of $1 million related to interest income during the quarter. During the nine months ended June 30, 2019, Other income (expense), net increased $18 million primarily driven by $21 million of other income related to a deposit liability received by TVA as a down payment on the sale of Bellefonte. The purchaser, Nuclear Development, LLC, failed to fulfill the requirements of the sales contract with respect to obtaining NRC approval of the transfer of required nuclear licenses and payment of the remainder of the selling price before the November 30, 2018, closing date. Partially offsetting this increase was $2 million of unrealized losses on the SERP and DCP investments.

~~16.~~18. Benefit Plans

TVA sponsors a qualified defined benefit ~~pension~~ plan ("pension plan") that covers most of its full-time employees hired before July 1, 2014, a qualified defined contribution plan ("401(k) plan") that covers most of its full-time employees, two unfunded post-retirement health care plans that provide for non-vested contributions toward the cost of eligible retirees' medical coverage, other ~~postemployment~~post-employment benefits, such as workers' compensation, and the SERP. The pension plan and the 401(k) plan are administered by a separate legal entity, the TVA Retirement System ("TVARS"), which is governed by its own board of ~~directors (the "TVARS Board").~~directors.

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The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the three and ~~three~~nine months ended ~~December 31, 2017~~June 30, 2019 and ~~2016~~2018, were as follows:


Components of TVA’s Benefit Plans
Components of TVA's Benefit Plans⁽¹⁾													Components of TVA's Benefit Plans⁽¹⁾
	For the Three Months Ended December 31												For the Three Months Ended June 30												For the Nine Months Ended June 30
	Pension Benefits						Other Post-Retirement Benefits						Pension Benefits						Other Post-Retirement Benefits						Pension Benefits						Other Post-Retirement Benefits
	2017			2016			2017			2016			2019			2018			2019			2018			2019			2018			2019			2018
Service cost	$	14		$	17		$	4		$	5		$	11		$	13		$	2		$	4		$	33		$	40		$	8		$	11
Interest cost	118			116			5			5			125			118			5			5			374			355			14			14
Expected return on plan assets	(120		)	(114		)	—			—			(119		)	(119		)	—			—			(358		)	(358		)	—			—
Amortization of prior service credit	(25		)	(25		)	(6		)	(6		)	(25		)	(25		)	(6		)	(5		)	(74		)	(74		)	(18		)	(16		)
Recognized net actuarial loss	103			116			2			3			84			103			1			1			252			307			3			5
Total net periodic benefit cost as actuarially determined	90			110			5			7			76			90			2			5			227			270			7			14
Amount capitalized due to actions of regulator	(14		)	(34		)	—			—
Amount expensed (capitalized) due to actions of regulator													—			(13		)	—			—			1			(40		)	—			—
Total net periodic benefit cost	$	76		$	76		$	5		$	7		$	76		$	77		$	2		$	5		$	228		$	230		$	7		$	14

Note

(1) The components of net benefit cost other than the service cost component are included in Other net periodic benefit cost in the Consolidated Statements of Operations.

~~As of October 1, 2016, TVARS’s Rules and Regulations require TVA to contribute to the~~TVA's minimum required pension plan the greater of the minimum contribution calculated by TVARS's actuary or $300 million for a period of 20 years or until the plan has reached a fully funded status if sooner than 20 years. The minimum required contribution for ~~2018~~2019 is $300 million. ~~As of December 31, 2017,~~ TVA ~~had contributed $75~~contributes $25 million per month to TVARS and ~~expects to contribute the~~as of June 30, 2019, had contributed $225 million. The remaining ~~$225~~$75 million will be contributed by September 30, ~~2018. TVA contributed $800 million to TVARS in 2017, though~~2019. For the ~~minimum required contribution was $300 million.~~nine months ended June 30, 2019, TVA also contributed ~~$23 million and $20~~$64 million to the 401(k) plan ~~during~~and $28 million (net of $3 million in rebates) to the ~~three~~other post-retirement plans. TVA has contributed $7 million to the SERP for the nine months ended December 31, 2017 and 2016, respectively. TVA does not separately set aside assets to fund its other post-retirement benefit plans, but rather funds such benefits on an as-paid basis. TVA provided approximately $12 million and $20 million, net of rebates and subsidies, to other post-retirement benefit plans for the three months ended December 31, 2017 and 2016, respectively. TVA includes its cash contributions to the pension plan in the rate-making formula; accordingly, TVA recognizes pension costs as regulatory assets to the extent that the amount calculated under GAAP as pension expense differs from the amount TVA contributes to the pension plan.June 30, 2019.

~~17.~~19. Contingencies and Legal Proceedings

Contingencies

Nuclear Insurance. Section 170 of the Atomic Energy Act, commonly known as the Price-Anderson Act, provides a

layered framework of protection to compensate for liability claims of members of the public for personal injury and property

damages arising from a nuclear event in the ~~United States. For the first layer, all~~U.S. This protection consists of ~~the Nuclear Regulatory Commission ("NRC") nuclear plant licensees, including TVA, purchase $450 million~~two layers of ~~nuclear liability~~coverage:

The primary level is private insurance ~~from~~underwritten by American Nuclear Insurers ("ANI") and provides public liability insurance coverage of $450 million for each ~~plant with~~operating reactor. If this amount is not sufficient to cover claims arising from an ~~operating license. Funds for~~accident, the second ~~layer,~~level, Secondary Financial Protection, applies.

Within the Secondary Financial ~~Program, would come from an assessment~~Protection level, the owner of each nuclear reactor has a contingent obligation to pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, regardless of proximity to the incident of fault, up to ~~$127~~a maximum of approximately $138 million ~~from~~per reactor per incident. With TVA’s seven reactors, the ~~licensees of each of the 102 NRC licensed reactors in the United States. The assessment for any nuclear accident would be limited to $19~~maximum total contingent obligation per incident is $963 million. This retrospective premium is payable at a rate currently set at approximately $20 million per year per ~~unit. American Nuclear Insurers, under a contract with the NRC, administers~~incident per reactor. Currently, 98 reactors are participating in the Secondary Financial ~~Program. With its seven licensed units, TVA could be required to pay~~Protection program.

In the event that a ~~maximum of $891 million per~~ nuclear ~~incident, but it~~power plant event results in third-party damages, the primary level provided by ANI combined with the Secondary Financial Protection would ~~have to pay no more than $133 million per incident~~provide approximately $14.0 billion in any one year. When the contributions of the nuclear plant licensees are added to the insurance proceeds of $450 million, over $13.0 billion, including a five percent surcharge for legal expenses, would be available. Under the Price-Anderson Act, if the first two layers are exhausted, the U.S. Congress is required to take action to provide additional funds to cover the additional losses.coverage.

Federal law requires that each NRC power reactor licensee obtain property insurance from private sources to cover the

cost of stabilizing or shutting down a reactor after an accident. TVA carries property, decommissioning, and decontamination

insurance from Nuclear Electric Insurance Limited ("NEIL"), totaling $5.1 billion for its licensed nuclear plants with up to $2.1 billion available for a loss at any one site. Some of this insurance may require the payment of retrospective premiums up to a

maximum of approximately ~~$126~~$139 million.

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TVA purchases accidental outage (business interruption) insurance for ~~TVA’s~~TVA's nuclear sites from NEIL. In the event that an accident covered by this policy takes a nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA, after a waiting period, an indemnity (a set dollar amount per week) up to a maximum indemnity of $490 million per unit. This insurance policy may require the payment of retrospective premiums up to a maximum of approximately ~~$43~~$46 million.

Workers' Compensation. The Federal Employees' Compensation Act ("FECA") governs liability to TVA employees for service-connected injuries. TVA purchases insurance that compensates TVA for certain FECA costs. In addition, TVA sponsors an Owner Controlled Insurance Program ("OCIP") that provides workers' compensation and liability insurance for a select group

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of contractors performing maintenance, modifications, outage, and new construction activities at TVA facilities. The insurance and OCIP are subject to the terms and conditions of the relevant policies including deductibles and self-insured retentions. To the extent insurance would not provide either a partial or total recovery of the costs associated with a loss, TVA would have to recover any such costs through other means, including through power rates.

Decommissioning Costs. TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets related primarily to nuclear generating plants, coal-fired generating plants, hydroelectric generating plants/dams, transmission structures, and other property-related assets. See Note ~~10.~~11.

Nuclear Decommissioning. Provision for decommissioning costs of nuclear generating units is based on options prescribed by the NRC procedures to dismantle and decontaminate the facilities to meet the NRC criteria for license termination. At ~~December 31, 2017,~~June 30, 2019, the estimated future decommissioning cost of ~~$2.9~~$3.1 billion was included in AROs. The actual decommissioning costs may vary from the derived estimates because of, among other things, changes in current assumptions, such as the assumed dates of decommissioning, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. Utilities that own and operate nuclear plants are required to use different procedures in calculating nuclear decommissioning costs under GAAP than those that are used in calculating nuclear decommissioning costs when reporting to the NRC. The two sets of procedures produce different estimates for the costs of decommissioning primarily because of differences in the underlying assumptions.

TVA maintains a NDT to provide funding for the ultimate decommissioning of its nuclear power plants. See Note 1415 — Investment Funds. TVA monitors the value of its NDT and believes that, over the long term and before cessation of nuclear plant operations and commencement of decommissioning activities, adequate funds from investments and additional contributions, if necessary, will be available to support decommissioning. ~~TVA’s~~TVA's operating nuclear power units are licensed through various dates between 2033 - 2055, depending on the unit. It may be possible to extend the operating life of some of the units with approval from the NRC.

Non-Nuclear Decommissioning. The estimated future non-nuclear decommissioning ARO was ~~$1.5~~$2.5 billion at ~~December 31, 2017.~~June 30, 2019. 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 how costs will escalate with inflation. The actual decommissioning costs may vary from the derived estimates because of changes in current assumptions, such as the assumed dates of decommissioning, changes in regulatory requirements, changes in selected closure methodology, changes in available technology, and changes in the cost of labor, materials, and equipment.

TVA maintains an ART to help fund the ultimate decommissioning of its non-nuclear power assets. See Note ~~14.~~15. Estimates involved in determining if additional funding will be made to the ART include inflation rate, rate of return projections on the fund investments, and the planned use of other sources to fund decommissioning costs.

Environmental Matters. ~~TVA’s~~TVA's power generation activities, like those across the utility industry and in other industrial sectors, are subject to federal, state, and local environmental laws and regulations. Major areas of regulation affecting ~~TVA’s~~TVA's activities include air quality control, water quality control, and management and disposal of solid and hazardous wastes. In the future, regulations in all of these areas are expected to become more stringent. Regulations are also expected to apply to new emissions and sources, with a particular emphasis on climate change, renewable generation, and energy efficiency.

TVA has incurred, and expects to continue to incur, substantial capital and operating and maintenance costs to comply with evolving environmental requirements primarily associated with, but not limited to, the operation of ~~TVA’s~~TVA's coal-fired generating units. Environmental requirements placed on the operation of ~~TVA’s~~TVA's coal-fired and other generating units will likely continue to become more restrictive over time. Litigation over emissions or discharges from coal-fired generating units is also occurring, including litigation against TVA. Failure to comply with environmental and safety laws can result in TVA being subject to enforcement actions, which can lead to the imposition of significant civil liability, including fines and penalties, criminal sanctions, and/or the shutting down of non-compliant facilities.

TVA estimates that compliance with existing and future Clean Air Act ("CAA") requirements (excluding greenhouse gas ("GHG") requirements) could lead to costs of approximately ~~$175~~$189 million from ~~2018~~2019 to ~~2022,~~2029, which include future clean air controls, existing controls capital projects, and air operations and maintenance projects. TVA also estimates additional expenditures of $1$1.4 billion from ~~2018~~2019 to ~~2022~~2023 relating to ~~TVA’s~~TVA's ~~coal combustion residuals ("CCR")~~CCR conversion program, ~~not including costs related to any new requirements related to the Gallatin CCR facilities lawsuits,~~as well as expenditures of approximately ~~$500~~$324 million from ~~2018~~2019 to ~~2024~~2025 relating to compliance with Clean Water Act requirements. Future costs could differ from these estimates if new environmental laws or regulations become applicable to TVA or the facilities it operates, or if existing environmental laws or regulations are revised or reinterpreted. There could also be costs that cannot reasonably be predicted at this time, due to uncertainty of actions, that could increase these estimates.

Liability for releases and cleanup of hazardous substances is primarily regulated by the federal Comprehensive Environmental Response, Compensation, and Liability Act, and other federal and parallel state statutes. In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years. TVA operations at some facilities have resulted in contamination that TVA is addressing. At ~~December 31, 2017,~~June 30, 2019, and September 30, ~~2017, TVA’s~~2018, TVA's

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estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate was approximately $8$16 million and $7$12 million, respectively, on a non-discounted basis, and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets.

Potential Liability Associated with Workers’ Exposure to CCR Materials. In response to the 2008 ash spill at Kingston, TVA hired Jacobs Engineering Group, Inc. ("Jacobs") to oversee certain aspects of the cleanup. After the cleanup was completed, Jacobs was sued in the United States District Court for the Eastern District of Tennessee ("Eastern District") by employees of a contractor involved in the cleanup and family members of some of the employees. The plaintiffs alleged that Jacobs had failed to take or provide proper health precautions and misled workers about the health risks associated with exposure to coal fly ash, which is a CCR material. The plaintiffs alleged that exposure to the fly ash caused a variety of significant health issues and illnesses, including in some cases death. The case was split into two phases, with the first phase considering, among other issues, general causation and the second determining specific causation and damages. On November 7, 2018, a jury hearing the first phase returned a verdict in favor of the plaintiffs, including determinations that Jacobs failed to adhere to its contract with TVA or the Site Wide Safety and Health Plan in place; Jacobs failed to provide reasonable care to the plaintiffs; and Jacobs’s failures were capable of causing a list of medical conditions, ranging from hypertension to cancer. On January 11, 2019, the district court referred the parties to mediation. Depending on the outcome of mediation, the litigation will proceed to the second phase on the question of whether Jacobs’s failures did in fact cause the plaintiffs’ alleged injuries and damages.

On May 13, 2019, an additional group of contractor employees and family members filed suit against Jacobs in the Circuit Court for Roane County, Tennessee. These plaintiffs have raised similar claims to those litigated in the case referenced above.

While TVA is not a party to either of these lawsuits, TVA could be contractually obligated to reimburse Jacobs for some amounts that Jacobs is required to pay. Further, TVA will continue monitoring the litigation to determine whether this or similar cases could have broader implications for the utility industry.

Legal Proceedings

General. At ~~December 31, 2017,~~June 30, 2019, TVA had accrued ~~$18~~$14 million of probable losses with respect to Legal Proceedings. Of the accrued amount, ~~$11~~$12 million is included in Other long-term liabilities and $7$2 million is included in Accounts payable and accrued liabilities. No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected.

Environmental Agreements. In April 2011, TVA entered into two substantively similar agreements, one with the Environmental Protection Agency ("EPA") and the other with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental ~~Agreements”~~Agreements"). They became effective in June 2011. Under the Environmental Agreements, TVA committed to (1) retire on a phased schedule 18 coal-fired units with a combined summer net dependable capability of 2,200 MW, (2) control, convert, or retire additional coal-fired units with a combined summer net dependable capability of 3,500 MW, (3) comply with annual, declining emission caps for sulfur dioxide ("SO₂") and nitrogen oxide, (4) invest $290 million in certain TVA environmental projects (of which TVA had spent approximately $278 million as of June 30, 2019), (5) provide $60 million to Alabama, Kentucky, North Carolina, and Tennessee to fund environmental projects, and (6) pay civil penalties of $10 million. In exchange for these commitments, most past claims against TVA based on alleged New Source Review and associated violations were waived and cannot be brought against TVA. Future claims, including those for sulfuric acid mist and GHG emissions, can still be brought against TVA, and claims for increases in particulates can also be pursued at many of ~~TVA’s~~TVA's coal-fired units. Additionally, the Environmental Agreements do not address compliance with new laws and regulations or the cost associated with such compliance.

The liabilities related to the Environmental Agreements are included in Accounts payable and accrued liabilities and

Other long-term liabilities on the June 30, 2019, Consolidated Balance Sheet. In conjunction with the approval of the

Environmental Agreements, the TVA Board determined that it was appropriate to record TVA's obligations under the

Environmental Agreements as regulatory assets, and they are included as such on the June 30, 2019, Consolidated

Balance Sheet and will be recovered in rates in future periods. TVA has substantially completed the requirements in the

Environmental Agreements related to retiring coal-fired units or installing controls on such units.

Case Involving ~~Tennessee Valley Authority Retirement System~~Kingston Fossil Plant. ~~In March 2010, eight current~~On May 7, 2019, Roane County and ~~former participants in~~

the Cities of Kingston and ~~beneficiaries of TVARS~~Harriman (“local governments”) filed ~~suit~~a lawsuit in the ~~U.S. District~~Circuit Court for Roane County, Tennessee, against TVA and Jacobs for monetary damages and unspecified injunctive relief relating to TVA’s cleanup response to the ~~Middle District~~2008 ash spill at Kingston Fossil Plant. The local governments allege that TVA and Jacobs failed to take proper measures to mitigate environmental and health risks during the

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cleanup response and misled the ~~TVARS Board's 2009 decision~~local governments and their citizens about health and environmental risks associated with exposure to ~~amend the TVARS Rules and Regulations (“Rules”) in exchange~~coal fly ash. The local governments seek to recover monetary damages on behalf of their citizens for a $1.0 billion contribution from TVA. The changes approved by the TVARS Board (1) suspended the TVA contribution requirements for 2010 through 2013, (2) reduced the calculation for COLAs for CY 2010 through CY 2013, (3) reduced the interest crediting rate for the fixed fund accounts, and (4) increased the eligibility age to receive COLAs from age 55 to 60. The plaintiffs alleged that these changes violated their constitutional rights (due process, equal protection,personal injury and property ~~rights), violated~~loss claims, damages for lost tax revenue, damages for increased emergency and medical response costs claims, punitive damages, and unspecified injunctive relief. On June 6, 2019, TVA removed the Administrative Procedure Act, and violated the substantive and procedural components of an anti-cutback provision in the Rules. TVA and the plaintiffs filed cross motions for summary judgment. In August 2015, the court granted TVA’s motion for summary judgment and dismissed the case with prejudice. In September 2015, the plaintiffs appealed this decisionlawsuit to the ~~Sixth Circuit. On August 12, 2016,~~Eastern District. TVA has filed a motion to dismiss the Sixth Circuit held that the plaintiffs’ rights were not violated because COLAs are not vested benefits. A few other issues were remanded to the district court for further proceedings. On March 2, 2017, the district court granted TVA's motion for a judgment on the administrative record and dismissed all the remaining claims in this case. ~~The plaintiffs appealed this order, and oral argument before the Sixth Circuit was held on January 31, 2018.~~

Cases Involving Gallatin Fossil Plant CCR Facilities. TVA is a party in two lawsuits relating to alleged releases of waste materials from the CCR facilities at Gallatin. See Note 89 — Background — Lawsuit Brought by TDEC and— Lawsuit Brought by TSRA and TCWN.

~~Petitions to Intervene in~~Consent Decree Involving Colbert Fossil Plant. In May 2013, the ~~Proceeding Involving~~Alabama Department of Environmental Management

("ADEM") and TVA entered into a consent decree concerning alleged violations of the ~~Early Site Permit Application for Small Modular Reactors at TVA's Clinch River Site~~. Three environmental groups — the Southern Alliance for Clean Energy ("SACE"), Tennessee Environmental Council ("TEC"), and Blue Ridge Environmental Defense League ("BREDL") — filed petitions to intervene in the proceeding regarding the Early Site Permit ApplicationAlabama Water Pollution Control Act. The

consent decree required, among other things, that TVA ~~submitted for review by the NRC in May 2016 relating~~continue remediation efforts TVA had begun prior to the ~~potential future construction~~ suit being filed

and ~~operation~~stop using an unlined landfill after a lined landfill is approved and constructed. TVA also paid $150,000 to Alabama under this 2013 consent decree. In August 2018, the parties agreed to amend the consent decree to deal with groundwater issues identified after TVA published groundwater monitoring reports in accordance with the EPA's CCR rule. The amended consent decree requires TVA to investigate the nature and extent of ~~two or more small modular reactor units at TVA’s Clinch River site in Oak Ridge, Tennessee. On October 10, 2017,~~any groundwater contamination, develop and implement a remedy, provide semiannual status reports to ADEM, and remedy any seeps identified during inspections. TVA also paid $100,000 to Alabama under the ~~Atomic Safety~~amended consent decree. In accordance with the amended consent decree, TVA submitted to ADEM a Comprehensive Groundwater Investigation Report on May 17, 2019, and Licensing Board issued a decision admitting two contentions proffered jointly by SACE and TEC and dismissing a third. The two admitted contentions challenge the application’s environmental report. Onean Assessment of the contentions alleges that the environmental report fails to consider the possibility of a spent fuel pool fire, and the other objects to language in the environmental report regarding the technical advantages of small modular reactors. The decision also denied admission of BREDL’s one proffered contention. On November 6, 2017, TVA appealed the admission of the two contentions to the NRC.Corrective Measures on July 17, 2019.

~~Gallatin Fossil Plant Clean Air Act Permit~~Case Involving Tennessee River Boat Accident. ~~In August 2016, the Sierra Club~~On July 23, 2015, plaintiffs filed a petition with the EPA requesting that the EPA object to the CAA renewal permit issued by TDEC to TVA for operations at Gallatin. The petition alleges that the permit (1) contains compliance evaluation requirements for opacity, particulate matter, and fugitive dust that are not as stringent as required, (2) includes allowances for startup, shutdown, and malfunctions that are inconsistent with the CAA, (3) fails to include

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~~reporting requirements to ensure compliance with the Environmental Agreements, and (4) contains impermissibly high SO~~₂ ~~emission limits. On May 15, 2017, the Sierra Club filed a lawsuit~~suit in the United States District Court for the Northern District of ~~Columbia~~Alabama, seeking recovery for personal injuries sustained when the plaintiffs’ boat struck a TVA transmission line which was being raised from the Tennessee River during a repair operation. The district court dismissed the case, finding that TVA’s exercise of its discretion as a governmental entity in deciding how to ~~compel~~carry out the ~~EPA~~operation barred any liability for negligence. In August 2017, the United States Court of Appeals for the Eleventh Circuit (“Eleventh Circuit”) affirmed the decision. The plaintiffs petitioned the U.S. Supreme Court ("Supreme Court") for review of the decision, arguing that the provision of the TVA Act which allows suit to ~~act on~~be brought against TVA does not allow TVA to claim immunity for discretionary actions. On April 29, 2019, the ~~petition.~~ Supreme Court issued its opinion reversing the judgment of the Eleventh Circuit and remanding the case to the Eleventh Circuit. On July 17, 2019, the Eleventh Circuit remanded the case to the district court for further proceedings consistent with the Supreme Court’s opinion.

Case Involving Bellefonte Nuclear Plant. On November ~~17, 2017,~~30, 2018, Nuclear Development, LLC, filed suit against TVA in the United States District Court ~~ordered~~for the ~~EPA~~Northern District of Alabama. The plaintiff alleges that TVA breached its agreement to ~~respond~~sell Bellefonte to the ~~petition by January 31, 2018. While proceedings on this petition were ongoing, TDEC modified~~plaintiff. The plaintiff seeks, among other things, (1) an injunction requiring TVA to maintain Bellefonte and the ~~CAA renewal permit on November 6, 2017,~~associated NRC permits until the case is concluded, (2) an order compelling TVA to ~~address compliance~~complete the sale of Bellefonte to the plaintiff, and (3) if the court does not order TVA to complete the sale, monetary damages in excess of $30 million. On December 26, 2018, Nuclear Development, LLC, and TVA filed a joint stipulation with the ~~1-hour SO~~₂ ~~NAAQS. On November 20, 2017,~~court. Under the ~~Sierra Club~~stipulation, Nuclear Development, LLC, withdrew its request for an expedited hearing on its injunction in exchange for TVA’s agreement to continue to maintain Bellefonte in accordance with the NRC permits and to give Nuclear Development, LLC, and the court five days prior notice of any filing by TVA to terminate the permits or sell the site. TVA filed a ~~second petition requesting~~motion to dismiss the ~~EPA to object to~~case on February 4, 2019. On May 15, 2019, the ~~modified permit. On January 31, 2018, the EPA~~court denied ~~both petitions.~~TVA's motion. Trial is currently scheduled for May 2020.

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ITEM 2. ~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in millions except where noted)

Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") explains the results of operations and general financial condition of the Tennessee Valley Authority ("TVA"). The MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements and TVA's Annual Report on Form 10-K for the fiscal year ended September 30, ~~2017~~2018 (the ~~“Annual Report”~~"Annual Report").

Executive Overview

~~TVA’s~~TVA's net income for the three and nine months ended ~~December 31, 2017,~~June 30, 2019, was ~~$288~~$165 million and $829 million, respectively, as compared with net income of ~~$102~~$470 million and $1.2 billion for the same ~~period~~periods of the prior year. ~~Total operating revenue~~TVA’s service territory experienced overall milder than normal weather during the ~~first quarter~~nine months ended June 30, 2019, despite record-setting cold weather experienced during November 2018. This overall milder weather drove lower energy sales. However, revenue from sales of ~~2018 was relatively flat~~electricity increased $27 million for the nine months ended June 30, 2019, as compared to the same period of the prior year. As is often the case for electric utilities, weather is a primary driver of TVA’s sales and revenue. TVA’s service territory experienced relatively normal weather during the three months ended December 31, 2017, resulting in higher energy sales compared to the milder weather experienced during the three months ended December 31, 2016. The increased revenue from higher energy sales andyear primarily driven by the base rate adjustment that became effective October 1, ~~2017, was offset by lower fuel cost recovery.~~2018.

~~Total operating expenses decreased approximately eight percent during the first quarter of 2018 as compared to the same period of the prior year.~~ Fuel and purchased power expense decreased ~~$115~~$70 million for the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year. This decrease was primarily due to ~~lower natural gas prices~~an overall decrease in sales of electricity and ~~a change~~significant hydroelectric generation resulting from record rainfall in ~~generation mix, including significantly more hydroelectric generation.~~the second quarter of 2019. This decrease was partially offset by an increase in purchased power utilized to meet increased demand during the first quarter of 2019. Operating and maintenance

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expense ~~decreased $32~~increased $408 million for the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year. This increase was primarily ~~due~~driven by accelerated recovery of the regulatory asset for Environmental cleanup costs related to ~~a decrease~~the Kingston ash spill in accordance with the TVA Board of Directors (the "TVA Board") ratemaking authority, an increase in project write-offs and Materials and supplies inventory reserves and write-offs associated with the anticipated retirement of Paradise Fossil Plant (“Paradise”) and Bull Run Fossil Plant (“Bull Run”), and increased outage expense driven by additional planned nuclear outage days which reduced outage expense by $24 million and a decrease of $8 million for reductions in workforce related to identified efficiencies and staffing changes needed to support TVA's generating fleet.days.

~~In April 2011,~~ TVA entered into two substantively similar agreements, one with the Environmental Protection Agency ("EPA") and the other with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental Agreements”). Under the Environmental Agreements, TVAremains committed to ~~among other things, retire 18 coal-fired units, control, convert, or retire additional coal-fired units,~~planning its system in a way that ensures evolving resource portfolios remain reliable and ~~invest in certain environmental projects. During~~provide the ~~first quarter of 2018,~~most value to all customers. TVA completed several actions related to these Environmental Agreements. The installations of two selective catalytic reduction systems ("SCRs") at the Gallatin Fossil Plant ("Gallatin"), as well as the installation of scrubbers and SCRs for Units 1 and 4 at the Shawnee Fossil Plant ("Shawnee"), were completed during the first quarter of 2018. In addition, Units 1-4 of the Johnsonville Fossil Plant were retired in December 2017. With these actions, TVA has substantially completed the requirements in the Environmental Agreements relating to retiring coal-fired units or installing controls on such units, with the exception of the retirement of Units 1-3 of Allen Fossil Plant, which will occur with the completion of the Allen Combined Cycle Plant ("Allen CC"). Allen CC began pre-commercial operations in September 2017 and is expected to begin commercial operations in the spring of 2018.

In May 2017, the TVA Board approved a $300 million multi-year, strategic fiber initiative that is expected to expand TVA’s fiber capacity and improve the reliability and resiliency of the transmission system. The network expansion is expected to help meet the power system’s growing need for bandwidth as well as accommodate the integration of new, distributed energy resources ("DER"). TVA has the potential to make some surplus fiber capacity available to help local communities and rural areas attract and retain jobs in support of economic development partnerships among TVA, the Tennessee Valley states, LPCs, and other service providers. TVA continues to achieve 99.999 percent reliability in delivering energy to its customers.

Consistent with national trends, energy demand in the areas served by TVA and its LPCs has been essentially flat over the past five years. TVA anticipates this trend to continue as technological advances, consumer demand for generation and energy management technologies, and distributed energy increase. To accommodate this trend, TVA is working with its LPC customers to adjust rate structures, pricing, and programs to ensure TVA's continued strong financial health and its ability to meet customer needs. TVA also utilizes an Integrated Resource Plan ("IRP") to provide direction on how to best meet future electricity demand. ~~In 2018,~~During the third quarter of 2019, TVA ~~will begin working on an updated~~finalized the 2019 IRP, ~~that will consider~~which considered many views of the future to determine how TVA can continue to provide low-cost, reliable electricity, support environmental stewardship, and spur economic development in the Tennessee Valley over the next 20 years. The final 2019 IRP will be presented to the TVA ~~remains committed~~Board for consideration at its August 2019 meeting.

During the third quarter of 2019, TVA completed power ascension testing on the third and final phase of the extended power uprate ("EPU") project at Browns Ferry Nuclear Plant ("Browns Ferry"). The generating capacity is expected to ~~planning~~increase by an estimated 465 MW after completion of the project and sufficient run time to validate the new capacity.

TVA also continues to achieve 99.999 percent reliability in delivering energy to its ~~system~~customers. TVA's reliability and economic development efforts continued to attract and encourage the expansion of business and industries in ~~a way that ensures evolving resource portfolios remain reliable~~the Tennessee Valley, with over $8.0 billion in investments and ~~provide~~more than 58,500 jobs created or retained through the ~~most value to all customers.~~third quarter of 2019.

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Results of Operations

Sales of Electricity

The following ~~chart compares TVA’s energy~~charts compare TVA's sales ~~statistics~~of electricity for the three and nine months ended ~~December 31, 2017~~June 30, 2019 and ~~2016:~~2018:



	Sales of Electricity⁽¹⁾
Three Months Ended ~~December 31,~~June 30
	(millions of kWh)



	Sales of Electricity
Nine Months Ended June 30
	(millions of kWh)

~~Note~~

Notes

(1) ~~Includes approximately 20~~Pre-commercial generation included in the three months ended June 30, 2018, was less than 1 million kilowatt hours ("kWh") ~~and 536~~. See Note 1 — Pre-Commercial Plant Operations.

(2) Includes approximately 429 million kWh of pre-commercial generation for the ~~three~~nine months ended ~~December 31, 2017, and 2016, respectively.~~June 30, 2018. See Note 1 — Pre-Commercial Plant Operations.

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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 invary from 65 degrees Fahrenheit. During 2019, TVA transitioned degree day calculation methodologies, moving from the average temperatures of the five largest cities in TVA's service area ~~vary from 65 degrees Fahrenheit.~~

to the average temperatures of 23 stations throughout TVA's service area. This transition provides TVA with increased geographic granularity throughout its service territory and improved modeling accuracy.

Degree Days
Three Months Ended December 31,
Variation from Normal Variation from Prior Period

2017
Actual
Normal Percent Variation
2016
Actual
Normal Percent Variation Percent Change
Heating Degree Days
Three Months Ended December 31 1,267
1,302
(2.7 )% 1,002
1,302
(23.0 )% 26.4 %

Cooling Degree Days
Three Months Ended December 31 129
67
92.5 % 171
67
155.2 % (24.6 )%
Total Degree Days 1,396
1,369
2.0 % 1,173
1,369
(14.3 )% 19.0 %



	Degree Days
	Variation from Normal								Variation from Prior Period
	2019 Actual	Normal	Percent Variation		2018 Actual⁽¹⁾	Normal⁽¹⁾	Percent Variation		Percent Change
Heating Degree Days
Three Months Ended June 30	139	191	(27.2	)%	292	191	52.9	%	(52.4	)%
Nine Months Ended June 30	3,219	3,350	(3.9	)%	3,381	3,350	0.9	%	(4.8	)%

Cooling Degree Days
Three Months Ended June 30	612	565	8.3	%	706	565	25.0	%	(13.3	)%
Nine Months Ended June 30	730	617	18.3	%	809	617	31.1	%	(9.8	)%

Total Degree Days
Three Months Ended June 30	751	756	(0.7	)%	998	756	32.0	%	(24.7	)%
Nine Months Ended June 30	3,949	3,967	(0.5	)%	4,190	3,967	5.6	%	(5.8	)%

Note

(1) The prior period degree day information has been adjusted in order to incorporate a change in TVA’s current calculation of this information. Every five years this calculation is updated in order to incorporate the current 15-year period of weather history. The most recent update, to incorporate weather history for CYs 2001-2015, occurred during the first quarter of 2019.

Sales of electricity ~~increased~~decreased approximately ~~two~~five percent for the three months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year, primarily due to ~~increased~~decreased sales volume for LPCs driven ~~primarily~~ by a 2625 percent ~~increase~~decrease in ~~heating~~total degree days. ~~Partially offsetting this increase was a slight decrease in~~Additionally, sales to industries directly ~~served.~~served decreased slightly, particularly in the chemical and metal sectors.

~~Table~~Sales of ~~Contents~~

electricity decreased approximately two percent for the nine months ended June 30, 2019, as compared to the same period of the prior year, primarily due to decreased sales volume for LPCs driven by a six percent decrease in total degree days. Milder than normal weather during the months of January 2019 and February 2019 offset record-setting cold experienced during November 2018, where TVA recorded its second highest peak power demand for the month of November. Partially offsetting the decreased sales volume for LPCs, sales to industries directly served increased slightly, particularly in the polysilicon sector.

Financial Results

The following table compares operating results for the three and nine months ended ~~December 31, 2017~~June 30, 2019 and ~~2016:~~2018:


Summary Consolidated Statements of Operations	Summary Consolidated Statements of Operations						Summary Consolidated Statements of Operations
							Three Months Ended June 30						Nine Months Ended June 30
	2017		2016		Percent Change		2019		2018		Percent Change		2019		2018		Percent Change
Operating revenues	$	2,549	$	2,546	0.1	%	$	2,604	$	2,707	(3.8	)%	$	8,079	$	8,048	0.4	%
Operating expenses	1,951		2,117		(7.8	)%	2,088		1,877		11.2	%	6,206		5,727		8.4	%
Operating income	598		429		39.4	%	516		830		(37.8	)%	1,873		2,321		(19.3	)%
Other income, net	12		12		—	%	14		11		27.3	%	52		34		52.9	%
Other net periodic benefit cost							65		65		—	%	194		193		0.5	%
Interest expense, net	322		339		(5.0	)%	300		306		(2.0	)%	902		942		(4.2	)%
Net income (loss)	$	288	$	102	182.4	%
Net income							$	165	$	470	(64.9	)%	$	829	$	1,220	(32.0	)%

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Operating Revenues. Operating revenues for the three and nine months ended ~~December 31, 2017~~June 30, 2019 and ~~2016,~~2018, consisted of the following:



	Operating Revenues⁽¹⁾
Three Months Ended ~~December 31,~~June 30

~~Note~~



	Operating Revenues
Nine Months Ended June 30

Notes

(1) Excludes a contra-revenue ~~amounts~~amount of ~~approximately~~less than $1 ~~million and $14~~ million representing revenue capitalized during pre-commercial operations for the three

months ended ~~December 31, 2017 and 2016, respectively.~~June 30, 2018. See Note 1 — Pre-Commercial Plant Operations.

(2) Excludes a contra-revenue amount of approximately $11 million representing revenue capitalized during pre-commercial operations for the nine months ended June 30, 2018. See Note 1 — Pre-Commercial Plant Operations.

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~~The~~TVA's current rate structure ~~in effect~~ provides ~~price~~pricing signals intended to ~~reflect~~signal higher cost periods to serve ~~the local power company~~its customers and capture a portion of ~~TVA ("LPCs") and their end-use customers. Under this structure, weather can positively or negatively impact both volume and effective rates because the wholesale~~TVA’s fixed costs in fixed charges. The structure includes ~~two~~three base revenue components: time of use demand charges, time of use energy charges, and a ~~demand~~grid access charge ~~and an energy charge.~~("GAC"). The demand ~~charge is~~charges are based onupon the customer's peak monthly usage and ~~increases~~increase as the peak increases. The energy ~~charge is~~charges are based on ~~the~~time differentiated kWh used by the customer. Both of these components can be significantly impacted by weather. The GAC, which was implemented in October 2018, captures a portion of fixed costs and will be offset by a corresponding reduction to the energy rates. The GAC will also reduce the impact of weather variability to the overall rate structure. Recognizing the need for flexibility, all LPCs were presented with the option to implement the GAC in October 2018 or defer the implementation until October 2019. Seventy-nine LPCs elected to implement in October 2018, while the remaining 75 have elected to implement wholesale changes in October 2019. In addition to base revenues, the rate structure also 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~~equivalents") associated with the fuel cost adjustments.

~~Table of Contents~~

The changes in revenue components ~~of operating revenues~~ for the three and nine months ended ~~December 31, 2017,~~June 30, 2019, compared to the three andnine months ended ~~December 31, 2016,~~June 30, 2018, are ~~as follows:~~summarized below:


Changes in Revenue Components								Changes in Revenue Components
	Three Months Ended December 31,							Three Months Ended June 30										Nine Months Ended June 30
	2017		2016		Change			2019			2018				Change			2019			2018				Change
Base revenue⁽¹⁾	$	1,837	$	1,716	$	121
Base revenue
Energy revenue								$	1,171		$	1,271		⁽¹⁾	$	(100	)	$	3,596		$	3,796		⁽¹⁾	$	(200	)
Demand revenue								849			824				25			2,565			2,464				101
Grid access charge								64			—				64			193			—				193
Other charges and credits⁽²⁾								(144		)	(158		)		14			(460		)	(483		)		23
Total base revenue								1,940			1,937				3			5,894			5,777				117
Fuel cost recovery	670		791		(121		)	623			730				(107		)	2,061			2,148				(87		)
Off-system sales	2		1		1			2			2				—			3			6				(3		)
Revenue from sales of electricity	2,509		2,508		1			2,565			2,669				(104		)	7,958			7,931				27
Other revenue	40		38		2			39			38				1			121			117				4
Total operating revenues	$	2,549	$	2,546	$	3		$	2,604		$	2,707			$	(103	)	$	8,079		$	8,048			$	31

~~Note~~Notes

(1) Includes the impact of revenue capitalized during pre-commercial operations of ~~approximately~~less than $1 million and ~~$14~~approximately $11 million for the three and nine months ended June 30, 2018, respectively. See Note 1 — Pre-Commercial Plant Operations.

(2) Includes economic development credits to promote growth in the Tennessee Valley, hydro preference credits for residential customers of LPCs, and interruptible credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. See Note 16 — Revenue from Sales of Electricity.

Operating revenues decreased $103 million for the three months ended ~~December 31, 2017 and 2016, respectively. See Note 1 —Pre-Commercial Plant Operations~~.

~~Operating revenues increased $3 million for the three months ended December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year, primarily due to a ~~$121~~$107 million decrease in fuel cost recovery revenues. The $107 million decrease in fuel cost recovery revenues was driven by a $73 million decrease attributable to lower fuel rates and a $34 million decrease attributable to lower energy sales. Base revenue was slightly higher driven by an increase of $97 million attributable to higher effective rates resulting from the base rate adjustment that became effective October 1, 2018, offset by a $94 million decrease attributable to lower sales volume.

Operating revenues increased $31 million for the nine months ended June 30, 2019, as compared to the same period of the prior year, primarily due to a $117 million increase in base revenue. The ~~$121~~$117 million increase in base revenue was driven by an increase of ~~$54~~$239 million resulting from higher sales volume during the quarter ended December 31, 2017, as compared to the same period of the prior year. In addition, approximately $54 million of the increase in base revenue was attributable to higher effective rates ~~during the three months ended December 31, 2017, as compared to the same period of the prior year,~~ resulting from the base rate adjustment that became effective October 1, ~~2017. The base~~2018, partially offset by a $133 million decrease attributable to lower sales volume. Milder than normal weather during the months of January 2019 and February 2019 offset record-setting cold experienced during November 2018, where TVA recorded its second highest peak power demand for the month of November. Further, there were no pre-commercial plant operations during the nine months ended June 30, 2019. Therefore, revenue ~~increase was also due in part to approximately $13 million less capitalization~~capitalized as a result of ~~revenue resulting from~~ pre-commercial generation during the ~~three~~nine months ended ~~December 31, 2017, as compared~~June 30, 2018, contributed $11 million to the ~~same period of~~additional base revenue for the ~~prior year.~~nine months ended June 30, 2019. See Note 1 — Pre-Commercial Plant Operations. Partially offsetting these increases was ~~a $121 million decrease in fuel cost recovery revenues. The $121~~an $87 million decrease in fuel cost recovery revenues, ~~reflects~~driven by a ~~$137~~$44 million decrease attributable to lower energy sales and a $43 million decrease attributable to lower fuel rates partially offset by a $16 million increase attributable to higher energy sales. The lower fuel rates experienced were primarily driven by lower market prices for natural gas and a change in the mixrates.

Table of ~~generation resources, including significantly more hydroelectric generation.~~Contents

Operating Expenses. Operating expense components as a percentage of total operating expenses for the three and nine months ended ~~December 31, 2017~~June 30, 2019 and ~~2016,~~2018, consisted of the following:

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Three Months Ended June 30, 2019, Compared to Three Months Ended June 30, 2018

The following ~~chart summarizes~~table shows TVA's net generation and purchased power ~~in millions of kWh~~ by generating source for the periods indicated:

																					Power Supply from TVA-Operated Generation Facilities and Purchased Power
	Three Months Ended December 31,										Three Months Ended June 30
	2017			2016							2019			2018
	kWh (millions)	Percent of Power Supply		kWh (millions)	Percent of Power Supply		Change		Percentage Change		kWh (millions)	Percent of Power Supply		kWh (millions)	Percent of Power Supply		Change		Percentage Change
Coal-fired	7,541	20	%	10,190	27	%	(2,649	)	(26	)%	5,774	15	%	7,694	19	%	(1,920	)	(25	)%
Nuclear⁽¹⁾	16,154	42	%	15,254	41	%	900		6	%	16,438	44	%	15,665	40	%	773		5	%
Hydroelectric	3,387	9	%	1,692	5	%	1,695		100	%	3,503	9	%	3,499	9	%	4		—	%
Natural gas and/or oil-fired⁽²⁾⁽¹⁾	6,037	16	%	5,328	14	%	709		13	%	7,129	19	%	7,574	19	%	(445	)	(6	)%
Total TVA-operated generation facilities⁽³⁾⁽²⁾	33,119	87	%	32,464	87	%	655		2	%	32,844	87	%	34,432	87	%	(1,588	)	(5	)%
Purchased power (non-renewable)⁽⁴⁾⁽³⁾	2,877	8	%	3,147	9	%	(270	)	(9	)%	2,853	8	%	3,322	8	%	(469	)	(14	)%
Purchased power (renewable)⁽⁵⁾⁽⁴⁾	1,927	5	%	1,505	4	%	422		28	%	2,081	5	%	1,875	5	%	206		11	%
Total purchased power	4,804	13	%	4,652	13	%	152		3	%	4,934	13	%	5,197	13	%	(263	)	(5	)%
Total power supply	37,923	100	%	37,116	100	%	807		2	%	37,778	100	%	39,629	100	%	(1,851	)	(5	)%

Notes

(1) The ~~nuclear~~natural gas and/or oil-fired amount ~~for the three months ended December 31, 2016,~~ includes ~~approximately 494~~less than 1 million kWh of pre-commercial generation at ~~Watts Bar Nuclear~~the Allen Combined Cycle Plant ("~~Watts Bar"~~Allen CC") ~~Unit 2.~~for the three months ended June 30, 2018. See Note 1 — Pre-Commercial Plant Operations.

(2) The natural gas and/or oil-fired amount includes approximately 20 million kWh and 42 million kWh of pre-commercial generation at Allen and Paradise Combined Cycle Plants for the three months ended December 31, 2017 and 2016, respectively. See Note 1 — ~~Pre-Commercial Plant Operations~~.

~~(3)~~ Generation from TVA-owned renewable resources ~~(non-hydro)~~(non-hydroelectric) is less than one percent for all periods shown and therefore is not represented in the table above.

~~(4) Purchased power (non-renewable) includes~~(3) Includes generation from Caledonia Combined Cycle Plant, which is currently a leased facility operated by TVA. Generation from Caledonia Combined Cycle Plant was ~~1,089~~882 million kWh and ~~1,035~~695 million kWh for the three months ended ~~December 31, 2017~~June 30, 2019 and ~~2016,~~2018, respectively.

~~(5) Purchased power (renewable) includes~~(4) Includes power purchased from the following renewable sources: hydroelectric, solar, wind, and cogeneration.

Fuel

Fuel expense decreased ~~$93~~$86 million for the three months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior ~~year. The impact~~year, due to decreases of ~~lower effective~~$33 million in the fuel ~~rates,~~rate driven by lower ~~market~~commodity prices ~~for natural gas~~ and ~~changes~~$22 million in ~~the mix~~lower fuel volume resulting from lower sales of ~~generation resources, including significantly more hydroelectric generation,~~electricity. In addition, variances in fuel rate recovery contributed ~~$103~~$31 million to the decrease. As an indication of the general market direction, the average Henry Hub natural gas spot price for the three months ended December 31, 2017, was approximately four percent lower than the price for the same period of the prior year. Partially offsetting this decrease was a $10 million increase in fuel expense driven by a two percent increase in generation from TVA operated resources.

Purchased Power

Purchased power expense decreased ~~$22~~$15 million for the three months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year. This ~~change~~ was primarily driven by ~~increased generation~~a $12 million decrease in volume resulting from ~~TVA operated hydroelectric, nuclear,~~lower overall demand and ~~natural gas assets, resulting~~an $11 million decrease in ~~a $29 million decrease.~~fuel rate recovery. Partially offsetting ~~this decrease~~these decreases was an increase of $7$8 million ~~related to overall higher demand and an increase~~ in the price of purchased ~~power renewables utilized to meet customer preferences.~~power.

Operating and Maintenance

Operating and maintenance expense ~~decreased $32~~increased $141 million for the three months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year. This ~~decline~~ was primarily driven by an increase of $108 million due to ~~a decrease~~accelerated recovery of the regulatory asset for Environmental cleanup costs related to the Kingston ash spill in accordance with the TVA Board's ratemaking authority and $25 million for project write-offs and Materials and supplies inventory reserves related to the anticipated retirements of Bull Run and Paradise. Additionally, there was an increase in planned nuclear outage days which ~~reduced~~increased outage expense by ~~$24 million, and a decrease of $8 million for reductions in workforce related to identified efficiencies and staffing changes needed to support TVA's generating fleet.~~$18 million.

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Depreciation and Amortization

Depreciation and amortization expense ~~decreased $14~~increased $172 million for the three months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year. ~~The retirement~~This was primarily driven by accelerated depreciation expense of ~~Paradise Units 1 and 2 in April 2017 contributed $29~~$225 million due to the ~~decrease. Partially offsetting this decrease was an~~decision to accelerate the retirements of Bull Run and Paradise. The increase ~~of approximately $15~~also included $5 million from ~~net~~new additions to Completed ~~plant, including $6~~plant. Partially offsetting these increases was a decrease of $58 million ~~for~~of prior year accelerated amortization of Deferred nuclear generating units and Nuclear training costs regulatory assets due to excess revenues collected in 2018 in accordance with the ~~Paradise Combined Cycle Plant, which commenced commercial operations in April 2017.~~

TVA Board's ratemaking authority.

Tax Equivalents

Tax equivalents expense decreased $5$1 million for the three months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year. This change primarily reflects a decrease in the accrued tax equivalent expense related to the fuel cost adjustment mechanism. The accrued tax equivalent expense is equal to five percent of the fuel cost adjustment mechanism revenues and decreased for the three months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year.

Nine Months Ended June 30, 2019, Compared to Nine Months Ended June 30, 2018

The following table shows TVA's net generation and purchased power by generating source for the periods indicated:



Power Supply from TVA-Operated Generation Facilities and Purchased Power
	Nine Months Ended June 30
	2019			2018
	kWh (millions)	Percent of Power Supply		kWh (millions)	Percent of Power Supply		Change		Percentage Change
Coal-fired	17,971	16	%	22,226	19	%	(4,255	)	(19	)%
Nuclear	46,890	41	%	47,768	41	%	(878	)	(2	)%
Hydroelectric	13,162	11	%	10,444	9	%	2,718		26	%
Natural gas and/or oil-fired⁽¹⁾	20,690	18	%	21,783	18	%	(1,093	)	(5	)%
Total TVA-operated generation facilities⁽²⁾	98,713	86	%	102,221	87	%	(3,508	)	(3	)%
Purchased power (non-renewable)⁽³⁾	10,299	9	%	9,645	8	%	654		7	%
Purchased power (renewable)⁽⁴⁾	6,202	5	%	5,982	5	%	220		4	%
Total purchased power	16,501	14	%	15,627	13	%	874		6	%
Total power supply	115,214	100	%	117,848	100	%	(2,634	)	(2	)%

Notes

(1) The natural gas and/or oil-fired amount includes 429 million kWh of pre-commercial generation at the Allen CC for the nine months ended June 30, 2018. See Note 1 — Pre-Commercial Plant Operations.

(2) 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.

(3) Includes generation from Caledonia Combined Cycle Plant, which is currently a leased facility operated by TVA. Generation from Caledonia Combined Cycle Plant was 2,887 million kWh and 2,762 million kWh for the nine months ended June 30, 2019 and 2018, respectively.

(4) Includes power purchased from the following renewable sources: hydroelectric, solar, wind, and cogeneration.

Fuel

Fuel expense decreased $114 million for the nine months ended June 30, 2019, as compared to the same period of the prior year. Lower effective fuel rates contributed $95 million to the decrease resulting from lower commodity prices and significantly more hydroelectric generation. Lower fuel volume contributed $50 million to the decrease driven by lower sales of electricity. Partially offsetting these decreases was an increase of $31 million driven by variances in fuel rate recovery resulting from the winter peaks experienced in the second quarter of 2018 compared to the overall milder than normal weather in the second quarter of 2019.

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Purchased Power

Purchased power expense increased $44 million for the nine months ended June 30, 2019, as compared to the same period of the prior year. This was primarily due to a $41 million increase in the volume of purchased power and a $14 million increase in fuel rate recovery resulting from the winter peaks experienced in the second quarter of 2018 compared to the overall milder than normal weather in the second quarter of 2019. Partially offsetting these increases was a decrease of $11 million in the price of purchased power.

Operating and Maintenance

Operating and maintenance expense increased $408 million for the nine months ended June 30, 2019, as compared to the same period of the prior year. This was primarily driven by an increase of $162 million due to accelerated recovery of the regulatory asset for Environmental cleanup costs related to the Kingston ash spill in accordance with the TVA Board's ratemaking authority and $160 million for project write-offs and Materials and supplies inventory reserves related to the anticipated retirements of Bull Run and Paradise. Additionally, there was an increase in planned nuclear outage days which increased outage expense by $66 million.

Depreciation and Amortization

Depreciation and amortization expense increased by $124 million for the nine months ended June 30, 2019, as compared to the same period of the prior year. This was primarily driven by an increase of $341 million of accelerated depreciation expense due to the decision to accelerate the retirements of Bull Run and Paradise. The increase also included $19 million from new additions to Completed plant. Partially offsetting this increase was a decrease of $176 million of prior year accelerated amortization of Deferred nuclear generating units and Nuclear training costs regulatory assets due to excess revenues collected in 2018 in accordance with the TVA Board's ratemaking authority and a decrease of $59 million due to the retirements of certain units at Allen Fossil Plant and Johnsonville Fossil Plant in 2018.

Tax Equivalents

Tax equivalents expense increased $17 million for the nine months ended June 30, 2019, as compared to the same period of the prior year. This change is primarily driven by an increase in TVA's overall revenue in 2018, which is used as the basis for calculating tax equivalent expense.

Interest Expense. Interest expense and interest rates for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2019 and ~~2016,~~2018, were as follows:

																									Interest Expense and Rates
	Three Months Ended December 31,								Three Months Ended June 30								Nine Months Ended June 30
	2017			2016			Percent Change		2019			2018			Percent Change		2019			2018			Percent Change
Interest expense⁽¹⁾	$	322		$	339		(5.0	)%	$	300		$	306		(2.0	)%	$	902		$	942		(4.2	)%

Average blended interest rate	4.94		%	5.15		%	(4.1	)%
Average blended debt balance⁽²⁾									$	23,117		$	24,701		(6.4	)%	$	23,449		$	25,074		(6.5	)%

Average blended interest rate⁽³⁾									4.94		%	4.74		%	4.2	%	4.90		%	4.81		%	1.9	%

~~Note~~Notes

(1) ~~Interest~~Total interest expense includes amortization of debt discounts, issuance, and reacquisition costs, net.

(2) Includes average balances of long-term power bonds, debt of variable interest entities ("VIE"), and discount notes.

(3) Includes interest on long-term power bonds, debt of VIE, and discount notes.

~~Interest~~Total interest expense decreased ~~$17~~$6 million for the three months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior ~~year,~~year. This decrease was primarily driven by $13 million of lower long-term interest expense due to a lower average balances on long-term debt. Partially offsetting this decrease was an increase of $6 million due to higher average rates on long-term debt.

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Total interest ~~rate~~expense decreased $40 million for the nine months ended June 30, 2019, as compared to the same period of the prior year. This decrease was primarily driven by $50 million of lower long-term interest expense due to lower average balances on long-term debt and a$2 million of lower long-term interest expense due to lower average ~~balance~~rates on long-term debt. Partially offsetting these decreases was an increase of ~~long-term~~$10 million in short-term interest due primarily to higher average rates on short-term debt.

Other Income (Expense), Net. During the three months ended June 30, 2019, Other income (expense), net increased $3 million primarily driven by $2 million of unrealized gains on the Supplemental Executive Retirement Plan ("SERP") and Deferred Compensation Plan ("DCP") investments and an increase of $1 million related to interest income during the quarter. During the nine months ended June 30, 2019, Other income (expense), net increased $18 million primarily driven by $21 million of other income related to a deposit liability received by TVA as a down payment on the sale of Bellefonte. The purchaser, Nuclear Development, LLC, failed to fulfill the requirements of the sales contract with respect to obtaining Nuclear Regulatory Commission ("NRC") approval of the transfer of required nuclear licenses and payment of the remainder of the selling price before the November 30, 2018, closing date. See Key Initiatives and Challenges — Surplus Property — Bellefonte Nuclear Plant for additional details. Partially offsetting this increase was $2 million of unrealized losses on the SERP and DCP investments.

Liquidity and Capital Resources

Sources of Liquidity

~~To meet cash needs and contingencies,~~ TVA depends on various sources of ~~liquidity. TVA’s~~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. ~~Current liabilities may exceed current assets from time to time in part because TVA uses~~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 ~~fund short-term cash needs, as well as to pay scheduled maturities and other redemptions of long-term debt. The daily balance~~maintain a target range of cash and cash equivalents ~~maintained is based~~ on ~~near-term expectations for cash expenditures and funding needs.~~hand.

In addition to cash from operations and proceeds from the issuance of short-term and long-term debt, TVA's sources of liquidity include a $150 million credit facility with the United States Department of the Treasury ("U.S. Treasury"), four long-term revolving credit facilities totaling $2.7 billion, and proceeds from other financings. See Note 1112 — Credit Facility Agreements. Other financing arrangements may include sales of receivables, loans, and other assets.

The TVA Act authorizes TVA to issue bonds, notes, or other evidences of indebtedness ~~("Bonds"~~(collectively, "Bonds") in an amount not to exceed $30.0 billion outstanding at any time. ~~See Note 11~~— ~~Debt Securities Activity~~.~~Bonds~~Power bonds outstanding, excluding unamortized discounts and premiums and net exchange ~~losses~~gains from foreign currency transactions, at ~~December 31, 2017~~June 30, 2019, were ~~$24.2~~$22 billion (including current maturities). The balance of Bonds outstanding directly affects ~~TVA’s~~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 7)8), could provide supplementary funding if needed. Currently, TVA believes that it has adequate capability to fund its ongoing operational liquidity needs and make planned capital investments over the next decade through a combination of Bonds, additional power revenues through power rate increases, cost reductions, or other ways. See Lease Financings below, Note 7,8, and Note 1112 for additional information.

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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.

Debt Securities. ~~TVA’s~~TVA's Bonds are not obligations of the United States, and the United States does not guarantee the payments of principal or interest on Bonds. ~~TVA’s~~TVA's Bonds consist of power bonds and discount notes. Power bonds have maturities of between one and 50 years. At June 30, 2019, the average maturity of long-term power bonds was 16.36 years, and the 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 ~~December 31, 2017.~~June 30, 2019. TVA also had secured notes outstanding at June 30, 2019, that were assumed in a prior year asset acquisition. See Lease Financings below, Note 7,8, and Note 1112 for additional information.

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The following table provides additional information regarding TVA's short-term ~~borrowings.~~borrowings:

																															Short-Term Borrowing Table
	At December 31, 2017			Three Months Ended December 31, 2017			At December 31, 2016			Three Months Ended December 31, 2016			At June 30, 2019			Three Months Ended June 30, 2019			Nine Months Ended June 30, 2019			At June 30, 2018			Three Months Ended June 30, 2018			Nine Months Ended June 30, 2018
Gross Amount Outstanding (at End of Period) or Average Gross Amount Outstanding (During Period)
Discount Notes	$	2,722		$	2,084		$	2,027		$	1,391		$	1,445		$	1,475		$	1,783		$	1,887		$	1,990		$	2,079
Weighted Average Interest Rate
Discount Notes	1.246		%	1.110		%	0.499		%	0.330		%	2.248		%	2.410		%	2.350		%	1.863		%	1.760		%	1.400		%
Maximum Month-End Gross Amount Outstanding (During Period)
Discount Notes	N/A			$	2,722		N/A			$	2,027		N/A			$	1,622		$	2,390		N/A			$	2,144		$	2,722

Lease Financings. TVA has entered into certain leasing transactions with special purpose entities ("SPEs") to obtain third-party financing for its facilities. These SPEs are sometimes identified as VIEs of which TVA is determined to be the primary beneficiary. TVA is required to account for these VIEs on a consolidated basis. See Note 78 and Note 1112 for information about ~~TVA’s~~TVA's lease financing activities. During 2017 and 2016, TVA acquired 100 percent of the equity interests in certain ~~special purpose entities~~SPEs created for the purpose of facilitating lease financing. TVA may seek to enter into similar arrangements in the future. In March 2019, TVA made final rent payments under lease/leaseback transactions involving eight CTs, and in July 2019, these transactions were terminated.

Summary Cash Flows

A major source of TVA's liquidity is operating cash flows resulting from the generation and sale of electricity. ~~There was no net change in cash and~~Cash, cash equivalents, ~~for the three months ended December 31, 2017,~~ and ~~December 31, 2016.~~restricted cash were $323 million at June 30, 2019, compared to $312 million at June 30, 2018. A summary of cash flow components for the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2019 and ~~December 31, 2016,~~2018, 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 $4$58 million for the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year, ~~as a result~~primarily driven by timing of ~~decreases in revenue collections due to timing~~payments and ~~decreased~~increased cash used for fuel ~~cost recovery,~~inventory purchases and outage costs. These changes were partially offset by the timing of revenue collections, increased base revenue driven by the base rate adjustment that became effective October 1, 2018, and lower operating and maintenance expense due primarily to a decrease in planned nuclear outage days and reductions in workforce related to identified efficiencies and staffing changes needed to support the generation fleet.

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interest paid.

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 decreased ~~by $79~~$13 million for the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period inof the prior year driven by the completion ~~or pre-commercial operations~~ of ~~capacity expansion and clean air projects, including Paradise Combined Cycle Plant,~~the Allen Combined Cycle Plant, ~~and the~~ clean air controls projects at Gallatin Fossil Plant ("Gallatin") and ~~Shawnee.~~Shawnee Fossil Plant ("Shawnee"), and the manufacturing of the Watts Bar Nuclear Plant ("Watts Bar") steam generator in the prior year. These decreases were offset by an increase in expenditures for the Boone Dam and Pickwick South Embankment remediation projects.

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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 ~~provided by~~used in financing activities decreased ~~by $75~~$34 million for the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2019, as compared to the same period of the prior year, primarily attributable to decreased long-term debt redemptions resulting from higher operating cash flows and a $1.0 billion power bond issuance in the prior year, ~~as a result of long-term debt redemptions,~~ partially offset by ~~net~~increased short-term debt ~~activities. Decreased investing expenditures reduced~~net issuances in the current year. TVA’s ~~borrowing needs. TVA generally uses short-term~~financing activities reflect an overall reduction in debt driven by strong financial performance and execution of long-range financial plans to ~~meet working capital needs~~reduce debt and ~~other cash requirements while maintaining minimal cash balances.~~ keep TVA’s electric rates competitive.

Contractual Obligations

TVA has obligations and commitments to make future payments under certain contracts. ~~During the three months ended December 31, 2017, there were no material changes in TVA’s contractual obligations outside~~As a result of the ~~ordinary course~~subsequent decision in TVA's favor by the Sixth Circuit, as well as the June 2019 consent decree filed in the case brought by TDEC, amounts previously recorded as Other long-term liabilities on an undiscounted basis have been reversed and an Asset retirement obligation in the amount of ~~business.~~$667 million has been recorded for the discounted cash flows expected for the closure and post-closure activities related to Gallatin CCR facilities. See Note 9 and Note 11. TVA's contractual obligations are discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources and Note 21 of the Notes to Consolidated Financial Statements in the Annual Report.

Key Initiatives and Challenges

Distributed Energy Resources

AsConsumer desire for energy choice, among other things, is driving the ~~amount of distributed energy resources ("DER") grows on~~expectation for flexible options in the TVA system, the need for TVA’s traditional generation resources may be reduced, and the ability of the system to reliably and economically operate in conjunction with these DER sources may become more challenging. To meet this challenge, TVA is working with LPCs and others on long-term pricing and product development strategies that include DER and address the implementation and support of those resources. Due to uncertainties related to the technology choices and market penetration rates for DER options, TVA cannot currently predict the potential financial impacts from the future growth in DER, but it is anticipated that future growth will be a part of TVA’s overall strategy to meet customer demand in an evolving marketplace.

As it transitions away from coal to other resources, TVA continues to identify significant impacts to its transmission system that include stress on its transmission equipment, such as lines and transformers. While TVA owns and operates its high-voltage transmission grid, the distribution system is a network of grids belonging to LPCs, each with its own characteristics and operational strengths and challenges. Integrating renewable generation (primarily photovoltaic solar and combined heat and power projects) presents a number of challenges, including grid balancing and reliability. The growth of renewable resources on the distribution grid necessitates the involvement of entities in addition to TVA, especially the LPCs. electric industry. TVA and LPCs are working together to leverage the strengths of the Tennessee Valley public power model to provide distributed energy solutions that are economic, sustainable, and flexible. TVA will ~~need to~~ focus on the safety and reliability ~~impact~~impacts of these resources as they are interconnected to the grid ~~as well as ensuring~~and will ensure that the pricing of electricity remains as low as feasible. ~~As generation resources become more distributed~~Additional regulatory considerations and ~~intermittent,~~analysis may be required as the ~~need~~DER market, technologies, and programs evolve. TVA is working to ~~extend secure communication networks for visibility~~develop pricing and ~~control~~regulatory structures with a deliberate and thoughtful analysis of ~~these resources becomes even more important in maintaining grid reliability.~~each current and future program offering. This requires strong partnerships with LPCs to give customers choices and provide end-use consumers the flexibility they desire.

~~Moving towards a more diverse resource mix,~~In May 2017, the TVA Board ~~approved a~~authorized up to $300 million ~~strategic fiber initiative in May~~

~~2017~~ to be spent over the next 10 years, ~~for upgrades~~subject to ~~the transmission system~~annual budget availability and necessary environmental reviews, to ~~maintain reliability. By investing in these~~

~~upgrades, TVA plans~~build an enhanced fiber network by adding up to ~~be in~~3,500 additional miles that will better connect its operational assets. Fiber is a ~~position to move to more distributed power generation from many smaller sources~~vital part of ~~generation~~

~~and to begin to price its products at different rates during different times of the day and season.~~TVA’s modern communication infrastructure. The new fiber optic lines will

~~also give~~ 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 June 30, 2019, TVA had installed 433 miles of fiber. As of June 30, 2019, TVA had spent $62 million on installation of the ~~potential~~fiber optic lines and expects to ~~make fiber capacity available~~spend an additional $238 million to ~~help local communities in rural areas attract and retain jobs.~~complete the project.

Changing Customer Preferences

As more consumers and businesses are demanding cleaner and greener energy, the utility industry is evolving to meet those needs. As TVA also evolves, it will see impacts to the way it does business ~~from~~through the pricing of products, transmission of energy, and development of new products and services for its customers in support of changing customer preferences and its economic development efforts. End-use customers are becoming more technologically ~~savvy~~sophisticated and want greater control over their energy usage. ~~Larger~~Many companies are focusing more on sustainability and requiring more energy efficiency as well as cleaner, greener, renewable energy options. The continuing challenge for TVA and others is finding ways to meet the needs and preferences of customers while successfully developing flexible pricing models to accommodate the evolving markets.

Renewable Power Purchase Agreements. In order to meet customer preferences and requirements for cleaner and greener energy, TVA has entered into certain power purchase agreements (“PPAs”) with renewable resource providers during 2019. These agreements are the latest to stem from TVA’s 2017 request for proposals for renewable energy. During the first quarter of 2019, TVA signed four solar PPAs for 674 MW of solar generation at sites in Tennessee and Alabama. These four solar projects are expected to come online in 2021. TVA will procure the renewable energy and sell the resulting Renewable Energy Certificates to specific customers, allowing TVA to increase its renewable energy portfolio without additional costs to other Valley customers. These agreements are part of progressive partnerships that align the core values of TVA and the public power model with the desire of TVA's customers for renewable energy.

Renewable Power Solutions. During its February 2019 meeting, the TVA Board approved new renewable power solutions, including a utility-scale option and a mid-scale option, that better equip TVA and LPCs with the flexibility to meet changing end-use customer needs. The utility-scale option, referenced at the February 2019 TVA Board meeting as the Flexibility Renewable Option, is implemented by a Renewable Investment Agreement (“RIA”), which aggregates demand through a competitive procurement process. The mid-scale option, also known as the Flexibility Research Project, is a joint project with

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LPCs to enable solutions for situations where the end-use consumer needs onsite renewable or distributed generation while gaining market knowledge and operational insights from these research projects.

In addition, TVA issued a request for proposal in April 2019 for up to 200 MW of new renewable energy. The ultimate volume contracted will align to TVA customers' demand for renewable energy, allowing TVA to increase its renewable energy portfolio without additional costs to other Valley customers. TVA accepted proposals through mid-May 2019 and anticipates making selections in October 2019.

Integrated Resource Planning

During 2018 and 2019, TVA ~~is beginning~~conducted a study of its energy resources in order to update and replace the ~~process of updating its~~ IRP that was accepted by the TVA Board in 2015. The IRP is a comprehensive study that provides direction on how to best meet future power demand by identifying the need for generating capacity, determining the best mix of resources, and evaluating the evolving role of ~~DER~~.DER. The IRP ~~will consider~~considers many views of the future to determine how TVA can continue to provide low-cost, reliable electricity, support environmental stewardship, and spur economic development in the Tennessee Valley over the next 20 years. To inform ~~TVA’s~~TVA's next long-term financial plan and proactively address the changing utility marketplace, TVA ~~is beginning~~began this work sooner than originally planned.

To ensure TVA best meets projected future needs, TVA will continue its tradition of innovation in each IRP. The 2011 IRP focused on diversifying and modernizing its generation portfolio, part of which included adding cost-effective renewables. The 2015 IRP identified DER as a growing trend in the utility industry and designed a mechanism where energy efficiency could be chosen as a resource. The 2019 IRP ~~will explore~~explored various DER scenarios, considering the speed and amount of DER penetration, ~~improve TVA’s~~and improved TVA's understanding of the impact and benefit of system flexibility with increasing renewable and distributed resources.

During the IRP process, TVA - with significant input from stakeholders and the public - considered a wide range of future scenarios, various business strategies, and a diverse mix of power-generation resources to build on TVA’s existing asset portfolio. IRP study results show:

There is a need for new capacity in all scenarios to replace expiring or retiring capacity.

Solar expansion plays a substantial role in all futures.

Gas, storage, and ~~determine~~demand response additions provide reliability and/or flexibility.

No baseload resources (designed to operate around the ~~implications~~clock) are added, highlighting the need for operational flexibility in the resource portfolio.

Additional coal retirements occur in certain futures.

Energy efficiency levels depend on market depth and cost-competitiveness.

Wind could play a role if it becomes cost-competitive.

In all cases, TVA will continue to ~~TVA’s diverse portfolio mix~~provide for economic growth in the ~~next 20 years.~~Tennessee Valley.

~~TVA is primarily~~The IRP was developed with input from the public and contributions from a wholesale power provider, and the LPCs are the service provider for most end-use customers. Due to this public power business model, collaboration with customers and stakeholders is a vital part of the IRP. Opportunities for customer and stakeholder engagement and for public comment will include public meetings, webinars, the IRP working group ~~and the Regional Energy Resource Council ("RERC"). The IRP working group and RERC will consist~~ of ~~representatives~~stakeholders from local power companies, ~~direct-served customers, non-governmental~~environmental organizations, ~~state~~ and ~~local governments,~~other public and ~~academia.~~private entities with a vested interest, including an extensive public outreach that included a series of open meetings around the Tennessee Valley. The final 2019 IRP will be presented to the TVA Board for consideration at its August 2019 meeting.

~~As part~~Natural Resource Plan

TVA is updating its Natural Resource Plan ("NRP"), which was completed in 2011 to guide TVA’s management of the ~~IRP decision-making process,~~public lands and waters within its seven-state service area. TVA remains committed to a balanced management approach and is considering changes to the NRP that include objectives and programs for each focus area and a flexible approach for long-term planning. These changes align with TVA’s mission and will help TVA be better equipped to prioritize funding plans and create efficiencies in ~~alignment with~~business planning and stewardship project implementation. TVA released the ~~National~~draft NRP and the associated Supplemental Environmental ~~Policy Act,~~Impact Statement ("SEIS") in May 2019 for public review and comment. During June 2019, TVA ~~will also analyze potential environmental implications associated with an~~hosted public meetings around the Valley and is currently evaluating comments received. The final SEIS and updated ~~IRP by issuing an environmental impact statement ("EIS").~~NRP are expected to be published in early 2020.

Generation Resources

~~Nuclear Response Capability~~. Since the events that occurred in 2011 at the Fukushima Daiichi Nuclear Power Plant ("Fukushima Events"), the Nuclear Regulatory Commission ("NRC") adopted additional detailed guidance on the expected response capability to be developed by each nuclear plant site. The NRC issued orders that modified each plant’s license to require implementation of additional external event mitigation capabilities. TVA has implemented these strategies and physical plant modifications to address the actions outlined in this guidance at Sequoyah Nuclear Plant ("Sequoyah") and Watts Bar. Implementation is in progress at Browns Ferry Nuclear Plant ("Browns Ferry") and is scheduled to be completed in 2019. As of December 31, 2017, TVA had spent $270 million on modifications related to these actions at all of its nuclear plants, including Watts Bar Unit 2, and expects to spend an additional $12 million to complete the remaining modifications intended to address this guidance.

Extreme Flooding Preparedness. Updates to the TVA analytical hydrology model completed in 2009 indicated that under ~~“probable~~"probable maximum ~~flood”~~flood" conditions, some of ~~TVA’s~~TVA's dams might not have been capable of regulating the higher flood waters. A ~~“probable~~"probable maximum ~~flood”~~flood" is an extremely unlikely event; however, TVA is obligated to provide protection for its nuclear plants against such events. As a result, TVA installed a series of modifications at three dams, and work on the fourth, Fort Loudoun Dam, is continuing in parallel with a Tennessee Department of Transportation project. The work being done by the State of Tennessee to support the Fort Loudoun Dam modifications is estimated to be completed by the spring of 2018. TVA's Fort Loudoun Dam modifications are also estimated to be completed during 2018. TVA is taking steps to ensure that it complies with the NRC license requirements for Watts Bar related to the completion of the project.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 Units 1 and 2. However, TVA identified an error in the modeling that will require ~~TVA to resubmit~~the models for Watts Bar Units 1 and 2.2 to be resubmitted. TVA plans to

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resubmit models for Watts Bar Units 1 and 2 during ~~2018.~~2019. In addition, TVA plans to submit models for Sequoyah Nuclear Plant ("Sequoyah") Units 1 and 2 in ~~2018.~~2019. TVA will subsequently address conditions at Browns Ferry as needed. TVA ~~has deferred some~~is deferring the decision on the need for additional modifications until after the ~~updated Watts Bar and Sequoyah models are completed.~~modeling work is complete.

As of ~~December 31, 2017,~~June 30, 2019, TVA had spent ~~$150~~$153 million on the modifications and improvements related to extreme flooding preparedness and expects to spend up to an additional ~~$28~~$27 million to complete the modifications.

NRC Seismic Assessments. On May 9, 2014, the NRC notified licensees of nuclear power reactors in the central and eastern ~~United States~~U.S. of the results of seismic hazard screening and prioritization evaluations performed by unit owners and reviewed by the NRC staff. Because the seismic hazards for Browns Ferry, Sequoyah, and Watts Bar had increases in seismic parameters beyond the technical information available when the plants were designed and licensed, TVA must conduct seismic risk evaluations for these plants. TVA completed the risk evaluation for Watts Bar and submitted it to the NRC on June 30, 2017; the evaluation concluded that no additional actions were required. The NRC completed its review of the Watts Bar evaluation in July 2018 and concluded that no further response or regulatory actions were required. The evaluations for Browns Ferry and Sequoyah are due by December 31, 2019.

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Mitigation of Beyond-Design-Basis Events. NRC rulemaking has been developed to codify the requirements promulgated by orders related to beyond-design-basis flooding and seismic events discussed above. The NRC staff submitted the draft final rule — Mitigation of Beyond-Design-Basis Events — to the NRC Commission on December 15, 2016, requesting approval to publish the final rule. The NRC Commissioners affirmed their final votes on the proposed rule in January 2019. The approved final rule language deleted several items that were included in the proposed rule language, resulting in minimal changes between the orders and the final rule. The final rule is expected to be ~~issued~~published for implementation in ~~2018. Minimal changes between the orders and final rule requirements are expected.~~2019. Once issued, TVA will review the final rule to identify any gaps to compliance. Gaps could result in TVA having to make modifications to one or more of its nuclear plants. Cost estimates for any required modifications cannot be developed until after the rule is finalized, but costs for modifications could be substantial. See Extreme Flooding Preparedness and NRC Seismic Assessments above.

Baffle-Former Bolt Degradation. In July 2016, Westinghouse Electric Co., LLC ("Westinghouse") issued a Nuclear Safety Advisory Letter ("NSAL") 16-01 that ~~addresses~~addressed recently identified degradation of baffle-former bolts in some U.S. pressurized water reactors ("PWRs"). Baffle-former bolts help hold together a structure inside certain reactor vessels. Sequoyah Units 1 and 2, both PWRs, are referenced in the NSAL. Visual inspections of baffle-former bolts in Sequoyah Units 1 and 2 during 2017 refueling outages showed no degradation of baffle-former bolts. TVA ~~is planning to complete~~completed ultrasonic ~~inspections during the Sequoyah~~testing for Unit 1 ~~refueling outage~~ in the ~~spring~~third quarter of 2018 and ~~the Sequoyah~~ Unit 2 ~~refueling outage~~ in the ~~fall~~first quarter of ~~2018.~~2019. Results for both units were within acceptable standards. Retesting will not be required until 2028.

Work Environment at Nuclear ~~Plants~~Plants.. In March 2016, the NRC issued a Chilling Effect Letter ("CEL") to TVA regarding work environment concerns identified at Watts Bar. In ~~subsequent inspections,~~June 2018, the NRC ~~found that~~conducted a follow-up inspection at Watts Bar ~~still faces challenges~~and noted some improvement. In the mid-cycle assessment letter issued in ~~maintaining~~June 2018, the NRC issued a Cross Cutting Issue ("CCI") in safety conscious work ~~environment. On April 12, 2017, TVA provided~~environment and outlined the closure criteria for both the CEL and the CCI. In August 2018, the NRC ~~with~~documented a chilled work environment in an updated letter outlining focus areas and metrics for monitoring performance at Watts Bar. In that letter, TVA made a formal commitment to the NRC to conduct a safety culture assessment at Watts Bar in CY 2017, which it has completed. On November 2, 2017, the NRC held a public meeting where TVA presented the progress in addressing the issues.additional department. TVA is working to implement actions to address the ~~fleet-wide actions as documented~~issues in the ~~Confirmatory Order issued on July 27, 2017, that will ensure sustainable improvement in safety culture. The NRC began a two-week~~additional department and closure criteria for the CEL ~~follow-up inspection at Watts Bar on January 22, 2018.~~and CCI.

~~Watts Bar Unit 2~~Tritium-Producing Burnable Absorber Rods. . TVA was a cooperating agency in the February 2016 Department of Energy ("DOE") Final ~~Supplemental Environmental Impact Statement~~SEIS for the Production of Tritium in a Commercial Light Water Reactor. On April 5, 2017, due to an anticipated need for more tritium-producing burnable absorber rods ("TPBARs"), the DOE announced its preferred alternative for irradiation services, which included use of an additional reactor. As a result of TVA’s assessment and concurrence with the DOE’s alternative, TVA submitted a license amendment request to the NRC in December 2017 to authorize the irradiation of TPBARs in Watts Bar Unit 2. The NRC approved the request on May 22, 2019. TVA is ~~expected~~projecting to ~~issue a decision by May 2019. Subject to approval of the license amendment,~~begin tritium production in Watts Bar Unit 2 ~~is projected to start~~ in the fall of 2020. The DOE's decision also allows for irradiation of TPBARs at ~~the~~ Sequoyah ~~site~~ in the future; however, TVA does not have plans to employ Sequoyah units for tritium production in the near term.

Extended Power Uprate. TVA ~~is undertaking~~has undertaken an ~~extended power uprate ("EPU")~~EPU project at Browns Ferry ~~that is expected~~ to increase the amount of electrical generation capacity of its reactors. ~~TVA plans~~The license for each reactor was amended to ~~begin implementing~~allow reactor operation at the higher power level. The Browns Ferry EPU ~~project during~~license amendments were approved by the ~~plant refueling outages in the spring of 2018 for~~ NRC on August 14, 2017, following a nearly two-year review.

Unit 3 was completed and synced to the ~~fall of~~grid in April 2018, ~~for~~reaching the new EPU 100 percent power in July 2018. Unit 1 was completed and synced to the ~~spring of~~grid in November 2018, reaching the new EPU 100 percent power in January 2019. Unit 2 was completed and synced to the grid in April 2019, ~~for Unit 2. Full~~reaching the new EPU 100 percent power ~~is expected to be achieved following the noted outages for each unit.~~in June 2019. The project ~~has~~ involved ~~and continues to involve~~ extensive engineering analyses and modification and replacement of certain existing plant components to enable the units to produce the additional power requested by the license amendments. The project is estimated to cost approximately $475 ~~million and add approximately~~million. The generating capacity is expected to increase by an estimated 465 MW ~~of generating capacity.~~

~~Performance of Suppliers. On March 29, 2017, Westinghouse, a subsidiary of Toshiba Corporation ("Toshiba"), filed for protection under Chapter 11~~after completion of the ~~United States Bankruptcy Code. On January 4, 2018, Brookfield Business Partners L.P., together with institutional partners, announced that they have entered into an agreement~~project and sufficient run time to ~~acquire 100 percent of Westinghouse. See Note 13 —~~ ~~Counterparty Risk~~ — ~~Suppliers~~.

~~TVA currently has several contracts with Westinghouse and Toshiba, including contracts for~~validate the enrichment and fabrication of nuclear fuel and the manufacture of a steam generator, as well as several ongoing agreements for maintenance and outage support at its nuclear and coal-fired plants. TVA is assessing potential performance impacts, including procurement of parts and services as well as outage schedules. Westinghouse and Toshiba are currently performing under the TVA contracts; however, if either supplier is unable to perform under TVA's existing contracts and TVA is unable to obtain similar services or required intellectual property at similar terms from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes which TVA cannot predict at this time, but which could be material.

~~Clean Air Projects~~. During 2011, the TVA Board approved the addition of emission control equipment at Gallatin. TVA completed the addition of scrubbers on the four Gallatin units during 2016, two SCRs in 2017, and two SCRs in the first quarter of 2018. In addition, at its December 30, 2014 meeting, the TVA Board authorized the installation of SCRs and scrubbers on Units 1 and 4 at Shawnee. These systems were placed in service during the first quarter of 2018.

~~Johnsonville Retirement.~~ ~~On December 31, 2017, TVA retired the remaining units at Johnsonville Fossil Plant, Units 1-4. These units had a summer net capability of 428 megawatts.~~new capacity.

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Plant Closures. During its August 2018 meeting, the TVA Board approved a plan to perform assessments of Bull Run and Paradise. These assessments included resiliency studies for fuel and transmission, financial considerations, and Environmental Assessments (“EAs”) pursuant to the National Environmental Policy Act ("NEPA"). Results of these assessments were presented to the TVA Board at its February 2019 meeting, and the Board approved the retirement of Paradise Unit 3 by December 2020 and Bull Run by December 2023. Subsequent to the Board approval, TVA determined Paradise would not be restarted after January 2020 due to the plant’s material condition. See Note 5.

Coal Combustion Residual Facilities. TVA has committed to a programmatic approach tofor the elimination of wet storage of CCRs within the TVA service area. Under this program (the “CCR Conversion Program”), TVA has committed to (1) convert all operational coal-fired plants to dry CCR storage, (2) close all wet storage facilities, and (3) meet all applicable state and federal regulations. To carry out its CCR Conversion Program, TVA is undertaking the following actions:

Dry ~~Generation~~generation and ~~Dewatering Projects~~dewatering projects. Conversion of coal plant CCR wet processes to dry generation or dewatering is complete at Bull Run, Shawnee, and ~~construction~~Kingston Fossil Plant ("Kingston"). Construction is underway at ~~Kingston,~~Gallatin and Cumberland Fossil Plant ("Cumberland"). Fly ash and gypsum conversion projects at Paradise ~~and Shawnee. Construction~~were complete during the third quarter of ~~an additional bottom ash dewatering facility is scheduled to begin at Gallatin in 2018.~~2019.

Landfills. ~~Lined~~TVA has made strategic decisions to build and maintain lined and permitted dry storage facilities ~~have been constructed and are operational~~on TVA-owned property at ~~Bull Run, Kingston, and Gallatin. Construction of new~~several TVA locations, allowing these facilities to operate beyond existing dry storage capacity. Currently, lined and permitted dry storage facilities are ~~scheduled to begin at Cumberland, Paradise,~~completed and ~~Shawnee in 2018. In addition, construction of another lined facility~~operational at Bull Run, Kingston, Gallatin, and a lined dry storage facility at Paradise has been constructed but is not yet operational. Construction of a lined dry storage facility at Cumberland is expected to start in 2021. A lined dry storage facility at Shawnee is currently under construction with completion scheduled for 2021. Kingston’s permitted lined dry storage expansion is scheduled for completion in 2021. TVA is designing and permitting a lateral expansion of the existing landfill at Gallatin. TVA is initiating the design and permitting process for a new lined landfill at Bull Run, but no decision to ~~begin in 2019.~~construct the facility has been made at this time. Construction of additional lined facilities may occur to support future business requirements.

Wet CCR ~~Impoundment Closures~~impoundment closures. TVA is planning to close wet CCR impoundments in accordance with federal and state requirements when (1) coal-fired plants are converted to dry CCR processes and dry storage landfills become operational or (2) the related plant operations cease. Closure project schedules and costs are driven by the selected closure ~~technology~~methodology (such as cap and close in place or closure by removal). TVA's predominant closure methodology is cap and close 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, although~~impoundments. The method of final closure ~~plans are still subject~~for each of these facilities will depend on various factors, including the results of studies conducted pursuant to NEPA and approval by appropriate state regulators. Additional ~~National Environmental Policy Act analyses~~NEPA studies will be conducted as other ~~impoundments~~facilities are designated for closure. As

On January 25, 2019, TVA approved a change in the preferred closure method for the Allen West Impoundment from closure-in-place to closure-by-removal. The cost impact of changing the closure method resulted in an increase of approximately $33 million to the non-nuclear asset retirement obligations ("AROs"). The method of final closure for this impoundment will depend on various factors, including the completion of all environmental ~~studies are performed and closure methodologies are determined, detailed project schedules and estimates will be finalized.~~reviews. See Note 11.

Groundwater ~~Monitoring~~monitoring. Compliance with the ~~EPA~~EPA's CCR rule (the "CCR Rule") as well as other requirements will require additional engineering and analysis as well as implementation of a comprehensive groundwater monitoring program. As further analyses are performed, including evaluation of monitoring results, there is the potential for additional costs for investigation and/or remediation. TVA expects to continue to evaluate and update these cost estimates.

In compliance with the CCR Rule, TVA published the results of additional groundwater testing at TVA's CCR facilities on March 1, 2019. The results included values above groundwater protection standards for some constituents at several CCR ~~Conversion Program~~units. Accordingly, TVA will have to cease sending CCR and non-CCR waste streams to any impacted unlined CCR surface impoundments no later than October 31, 2020 (and potentially earlier due to location demonstration results) and initiate additional corrective actions for groundwater. TVA is ~~scheduled~~developing these corrective actions and anticipates publishing the relevant reports to ~~be completed by 2022 with two exceptions. First, a new landfill~~its CCR website in August 2019. Due to location demonstration results, TVA has already ceased sending waste streams to one impoundment at ~~Shawnee will be required to accommodate the addition of air pollution controls,~~Allen and the landfill is scheduled to be operational by 2020. Once the new landfill is in service, the existing bottom ash impoundment and dry stack will be closed in accordance with federal and state requirements. Second, thefour impoundments at ~~Gallatin are pending additional studies to determine the final closure methodology and schedule. While plans are currently being formulated for~~Gallatin. As required by the CCR ~~closure methodology for Gallatin,~~ Rule, TVA will continue to publish reports in the second quarter of each year on annual groundwater monitoring and corrective actions at its active CCR facilities.

TVA is involved in two lawsuits relating to alleged releases of waste materials from the CCR facilities at Gallatin. ~~On August 4, 2017, the court~~The parties in one ~~case ordered~~of the cases filed a consent decree that, when entered, will resolve this matter. Under the consent decree, TVA agreed to ~~move all materials from~~close the existing wet ash impoundments by removal, either to an onsite landfill or to an offsite facility. TVA may also submit a ~~lined facility but did not impose any monetary penalties. The costs of constructing a lined facility onsite and excavating and moving the ash is approximately $900 million. If~~plan that allows for beneficial reuse. TVA is ~~required~~currently conducting additional studies and environmental reviews to ~~use a facility offsite, then~~support its determination of the costs could be approximately $2.0 billion, plus an amount of additional costs reflecting the expected impacts of inflation given the extended duration of an offsite relocation project. These amounts do not include costs or penalties associated with any order in the other case. These amounts cannot be estimated at this time, but could be material.specific removal plans. See Note 8.9.

~~Through December 31, 2017,~~

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As of June 30, 2019, TVA had spent approximately ~~$1.3~~$1.7 billion on its CCR Conversion Program. TVA expects to spend ~~approximately~~ an additional ~~$1.0~~$1.4 billion on the CCR Conversion Program through ~~2022, excluding new requirements related to~~2023. These estimates may change depending on the ~~Gallatin CCR facilities lawsuits.~~final closure method selected for each facility. Once the CCR Conversion Program is completed, TVA will continue to undertake certain CCR projects, including building new landfill ~~sections~~cells under existing permits and closing existing ~~sections~~cells once they reach capacity.

~~Natural Gas-Fired Units~~. Pre-commercial operations on Units 1 and 2 of the Allen Combined Cycle Plant began in September 2017, and the plant is expected to begin commercial operations in the spring of 2018. The plant has an expected generation capacity of approximately 1,100 MW with a cost not to exceed $975 million. Upon completion of this facility, the existing coal-fired units at the site will be retired. See ~~Regulatory Compliance~~ — ~~Allen Groundwater Investigation~~ ~~below.~~

~~Pre-commercial operations on Unit 20~~Potential Liability Associated with Workers’ Exposure to CCR Materials. In response to the 2008 ash spill at Kingston, TVA hired Jacobs Engineering Group, Inc. (“Jacobs”) to oversee certain aspects of the ~~Johnsonville Combustion Turbine Plant,~~cleanup. After the cleanup was completed, Jacobs was sued in the Eastern District by employees of a contractor involved in the cleanup and family members of some of the employees. The plaintiffs alleged that Jacobs had failed to take or provide proper health precautions and misled workers about the health risks associated with exposure to coal fly ash, which ~~allows for cogeneration capability, began~~is a CCR material. The plaintiffs alleged that exposure to the fly ash caused a variety of significant health issues and illnesses, including in ~~September 2017, and~~some cases death. The case was ~~placed in service during~~split into two phases, with the first ~~quarter~~phase considering, among other issues, general causation and the second determining specific causation and damages. On November 7, 2018, a jury hearing the first phase returned a verdict in favor of ~~2018. Unit 20 replaces Johnsonville Fossil Plant’s cogeneration capability~~the plaintiffs, including determinations that Jacobs failed to adhere to its contract with TVA or the Site Wide Safety and Health Plan in place; Jacobs failed to provide reasonable care to the plaintiffs; and Jacobs’s failures were capable of ~~Units 1-4, which were retired~~causing a list of medical conditions, ranging from hypertension to cancer. On January 11, 2019, the district court referred the parties to mediation. Depending on the outcome of mediation, the litigation will proceed to the second phase on the question of whether Jacobs’s failures did in ~~December 2017.~~fact cause the plaintiffs’ alleged injuries and damages.

River ~~Management.~~Management ~~While drier than~~. Rainfall and runoff in the Tennessee Valley during the third quarter of 2019 were 126 percent and 115 percent of normal, ~~conditions dominated the first half of 2017, the second half of the year saw a return to~~respectively. Above normal rainfall and ~~near normal~~ runoff ~~a trend that~~has continued ~~into the first quarter of 2018. Increased rainfall and improved runoff during the first quarter of 2018 has helped~~to help TVA meet its river system commitments, including managing minimum river flows for ~~navigation;~~navigation, generating low-cost hydroelectric ~~power;~~power, maintaining water quality and water supply, and ~~recreation~~providing recreational opportunities for the Tennessee ~~Valley;~~Valley. In addition, having cool water available helps TVA to meet thermal compliance and ~~enabling~~support normal operation of ~~TVA’s~~TVA's nuclear and fossil-fueled ~~plants; and~~plants, while oxygenating water ~~to help~~helps fish species remain healthy. Rainfall and runoff in the Tennessee Valley ~~during~~through the ~~first~~third quarter of ~~2018~~2019 were 99144 percent and ~~110~~163 percent of normal, ~~respectively, which resulted in conventional hydroelectric generation being 87 percent higher during this period as compared to the same period of 2017.~~respectively.

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Small Modular Reactors. TVA submitted an Early Site Permit Application ("ESPA") for review by the NRC in May 2016. The ~~NRC completed its acceptance~~progress of the NRC’s review of the ~~application on December 30, 2016, and began its detailed technical review of~~ESPA is consistent with the ~~application in January 2017.~~NRC’s published schedule. The ESPA is based on the potential future construction and operation of two or more small modular reactors ("~~SMR"~~SMRs") units at TVA’s Clinch River site in Oak Ridge, Tennessee. TVA’s ESPA is based upon information regarding the various SMR ~~potential~~ designs under development in the ~~United States. Because a design has not been selected, the ESPA seeks approval of a Plant Parameter Envelope that encompasses any of the potential designs.~~U.S. TVA and the DOE are working under an interagency agreement to jointly fund licensing activities for the Clinch River site with DOE reimbursement of up to 50 percent of TVA's eligible costs through 2020.

TVA is developing the Clinch River site onat a ~~schedule that supports submittal of a combined construction and operating license ("COL") application in 2020, in conjunction~~pace consistent with ~~supporting the NRC’s review of the ESPA. Submittal of a COL is subject to sufficient~~ progress being made by developers on the engineering and licensing of SMR ~~vendor(s) with their design certification(s) and a TVA decision to select a specific SMR technology and proceed with development of a COL application in 2018.~~designs. The project has a great deal of flexibility at this early stage and by ~~moving forward with an ESPA,~~working to reduce licensing risk, TVA ~~will~~expects to be in a position to build aan SMR if and when additional power sources are needed. Any decision to construct aan SMR would require approval by the TVA Board.

~~On October 10, 2017,~~Seismic Activity. The TVA service area experienced several earthquakes during the ~~Atomic Safety~~first nine months of 2019. Inspections were completed and ~~Licensing Board issued a decision admitting two contentions proffered jointly by Southern Alliance for Clean Energy ("SACE") and Tennessee Environmental Council ("TEC")~~no impacts to ~~intervene in~~ the ~~ESPA proceeding. See Note 17~~ ~~— Legal Proceedings — Petitions~~TVA generating facilities or dams were identified. TVA's generating system continued to ~~Intervene in the Proceeding Involving the Early Site Permit Application for Small Modular Reactors at TVA's Clinch River Site~~.operate safely.

Dam Safety and Remediation Initiatives

Assurance Initiatives. TVA has an established dam safety program, which includes procedures based on the Federal Guidelines for Dam Safety, with the objective of reducing the risk of a dam safety event. The program is comprised of various engineering activities for all of TVA’s dams including safety reassessments using modern industry criteria and the new probable maximum flood and site-specific seismic load cases. One aspect of the guidelines is that dam structures will be periodically assessed to assure that TVA's dams meet current design criteria. These assessments include material sampling of the dam and foundational structures and detailed engineering analysis. TVA will continue ~~its~~ preventative and ongoing maintenance as a part of this safety program. ~~TVA has spent $86 million on dam safety assurance initiatives since 2012 and expects to spend an additional $206 million through 2021.~~

Boone Dam Remediation. In October 2014, 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

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a composite seepage barrier wall in the ~~dam’s~~dam's earthen embankment. TVA ~~is currently evaluating the effectiveness~~has completed grouting and construction of ~~that grouting phase. The second phase~~an upstream and downstream buttress. Installation of the ~~grouting program (high mobility grouting)~~concrete cut-off wall elements is ~~on hold as TVA continues to perform investigative drilling, testing, and other activities~~ in ~~support of the seepage barrier design. Based on preliminary findings, results are being incorporated into the design, and some planned activities are being re-sequenced.~~process.

~~As determined from the extensive analyses, TVA has decided that the overall remediation plan for Boone Dam remains the installation of a composite seepage barrier wall.~~ As design and construction plans are finalized, the estimated cost and duration continue to be refined. As of ~~December 31, 2017,~~June 30, 2019, TVA had spent ~~$108~~$161 million related to ~~these projects~~this project and expects to spend an additional ~~$342~~$295 million through ~~2022.~~2023. TVA expects the reservoir to return to normal operations in 2022 and is continuing to work with the community to help mitigate local impacts of the extended drawdown.

Pickwick South Embankment Remediation. Reassessments of Pickwick Landing Dam ("Pickwick") found low safety factors for post-earthquake stability indicating that the dam is at significant risk for slope stability failure following a seismic event in portions of the south embankment. Slope stability failure could lead to a breach of the south embankment and loss of the reservoir, resulting in loss of life and damage to property downstream, disruption to navigation, and loss of generation and recreation.

TVA is planning to upgrade the south embankment by constructing berms on the upstream and downstream slopes. The design phase of the project began during the first quarter of 2017 and is now completed. Construction began in the ~~project is expected to be in full construction during 2018. The~~spring of 2019, and the project is currently estimated to be completed in two ~~years. However, the project may~~years, but could take longer ~~than two years~~ depending on successful construction sequencing. As of ~~December 31, 2017,~~June 30, 2019, TVA had spent $6$42 million related to ~~these projects~~this project and expects to spend an additional ~~$94~~$106 million.

Surplus Property

TVA continues to study its real estate portfolio for the purpose of aligning its real estate holdings with TVA's strategic direction. A comprehensive assessment of its real estate holdings has been completed, and TVA is implementing a strategy aimed at reducing cost and right-sizing its portfolio as part of the effort.

Bellefonte Nuclear Plant. On November 14, 2016, following a public auction, TVA entered into a contract to sell substantially all of ~~its~~the Bellefonte site to Nuclear Development, LLC, for $111 million. Nuclear Development, LLC, paid TVA $22

million on November 14, 2016, ~~and~~with the remaining $89 million is due at closing. Nuclear Development, LLC, ~~has~~had up to two years from November 14, 2016, to close on the property, and TVA ~~will~~agreed to maintain the site until ~~then. The~~closing. Nuclear Development, LLC, requested and was granted an extension of the initial closing ~~is subject~~date to ~~among~~

~~Table~~November 30, 2018. Nuclear Development, LLC, failed to obtain NRC approval of ~~Contents~~

~~other conditions,~~the transfer of the Bellefonte nuclear licenses. TVA determined that the Atomic Energy Act required that this approval be obtained before closing. TVA declined to provide a ~~determination by TVA's Chief Executive Officer that potential environmental impacts have been appropriately addressed or are acceptable. TVA's CEO made this determination~~second extension of the purchase agreement. On November 30, 2018, Nuclear Development, LLC, filed suit against TVA in the ~~affirmative on August 10, 2017.~~

~~Muscle Shoals Property~~United States District Court for the Northern District of Alabama. See Note 19 — ~~. In alignment with its strategic direction of right-sizing its real estate portfolio, TVA has drafted~~Legal Proceedings for a ~~strategy to further reduce a significant number of buildings and property in Muscle Shoals, Alabama, including the disposition of 900 acres~~discussion of the ~~970 acres approved~~lawsuit filed by the TVA Board in 2012. Active marketing efforts began in March 2017, and TVA is receiving interest from local groups with the ability to promote local economic growth in the area. Depending on interest, TVA plans to auction the 900 acres.Nuclear Development, LLC.

Knoxville Property. In 2016, TVA completed a comprehensive assessment of its real estate holdings in the Knoxville, Tennessee region including the Knoxville Office Complex ~~(“KOC”~~("KOC") and adjacent Summer Place Complex ("SPC"). As a result of this study and a subsequent environmental assessment in 2017, TVA is ~~planning to consolidate most~~in the process of consolidating its Knoxville area employees into ~~one location in~~ the West Tower of the KOC ~~and~~or a centralized field office in Norris, Tennessee. As part of this consolidation effort, TVA plans to convey the SPC and the East Tower of the KOC. ~~Evaluation of the real estate portfolio is continuing.~~

Regulatory Compliance

~~Transmission Issues.~~ TVA anticipates expenditures related to transmission facilities to increase as a result of both new and evolving regulatory requirements. The North American Electric Reliability Corporation ("NERC") approved to the Transmission Planning ("TPL") Reliability Standards in 2013. TVA has spent $40 million since the approval of the standard through December 31, 2017, on existing transmission facilities and anticipates spending an additional $13 million through 2018 to ensure compliance with the 2013 revision of the TPL standards. Total costs of compliance with the standard, including those beyond 2018, are estimated to be approximately $650 million.

Steam-Electric Effluent Guidelines. On November 3, 2015, the EPA published a final rule revising the existing ~~steam electric~~

steam-electric effluent limitation guidelines ("ELGs"). The ELGs update the existing technology-based water discharge limitations for power plants. Compliance with new requirements is required in the 2018-2023 timeframe and will necessitate major upgrades to wastewater treatment systems at all coal-fired plants. Dry fly ash handling is mandated by the rule. The rule also requires either dry bottom ash handling systems or “no discharge” recycle of bottom ash transport waters, and new technology-based limits on flue gas desulfurization ("FGD") (scrubber) wastewater require primary physical/chemical treatment and secondary biological treatment to meet extremely low limits for arsenic, mercury, and selenium.

The EPA published a rule on September 18, 2017, postponing certain compliance/applicability dates to provide the EPA time to review and revise, as necessary, the ~~new, stringent~~2015 ELGs ~~previously established~~ for ~~flue gas desulfurization~~FGD wastewater and bottom ash transport water. The EPA ~~pushed back~~delayed the compliance dates for these two ~~wastestreams~~waste streams from the 2018-2023 timeframe to 2020-2023. ~~Other requirements and~~However, the 2018-2023 applicability dates ofand the ~~rule~~accompanying requirements for fly ash transport water, flue gas mercury control wastewater, and gasification wastewater remain ~~in effect. See Item 1, Business —~~ ~~Environmental Matters~~ — ~~Water Quality Control Developments — Steam-Electric Effluent Guidelines~~ inunchanged. While the ~~Annual Report.~~EPA reconsiders the limits for FGD wastewater and bottom ash transport water, states have issued NPDES permits for all of TVA's active coal facilities based on the 2015 ELGs, recognizing that the permits may need to be reopened to incorporate modifications to those ELGs.

TVA currently has four plants with wet scrubbers that ~~will have~~may be subject to ~~comply with the~~new scrubber-related limits, the largest being Cumberland. With the recent Board approval of accelerated retirement for Bull Run and Paradise, these plants may be exempted from the imposition of new scrubber-related limits, either as a result of the rule reconsideration currently underway or due to the retirement of the units prior to the regulatory deadline. TVA is working to address future compliance with the ELGs at Cumberland given its unique ~~“once-through”~~"once-through" scrubber design. Compliance with the current rule at Cumberland without

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modification to address the unique design could cause TVA to incur disproportionately high costs at Cumberland or experience other operational outcomes which TVA cannot predict at this time.

Allen Groundwater Investigation. InThe 2015 EPA CCR Rule required TVA to conduct additional engineering and analysis, as well as implement a comprehensive groundwater monitoring program. As a result of this groundwater monitoring program, TVA reported to the Tennessee Department of Environment and Conservation ("TDEC") in May 2017 ~~TVA reported~~ elevated levels of arsenic, lead, and fluoride in water samples taken at a few shallow-aquifer groundwater monitoring wells ataround the Allen ~~Fossil Plant.~~East Impoundment. TVA, ~~is working with~~under the ~~Tennessee Department~~oversight of ~~Environment~~TDEC, has been conducting a remedial investigation into the nature and ~~Conservation ("TDEC") to identify the source~~extent of the ~~arsenic, lead, and fluoride.~~contamination. In July 2017, TVA received a Remedial Site Investigation request from TDEC, ~~in July 2017,~~ outlining the objectives of the investigation and ~~asking~~requiring TVA to provide a work plan.

The plan, ~~includes~~which was submitted to TDEC in September 2017, included more extensive groundwater monitoring sampling to identify the source and extent of the contamination. The plan also ~~includes~~included groundwater modeling to determine the current groundwater flow conditions and likely future conditions that may develop as a result of pumping cooling water from the deeper aquifer to the Allen ~~Combined Cycle Plant,~~CC, including a pump test involving the cooling water withdrawal wells. While evaluation continues, TVA has ~~contracted~~suspended plans to obtain cooling water from the deeper aquifer. TVA constructed water tanks on site and is purchasing cooling water from the LPC, Memphis Light, Gas, and Water Division. The use of water tanks rather than the wells may impose some operational restrictions on the Allen CC due to the lower availability of cooling water.

TVA is continuing to work with TDEC on the remedial investigation. On March 14, 2019, TDEC approved TVA’s interim groundwater monitoring plan. Approval of this plan allows TVA to proceed with the ~~U.S. Geological Survey and the University of Memphis to conduct this portion of the work. A Remedial Investigation Report summarizing the results~~next steps of the investigation ~~will be submitted to TDEC~~and interim response action, including the installation of new groundwater monitoring wells. TVA is currently in ~~March 2018. Depending~~the final design stage of the ~~results~~interim response action, which is expected to be a groundwater extraction system to control and begin treating the shallow groundwater that contains elevated concentrations of ~~the monitoring and the determination of the source of the contamination,~~arsenic. TVA ~~may be required~~also plans to ~~take actions including remediation and/or altering its planned source of cooling water for~~begin dewatering the Allen ~~Combined Cycle Plant.~~East Impoundment in August 2019.

TVA is preparing an Environmental Impact Statement to address the potential environmental effects associated with the future management of CCR material at Allen. In March 2019, TVA released its public scoping report, which eliminated closure-in-place as a reasonable alternative.

Ratemaking

At its August ~~23, 2017~~22, 2018, meeting, the TVA Board approved a base rate adjustment which became effective on October 1, ~~2017.~~2018. The base rate adjustment is expected to contribute approximately ~~$195~~$200 million to ~~2018~~2019 revenues.

~~Table~~Since the fall of ~~Contents~~2013, TVA, LPCs and directly served industries have worked collaboratively to develop changes to TVA's rates that focus on TVA’s long-term pricing efforts. A comprehensive rate restructuring was implemented in October 2015 to improve pricing by better aligning rates with underlying cost drivers and sending improved pricing signals, while maintaining competitive industrial rates and keeping residential rates affordable.

Consistent with the pricing direction and changes implemented in the 2015 rate restructuring, TVA staff recommended, and the TVA Board approved, the proposed 2018 rate change on May 10, 2018. This change reduced wholesale energy rates for Standard Service and introduced a GAC at an offsetting rate to better recover fixed costs. Recognizing the need for flexibility, all LPCs were presented with the option to implement the wholesale changes in October 2018 or defer the implementation of the GAC until October 2019. Seventy-nine LPCs elected to implement the wholesale changes in October of 2018, while the remaining 75 have elected to implement the wholesale changes in October of 2019.

The 2018 rate change better reflects the wholesale cost of energy and recognizes the value of the grid’s reliability and associated fixed costs. This modernized approach to pricing provides bill stability while maintaining reliability and fairness for all TVA's customers. Concurrent with this process, an Environmental Assessment was completed on May 4, 2018, resulting in a finding of no significant impact.

At its May 9, 2019 meeting, the TVA Board approved a change to the wholesale power rate schedules to provide a mechanism to adjust the GAC for large changes in LPC load. This change helps ensure the equitable administration of the GAC.

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, ~~transport,~~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.

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Physical attacks on transmission facilities across the country have heightened awareness of the need to physically protect facilities. TVA ~~is working~~continues to work with the ~~NERC,~~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.~~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 Department of Homeland Security and the United States Computer Emergency Readiness Team ("US-CERT"). US-CERT functions as a liaison between the Department of Homeland Security and the public and private sectors to coordinate responses to security threats from the internet. ~~TVA is also participating in studies funded through the DOE to identify, design, and test new solutions for protecting critical infrastructure from cyber attacks.~~

The risk of these cybersecurity events continues to ~~intensify, and while~~intensify. While TVA has been, and will likely continue to be, subjected to such attacks, to date the attacks have not impacted TVA's ability to operate as planned or compromised data which could involve TVA in lawsuits, claims, proceedings, investigations, and other legal ~~proceedings.~~matters ("Legal Proceedings"). See Item 1A, Risk Factors — Operational Risks — TVA's facilities and information infrastructure may not operate as planned due to cyber threats to TVA's assets and operations in the Annual Report.

Over the last few years, there has been an increase of malicious cyber activity across all industries, including the energy sector. This activity has caused the need for heightened awareness and preparedness. Although TVA has not been compromised during these recent incidents, it is leveraging its federal intelligence partners to better identify, detect, protect, and respond to these potential attacks.

Transmission Assets. In addition to physical and cybersecurity attacks, ~~TVA’s~~TVA's transmission assets are vulnerable to various types of electrically charged energy disruptions such as those from geomagnetic disturbances ("~~GMD"~~GMDs") and electromagnetic pulses ("EMP"). ~~Although~~Because the effects of GMD and EMP are ~~dissimilar,~~similar, they are often considered together. OnIn September ~~22,~~ 2016, the Federal Energy Regulatory Commission ("FERC") approved ~~the Phase 2 NERC Standard TPL-007~~a new standard to address GMD ~~events.~~events, and in November 2018, FERC approved a revision to the standard. TVA has ~~already~~ met ~~many~~the requirements of the original standard and most of the requirements of the ~~new~~revised standard, ~~with completion of a model of the 500 kV grid~~ and ~~evaluation of~~has evaluated the effects of solar storms ranging from ~~NERC’s~~NERC's reference case to possible extreme levels. Only a few items of equipment would exceed threshold levels even for the extreme cases and no damage would be expected. FERC's approval of NERC Standard TPL-007 included requirements for changes to this standard by May 2018. TVA iscontinues as an active participant with NERC in ~~developing these changes.~~this field. The most serious threats from EMP are those caused by high-altitude nuclear explosions. Like others in the industry, TVA is coordinating with federal and state authorities, NERC, Electric Power Research Institute ("EPRI"), and other grid owners and operators to address this ~~re-emergent~~ concern.

Environmental Matters

~~TVA’s~~TVA's activities, particularly its power generation activities, are subject to comprehensive regulation under environmental laws and regulations relating to air pollution, water pollution, and management and disposal of solid and hazardous wastes, among other issues. Emissions from all TVA-owned and operated units (including small combustion turbine units of less than 25 MWs) have been reduced from historic peaks. Emissions of nitrogen oxide ("NO_x") have been reduced by 96 percent below peak 1995 levels and emissions of sulfur dioxide ("SO₂") have been reduced by 99 percent below 1977 levels through CY 2018. For CY 2018, TVA’s emission of carbon dioxide ("CO₂") from its sources was 52 million tons, a 51 percent reduction from 2005 levels. This amount includes 5,037 tons from units rated at less than 25 MWs. To remain consistent and provide clear information and to align with the EPA’s reporting requirements, TVA intends to continue to report CO₂ emissions on a calendar year basis.

Clean Air Act

Mercury and Air Toxics Standards for Electric Utility Units. The U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") upheld the Mercury and Air Toxics Standards ("MATS") rule on April 15, 2014. In June 2015, however, the U.S. Supreme Court left the rule in place but remanded it back to the D.C. Circuit, finding that the EPA was required to consider cost before deciding whether the regulation of hazardous air pollutants ("HAP") emitted from steam electric utilities was appropriate and necessary. In response to the Supreme Court's remand, the EPA published the final Supplemental Finding That It is Appropriate and Necessary to Regulate Hazardous Air Pollutants from Coal- and Oil-Fired Electric Utility Steam Generating Units (the "Supplemental Finding") in April 2016. Several groups filed petitions with the D.C. Circuit challenging the Supplemental Finding. In April 2017, the EPA, under the new Administration, announced that it was reviewing the Supplemental Finding. On December 27, 2018, the EPA released a proposed rule to replace the Supplemental Finding with a new finding that it is not appropriate and necessary to regulate HAP emissions from steam electric utilities. However, the EPA also proposed that notwithstanding this new finding, it would not remove electric generating units from the source categories listed under Section 112 of the Clean Air Act ("CAA") and it would not rescind the MATS requirements. Additionally, the EPA proposed to find that further restrictions on HAP emissions are not warranted upon conducting a residual risk and technology review ("RTR") for this

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source category. Until a final rule is issued, specific impacts to TVA cannot be determined; however, as proposed, the rule would not change TVA’s MATS compliance requirements or strategy.

Cross-State Air Pollution Rule. The EPA issued the Cross-State Air Pollution Rule ("CSAPR") in July 2011, requiring several states in the eastern U.S. to improve air quality relative to the 1997 ozone National Ambient Air Quality Standards (“NAAQS”) and the 1997 and 2006 fine particle NAAQS by reducing power plant emissions that contribute to pollution in other states. In September 2016, the EPA issued an update to CSAPR (the "CSAPR Update Rule") to address cross-state pollution relative to the 2008 ozone NAAQS and also to respond to a July 2015 remand of the CSAPR emission budgets for certain states by the D.C. Circuit. On December 6, 2018, the EPA finalized its determination that the CSAPR Update Rule fully addresses the obligations for 22 states in the eastern U.S. under the good neighbor provision of the CAA regarding interstate pollution transport for the 2008 ozone NAAQS. Tennessee and Kentucky, states in which TVA operates coal-fired units, are among the states subject to the CSAPR Update Rule. TVA does not anticipate significant changes to its operations based on the CSAPR Update Rule.

Petition to Expand the Ozone Transport ~~Region.~~ Region. On December 9, 2013, eight of the twelve states that make up the

Ozone Transport Region ("OTR") submitted a petition, pursuant to section 176A(a) of the CAA, requesting the EPA to add nine

states, including Kentucky and Tennessee, to the OTR. The EPA failed to act on the petition within the 180-day period provided

under the CAA. On October 6, 2016, six of the eight states filing the petition sued the EPA in the U.S. District Court for the

Southern District of New York, asking the court to require the EPA to act on the petition by a date certain. In response to this lawsuit, the EPA published a notice in the Federal Register on January 19, 2017, proposing to deny the petition on the basis that the CAA provides other options to address the impact of interstate air pollution. These options include the use of the “good neighbor provision” in Section 110 of the CAA and the authority granted states under Section 126 of the CAA to petition the EPA Administrator to set emission limits. The EPA also states that its CSAPR Update Rule is a significant step to control states’ emission reduction obligations under Section 110 to meet the CY 2008 ozone NAAQS. On October 27, 2017, the EPA denied the petition. On December 22, 2017, the eight petitioning states filed in the D.C. Circuit a petition for judicial review of the EPA’s denial of the petition to add states to the OTR. On April 23, 2019, the D.C. Circuit denied the petition for judicial review of the EPA's refusal to expand the OTR to include nine additional states.

New York Petition to Address Impacts from Upwind High Emitting Sources. On March 12, 2018, the State of New York

filed a petition with the EPA under Section 126(b) of the CAA to address ozone impacts on New York from the NO_x emissions

from sources emitting at least 400 tons of NO_x in CY 2017 from nine states including Kentucky. The New York petition requests

that the EPA require daily NO_x limits for utility units with SCRs such as Paradise Unit 3 and emission reductions from utility units

without SCRs such as Shawnee Units 2, 3, and 5-9. On April 12, 2019, the State of New York filed a lawsuit against the EPA asking the U.S. District Court for the Southern District of New York to set a deadline for the EPA to make the requested finding on New York’s Section 126(b) petition or deny it. Kentucky utility unit NO_x emissions are already limited by the CSAPR Update Rule and are declining, and current EPA modeling projects no additional requirements to reduce Kentucky NO_x emissions are necessary. During its February 2019 meeting, the TVA Board approved the retirement of Paradise Unit 3 by December 2020. On May 20, 2019, the EPA proposed to deny New York's petition because the state did not demonstrate, and the EPA could not independently establish, that sources in the states listed in the petition contribute to exceedances of the 2008 and 2015 ozone NAAQS in New York.

Proposed Rule on National Emission Standards for Hazardous Air Pollutants for Stationary Combustion Turbines. On April 12, 2019, the EPA published a proposed rule to finalize its residual risk and technology review for stationary combustion turbines that the EPA is required to conduct in accordance with the CAA. The EPA is proposing to find that the health risks from the emissions of air toxics from stationary combustion turbines are acceptable and that the existing National Emission Standards for Hazardous Air Pollutants for these turbines provides an ample margin of safety to protect public health. The EPA also identified no new cost effective controls for these turbines that would achieve further emission reductions. In addition, the EPA proposes to remove the current stay of the stationary combustion turbine National Emission Standards for Hazardous Air Pollutants that has been in place since 2004. These rules apply only to those stationary turbines constructed after January 14, 2003, and that are located at facilities classified as major sources of hazardous air pollutants by the EPA because they have the potential to emit 10 tons or more per year of any hazardous air pollutant or 25 tons or more per year of any combination of hazardous air pollutants. As proposed, the rule would not have significant impacts on TVA. The TVA stationary combustion turbines that may become subject to the rules already have controls installed that are expected to meet the emission standards that become effective if the stay is removed. Actual impacts on TVA cannot be determined until a final rule is issued.

Affordable Clean Energy Rule. On June 19, 2019, the EPA finalized the final Affordable Clean Energy ("ACE") rule and repealed the Clean Power Plan. The ACE rule establishes guidelines for greenhouse gas ("GHG") emissions from existing coal-fired units based on efficiency improvements that can be achieved at those units at reasonable cost. States are required to apply the emission guidelines to coal-fired units within their respective jurisdictions and take into account the remaining useful life of those units. The impact of the ACE rule on TVA's coal-fired units cannot be determined until Tennessee and Kentucky submit to the EPA their state implementation plans ("SIPs") implementing guidelines in the ACE rule and the EPA approves these SIPs. The ACE rule allows states three years to submit their SIPs and allows the EPA one year for approval.

Proposed Revisions to New Source Performance Standards for Greenhouse Gas Emission Standards for Electric Generating Units. On December 6, 2018, the EPA proposed revisions to the GHG emission standards for new, modified, and

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reconstructed electric utility generating units that were finalized by the EPA on October 23, 2015. For coal-fired units, the EPA proposes to revise the current new source standards such that carbon capture and sequestration technology is no longer necessary to meet the standards of performance that reflect the best system of emission reduction. The resulting limits are less stringent than limits under the current rule and can be met by modern coal-fired units (e.g., supercritical steam generators) in combination with best operating practices, but without carbon capture and sequestration. The EPA is not proposing to revise the new source performance standard for GHG emission from gas-fired units. If finalized as proposed, the revisions are not expected to significantly impact TVA since TVA does not currently plan to construct, modify, or reconstruct any coal-fired units.

Maryland Petition to Address Impacts from Upwind Electric Generating Units. On September 27, 2017, the State of

Maryland filed a lawsuit against the EPA for failing to act within 60 days on Maryland’s petition under Section 126 of the CAA to

address ozone impacts on Maryland from the NO_xemissions of 36 electric generating units, including TVA’s Paradise coal-fired

Unit 3. On October 4, 2017, a group of seven environmental advocacy groups filed a similar complaint against the EPA. At

issue in Maryland’s petition are alleged excessive NOx emissions from the 36 electric generating units as a result of SCR units

not being operated continuously. Paradise coal-fired Unit 3 is equipped with a SCR that TVA continuously operates to the

greatest extent technically practicable in order to minimize NOx emissions. See Note 5. On October 5, 2018, the EPA denied Maryland's petition in light of the existing regulations already addressing emissions from the generating units identified in the petition. On October 15, 2018, the State of Maryland filed a petition for judicial review with the D.C. Circuit asking the court to review the EPA's decision.

Cleanup of Solid and Hazardous Wastes

Coal Combustion Residuals. ~~In May 2017, industry petitioners asked~~On March 13, 2019, the D.C. Circuit granted the EPA’s request to remand a final rule issued by the EPA in July 2018 amending portions of the CCR Rule to provide flexibility and an extension of certain deadlines to align the rule with the previously issued Steam-Electric Effluent Guidelines rule. The remand allows the EPA to reconsider the amendments to the CCR ~~rule~~Rule. The remand also allows the EPA additional time to complete a new rulemaking to establish revised timelines for unlined impoundments to initiate closure and to ~~incorporate new flexibility provided by~~reexamine the ~~Water Infrastructure Improvements~~October 2020 deadline for the Nation Act — specifically authority to make site-specific, risk-based decisions on implementing the federal criteria and to postpone upcoming regulatory deadlines during the new rulemaking. The EPA had previously agreed through settlement to revisit several elements of the CCR rule, so it will already be re-opening the rule. On September 14, 2017, the EPA announced that it plans to address the request to revisit key parts of its 2015 CCR rule. In addition, on September 18, 2017, the EPA filed a motion to hold the CCR litigation in abeyance and to postpone oral argument in the case while it reconsiders the CCR rule. The United States Court of Appeals for the District of Columbia Circuit essentially denied the EPA's motion and directed the EPA to file a status report specifying which provisions of the CCR rule are, or are likely to be, subject to reconsideration and specifying a rulemaking timeline. The EPA filed the court-ordered status report on November 15, 2017, and identified the provisions it intends to reconsider, including the regulation of

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~~inactive service~~closing some unlined impoundments. The EPA intends to take a phased approach and expects to announce a notice of proposed rulemaking for phase one issues no later than March 2018 and to take final action on phase one issues no later than June 14, 2019. The EPA plans to complete its review and announce any additional proposed revisions for phase two by no later than September 2018 and to take final action on phase two issues no later than December 2019. As a result of these developments, it is not possible to predict changes to the CCR ~~rule or their~~Rule and potential impacts on TVA.

Groundwater Contamination. Environmental groups and state regulatory agencies are increasing their attention on alleged groundwater contamination associated with CCR management activities. As a result, TVA may have to change how it manages CCRs at some of its plants, potentially resulting in higher costs. See Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residual Facilities and Key Initiatives and Challenges — Regulatory Compliance — Allen Groundwater Investigation.

Estimated Required Environmental Expenditures

The following table contains information about ~~TVA’s~~TVA's current estimates of expenditures for projects related to environmental laws and regulations:


Estimated Potential Environmental Expenditures⁽¹⁾⁽²⁾ At December 31, 2017 (in millions)
Estimated Potential Environmental Expenditures⁽¹⁾⁽²⁾ At June 30, 2019 (in millions)									Estimated Potential Environmental Expenditures⁽¹⁾⁽²⁾ At June 30, 2019 (in millions)
	Remaining 2018		2019		Thereafter⁽³⁾		Total		Remaining 2019		2020		Thereafter⁽³⁾		Total
Coal combustion residual conversion program⁽⁴⁾	$	215	$	360	$	425	$	1,000	$	117	$	375	$	862	$	1,354
Clean air control projects⁽⁵⁾	70		35		70		175		2		24		163		189
Clean Water Act requirements⁽⁶⁾	50		45		405		500		22		84		218		324

Notes

(1) These estimates are subject to change as additional information becomes available and as regulations change.

(2) These estimates include ~~$255~~$88 million, ~~$240~~$328 million, and ~~$600~~$524 million for the remainder of ~~2018,~~ 2019, 2020, and ~~Thereafter,~~thereafter, respectively, in capital expenditures.

(3) See Note 1719 — ~~Contingencies.~~Contingencies.

(4) Includes costs associated with pond closures, conversion of wet to dry handling, and landfill activities. TVA is continuing to evaluate the rules and their impact on its operations, including the cost and timing estimates of related projects. Includes approximately $150 million for Gallatin projects that are part of the original activities scheduled in TVA’s CCR Conversion Program and excludes costs resulting from any new requirements related to the Gallatin lawsuits. See Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Coal Combustion Residual Faci~~lities~~ ~~and Note 8.~~lities.

(5) Includes air quality projects that TVA is currently performing to comply with existing air quality regulations, but does not include any projects that may be required to comply with potential GHG regulations or transmission upgrades.

(6) Includes projects that TVA is currently planning to comply with revised rules under the Clean Water Act (i.e., Section 316(b) and effluent limitation guidelines for

steam electric power plants).

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Legal Proceedings

From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting its activities, as a result of catastrophic events or otherwise. At June 30, 2019, TVA had accrued ~~approximately $18~~$14 million with respect to Legal ~~Proceedings as of December 31, 2017.~~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 89 and Note 1719 — Legal Proceedings, which discussions are incorporated into this Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Off-Balance Sheet Arrangements

At ~~December 31, 2017,~~June 30, 2019, TVA had no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the financial statements. Although the financial statements are prepared in conformity with accounting principles generally accepted in the U.S., TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are 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 would materially impact TVA's financial condition, results of operations, or cash flows. TVA's critical accounting policies are discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates and Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.

New Accounting Standards and Interpretations

For a discussion of new accounting standards and interpretations, see Note 2, which discussion is incorporated into this Part I, Item 2, ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations.

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~~Corporate Governance~~

On December 21, 2017, the United States Senate confirmed the nominations of Mr. Kenneth E. Allen, Mr. A.D. Frazier, Mr. Jeffrey W. Smith, and Mr. James R. Thompson, III, to serve on the Board. Mr. Frazier was sworn in on January 9, 2018, Mr. Allen and Mr. Smith were sworn in on January 11, 2018, and Mr. Thompson was sworn in on January 12, 2018.

~~On January 3, 2018, the terms of Marilyn A. Brown and V. Lynn Evans as members of the TVA Board ended with the adjournment of the most recent session of Congress.~~

Legislative and Regulatory Matters

TVA continues to monitor how regulatory agencies are interpreting and implementing the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in July 2010. As a result, ~~of this act and its implementing regulations,~~ TVA has become subject to

recordkeeping, reporting, and reconciliation requirements related to its derivative transactions. In addition, depending on how regulatory agencies interpret and implement the provisions, ~~of this act, TVA’s~~TVA's hedging costs may increase, and TVA may have to post additional collateral and margin in connection with its derivative transactions.

TVA does not engage, and does not control any entity that is engaged, in any activity listed under Section 13(r) of the Securities Exchange Act of 1934 (the "Exchange Act"), which requires certain issuers to disclose certain activities relating to Iran involving the issuer and its affiliates. Based on information supplied by each such person, none of TVA's directors and executive officers are involved in any such activities. While TVA is an agency and instrumentality of the ~~United States of America,~~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 ~~United States.~~U.S.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There are no material changes related to market risks disclosed under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Activities in the Annual Report. See Note 1314 for additional information regarding TVA's derivative transactions and risk management activities.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

~~TVA’s~~TVA's management, including the President and Chief Executive Officer, the Executive Vice President and Chief Financial Officer, and members of the Disclosure Control Committee, including the Vice President and Controller (Principal Accounting Officer), evaluated the effectiveness of ~~TVA’s~~TVA's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of ~~1934 (the "Exchange Act")~~)1934) as of ~~December 31, 2017~~June 30, 2019. Based on this evaluation, ~~TVA’s~~TVA's management, including the President and Chief Executive Officer, the Executive Vice President and Chief Financial Officer, and members of the Disclosure Control Committee, including the Vice President and Controller (Principal Accounting Officer), concluded that ~~TVA’s~~TVA's disclosure

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controls and procedures were effective as of ~~December 31, 2017~~June 30, 2019, to ensure that information required to be disclosed by TVA in reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange ~~Commission’s~~Commission's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by TVA in such reports is accumulated and communicated to ~~TVA’s~~TVA's management, including the President and Chief Executive Officer, the Executive Vice President and Chief Financial Officer, and members of the Disclosure Control Committee, including the Vice President and Controller (Principal Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the quarter ended ~~December 31, 2017~~,June 30, 2019, there were no changes in TVA's internal control over financial reporting

that materially affected, or are reasonably likely to materially affect, TVA's internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. 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. While the outcome of the Legal Proceedings to which TVA is a party cannot be predicted with certainty, any adverse outcome to a Legal Proceeding involving TVA may have a material adverse effect on ~~TVA’s~~TVA's financial condition, results of operations, and cash flows.

For a discussion of certain current material Legal Proceedings, see Note 89 and Note 1719 — Legal Proceedings, which discussions are incorporated by reference into this Part II, Item 1, Legal Proceedings.

ITEM 1A. RISK FACTORS

There are no material changes related to risk factors from the risk factors disclosed in Item 1A, Risk Factors in the Annual Report.

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ITEM 6. EXHIBITS



Exhibit No.	Description

31.1	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer

31.2	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer

32.1	Section 1350 Certification Executed by the Chief Executive Officer

32.2	Section 1350 Certification Executed by the Chief Financial Officer

101.INS	TVA XBRL Instance Document

101.SCH	TVA XBRL Taxonomy Extension Schema

101.CAL	TVA XBRL Taxonomy Extension Calculation Linkbase

101.DEF	TVA XBRL Taxonomy Extension Definition Linkbase

101.LAB	TVA XBRL Taxonomy Extension Label Linkbase

101.PRE	TVA XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements of Section 13, 15(d), or 37 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Date:	~~February~~August 1, ~~2018~~2019		TENNESSEE VALLEY AUTHORITY
			(Registrant)


		By:	~~_/s/ William D. Johnson_________~~ /s/ Jeffrey J. Lyash
			~~William D. Johnson~~Jeffrey J. Lyash
			President and Chief Executive Officer (Principal Executive Officer)
		By:	~~_/s/~~ /s/ John M. Thomas, III ~~________~~
			John M. Thomas, III
			Executive Vice President and Chief Financial Officer (Principal Financial Officer)

6169



Financial Trading Program Unrealized Gains (Losses)
	At December 31, 2017		At September 30, 2017
FTP unrealized gains (losses) deferred as regulatory liabilities (assets)
Natural gas	$	—	$	(5	)



Fair Value Measurements Using Significant Unobservable Inputs
	Commodity Contract Derivatives
Balance at October 1, 2016	$	(127	)
Change in net unrealized gains (losses) deferred as regulatory assets and liabilities	23
Balance at December 31, 2016	$	(104	)

Balance at October 1, 2017	$	(67	)
Change in net unrealized gains (losses) deferred as regulatory assets and liabilities	(6		)
Balance at December 31, 2017	$	(73	)